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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2001
Commission File Number: 000-21287
PEERLESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-3732595
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2381 Rosecrans Avenue
El Segundo, CA 90245
(Address of principal executive offices, including zip code)
(310) 536-0908
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No [_]
The number of shares of Common Stock outstanding as of December 7, 2001 was
15,372,839.
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements
prompted by, qualified by or made in connection with such words as "will be,"
"continue," "anticipates," "estimates," "expects," "continuing," "projects,"
"returning to," "plans," "targets," and "believes" and words of similar
substance signal forward-looking statements. Likewise, the use of such words in
connection with or related to any discussion of or reference to the Company's
future business operations, opportunities or financial performance sets apart
forward-looking statements.
In particular, statements regarding the Company's outlook for future business,
financial performance and growth, including projected revenue, both quarterly
and from specific sources, profit, spending, including spending on research and
development efforts at Peerless and Netreon, costs, margins and the Company's
cash position, as well as statements regarding expectations for the embedded
imaging and storage markets, new product development and offerings, customer
demand for the Company's products and services, market demand for products
incorporating the Company's technology, future prospects of the Company and its
Netreon subsidiary, and the impact on future performance of organizational and
operational changes all constitute forward-looking statements.
These forward-looking statements are just projections and estimations based
upon the information available to the Company at this time. Thus they involve
known and unknown risks and uncertainties such that actual results could differ
materially from those projected in the forward-looking statements made in this
Report on Form 10-Q. Risks and uncertainties include, but are not limited to: a)
changes in the marketplace in which the Company offers its products; b) the
failure of Peerless' business strategy to produce the projected financial
results; c) the failure of Peerless to maintain its margins due to changes in
its business model in reaction to competitive pressures; d) the delay in or the
non-acceptance by the market of new product and technology offerings; e) the
inability of the Company to retain and attract the technical talent to compete
effectively in the marketplace for imaging and storage; f) the failure of
Peerless' markets to achieve anticipated growth rates; g) unfavorable economic
conditions resulting in decreased demand for original equipment manufacturers'
("OEMs") products using Peerless' technology, making it difficult for the
Company to obtain new licensing agreements; h) OEM's determinations not to
proceed with development of products using Peerless' technology due to, among
other things, changes in the demand for anticipated OEM products, age of
Peerless' technology, concerns about Peerless' financial position and Peerless'
competitors offering alternative solutions; i) the lack of acceptance of
Peerless' Internet printing technology by users in the hospitality markets; j)
Peerless' competitors coming to market with new products or alternative
solutions that are superior or available at a lower cost or earlier than
anticipated or believed to be possible; k) the markets in imaging, network
attached storage ("NAS") and storage area network ("SAN") may not grow to
anticipated levels; l) the costs associated with the development of products for
imaging, NAS and SAN may be higher than currently forecasted; m) an unfavorable
outcome to the class action lawsuit presently being litigated; n) changes in
demand for the Company's products and services based on market conditions and
the competitiveness of Peerless' products from both technological and pricing
perspectives; o) the Company's inability to maintain or further improve
operating efficiencies or to further streamline operations; p) the impact on the
Company's financials of any future need to expand the organization to meet
customer or market demands; q) continuing unfavorable world-wide economic
conditions exacerbated by the terrorist attacks on the worldwide financial
infrastructure; and r) other factors affecting Peerless' business and the
forward-looking statements set forth herein as set out from time to time in
Peerless' public filings with the Securities and Exchange Commission, including
but not limited to the Company's most recent Annual Report on Form 10-K dated
January 31, 2001, in the Section called Risks and Uncertainties on pages 31
through 41, inclusive, filed on or about May 1, 2001, and this Quarterly Report
on Form 10-Q in the Section called Risks and Uncertainties on pages 17 through
26, inclusive.
Current and prospective stockholders are urged not to place undue reliance on
forward-looking statements, which speak only as of the date hereof. The Company
is under no obligation, and expressly disclaims any obligation, to update or
alter any forward-looking statements, whether as a result of new information,
future events or otherwise. All forward-looking statements contained herein are
qualified in their entirety by the foregoing cautionary statements.
2
PEERLESS SYSTEMS CORPORATION
INDEX
Page No.
------------
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets October 31, 2001 and January 31, 2001..................................... 4
Consolidated Statements of Operations Three Month and Nine Month Periods Ended
October 31, 2001 and October 31, 2000................................................................ 5
Consolidated Statements of Cash Flows Nine Month Periods Ended October 31, 2001 and
October 31, 2000..................................................................................... 6
Notes to Consolidated Financial Statements............................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 17
PART II--OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 27
Item 2. Changes in Securities................................................................................. 27
Item 3. Defaults Upon Senior Securities....................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders................................................... 27
Item 5. Other Information..................................................................................... 27
Item 6. Exhibits and Reports on Form 8-K...................................................................... 27
Signatures...................................................................................................... 28
TRADEMARKS
Memory Reduction Technology(R) (MRT), PeerlessPowered(R), WINEXPRESS(R),
PeerlessPrint(R), redipS(R), AccelePrint(R), SyntheSys(R) and QuickPrint(R) are
registered trademarks of Peerless Systems Corporation. Netreon(TM),
DirectoryAgent(TM) and MagicPrint(TM) are trademarks of Peerless Systems
Corporation and are subjects of applications pending for registration with the
United States Patent and Trademark Office. PeerlessPage(TM), ImageWorks(TM) and
WebWorks(TM) are trademarks of Peerless Systems Corporation. Peerless Systems,
PEERLESSPRINT and PEERLESS PAGE (in English and Japanese Katakana), Peerless (in
logo) and P (in logo) , PEERLESSPRINT are registered trademarks and service
marks with the Japanese Patent Office. This Report on Form 10-Q also refers to
various products and companies by their trademark names. In most, if not in all
cases, their respective companies claim these designations as trademarks or
registered trademarks.
3
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements.
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
October 31, January 31,
2001 2001
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,701 $ 12,073
Restricted cash 594 742
Short term investments 963 6,358
Trade accounts receivable, net 2,636 6,428
Unbilled receivables 237 159
Income tax receivable 163 19
Prepaid expenses and other current assets 526 474
--------------- ---------------
Total current assets 19,820 26,253
Investments 2,319 3,070
Long-term receivable - 1,500
Property and equipment, net 5,124 5,710
Other assets 497 575
--------------- ---------------
Total assets $ 27,760 $ 37,108
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,112 $ 901
Accrued wages 822 2,075
Accrued compensated absences 807 714
Other current liabilities 2,975 3,507
Deferred revenue 1,220 826
--------------- ---------------
Total current liabilities 6,936 8,023
Other tax liabilities 2,260 2,260
Deferred rent 97 97
--------------- ---------------
Total liabilities 9,293 10,380
--------------- ---------------
Stockholders' equity:
Common stock 15 15
Additional paid-in capital 48,778 48,471
Deferred compensation (9) (58)
Accumulated deficit (30,204) (21,700)
Treasury stock (113) -
--------------- ---------------
Total stockholders' equity 18,467 26,728
--------------- ---------------
Total liabilities and stockholders' equity $ 27,760 $ 37,108
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
4
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------ --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Product licensing $ 6,078 $ 6,985 $ 15,683 $ 16,633
Engineering services and maintenance 1,603 2,023 4,772 6,147
Other 5 457 1,274 1,192
----------- ----------- ----------- -----------
Total revenues 7,686 9,465 21,729 23,972
----------- ----------- ----------- -----------
Cost of revenues:
Product licensing 1,605 1,954 5,208 4,481
Engineering services and maintenance 1,484 2,355 4,717 8,072
Other 4 281 761 719
----------- ----------- ----------- -----------
Total cost of revenues 3,093 4,590 10,686 13,272
----------- ----------- ----------- -----------
Gross margin 4,593 4,875 11,043 10,700
----------- ----------- ----------- -----------
Operating expenses:
Research and development 3,621 3,122 10,305 9,279
Sales and marketing 1,541 1,504 4,409 4,612
General and administrative 1,634 2,060 6,155 7,313
----------- ----------- ----------- -----------
Total operating expenses 6,796 6,686 20,869 21,204
----------- ----------- ----------- -----------
Loss from operations (2,203) (1,811) (9,826) (10,504)
Other income - - 2,320 -
Interest income, net 175 242 623 865
----------- ----------- ----------- -----------
Total other income 175 242 2,943 865
----------- ----------- ----------- -----------
Loss before income taxes (2,028) (1,569) (6,883) (9,639)
Provision for income taxes 685 452 1,621 938
----------- ----------- ----------- -----------
Net loss $ (2,713) $ (2,021) $ (8,504) $ (10,577)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.18) $ (0.14) $ (0.57) $ (0.71)
=========== =========== =========== ===========
Weighted average common shares
outstanding - basic and diluted 15,099 14,899 15,009 14,824
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
October 31,
-------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (8,504) $(10,577)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 1,602 1,444
Amortization of investment discounts and premiums (10) -
Amortization of deferred compensation 49 49
Compensation expense for option amendment and
common stock issued to employees - 245
Deferred taxes - 1,732
Changes in operating assets and liabilities:
Trade accounts receivable 3,792 496
Unbilled receivables (78) 2,238
Income tax receivable (144) (1,836)
Prepaid expenses and other current assets (52) 244
Long-term receivable 1,500 -
Other assets (18) 79
Accounts payable 211 53
Other liabilities (1,602) 1,697
Other tax liabilities - (419)
Deferred revenue 394 536
-------- --------
Net cash used by operating activities (2,860) (4,019)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (759) (943)
Purchases of leasehold improvements (161) -
Purchases of available-for-sale securities (6,647) (27,696)
Proceeds from sales of available-for-sale securities 12,803 33,601
Restricted cash 148 (742)
-------- --------
Net cash provided by investing activities 5,384 4,220
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 208 227
Proceeds from exercise of common stock options 9 45
Repurchase of common stock (113) -
-------- --------
Net cash provided by financing activities 104 272
-------- --------
Net increase in cash and cash equivalents 2,628 473
Cash and cash equivalents, beginning of period 12,073 13,620
-------- --------
Cash and cash equivalents, end of period $ 14,701 $ 14,093
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements of Peerless
Systems Corporation ("Peerless" or the "Company") have been prepared pursuant to
the rules of the Securities and Exchange Commission (the "SEC") for Quarterly
Reports on Form 10-Q and do not include all of the information and note
disclosures required by generally accepted accounting principles. The financial
statements and notes herein are unaudited, but in the opinion of management,
include all the adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows of the Company. These statements should be read in conjunction with
the audited financial statements and notes thereto for the years ended January
31, 2001, 2000 and 1999 included in the Company's Annual Report on Form 10-K
filed with the SEC on or about May 1, 2001. The results of operations for the
interim periods shown herein are not necessarily indicative of the results to be
expected for any future interim period or for the entire year.
