-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EPdTqT+jOva3rJk0HKoCXkTpiZ9rfKiy4mdxoD3XNTKQBMnsfvseMrdoKeZbp/v+ XMLvPCdSn1SwQFcIezFv8w== 0000944209-99-000625.txt : 19990427 0000944209-99-000625.hdr.sgml : 19990427 ACCESSION NUMBER: 0000944209-99-000625 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEERLESS SYSTEMS CORP CENTRAL INDEX KEY: 0000897893 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 953732595 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21287 FILM NUMBER: 99600390 BUSINESS ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3105360908 MAIL ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-K405 1 FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number: January 31, 1999 000-21287 --------------- PEERLESS SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-3732595 (State or other jurisdiction of (I.R.S. Employer 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) Securities registered pursuant to Section 12(b) of the Acts: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value Per Share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed 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[_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of the Common Stock held by non- affiliates of the Registrant, based upon the last sale price of the Common Stock reported on the Nasdaq National Market on April 13, 1999 was approximately $66,719,574. The number of shares of Common Stock outstanding as of April 13, 1999 was 11,204,099. DOCUMENTS INCORPORATED BY REFERENCE Certain parts of the Peerless Systems Corporation Proxy Statement relating to the annual meeting of stockholders to be held on June 17, 1999 (the "Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K. ================================================================================ SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS This Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 which are subject to the "safe harbor" created by those sections. The forward-looking statements include, but are not limited to, statements related to industry trends and future growth in the markets for digital document products, embedded imaging systems and enterprise networks; the Company's strategies for reducing its customers' costs and time-to-market; the Company's product development efforts; the Company's efforts to secure and protect the rights to its proprietary technology; the effect of GAAP accounting pronouncements on the Company's recognition of revenues; the effect of the Year 2000 Issue on the Company's operations; market risk; the Company's future research and development expenditures; the availability of future rental space; the payment of dividends; and the sufficiency of the Company's capital resources. Discussions containing such forward-looking statements may be found in "Business", "Properties", "Market for Registrant's Common Equity and Related Stockholder Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. The Company disclaims any obligation to update these forward-looking statements as a result of subsequent events. The risks and uncertainties on pages 20 through 24, among other things, should be considered in evaluating the Company's prospects and future financial performance. 2 PEERLESS SYSTEMS CORPORATION 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I Item 1. BUSINESS.............................................. 4 Item 2. PROPERTIES............................................13 Item 3. LEGAL PROCEEDINGS.....................................13 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...13 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS...................................14 Item 6. SELECTED FINANCIAL DATA...............................15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................16 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........25 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................25 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS......................26 Item 11. EXECUTIVE COMPENSATION................................27 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................27 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........27 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...........................................28
TRADEMARKS Memory Reduction Technology(R), PEERLESS SYSTEMS(R), WINEXPRESS(R), PeerlessPrint(R) and QuickPrint(R) are registered trademarks of Peerless Systems Corporation. PeerlessPowered/TM/, CPL/TM/, PicturePrint/TM/, Acceleprint/TM/ and Synthesys/TM/ are trademarks of Peerless Systems Corporation and are subjects of applications pending for registration with the United States Patent and Trademark Office. Peerless Systems (in English and Japanese Katakana), Peerless (in logo) and P (in logo) are registered service marks with the Japanese Patent Office. Peerless/TM/ (in logo) and P/TM/ (in logo), Peerless Systems/TM/, PEERLESSPRINT and PEERLESSPAGE/TM/ (all in English and Japanese Katakana), are trademarks of Peerless Systems Corporation and are subjects of applications pending for registration with the Japanese Patent Office. This Form 10-K also refers to various products and companies by their trademark names. In most, if not in all cases, these designations are claimed as trademarks or registered trademarks by their respective companies. 3 PART I Item 1 -- Business. Peerless Systems Corporation ("Peerless" or the "Company") is a leading provider of software-based embedded imaging systems to original equipment manufacturers ("OEMs") of digital document products. Digital document products include printers, copiers, fax machines and scanners, as well as multifunction products ("MFPs") that perform a combination of these imaging functions. In order to process digital text and graphics, digital document products rely on a core set of imaging software and supporting electronics, collectively known as an embedded imaging system. Peerless' technology and engineering services provide advanced embedded imaging solutions that enable the Company's OEM customers to develop digital printers, copiers and MFPs quickly and cost effectively. The Company markets its solutions directly to OEM customers such as Canon, IBM, Minolta and Ricoh. Peerless was incorporated in California in 1982 and reincorporated in Delaware in September 1996. Industry Background Embedded Imaging Systems Today's office environment is increasingly dependent on a variety of