2. Significant Accounting Policies:
Revenue Recognition: The Company recognizes revenues in accordance with
Statement of Position 97-2 "Software Revenue Recognition" as amended by
Statement of Position 98-9. In November 2000, the Company adopted Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" and
Emerging Issues Task Force 99-19, "Reporting Revenue Gross as a Principal versus
Net as an Agent." The adoptions did not impact the Company's revenue recognition
policy.
Development license revenues from the licensing of source code or software
development kits ("SDKs") for the Company's standard products are recognized
upon delivery to and acceptance by the customer of the software if no
significant modification or customization of the software is required and
collection of the resulting receivable is probable. If modification or
customization is essential to the functionality of the software, the development
license revenues are recognized over the course of the modification work.
The Company also enters into engineering services contracts with certain of
its OEMs to provide a turnkey solution, adapting the Company's software and
supporting electronics to specific OEM requirements. Revenues on such contracts
are recognized over the course of the engineering work on a percentage-of-
completion basis. Progress-to-completion under percentage-of-completion is
determined based on direct costs, consisting primarily of labor and materials,
expended on the arrangement. The Company provides for any anticipated losses on
such contracts in the period in which such losses are first determinable. At
October 31, 2001, the Company had a reserve of $129 for losses on three
contracts that experienced delays in completion, a decrease from the $159
reserve at July 31, 2001. Maintenance revenues are recognized ratably over the
term of the maintenance contract.
Recurring licensing revenues are derived from per unit fees paid by the
Company's customers upon manufacturing and subsequent commercial shipment of
products incorporating Peerless and third party technology. These recurring
licensing revenues are recognized on a per unit basis as products are shipped
commercially. In certain cases, the Company may sell a block license, that is, a
specific quantity of licensed units that may be sold in the future, or the
Company may require the customer to pay minimum royalty commitments. Associated
payments are typically made in one lump sum or extend over a period of four or
more quarters. The Company generally recognizes revenues associated with block
licenses and minimum royalty commitments on delivery and acceptance of software,
when collection of the resulting receivable is probable and when the fee is
fixed and determinable. In cases where block licenses or minimum royalty
commitments have extended payment terms and the fees are not fixed and
determinable, revenue is recognized as payments become due. Further, when earned
royalties exceed minimum royalty commitments, revenues are recognized on a per
unit basis as products are shipped commercially.
For fees on multiple element arrangements, values are allocated among the
elements based on vendor specific objective evidence of fair value ("VSOE"). If
VSOE does not exist, all revenue for the arrangement is deferred until the
7
earlier of the point at which such VSOE does exist or all elements of the
arrangement have been delivered. If an arrangement includes software and service
elements, a determination is made as to whether the service element can be
accounted for separately as services are performed.
Deferred revenue consists of prepayments of licensing fees and payments
billed to customers in advance of revenue recognized on engineering services
contracts. Unbilled receivables arise when the revenue recognized on a contract
exceeds billings due to timing differences related to billing milestones as
specified in the contract.
3. Investments:
Investments consisted of the following:
October 31, January 31,
2001 2001
----------- -----------
Available-for-sale securities:
Maturities within one year:
U.S. government debt securities $ 311 $ -
State and local government debt securities 652 1,417
Corporate debt securities - 4,941
----------- ------------
963 6,358
----------- ------------
Maturities after one year through five years:
U.S. government debt securities 919 912
----------- ------------
Maturities after five years:
Corporate debt securities 1,400 2,158
----------- ------------
Total investments $ 3,282 $ 9,428
=========== ============
The fair value of available-for-sale securities at October 31, 2001 and
January 31, 2001 approximated their carrying value (amortized cost).
Unrealized gains or losses on securities were immaterial for all periods
presented.
4. Restricted Cash:
On March 16, 2000, Netreon, Inc. entered into an agreement to lease
approximately twelve thousand square feet of office space in Mountain View,
California. The term of the lease agreement is seven years, which commenced on
July 1, 2000. The Company has guaranteed the lease commitment of Netreon, Inc.
and has secured the current twelve months of the agreement with a $594 standby
letter of credit. This letter of credit has been secured by a certificate of
deposit of a like amount. For the subsequent three years, the value of the
standby letter of credit and the certificate of deposit shall be reduced to
$445, $297, and $148, respectively.
5. Issuance and Purchase of Shares:
On April 11, 2001, the Company issued 429 put options with a strike price
of $0.75 per share. The potential obligation under the outstanding put options
was transferred from stockholder's equity to "common stock subject to put
options". The put options entitled the holder to sell shares of Peerless common
stock to the Company at the strike price on or before October 10, 2001, the
expiration date of the put options. During the nine month period ended October
31, 2001, the Company repurchased 150 shares for $113 as the result of the
exercise of put options. The remaining obligation under the outstanding put
options, which expired October 10, 2001, has been transferred back to
stockholders' equity.
8
6. Legal Proceedings:
The Company engaged in the following litigation matters:
On August 28, 2000, a stockholder class action lawsuit was filed against
the Company and two of the Company's former officers in the United States
District Court for the Southern District of California. A second stockholder
class action lawsuit was filed on September 19, 2000 against the Company and the
same two former officers of the Company in the same United States District
Court. On April 17, 2001, the Company was served with an Amended and
Consolidated Complaint. These lawsuits allege a scheme to artificially inflate
the Company's stock price based on alleged misleading public announcements and
seek compensatory damages with interest and attorneys fees and expenses.
Peerless believes all of the claims to be without merit. A hearing on the motion
filed by the Company and the two former officers to dismiss the Amended and
Consolidated Complaint was held on October 9, 2001. A ruling by the Court will
be forthcoming.
The Company filed a lawsuit in January 2000 against Conexant Systems Inc.,
Newport Beach, California in the Orange County Superior Court regarding the
alleged failure and refusal of Conexant to pay to the Company a portion of a
Source License Fee and guaranteed royalty payments pursuant to an agreement
between the parties. The parties entered into a Settlement and Mutual General
Release Agreement (the "Settlement") effective April 9, 2001 wherein all
disputes were settled.
In December 1999, the Company and the Company's former Chief Executive
Officer were sued by the State of Wisconsin Investment Board ("SWIB") in the
Court of Chancery of the State of Delaware in New Castle County. The complaint
alleged that Peerless wrongfully influenced the passage and provided misleading
information in connection with, a proposal to increase the number of shares
available for issuance under the Company's 1996 Equity Incentive Plan by 1,000
options at the Company's Annual Meeting of Stockholders in June 1999. The
parties have signed a settlement agreement that, among other things, resulted in
a payment of $375 from the Company to SWIB for a portion of its legal fees. The
lawsuit has been resolved in a manner satisfactory to the Company.
In July 2000, the Company filed a claim in the United States District Court
for the Central District of California against the former owners of HDE, Inc. in
connection with Peerless' acquisition of that entity. On April 11, 2001, the
Company entered into a Settlement Agreement with one of the former owners, and
dismissed the lawsuit. Under this agreement, the Company agreed to re-purchase
certain of the former owner's shares at his election, which election expired
October 10, 2001. See Note 5 to Consolidated Financial Statements.
7. Concentration of Revenues:
During the third quarter fiscal year 2002, three customers each generated
greater than 10% of the revenues and collectively contributed 57% of revenues.
Block license revenues for the same time period amounted to $5.2 million, or 67%
of revenues. During the third quarter of fiscal year 2001, four customers each
generated greater than 10% of the revenues, which contributed 60% of revenues.