electronic imaging products such as printers, copiers, fax machines and scanners, collectively known as digital document products. These imaging products also are becoming common in the home environment. Historically, most electronic imaging products in the office environment have been stand-alone, monochrome (black-and-white) machines, based on analog technology and dedicated to a single print, copy, fax or scan function. However, with the proliferation of personal computers, desktop publishing software and network computing, documents increasingly are being created, stored and transmitted digitally, thereby creating the need for digital document production. Digital documents are becoming increasingly complex and may include digital text, line art or photographic images. In order to process and render these documents, digital document products rely upon a core set of imaging software and supporting electronics collectively known as an embedded imaging system. With advances in digital imaging engines such as laser printing engines in the mid-1980s, a common imaging technology foundation for multiple market sectors has emerged. To date, a majority of embedded imaging systems have been developed and produced internally by digital document product manufacturers such as Hewlett-Packard ("HP"), Xerox and Canon. The Company estimates the digital document market, based in part upon data and projections provided by International Data Corporation ("IDC"), was approximately $35 billion in 1998. Developments in the Digital Document Products Market Rapid changes in technology and end-user requirements have created increased challenges for digital document product manufacturers, particularly in the area of embedded imaging systems. These changes include increased technical complexity, the increased role of networking, the emergence of MFPs and the demand for color imaging. As a result, OEMs increasingly are relying on outside embedded imaging systems suppliers to provide their embedded imaging system solutions. Increased Technical Complexity. Initially, the software written for embedded imaging systems supported only monochrome, single-function, low-resolution capabilities. This software was relatively simple and resided on a low-end 8-bit microprocessor platform. However, as technology and end-user requirements have evolved, the embedded imaging task has become significantly more complex. Today, digital imaging engines operate at resolutions of 1,200 dots per inch and greater, require the support of a variety of document handling options, operate at increased speeds and are beginning to offer high-quality color output. In addition, computers and application software create increasingly sophisticated documents that incorporate complex graphical content. The data files for these digital documents can be very large and, if left in raw form, can overwhelm the memory and processing power of the digital document product. In response, embedded imaging systems have evolved from 8-bit to 32-bit platforms that 4 often must employ special techniques to manage large data files and minimize memory costs. Most embedded imaging systems use compression techniques to reduce the size of data files, which can result in reduced image quality. The increased complexity of digital document products, the rapid pace of technological change and the increased memory requirements have created increased challenges for digital document product manufacturers, particularly in the core areas of image processing and operating system architecture. Increased Reliance on Outsourcing. In addition to the engineering challenges generated by changing technology, digital document product manufacturers are continually subject to a variety of market pressures. Competition in the marketplace, coupled with end-user demand for greater performance at reduced cost has created a growing need to reduce time-to-market and engineering costs. This increased competition is forcing digital document product manufacturers to outsource imaging software and supporting electronics design to embedded imaging systems suppliers in order to include new imaging technologies and minimize development time and cost. The increased role of networking, the emergence of MFPs, the demand for color imaging and the increased technical complexity associated with products meeting these market changes have accelerated the trend toward outsourcing. As digital document product manufacturers move to incorporate imaging technologies from outside suppliers, their internal resources are freed to focus on their core competencies in product differentiation, marketing and distribution. Additionally, there has been no established comprehensive embedded imaging system standard for the digital document product industry to date. However, as the digital document product market sectors converge and the complexity of imaging technology intensifies, Peerless believes digital document product manufacturers will realize significant cost and time-to-market advantages by utilizing a single open embedded imaging system standard across multiple digital document product market sectors. See "Competition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of these forward-looking statements. Demand for Color Imaging. Although many office computers have color displays, and the graphical content available to office users via the Internet and advanced office applications make heavy use of color, most digital document products found in today's office environment still generate monochrome output. In the 1990s, color inkjet printers were introduced into the small office/home office (SOHO) market and color laser printers were introduced into the office marketplace. In the SOHO market, most color inkjet printers are typically limited by output speeds of one or fewer pages per minute. In the office market, color laser printers have been limited by technology and unit costs that remain significantly higher than monochrome laser printers. In addition, the printing speeds for color continue to be significantly slower than monochrome laser printers. Furthermore, digital document product manufacturers are developing tandem engines, which are comprised of multiple imaging stations dedicated to individual colors used in the printing process. Although these products hold the promise of raising desktop office color printing speeds to monochrome levels of performance, cost effective embedded imaging systems that can produce high quality output from these tandem engines are limited in the market. As a result, market pressures for advanced embedding imaging systems that enable high quality and improved price/performance for both SOHO and office color products remain high. In addition, new digital appliances such as digital cameras are creating an intensified need for photoquality color printing capabilities. Although digital document engine manufacturers have developed color hardware technology that is now capable of supporting high speed photoquality color printing, the output produced by today's digital document products, in many cases, continues to be limited by existing embedded imaging systems. Today's embedded imaging systems are challenged by the transition from monochrome to color output because the simultaneous implementation of four planes of color coupled with up to 8 bits per pixel at increased resolution significantly increases the size of the digital document data stream. As a result, there is a need for embedded imaging systems that can support the accelerated performance requirements of high- density color output. Emergence of Multifunction Products. The advent of MFPs has eroded the boundaries between the previously distinct printer, copier, fax and scanner market sectors. MFPs, ranging from small home products to large office devices, offer several of these functions for significantly less cost than would otherwise be incurred by purchasing these products separately. Each of the dominant vendors in the printer, copier and fax markets have now introduced MFPs, which have required each of them to broaden their imaging expertise. At the same time, the need for 5 concurrent processing of multiple digital document product functions has created the need for real-time, multitasking operating system support. Increased Role of Networking. Within the office environment, digital document products increasingly are deployed in a networked configuration. According to projections by IDC, 74% of laser printers sold in the United States in 1996 were estimated to have been connected to enterprise networks, and this percentage is expected to increase to 81% by 2002 Because multiple local area network protocols and network operating systems are deployed in the corporate network environment, networked digital document products must support a broad array of networking technologies to maximize accessibility by various user groups. The network environment is also changing rapidly and becoming increasingly complex, with a growing requirement for remote network management that extends across local area networks, wide area networks and the Internet. In addition, because the majority of office digital document products are networked, the image processing intelligence may be partitioned and located anywhere within the network: at the site of document or image origination, at a server, or, as is typically the case today, inside the digital document product itself. In some instances, such as when printing to a remote location, it can be advantageous to perform image pre-processing and compression at the document origination site prior to transmission over usage-sensitive or congested facilities. In other instances, such as when printing from a graphics workstation, it can be advantageous to perform most of the image processing at the printer in order to offload a host computer that is under a heavy workload. In order to accommodate the emerging needs of the networked office environment, an optimal embedded imaging system must employ a modular architecture capable of serving and managing distributed corporate resources. Advent of Digital Photography. The emergence of digital cameras capable of producing images of near-film quality and the increasing popularity of these devices has created a need for editing and directly printing these images to a variety of digital document products without an intermediary computer. Many of today's digital camera manufacturers are restricted to a single specific printer to which their camera can print directly. This limitation may restrict the appeal of their products to potential buyers. The lack of a standard embedded imaging solution to accomplish these tasks has created new technical challenges for both digital camera manufacturers and the digital document product market. Peerless Products And Solutions Peerless is a leading provider of embedded imaging systems for the digital document product market. The Company's technology and engineering services provides advanced embedded imaging solutions that enable the Company's OEM customers to develop digital printers, copiers and MFPs quickly and cost effectively. The Company delivers its products to its OEM customers in multiple ways: 1) licensing of the Company's standard imaging technology for the OEM's internal product development; 2) turnkey product development whereby the Company provides the technology and the additional engineering services necessary to integrate the appropriate technology into a complete embedded imaging system solution optimized to the OEM's specific requirements or 3) a co-development relationship that combines the licensing of Peerless technology with joint Peerless and OEM engineering resources. Products and Services The Company has designed its embedded imaging technology with a modular architecture that addresses a broad spectrum of digital document product solutions tailored to an individual OEM's requirements. Peerless offers its OEMs the flexibility to selectively optimize solutions for monochrome and color, networking support, languages or multifunction features for their digital document products. Peerless also offers engineering services to allow OEMs to outsource the development of the entire embedded imaging system for a digital document product. The Company's products include the following technologies and services: Object-Based Imaging System. PeerlessPage is a complete object-based imaging system including a high-performance real-time operating system kernel, printing engine driver, object-based image processing model, 6 graphics library, font management, hard disk management, print job management and user control panel interface. The scaleable nature of the Company's technology enables it to serve both the low cost and high performance sectors of the market. The multitasking operating system enables the Company to manage concurrent processing of digital document product tasks for the MFP marketplace. For added performance and