Block license revenues for the third quarter of fiscal year 2001 amounted to
$4.4 million, or 46% of revenues.
8. Other Income:
The Company resolved a disputed claim regarding the licensing of its
intellectual property and reported non-recurring other income of $2.3 million
and collected a $1.5 million receivable during the nine months ended October 31,
2001.
9. Segment Reporting:
Peerless provides software-based embedded imaging and networking technology
for digital document products and provides directory and management software for
networked storage devices and integrates proprietary software into enterprise
networks of original equipment manufacturers.
9
The Company views its operations as two segments: Imaging and Storage. The
factors that management uses to identify the separate segments include customer
base, products and technology. The factors used to measure the performance of
the two segments include revenues, operating profit and staffing.
A description of the products and services provided by each segment is as
follows:
. Imaging provides to OEM customers imaging systems, page description
languages, drivers, application specific integrated circuits,
engineering services to modify products for specific applications and
maintenance for digital document products. Products can be purchased in
source code form or can be modified using the Company's engineering
services to adapt for a specific application. License fees are charged
for the utilization of imaging technology.
. Storage provides OEM storage customers Network Attached Storage
software development kits that allow NAS OEMs to provide NetWare or
Windows 2000 compatibility for their products. Storage is currently
developing comparable products for the Storage Area Networks. Products
can be purchased in source code form or can be modified using the
Storage engineering services to adapt for a specific application.
License fees are charged for the utilization of the Storage technology.
The accounting policies used to derive reportable segments results are
generally the same as those described in the Company's Annual Report on Form
10-K dated January 31, 2001 Note 1 of Notes to Consolidated Financial
Statements. Inter-segment transactions are not material. The Company's selling,
general and administrative expenses are not identified by segments or
accumulated in this manner due to, among other things, shared management and
cross-utilization of personnel. For fiscal year 2002, such expenses related to
the Company's Netreon, Inc. subsidiary are attributed to the Storage segment;
all other such expenses incurred by the Company are allocated to the Imaging
segment. In fiscal year 2001, these expenses are allocated to segments based on
the ratio of the segments' revenues to total revenues.
The table below presents segment information for third fiscal quarter
ending October 31:
Total
Imaging Storage Segments
----------- ----------- -------------
October 31, 2001
- ----------------
Revenues $ 7,586 $ 100 $ 7,686
Operating loss (37) (2,166) (2,203)
Depreciation and amortization 446 56 502
Assets 26,165 1,595 27,760
Capital expenditures 77 29 106
October 31, 2000
- ----------------
Revenues 9,345 120 9,465
Operating loss (744) (1,067) (1,811)
Depreciation and amortization 590 26 616
Assets 43,229 1,192 44,421
Capital expenditures 290 56 346
10
The table below presents segment information for nine months ending October
31:
Total
Imaging Storage Segments
--------- ------- --------
October 31, 2001
- ----------------
Revenues $ 21,629 $ 100 $ 21,729
Operating loss (2,477) (7,349) (9,826)
Depreciation and amortization 1,361 280 1,641
Capital expenditures 367 553 920
October 31, 2000
- ----------------
Revenues 23,722 250 23,972
Operating loss (8,486) (2,018) (10,504)
Depreciation and amortization 1,407 86 1,493
Capital expenditures 737 206 943
10. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, and the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations for a disposal of a
segment of a business. FAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company expects to
adopt FAS 144 as of February 1, 2002 and it has not determined the effect, if
any, the adoption of FAS 144 will have on the Company's financial position and
results of operations.
11
PEERLESS SYSTEMS CORPORATION
Item 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Report on Form 10-Q
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation, statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this Report on Form 10-Q are based on
current expectations, estimates, forecasts and projections about the industries
in which Peerless operates, management's beliefs, and business assumptions made
by management. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Overview
The Company was founded in April 1982. It is a provider of software-based
embedded imaging and networking systems and storage management systems to the
digital document and storage markets.
The Peerless imaging solution is based on a combination of software and
imaging application specific integrated circuit solutions ("ASICs"), which
together form a cost-effective embedded imaging system that addresses virtually
all sectors of the printing market, from low-end small office/home office
("SOHO") inkjets to high-end laser digital color copiers and printers. The low-
cost, high performance printers and multifunction products ("MFPs") that the
Company's imaging solutions drive, are replacing expensive stand-alone copiers
and printers in corporate offices.
Netreon, Inc., the Company's wholly owned subsidiary, develops software for
centralized, directory-based management of network attached storage ("NAS")
devices and storage area network ("SAN") fabrics, and focuses on the development
and sale of directory storage technology to enterprise storage manufacturers,
primarily in the NAS and SAN markets. Netreon's embedded directory agent
technology enables networked devices to use directory services to authenticate
users and administer their access rights, and is also designed to allow a
directory to store and read configuration parameters and to configure itself
automatically.
Peerless Systems Imaging Products, Inc. ("PSIP"), the other of the
Company's wholly owned subsidiaries, is a developer of embedded imaging and
Internet printing products and is an integrator of Adobe Postscript, which it
also licenses.
Historically, a limited number of customers have provided a substantial
portion of the Company's revenues. Therefore, the availability and the
successful closing of new contracts, or modifications and additions to existing
contracts with these customers, may materially impact the Company's financial
position and results of operations from quarter to quarter.
During the fiscal year ended January 31, 2001 and in the first nine months
of this fiscal year, the Company experienced a decline in demand by OEMs for
Peerless' embedded imaging for digital document product offerings. This decline
surfaced initially in fiscal year 2000 as a shift in demand from traditional
turnkey solutions to SDKs. With the subsequent slump in business in general, the
printer industry in particular, and other factors, the demand for SDKs as well
as for turnkey solutions declined.
In response to the lessened demand for its products, the Company reduced
the size of its staff at its California Imaging operations. At October 31, 2001,
the staffing level was 93, which represents a 47% reduction from the comparable
level at January 31, 2000. Subsequent to the end of the second quarter of fiscal
year 2002, the Company has reduced its workforce at its Netreon subsidiary by 16
employees, approximately 28% of Netreon's workforce and approximately 10% of
Peerless' workforce. Additionally, in order to improve the attractiveness of the
Company's product offerings, the Company adapted its pricing model to no longer
require OEMs to commit to minimum levels of royalties prior to the completion of
turnkey efforts.
12
The Company's product licensing revenues are comprised of recurring
licensing fees (per-unit fees), block licenses and development licensing fees
for source code and SDKs. Recurring licensing revenues are derived from per-unit
fees paid periodically by the Company's OEM customers upon the manufacturing of
and subsequent commercial shipment of their products incorporating the Company's
technology. Recurring licensing revenues are also derived from arrangements in
which the Company enables and licenses third party technology, such as solutions
from Adobe Systems Inc. and Novell, Inc., to be used with its products.
Block licenses are per-unit licenses sold in large volume quantities to an
OEM for products either in or about to enter distribution into the marketplace.
Payment schedules for block licenses are negotiable and payment terms are often
dependent on the size of the block license and other terms and conditions of the
block license being acquired. Typically, payments are made in either one lump
sum or over a period of four or more quarters. The Company generally recognizes
revenues associated with block licenses on delivery and acceptance of software,
when collection of the resulting receivable is probable and when the fee is
fixed and determinable. In cases where block licenses have extended payment
terms and the fees are not fixed and determinable, revenue is recognized as
payments become due.
The Company also receives engineering services revenues that are derived
primarily from adapting the Company's software and supporting electronics to
specific OEM requirements. The Company provides its engineering services to OEMs
seeking a turnkey embedded imaging solution for their digital document products.
The Company's maintenance revenues are derived from software maintenance
agreements. Maintenance revenues currently constitute a small portion of total
revenue.
The Peerless embedded imaging solution is based on a combination of
software and imaging ASICs, which together form a system that addresses most
sectors of the printing market, from low-end SOHO inkjets to high-end laser
digital color copiers and printers. Low-cost, high performance printers are
increasingly replacing expensive stand-alone copiers and printers in corporate
offices. The shift to low-cost devices is placing considerable pressure on the
Company and its competitors to provide lower cost solutions while the OEMs
themselves look to bring their development and engineering efforts in-house to
reduce their costs.
Traditionally, Peerless provided ASIC designs to chip foundries that
manufactured and distributed the Company's ASICs to the Company's OEMs. In
return, the Company received license revenue from these chip foundries. As part
of the total solution being offered to its OEMs, the Company has developed a
direct distribution channel for its ASIC chips. Under this "fabless" model,
Peerless can supply ASIC chips from the foundry directly to the OEMs through
third party distributors. The Company is responsible for marketing and sales
administration, including the billings and collections to and from its OEMs and
distributors, and the third party is responsible for the coordination of
production with the foundry, maintenance of necessary inventories and providing
just-in-time delivery to OEMs and distributors.
The Company has agreements with Arrow Electronics and Marubun Corporation
to act as third party distributors. The distribution agreement with Arrow
Electronics requires title to the inventory to remain with the Company until
final acceptance by the OEM. There can be no assurance that the OEM will accept
the delivery in which case the Company is responsible for all costs related to
the delivery and shipment. The distribution agreement with Marubun requires that
title to inventory be transferred to Marubun upon order shipment by the Company.