flexibility, the Company's imaging system may be implemented to operate in a distributed fashion, allowing for portions of the imaging processing task to take place in the originating host computer, in the digital document product or elsewhere in the network. Color extensions to PeerlessPage support the unique requirements of color printers. Extensions to support MFPs have been developed to provide multitasking capability. Page Description Languages. The Company provides OEMs with support for the most widely used and standard page description languages ("PDLs"), Adobe's PostScript Software and Hewlett-Packard's Printer Control Language ("PCL"). The Company offers PeerlessPrint technology, which emulates Hewlett-Packard's PCL. The complete range of printing language products includes PeerlessPrint5E, 5C and 6. PeerlessPrint5E provides compatibility with HP's PCL 5e language utilized in their LaserJet 5P, 5Si, LJ4000 and LJ5000 laser printer products, as well as enhancements to support higher resolutions and added paper handling options. PeerlessPrint5C is designed to provide compatibility with HP's PCL 5C utilized in its Color LaserJet 4500 and high-end inkjet products. PeerlessPrint6 provides monochrome and color compatibility with HP's latest PCL 6 language. As a third- party co-developer, the Company provides an optimized, high performance integration of Adobe PostScript 3 into the PeerlessPage imaging system for customers desiring to license PostScript from Adobe Systems Incorporated ("Adobe"). The Company's WinEXPRESS languages have been designed to provide host-based printing solution for low cost monochrome and color printers and MFPs and ACCELEPRINT combines a host-based printing solution with an industry standard PCL solution to provide a highly optimized method for printing documents. PC Software. The Company provides a complete set of PeerlessPrint drivers that optimize the printing process in the Windows 3.1, 95, 98 and the NT 4.0 environments. Windows NT 5.0 is currently under development and planned for future release. ASICs and Integrated Processors. The Company designs application specific integrated circuit ("ASIC") solutions for the office and SOHO sectors of the digital document product marketplace. These ASICs provide a silicon-based implementation of key components of its imaging software. Peerless has licensed these designs to semiconductor manufacturers, such as IBM Microelectronics and Motorola who, in turn, have the right to manufacture and sell these ASICs directly to digital document product manufacturers. The Company's QuickPrint line of imaging ASIC co-processors and integrated processors incorporate basic components of the Company's imaging system into a silicon solution to reduce controller costs and enhance overall performance. For the high performance sector of the office market, the Company offers specialized co-processors that accelerate the Peerless imaging software and incorporate controller functionality and imaging features to provide both cost savings and performance enhancements. The Company currently markets the QP 1700, QP 1800 and QP +401 ASICs. The QP +401 is a "system on a chip" solution which integrates the processor and co-processor on a single chip. Additionally, the Company has introduced the QP 1900 family of ASICs to address the multiple color planes of high-speed color printing as well as very high-speed monochrome printing. In addition, the Company, in partnership with Conexant Systems, Inc. ("Conexant"), formerly Rockwell Semiconductor Systems, Inc., has developed an integrated processor solution for the multifunction SOHO color inkjet market which will incorporate Peerless' object-based imaging system and Rockwell's fax technology into a low cost chipset solution. Networking Technology. The Company has designed a standardized networking interface, the Peerless Standard Input/Output ("PSIO") interface, to enable its digital document product OEMs to reduce custom development costs for their networking solutions through third parties. In addition, Peerless supports a broad array of networking protocols, allowing its OEM customers to address the majority of end-user networking requirements. To accommodate the need for remote network management of digital document products over LANs and across wide area networks, including intranets, the Company supplies management information base ("MIB") tables that may be 7 utilized by open industry-standard network management systems. Most recently, Peerless has agreed to merge, subject to final closing, with a networking company that enables the Company to provide cost-effective embedded networking solutions. The embedded network solution eliminates the need for a network interface card and provides low cost embedded networking solutions for cost sensitive market segments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of the acquisition. Engineering Services. For those OEMs that wish to outsource the development of some or all of the embedded imaging system for a digital document product, the Company offers engineering services. This can include controller design and custom engineering for vendor-specific features that complement the Company's standard imaging technology. In addition, during fiscal 1998 the Company established the Peerless Development Partner Program to give Peerless and OEM customers the option of using an independent development partner closely allied with Peerless for product development and integration services. Solutions The Company's technology can be leveraged to provide a wide range of scaleable solutions: Monochrome Solution. The Company's monochrome solution targets low cost, networkable office laser printers. The Company's color imaging technology also provides photographic quality image printing on monochrome products. Multifunction Solution. The Company's MFP imaging solutions target lower-cost color inkjet, fax or laser-based workgroup MFP products and high-speed copier- based MFP products. The lower-cost inkjet solutions will combine Peerless imaging technology and Conexant fax technology. The higher-end solutions combine the Company's networkable imaging products with MFP-specific extensions to facilitate printing, copying, faxing and scanning in the same digital document product. The Company's solutions provide multifunction capability, but the Company does not provide stand-alone fax or copier solutions During fiscal 1999, the Company, in partnership with Ricoh, announced 35 and 45 