As a result, the Company is not responsible for any costs associated with the
delivery of inventory if not accepted by the OEM.
The change in the business model from licensing ASIC technology to the
distribution of the actual chips is meant to result in higher revenues and
higher gross margin, but lower margin percentages due to the cost of ASIC chips
and the costs of distribution and inventory maintenance by the third party. The
Company made its first distribution in the first quarter of fiscal year 2001.
The Company generates revenue from its OEMs through the sale of embedded
imaging solutions in either turnkey or software development kit form.
Historically, OEM demand for turnkey solutions had exceeded demand for SDK
solutions. However, in the fiscal year 2000, the Company experienced a shift in
demand away from turnkey solutions to demand for the Company's SDKs,
particularly for its mature monochrome solutions. The Company has attempted to
expand its solution offerings by incorporating related embedded imaging and
networking technologies developed internally as well as licensed from third
parties.
The current market in which the Company operates has been consolidating,
and the demand for the technology and products offered by the Company continued
to decline throughout fiscal year 2001. Peerless provides its technology and
products to the worldwide market for printers (21-69 PPM) and MFPs (21-110 PPM),
unit volumes for
13
which have been projected by International Data Corporation ("IDC") to grow at
lower rates. It should also be noted that available data indicate retail prices
are also declining in these market segments.
The Company has experienced a change in its business environment as well.
While it had been expected that SDK sales would result in an increase in the OEM
products shipping, as OEMs that utilized Peerless SDKs developed and introduced
multiple products, the increase in products shipping did not materialize,
aggravating the decline in the Company's sales and the increase in its operating
losses during fiscal year 2002. The engineering services business declined as
OEMs took technology development in-house through the utilization of SDKs, and
in situations where the SDKs did not address the current and particular needs of
the OEM, the OEMs chose Peerless' competitors or elected to develop the needed
technologies themselves.
Although sales have increased during the quarter ended October 31, 2001,
the Company is continuing to meet sales resistance from its customers. In the
past, these OEMs have reduced the absolute number of new products being
developed and in some instances, the OEMs have preferred to perform in-house
development projects for the projects that they are developing and/or planning
to launch. Although there have been fewer opportunities for the Company to sell
its turnkey services and SDKs, the Company continued to support its current OEM
controller customers in the digital printing devices business with its existing
technology and has sized the organization to provide the necessary support and
maintenance. During the current fiscal year, the Company has invested in
research and development and has developed and integrated new product
technologies that the Company will offer to its OEM customers in this and future
quarters.
As a result of the decline in the embedded controller business worldwide,
the Company continues to explore opportunities to enhance the value of the
Company, including new market opportunities, mergers, acquisitions and/or the
sale of all or a portion of Company's assets.
As a result of the decline in the storage business area, the Company
experienced significant sales resistance from NAS and SAN customers. This sales
resistance has caused the Company to explore a number of alternatives and
options with respect to the Netreon subsidiary. Pursuit of satisfactory
resolution to the Netreon storage business investment remains a high priority
for the Company. There is no assurance that the Company can or will be
successful in getting Netreon to a profitable state. Among other options, the
Company is considering a shutdown of Netreon storage operations, a sale of the
storage technology and an employee buyout.
There is no assurance that the Company can or will be successful in the
pursuit of these new opportunities or a solution to resolve Netreon meant to
result in a return to a growth in revenues, profitability and an increase in
shareholder value. Failure to realize success in the marketing of these new
opportunities or as to Netreon could have a material adverse effect on the
Company's operational results.
Results of Operations
Comparison of Three and Nine Month Periods Ended October 31, 2001 and October
31, 2000
The Company's loss for the third quarter of fiscal year 2002 increased
34.2% to $(2.7) million or ($0.18) per basic and diluted share compared to a net
loss of $(2.0) million or ($0.14) per basic and diluted share reported for the
third quarter a year ago. The Company narrowed its net loss for the nine month
period ended October 31, 2001 to $(8.5) million, or $(0.56) per basic and
diluted share, compared to a net loss of $(10.6) million, or $(0.71) per basic
and diluted loss per share a year ago. Results for the nine month period ended
October 31, 2001 are net of $2.3 million of non-recurring other income related
to the settlement of litigation.
Total consolidated revenues were $7.7 million and $21.7 million for the
three and nine months ended October 31, 2001, respectively, compared to $9.5
million and $24.0 million, for the comparable periods a year ago. The decrease
from the year ago third fiscal quarter was due primarily to lower levels of per-
unit royalty revenues and engineering services and maintenance revenues. Per-
unit royalty revenues in the third quarter of fiscal year 2001 included $0.8
million in guaranteed minimum quarterly royalties. In the third quarter of last
year, $4.4 million in block licenses were entered into and recognized as
revenues. This year the Company has negotiated block license agreements such
that block revenues are recognized over five quarters. During the quarter ended
October 31, 2001 the Company recognized $5.2 million in revenues from block
license agreements, $2.8 million of which was derived from block license
agreements entered into in previous quarters.
14
Total cost of revenues were $3.1 million and $10.7 million for the three
and nine months ended October 31, 2001, respectively, compared to $4.6 million
and $13.3 million for the comparable periods a year ago. Product licensing costs
were $1.6 million and $5.2 million for the three and nine months ended October
31, 2001, respectively, compared to $2.0 million and $4.5 million for the
comparable periods a year ago. The decrease in product licensing costs for the
three month period was due primarily to the lower level of product licensing
revenues and a lower level of licensing costs of third party technology in
fiscal year 2002 resulting from increased Peerless property technology content.
The increase in product licensing costs in the nine month period was due to
licensing costs of third party technology bundled with Peerless' intellectual
property that was associated with the $12.9 million in sales to OEMs of block
licenses through the nine months ended October 31, 2001, which was a 35%
increase over similar sales in the nine months ending October 31, 2000.
Engineering services and maintenance costs for the three and nine month periods
ended October 31, 2001 were $1.5 million and $4.7 million, respectively,
compared to $2.4 million and $8.1 million in the comparable fiscal year 2001
periods. The decreases were due primarily to the lower level of business and
staffing in engineering services and maintenance in the comparable periods of
fiscal year 2002 as compared to fiscal year 2001.
In the past, OEMs would license Adobe technology directly from Adobe. Adobe
would pay Peerless a portion of the revenues that Adobe derived from its
products that were licensed for use in Peerless enabled products. OEMs currently
license Adobe technology from Peerless, with Peerless assuming additional
responsibilities (i.e., certification, maintenance, collections, etc.). Peerless
now pays Adobe a portion of the revenues that Peerless derives from Adobe
technology. The change in the Adobe arrangement has resulted in higher revenues,
higher cost of revenues and higher gross margins.
Total gross margins for the three and nine months ended October 31, 2001
were $4.6 million, or 59.8%, and $11.0 million, or 50.8%, respectively, compared
to $4.9 million, or 51.5%, and $10.7 million, or 44.6%, for the comparable
periods a year ago. Gross margins were impacted by the increased costs of
projects that were nearing completion during the quarter ended October 31, 2001,
net of the increased sales of products with higher content of Peerless
proprietary technology. Gross margins are expected to decrease to approximately
50% in the fourth quarter of fiscal year 2002.
Total operating expenses for the three and nine months ended October 31,
2001 were $6.8 million and $20.9 million, respectively, compared to $6.7 million
and $21.2 million for the comparable periods a year ago.
Total research and development expenses for the three and nine months ended
October 31, 2001 were $3.6 million and $10.3 million, respectively, compared to
$3.1 million and $9.3 million for the comparable periods a year ago. Research
and development expense increased as engineering efforts were directed at NAS
and SAN storage, MagicPrint(TM), and the development of new imaging
technologies. It is expected that R & D expenses will remain relatively flat in
the fourth quarter.
Total sales and marketing expenses for the three and nine months ended
October 31, 2001 were $1.5 million and $4.4 million, respectively, compared to
$1.5 million and $4.6 million for the comparable periods a year ago. Sales and
marketing expenses are expected to increase in the fiscal year 2002 fourth
quarter.
Total general and administrative expenses for the three months ended
October 31, 2001 were $1.6 million, compared to $2.1 million for the comparable
period a year ago. For the nine months ended October 31, 2001, total general and
administrative costs were $6.2 million, compared to $7.3 million for the nine
month period ending October 31, 2000. Decreases in staffing costs, and lower
consulting and advisory fees were the primary factors for the decreases.
The Company resolved a disputed claim regarding the licensing of its
intellectual property and reported non-recurring other income of $2.3 million
and collected a $1.5 million receivable during the nine months ended October 31,
2001.
Interest income earned in both periods was attributable to interest and
investment income earned on cash and cash equivalents and investment balances.
The provision for income taxes for the three and nine months ended October
31, 2001 was primarily attributable to foreign taxes. The Company has provided a
valuation allowance on its net deferred tax assets because of the uncertainty
with respect to the Company's ability to generate future taxable income to
realize the deferred tax assets.
15
Liquidity and Capital Resources
Compared to January 31, 2001, total assets at October 31, 2001 decreased
25.2% to $27.8 million and stockholders' equity decreased 30.9% to $18.5
million. The Company's cash and investment portfolio at October 31, 2001 was
$18.0 million and the ratio of current assets to current liabilities was 3:1.
The Company used $2.9 million in cash during the nine month period ended October
31, 2001 to finance operations as compared to $4.0 million in cash used from
operations during the nine month period ended October 31, 2000.
The Company's investment activities during the nine month period ended
October 31, 2001 provided cash of $5.4 million. It is the Company's policy to
invest the majority of its unused cash in low risk government and commercial
debt securities. The Company has not historically purchased, nor does it expect
to purchase in the future, derivative instruments or enter into hedging
transactions. For the nine month period ended October 31, 2001, the Company
invested $0.9 million in property, equipment and leasehold improvements which
was comparable to the $0.9 million invested during the nine month period ended
October 31, 2000.
In the nine months ended October 31, 2001, cash provided by the issuance of
common stock under the Company's employee stock purchase plan and exercise of
stock options was offset by a repurchase of the Company's common stock. During
the nine month period ended October 31, 2001, the Company repurchased 150,000
shares of common stock for an aggregate cost of $0.1 million pursuant to a
settlement agreement with one of the former owners of HDE, Inc. Those purchases
occurred at the former owner's option, which option expired on October 10, 2001.
Net cash provided by financing activities in the nine month period ended October
31, 2000 was $0.3 due to the issuance of shares under the Company's employee
stock purchase plan and the exercise of common stock options.
During the nine month period ended October 31, 2001, cash and investments
decreased $3.5 million compared to a decrease of $5.4 million for the comparable
period last fiscal year. To offset the Company's decrease in cash, the Company
has made a determined effort to collect its accounts receivable. As a result,
the Company had a $3.8 million reduction in net trade receivables during the
nine month period, including a $1.2 million reduction in the third quarter of
fiscal year 2002. The Company collected $4.0 million in block licenses that
were included in revenues during the third quarter of fiscal year 2002.
Additionally, the Company resolved a disputed claim regarding the licensing of
intellectual property and as a result collected a $1.5 million long-term
receivable during the nine months ended October 31, 2001.
The Company has guaranteed Netreon's obligations under the lease for its
Mountain View, California property. The aggregate lease payments through the
remaining term of this lease, which expires on June 30, 2007, are $5.2 million.
Under the current terms of this lease, the Company would remain obligated for
such payments, regardless of any disposition of Netreon; however, the Company is
continuing negotiations with the lessor concerning possible changes to the terms
of the lease should the operating status of Netreon change.
For the nine month period ended October 31, 2001, the Company incurred a
loss and experienced negative cash flow from operating activities. The Company's
principal source of liquidity is its cash and cash equivalents and investments,
which, as of October 31, 2001 were $18.0 million in the aggregate; the Company
expects to end the fourth quarter of fiscal year 2002 with $13 to $15 million in
cash and cash equivalents and investments, which the Company believes is
adequate to fund the Company until it is able to return to profitability and
generate a positive cash flow. The Company does not have a credit facility and
the Company does not expect to secure a line of credit in order to maintain
liquidity.
If the Company does not generate anticipated cash flow from sales, or if
expenditures are greater than expected, the Company most likely will reduce
discretionary spending, which would require the Company to delay, scale back or
eliminate some or all of its development efforts, any of which could have a
material adverse effect on the Company's business, results of operations and
prospects. Further, if the Company continues to experience negative cash flows,
as is anticipated, and is unable to increase revenues or to cut costs so that
revenues generated from operating activities are sufficient to meet the
Company's obligations as a result of which the Company exhausts current capital
resources, the Company will be required to obtain additional capital from other
sources. Such sources might include issuance of debt or equity securities, bank
financing or other means that might be available to the Company to increase its
working capital. Under such circumstances, there is substantial doubt as to
whether the Company would be able to obtain additional capital on commercially
reasonable terms, or at all. The inability to obtain such resources on
commercially acceptable terms would have a material adverse effect on the
Company, its operations, liquidity and financial condition, its prospects and
the scope of strategic alternatives and initiatives available to the Company.
16
Item 3--Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to a variety of risks in its investments, mainly a
lowering of interest rates. The primary objectives of the Company's investment
activities are to preserve the principal while at the same time maximizing
yields without significantly increasing risk. To achieve this objective, the
Company from time to time maintains its portfolio of cash equivalents, fixed
rate debt instruments of the U.S. Government and high-quality corporate issuers
and short-term investments in money market funds. Although the Company is
subject to interest rate risks, the Company believes an effective increase or
decrease of 10% in interest rate percentages would not have a material adverse
effect on its results from operations.
The Company has not entered into any derivative financial instruments.
Currently all of the Company's contracts, including those involving foreign
entities, are denominated in U.S. dollars and as a result, the Company has
experienced no foreign exchange gains and losses to date. The Company has not
engaged in foreign currency hedging activities to date and has no intention of
doing so. The Company's international business is subject to risks typical of an
international business including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and to a lesser extent foreign exchange rate
volatility. Accordingly, the Company's future results could be materially and
adversely affected by changes in these or other factors.
Risks and Uncertainties
An investment in the Company's common stock involves a high degree of risk.
Peerless operates in a dynamic and rapidly changing industry that involves
numerous risks and uncertainties. The risks and uncertainties described below
are not the only ones the Company faces, and other risks and uncertainties,
including those that the Company does not consider material at the time of the
filing of this Report on Form 10-Q, may impair the Company's business or
operations. If events giving rise to any of the risks discussed below actually
occur, the Company's business, financial condition, operating results or cash
flows could be materially adversely affected.
Peerless has a history of losses and anticipate continued losses.
Peerless has been unprofitable since the fourth quarter of fiscal year
2000, which ended on January 31, 2000, and expects to incur quarterly operating
losses at least through the first half of fiscal year 2003 and perhaps beyond.
There is no assurance that the Company will be profitable in the future.
Continuing losses will deplete the Company's capital resources, and
projected decreases in expenses are not expected to offset the decline in
revenues. The factors noted below have had and will continue to have a material
adverse effect on the Company's future revenues and/or results of operations.
The future demand for the Company's current Imaging products is uncertain.
Peerless' current technology and products in the Imaging segment have been
in the marketplace for an average of 27 months as of October 31, 2001. This
represents an 80% increase from the average of 15 months that the Company's
products had been in the marketplace as of October 31, 2000. The growth in the
average age of current technology and products in the marketplace reflects the
decline in demand for the Company's technology and products. While Peerless
continues to license its current technology and products to certain OEMs, and
has introduced new technology and products this current fiscal year, there can
be no assurance that the OEMs will continue to need or utilize the current
technology and products the Company offers.
Possible disposition or discontinuation of all or a part of Netreon's business
could materially and adversely affect Peerless and its stock price.
17
To date, Netreon's products have not found substantial acceptance in the
marketplace. As a result, Netreon has not become financially self-sufficient,
and Peerless has had to continue to fund its development efforts. There is no
assurance that Netreon's products will be accepted in the marketplace, or that
Netreon will become a profitable line of business. Peerless continues to
explore various options and strategic alternatives to reduce substantially the
level of operating costs of Netreon that Peerless is funding. Towards this end,
there have been substantial reductions in the Netreon workforce. Additional
options and alternatives under exploration include a sale of all or a
substantial part of Netreon and shutdown of Netreon, with or without a sale of
its technology assets. The realization of any of these scenarios could have a
material adverse effect on Peerless and the trading prices of the Company's
common stock.
The current market in which Peerless operates has been consolidating and demand
for its Imaging technology and products has been declining.
The Company provides its technology and products to the worldwide market
for printers (21-69 PPM) and MFPs (21-110 PPM), unit volumes for which have been
projected by International Data Corporation to grow at lower rates. Available
data indicates that retail prices are declining in these segments. Both of these
segments are key target markets for the Company. There has been a decline in the
number of contracts that the Company has with OEMs under which the Company is
currently performing services and granting licenses, and this decline is likely
to continue along with the demand for the technology and products the Company
presently offers. Competitors are merging into larger business units with the
resulting strength to acquire and impose a competitive advantage in the
Company's market segments.
Peerless may be unable to develop new and enhanced products that achieve
widespread market acceptance.
Peerless currently derives substantially all of the Company's revenues from
licensing and sales of the Company's embedded imaging software and products.
Peerless expects that revenue from the embedded imaging products will continue
to account for a substantial portion of revenues for the remainder of fiscal
year 2002 and beyond. Additionally, the Company's future success depends in part
on the Company's ability to address the rapidly changing needs of potential
customers in the storage marketplace and the introduction of high-quality, cost-
effective storage products, product enhancements and services on a timely basis,
and by keeping pace with technological developments and emerging storage
industry standards has not achieved the expected results. The Company's failure
to develop and to successfully introduce new products and product enhancements
in the Company's prime marketplaces could materially and adversely affect the
Company's business and financial results.
Peerless relies on relationships with certain customers and any change in those
relationships will harm the Company's business.
During the third quarter of fiscal year 2002, three customers each
generated greater than 10% of the revenues and collectively contributed 57% of
revenues. Block license revenues for the same time period amounted to $5.2
million, or 67%, of revenues. During the third quarter of fiscal year 2001, four
customers each generated greater than 10% of the revenues, that collectively
contributed 60% of revenues. There were $4.4 million of block license revenues
during the third quarter of fiscal year 2001.
Although the acquisitions of Netreon and PSIP and the Company's on-going
sales efforts have expanded the Company's potential customer base, a limited
number of OEM customers continue to provide a substantial portion of Peerless'
revenues. There presently are only a limited number of OEM customers in the
digital document product market to which the Company can market its technology
and services. Therefore, the Company's ability to replace a lost customer or
offset a significant decrease in the revenues from a particular customer is
severely constrained. A reduction in business from a customer providing a
significant portion of the Company's revenues will have a material adverse
effect on the Company's operating results.
Peerless relies on relationships with a certain technology vendor and any change
in those relationships will harm the Company's business.
The Company has a licensing agreement with a certain technology vendor to
bundle and sublicense the vendor's licensed products with the Company's licensed
software. This relationship accounted for $4.5 million in revenues and
18
an associated $1.6 million in cost of revenues in the third quarter of fiscal
year 2002. Should the agreement be terminated or canceled by the certain
technology vendor, there is no assurance that the Company could replace that
revenue within an immediate term. Such an event would have a material adverse
effect on the Company's operating results.
The Company's engineering services revenue is subject to significant
fluctuations.
Peerless has experienced significant fluctuations in engineering services
financial performance that have been caused by many factors including:
. product development delays (see "PEERLESS MUST ADAPT TO TECHNOLOGY
TRENDS AND EVOLVING INDUSTRY STANDARDS OR THE COMPANY WILL NOT BE
COMPETITIVE" below);
. third party delays;
. increases in the estimated hours to complete particular engineering
services projects;
. delays in the availability or stability of third party technology; and
. cancellation or redirection of engineering services projects by OEMs.
There can be no assurance that these and similar factors will not adversely
impact future engineering services results, or that the Company will be able to
negotiate cancellation fees into future engineering services arrangements.
Peerless' licensing revenue is subject to significant fluctuations.
The Company's recurring licensing revenue model has shifted from per-unit
royalties paid upon OEM shipment of product and guaranteed quarterly minimum
royalties to a model that results in revenues associated with the sale of SDKs
and block licenses. The reliance on block licenses has occurred due to aging OEM
products in the marketplace, reductions in Adobe product penetration, reductions
in the number of OEM products shipping and a design win mix that changed from
object code licensing arrangements to predominately SDKs. Revenues could
continue to fluctuate significantly from quarter to quarter as the number and
value of design wins vary or if block licenses are delayed or are lost to
competitors. Any of these factors could have a material adverse effect on the
Company's operating results.
Peerless may be unable to accurately estimate the Company's revenues from
product licensing and as a result may be required to adjust the Company's
revenues in the future.
Peerless' recurring product licensing revenues are dependent, in part, on
the timing and accuracy of product sales reports received from OEM customers.
These reports are provided on a calendar quarter basis and, in any event, are
subject to delay and potential revision by the OEM. Therefore, the Company must
estimate the entire recurring product licensing revenues for the last month of
each fiscal quarter and to further estimate all quarterly and annual revenues
from an OEM when the report from such OEM is not received in a timely manner. In
the event that the Company is unable to estimate such revenues accurately prior
to reporting quarterly or annual results, the Company may be required to adjust
recorded revenues in subsequent periods.
Peerless must adapt to technology trends and evolving industry standards or the
Company will not be competitive.
The marketplace for Peerless' products and services is characterized by
rapidly changing technology, evolving industry standards and needs, frequent new
product introductions, knowledgeable OEMs with financial strength and
negotiating leverage greater than the Company's own and competitive incursions.
Over the past year, the Company's ability and the ability of the Company's OEM
customers to meet industry changes and market demands in a timely manner with
responsive development projects has been significantly reduced. Peerless'
success has always depended on the achievement of new design wins followed by
OEM deployment of associated new digital document products with attendant
recurring license fees, and the regular and continued introduction of new and
enhanced technology and services to the Company's OEMs on a timely and cost-
effective basis. The shortfall of the acceptance
19
by OEMs of the Company's technology has been further exacerbated by less than
projected deliveries of digital document products by the Company's OEM customers
to the marketplace due to the recent slow down in business and economic
activity.
There can be no assurance that the product solutions and technology of the
Company's competitors or the OEMs themselves will not render the Company's
technology or the Company's OEMs' products technically or fiscally
noncompetitive or obsolete. If Peerless or its OEMs fail to anticipate or
respond adequately to the rapidly changing technology and evolving industry
standards and needs, or any significant delay in development or introduction of
new and enhanced products and services, it could result in a loss of
competitiveness and/or revenues. Such actions would have a material adverse
effect on the Company's operating results.
The industry for embedded imaging systems for digital document products involves
intense competition and rapid technological changes and the Company's business
may suffer if its competitors develop superior technology.
The market for embedded imaging systems for digital document products is
highly competitive and characterized by continuous pressure to enhance
performance, to introduce new features and to accelerate the release of new
products. Peerless competes on the basis of technology expertise, product
functionality, development time and price. Peerless' technology and services
primarily compete with solutions developed internally by OEMs. Virtually all of
the Company's OEM customers have significant investments in their existing
solutions and have the substantial resources necessary to enhance existing
products and to develop future products. These OEMs have or may develop
competing embedded imaging systems technologies and may implement these systems
into their products, thereby replacing the Company's current or proposed
technologies, eliminating a need for the Company's services and products and
limiting the Company's future opportunities. Therefore, Peerless is required to
persuade these OEMs to outsource the development of their embedded imaging
systems to the Company, and to provide products and solutions to these OEMs that
cost-effectively compete with their internally developed products. Peerless also
competes with software and engineering services provided in the digital document
product marketplace by other systems suppliers to OEMs.
As the industry continues to develop, competition and pricing pressures
will increase from OEMs, existing competitors and other companies that may enter
the Company's existing or future markets with similar or substitute solutions
that may be less costly or provide better performance or functionality. Peerless
anticipates increasing competition for the Company's color products under
development, particularly as new competitors develop and enter products in this
market. Some of the Company's existing competitors, many of the Company's
potential competitors and virtually all of the Company's OEM customers have
substantially greater financial, technical, marketing and sales resources than
Peerless. In the event that price competition increases, competitive pressures
could require the Company to reduce the amount of royalties received on new
licenses and to reduce the cost of the Company's engineering services in order
to maintain existing business and generate additional product licensing
revenues. This could reduce profit margins and result in losses and a decrease
in market share. No assurance can be given as to the Company's ability to
compete favorably with the internal development capabilities of the Company's
current and prospective OEM customers or with other third party embedded imaging
system suppliers, and the inability to do so would have a material adverse
effect on the Company's operating results.
If Peerless is not in compliance with the Company's licensing agreements,
Peerless may lose the Company's rights to sublicense technology; the Company's
competitors are aggressively pursuing the sale of licensed third party
technology.
Peerless currently sublicenses third party technologies to the Company's
OEM customers. Such sublicense agreements are non-exclusive. If Peerless is
determined not to be in compliance with the Company's agreements with its
licensors, Peerless may forfeit the Company's right to sublicense these
technologies. Likewise, if such sublicense agreements were canceled, Peerless
would lose the Company's right to sublicense these technologies. Additionally,
the licensing of these technologies has become very competitive, with
competitors possessing substantially greater financial and technical resources
and market penetration than Peerless. As competitors are pursuing aggressive
strategies to obtain similar rights as held by Peerless to sublicense these
third party technologies there is no assurance that Peerless can remain
competitive in the marketplace if one or more competitors are successful.
The Company's reserves for accounts receivable may not be adequate.
20
The Company's net accounts receivable declined to $2.6 million as of
October 31, 2001, down from $7.9 million as of January 31, 2001, reflecting
significant collections from several major customers, including the conversion
of unbilled receivables to accounts receivable and the resolution of a disputed
claim regarding the licensing of intellectual property resulting in a collection
of a $1.5 million long-term receivable. Although Peerless feels that the
Company's reserves for accounts receivable are adequate for fiscal year 2002,
there can be no assurance this is the case. If the Company's reserves for
accounts receivable are inadequate, it could have a material adverse effect on
the Company's results of operations.
The Company's business may suffer if the Company's third party distributors are
unable to distribute the Company's products and address customer needs
effectively.
Peerless has developed a "fabless" distribution model for the sale of
ASICs. Peerless has no direct distribution experience and places reliance on
third party distributors to maintain inventories to address OEM needs, manage
manufacturing logistics, and distribute the product in a timely manner. There
can be no assurance that these distribution agreements will be maintained or
will prove adequate to meet the Company's needs and contractual requirements.
Peerless relies on certain third party providers for applications to develop the
Company's products. As a result, Peerless is vulnerable to any problems
experienced by these providers, which may delay product shipments to the
Company's customers.
Currently, Peerless relies on three independent parties, Motorola, IBM
Microelectronics and NEC Microelectronics, each of which provides unique
application specific integrated circuits incorporating the Company's imaging
technology for use by the Company's OEMs. These sole source providers are
subject to materials shortages, excess demand, reduction in capacity and/or
other factors that may disrupt the flow of goods to the Company's customers
thereby adversely affecting the Company's customer relationships. Any such
disruption could limit or delay production or shipment of the products
incorporating the Company's technology, which could have a material adverse
effect on the Company's operating results.
Additionally, Peerless has relationships with Adobe and Novell that address
many critical aspects of the Company's OEM customers' needs and represent
significant portions of the Company's revenue. Peerless has licensed from Adobe,
for internal development purposes, the right to use Adobe's PostScript Software
to enable the Company's products to provide Adobe's PostScript printing.
Peerless has licensed to Adobe several of the Company's technologies and has
developed technologies for Adobe for which Peerless receives royalties.
Through the Company's subsidiary Netreon, Peerless has entered into
contracts with entities and persons located in Hong Kong. Peerless utilizes the
services of these entities for engineering development and testing. Through
long-term relationships, Peerless operates at favorable costs, schedule and
quality of output advantages. If the services provided by these entities and
persons were to be discontinued, Peerless would have to bring these services in-
house, which could increase costs and delay deliverables. There can be no
assurances that the political and business climates in Hong Kong will remain
stable. However, should there be disruption in the aforesaid relationships, it
is not expected to have a material adverse effect on the Company's financial
condition or the Company's results of financial operations.
Peerless may be unable to respond quickly to changes in demand.
Most of the Company's costs and expenses are related to costs of
engineering services and maintenance, product development, other personnel
costs, marketing programs and facilities. The level of spending for such costs
and expenses cannot be adjusted quickly and is based, in significant part, on
the Company's expectations of future revenues and anticipated OEM commitments.
As in fiscal year 2001, if such commitments do not materialize or are terminated
or if revenues are below expectations, costs and expenses will continue to be
incurred and the Company's quarterly and annual operating results will be
materially and adversely affected.
Peerless is dependent on key personnel and on employee retention and recruiting
for the Company's future success.
21
Peerless is largely dependent upon the skills and efforts of the Company's
senior management and other officers and key employees. The Company's future
success will continue to depend in large part upon the Company's ability to
retain and attract highly skilled managerial, engineering, sales, marketing and
operations personnel, many of whom are in great demand. Competition for such
personnel is intense. The loss of key personnel or the inability to hire or
retain qualified personnel has had and could continue to have a material adverse
effect on the Company's operating results.
Peerless maintains a key person life insurance policy for one executive, Mr.
Au, the General Manager of Netreon, Inc.
The Company's international activities may expose the Company to risks
associated with currency fluctuations.
Peerless is substantially dependent on the Company's international business
activities. The international market for products incorporating the Company's
technology is highly competitive, and Peerless faces substantial competition in
this market from technologies developed internally by the Company's OEMs.
Risks inherent in the Company's international business activities also
include:
. disruptions by terrorists of normal channels of distribution;
. disruptions by terrorists of normal communications lines;
. major currency rate fluctuations;
. changes in the economic condition of foreign countries;
. the imposition of government controls;
. tailoring of products to local requirements;
. trade restrictions;
. changes in tariffs and taxes; and
. the burdens of complying with a wide variety of foreign laws and
regulations,
any of which could have a material adverse effect on the Company's operating
results.
Although all of the Company's contracts are, and Peerless expects that the
Company's future contracts will be, denominated in U.S. dollars, there can be no
assurance that the Company's contracts with international OEMs in the future
will be denominated in U.S. dollars. If any of the Company's contracts are
denominated in foreign currencies, Peerless will be subject to major risks
associated with currency fluctuations, which could have a material adverse
effect on the Company's operating results.
Demand from Pacific Rim customers has continued to and may continue to decline.
During the past several years and continuing through fiscal year 2002, the
Pacific Rim economies have been financially depressed. As a result, some members
of the imaging industry have reported negative financial impacts attributable to
a decrease in demand from Pacific Rim customers. The Company's Pacific Rim
customers are comprised primarily of companies headquartered in Japan. These
Japanese OEMs sell products containing the Company's technology primarily in the
North American, European, and Asian marketplaces. These revenues have declined
and there can be no assurance that revenues from Japanese OEMs will not continue
to decline in future quarters.
The Company's stock price may experience extreme price and volume fluctuations.
22
The Company's common stock has experienced significant price volatility and
over the past 60 days generally has been trading at less than $2.00 per share,
including a period during which the stock traded at less than $1.00 per share.
Such price volatility may occur in the future. Factors that could affect the
trading price of the Company's common stock include:
. swings in quarterly results of operations;
. announcements of new products by the Company or the Company's competitors;
. developments or disputes with respect to proprietary rights;
. a disposition of Netreon or its assets or a discontinuation of Netreon's
business;
. general trends in the industry; and
. overall market conditions, and other factors.
In addition, the stock market historically has experienced extreme price and
volume fluctuations, which have particularly affected the market price of
securities of many related high technology companies and which at times have
been unrelated or disproportionate to the operating performance of such
companies.
Peerless is subject to securities litigation which is expensive and results in a
diversion of resources. Peerless could be subject to additional litigation due
to the volatility of the Company's stock price or for other reasons.
Securities class action litigation has become increasingly common in recent
years. Technology companies are frequently the subjects of such litigation.
Securities class action litigation is particularly common following periods of
market volatility and significant fluctuations in companies' stock prices. In
fiscal year 2000, Peerless and two of the Company's former officers were named
in two separate shareholder class action lawsuits. The first was filed on August
28, 2000; the second was filed on September 19, 2000. They have since been
consolidated and an Amended and Consolidated Complaint has been filed. The
Amended and Consolidated Complaint alleges that Peerless and the individual
defendants engaged in a scheme to artificially inflate the Company's stock price
through the dissemination of false and misleading information. These lawsuits
seek compensatory damages, attorney's fees, fees and expenses. Litigation is
often expensive and diverts management's attention and resources, which could
materially and adversely affect business, financial conditions and results of
operations.
Future sales of the Company's common stock may affect the market price of the
Company's common stock.
As of December 7, 2001, Peerless had 15,372,839 shares of common stock
outstanding, which does not include x,xxx,xxx shares subject to options
outstanding as of such date under stock option plans that are exercisable at
prices ranging from $0.39 to $22.375 per share and 150,000 shares held in
treasury. Management cannot predict the effect, if any, that future sales of
common stock or the availability of shares of common stock for future sale will
have on the market price of common stock prevailing from time to time. Certain
holders of the Company's common stock have registration rights with respect to
their shares. Sales of substantial amounts of common stock (including shares
issued upon the exercise of stock options), or the perception that such sales
could occur, may materially and adversely affect prevailing market prices for
common stock.
The Company's common stock may be removed from listing on the Nasdaq National
Market and thus may not provide adequate liquidity.
On February 23, 2001, Peerless received a notice from Nasdaq indicating that
Peerless had failed to maintain a minimum bid price of $1.00 over a 30 trading
day period as required by Marketplace Rule 4450(a)(5) and that Peerless had
until May 24, 2001 to regain compliance. On May 21, 2001, Peerless received
notice from Nasdaq that Peerless had regained compliance. While Nasdaq has
implemented a temporary moratorium on delistings due to share price, there can
be no assurance that compliance with Nasdaq listing requirements will be
maintained following the expiration of such moratorium in January 2002. If
Peerless is unable to maintain compliance, the Company's common stock may be
subject to being removed from listing on the Nasdaq National Market. Trading in
the Company's common stock after a delisting, if any, would likely be conducted
in the over-the-counter markets in the
23
so-called "pink sheets" or the National Association of Securities Dealers'
Electronic Bulletin Board and could also be subject to additional restrictions.
As a consequence of a delisting, the Company's stockholders would find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Company's common stock. In addition, a delisting would make the
Company's common stock substantially less attractive as collateral for margin
and purpose loans, for investment by financial institutions under their internal
policies or state legal investment laws or as consideration in future capital
raising transactions.
The Company's common stock may be subject to the "penny stock" regulations which
may affect the ability of the holders to sell the Company's common stock.
If the Company's common stock were to be delisted from the Nasdaq National
Market, it may become subject to regulation as a "penny stock." The Securities
and Exchange Commission has adopted regulations that generally define "penny
stock" to be any equity security that has a market price or exercise price less
than $5.00 per share, subject to certain exceptions, including listing on the
Nasdaq National Market. If the common stock is delisted from the Nasdaq National
Market and no other exception applies, the Company's common stock may become
subject to the Securities and Exchange Commission's Penny Stock Rules, Rule 15g-
1 through Rule 15g-9 under the Exchange Act. For transactions covered by these
rules, the broker-dealer must make a special suitability determination for the
purchase of such securities and have received the purchaser's written consent to
the transaction prior to the purchase. Additionally, a risk disclosure document
mandated by the Securities and Exchange Commission relating to the "penny stock"
market must be delivered to the purchaser prior to the transaction, unless the
transaction satisfies one of the exemptions under the rules. The broker-dealer
must also disclose the commission payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Monthly
statements must be sent disclosing recent price information for the "penny
stock." Additionally, the rules may restrict the ability of broker-dealers to
sell the Company's common stock and may affect the ability of holders to sell
the Company's common stock in the secondary market.
The Company's future investment income may fall below expectations due to
adverse market conditions.
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates. The Company's exposure to market rate
risk for changes in interest rates relates primarily to the Company's investment
portfolio. Peerless invests the Company's excess cash in fixed rate debt
instruments of the U.S. Government and high-quality corporate issuers as well as
floating rate money market funds. Interest rates on these instruments have
declined substantially. Peerless, by policy, limits the amount of credit
exposure to any one issuer. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates, or Peerless may suffer losses in principal if forced to sell
securities before maturity, if they have declined in market value due to changes
in interest rates.
Effects of anti-takeover provisions could inhibit the Company's acquisition.
Some of the provisions of the Company's certificate of incorporation, by-laws
and Delaware law could, together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control;
. limit the price that investors might be willing to pay in the future for
shares of the Company's common stock.
The Company's existing capital resources may not be sufficient and if Peerless
is unable to raise additional capital, the Company's business may suffer.
24
The Company's cash and short-term investment portfolio was $15.7 million at
October 31, 2001 and the current ratio of assets to current liabilities was 3:1.
For the nine month period ended October 31, 2001, Peerless used $2.9 million in
cash to finance operations.
The Company's principal source of liquidity is the Company's cash and cash
equivalents and investments, which, as of October 31, 2001 were $18.0 million in
the aggregate; the Company expects to end the fourth quarter of fiscal year 2002
with $13 to $15 million in cash and cash equivalents and investments, which the
Company believes is adequate to fund the Company until it is able to return to
profitability and generate a positive cash flow. For the nine month period ended
October 31, 2001, Peerless incurred a loss and experienced negative cash flow
from operating activities. Peerless does not have a credit facility and Peerless
does not expect to secure a line of credit. If Peerless does not generate
anticipated cash flow from licensing, or if expenditures are greater than
expected, Peerless most likely will reduce discretionary spending, which could
require a delay, scaling back or elimination of some or all of the Company's
development efforts, any of which could have a material adverse effect on the
Company's business, results of operations and prospects. Furthermore, if
Peerless continues to experience negative cash flows, as is currently
forecasted, and Peerless is unable to increase revenues or cut costs so that
revenues generated from operating activities are sufficient to meet the
Company's obligations as a result of which Peerless exhausts current capital
resources, Peerless will be required to obtain additional capital from other
sources. Such sources might include issuances of debt or equity securities, bank
financing or other means that might be available to increase the Company's
working capital. Under such circumstances, there is substantial doubt as to
whether Peerless would be able to obtain additional capital on commercially
reasonable terms or at all. The inability to obtain such resources on
commercially acceptable terms could have a material adverse effect on the
Company's operations, liquidity and financial condition, the Company's prospects
and the scope of strategic alternatives and initiatives available to the
Company.
If Peerless fails to adequately protect the Company's intellectual property or
face a claim of intellectual property infringement by a third party, Peerless
could lose the Company's intellectual property rights or be liable for damages.
The Company's success is heavily dependent upon the Company's proprietary
technology. To protect the Company's proprietary rights, Peerless relies on a
combination of patent, copyright, trade secret and trademark laws as well as the
early implementation and enforcement of nondisclosure and other contractual
restrictions. As part of the Company's confidentiality procedures, Peerless'
policies are to enter into written nondisclosure agreements with the Company's
employees, consultants, prospective customers, OEMs and strategic partners and
to take affirmative steps to limit access to and distribution of the Company's
software, intellectual property and other proprietary information. Despite these
efforts, Peerless may be unable to effectively protect the Company's proprietary
rights and the enforcement of the Company's proprietary rights may be cost
prohibitive.
The Company's source code also is protected as a trade secret. However, from
time to time Peerless licenses the Company's source code to OEMs, which subjects
the Company to the risk of unauthorized use or misappropriation despite the
contractual terms restricting disclosure and use. In addition, it may be
possible for unauthorized third parties to copy the Company's products or to
reverse engineer in order to obtain and subsequently use the Company's
proprietary information.
Peerless holds eight patents issued in the United States, one of which is
also issued in France, Germany, Great Britain and Hong Kong. The issued patents
relate to techniques Peerless has developed for generating output for continuous
synchronous raster output devices, such as laser printers. Peerless has five
patent applications pending in Japan, nine applications pending in the United
States, four applications pending in the European Patent Office and two
applications each pending in Hong Kong and Canada. There can be no assurance
that patents Peerless holds will not be challenged or invalidated, that patents
will issue from any of the Company's pending applications or that any claims
allowed from existing or pending patents will be of sufficient scope or strength
(or issue in the countries where products incorporating the Company's technology
may be sold) to provide meaningful protection or any commercial advantage to the
Company. In any event, effective protection of intellectual property rights may
be unavailable or limited in certain countries. The status of United States
patent protection in the software industry will evolve as the United States
Patent and Trademark Office grants additional patents. Patents have been granted
to fundamental technologies in software after the development of an industry
around such technologies and patents may be issued to third parties that relate
to fundamental technologies related to the Company's technology.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on the
Company's technologies may become the subjects of infringement claims. There can
be no assurance that third parties will not assert infringement claims against
the Company in the future. Any such
25
claims, regardless of merit, could be time consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect on the Company's operating results.
In addition, Peerless may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Litigation to determine the
validity of any claims, whether or not such litigation is determined in the
Company's favor, could result in significant expenses and divert the efforts of
the Company's technical and management personnel from productive tasks. In
addition, Peerless may lack sufficient resources to initiate a meritorious
claim. In the event of an adverse ruling in any litigation regarding
intellectual property, Peerless may be required to pay substantial damages,
discontinue the use and sale of infringing products, and expend significant
resources to develop non-infringing technology or obtain licenses to infringing
or substituted technology. The Company's failure to develop, or license on
acceptable terms, a substitute technology if required could have a material
adverse effect on the Company's operating results.
Peerless cannot guarantee the success of the Company's new Internet printing
systems.
Peerless has installed the Company's first two Internet printing systems in
the hospitality market, has initiated limited beta-site testing and has just
recently begun to implement the business model. Although Peerless has been able
to demonstrate that the Company's Internet printing system works, there is no
assurance that this new business model will generate revenues and become
profitable.
Peerless may be unable to manage expansion and growth effectively.
The Company's ability to implement the Company's business plan, develop and
offer products and manage expansion in rapidly developing and disparate
marketplaces requires comprehensive and effective planning and management. The
growth in business, relationships with current and potential customers and third
parties has placed, and will continue to place, a significant strain on
management systems and resources. The Company's failure to continue to improve
upon the operational, managerial and financial controls, reporting systems and
procedures in its Imaging and Storage businesses or the Company's failure to
expand and manage its workforce, could have a material adverse effect on the
Company's business and financial results.
Peerless may be unable to deploy the Company's employees effectively in
connection with changing demands from the Company's OEM customers.
The industry in which Peerless operates has experienced significant
downturns, both in the United States and abroad, often in connection with, or in
anticipation of, maturing product cycles and declines in general economic
conditions. Over the past two years, Peerless has experienced a shift in OEM
demand from the historically prevailing requirement for turnkey solutions toward
SDKs. Because Peerless has experienced a general decrease in demand for
engineering services, engineering services resources have been re-deployed to
research and development. Should this trend abruptly change, Peerless may be
unable to re-deploy labor effectively and timely, which inability could have a
material adverse effect on the Company's operational results.
26
PART II--OTHER INFORMATION
Item 1--Legal Proceedings.
The Company engaged in the following litigation matters:
On August 28, 2000, a stockholder class action lawsuit was filed against the
Company and two of the Company's former officers in the United States District
Court for the Southern District of California. A second stockholder class action
lawsuit was filed on September 19, 2000 against the Company and the same two
former officers of the Company in the same United States District Court. On
April 17, 2001, the Company was served with an Amended and Consolidated
Complaint. These lawsuits allege a scheme to artificially inflate the Company's
stock price based on alleged misleading public announcements and seek
compensatory damages with interest and attorneys fees, fees and expenses.
Peerless believes all of the claims to be without merit. A hearing on the motion
filed by the Company and the two former officers to dismiss the Amended and
Consolidated Complaint was held on October 9, 2001. A ruling by the Court will
be forthcoming.
Item 2--Changes in Securities.
None
Item 3--Defaults Upon Senior Securities.
None
Item 4--Submission of Matters to a Vote of Security Holders.
None
Item 5--Other Information.
None
27
Item 6--Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
Form 8-K was filed as of September 7, 2001 reporting other events pursuant
to Item 5 of Form 8-K.
28
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized:
Peerless Systems Corporation
Date: December 14, 2001 By: /s/ Howard J. Nellor
------------------------------------------
Howard J. Nellor
President and Chief Executive Officer
(Principal Executive Officer)
Date: December 14, 2001 By: /s/ William R. Neil
------------------------------------------
William R. Neil
Vice President of Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
29