PPM copier based MFP solutions. Color Solution. The Company's color imaging solutions target OEM requirements for a broad range of color imaging devices. The Company's proprietary object- based imaging system reduces memory requirements for printing color pages while simultaneously accelerating the document imaging process and increasing print quality. During fiscal 1999, the Company announced eight new color products shipping in the market with Peerless technology. OEMs shipping these new products include Minolta, Kyocera and Tektronix. Technology The Company develops unique technologies for the embedded imaging systems marketplace that provide meaningful improvements in performance, cost and time to market for Peerless' OEMs. The Company's proprietary embedded, object-based imaging system reduces the size of digital document product imaging files with virtually no noticeable loss of visual quality. This proprietary technology enables the Company's OEM customers to reduce memory cost and increase print quality and speed while eliminating or reducing the need for incremental compression technology. When optimized, this component of the embedded imaging system can provide significant cost savings and performance differentiation to digital document product manufacturers. The Company incorporates complementary technologies, or makes its technologies compatible with third-party technologies, in order to provide its customers with a more comprehensive imaging solution. Object-Based Image Processing. Most other embedded imaging systems utilize similar methods of processing document imaging information. They convert a file that represents a document page into a bitmap and then process all page elements as a collection of pixels. Because bitmaps generate large files, the image processing task can become time-consuming, requiring subsequent document pages to be stored in memory while previous pages are being processed. To accommodate memory limitations, file compression technologies are often utilized. These 8 compression technologies frequently result in a loss of clarity and detail in the printed document and require significant processing power. Peerless has developed a proprietary approach to the embedded imaging task. Rather than recognizing a page image as a collection of pixels, the Peerless object-based image processing technology recognizes basic imaging elements in the document, differentiating between text, line art and photographs much as the human eye does. Peerless' software then creates a display list of image objects as an intermediate representation of the document to be printed. This display list is a more concise means of representing the imaging information of the document, enabling complex imaging data to be processed more quickly and with less memory, typically without resorting to compression techniques that degrade the image. For high performance applications, the display list can be processed in real time with assistance from a Peerless-designed graphics co-processor embedded in the digital document product. Because Peerless technology can enable the page image to be processed in real time, concurrent with the transmission of the document print file, memory requirements can be reduced and performance can be enhanced. Furthermore, the image quality or resolution can be reduced to accommodate limitations in the digital document product's memory, or progressively enhanced by installation of additional digital document product memory. The Company's object-based image processing technology provides more significant benefits as the image processing workload increases, which occurs with increased resolution or a transition from monochrome to color. The Company holds six patents in the United States protecting the intellectual property within certain aspects of its object-based imaging approach. Systems Architecture. The Company has developed standardized interfaces for the Company's family of products that enable the Company's imaging solution to be ported to a variety of platforms, languages and applications. For example, the standardized PeerlessPage interface provides the ability to support multiple printing languages. The PeerlessPage object-based imaging system is both platform- and device-independent and is able to accommodate a variety of print engines and controller architectures. The Company has also developed an applications interface that enables the support of features such as spooling, stored macros, stored forms, electronic collation and stapling. Technology Partners. The Company has established relationships that permit it to offer to its customers complementary technologies through technology partners. For example, Peerless has licensed (for internal development purposes) the right to use Adobe's PostScript Software to enable the Company's products to be used with Adobe's PostScript Software. The Company's relationship with Adobe permits the Company to offer a convenient and optimized Adobe PostScript-enabled solution. In addition, the Company incorporates font rasterizers into its imaging solution to enable its OEMs to license font technology from providers such as Agfa and Bitstream. The Company has also established semiconductor agreements with leading developers and manufacturers of RISC microprocessors in order to offer integrated processor and co-processor solutions. The integrated processors combine the Company's basic imaging sending functionality with an industry-standard microprocessor. In October 1996, the Company entered into an agreement with Conexant, a major developer and manufacturer of communication chips, relating to the licensing of Peerless technologies and engagement of Peerless technical personnel for engineering development services. The agreement covers a joint development effort between Conexant and Peerless to specify, design and produce an integrated semiconductor solution for multifunction products that combines Conexant's fax technology and Peerless' embedded imaging technology. The combined technology has been embedded into an OEM's SOHO MFP product that is expected to be shipping in the marketplace by the second quarter of calendar year 1999. Digital Device Technology. The Company is in the early stages of core technology development for a digital device and is focusing primarily on digital photography. Future revenue associated with this digital device technology will depend on the success of the Company's underlying development and marketing efforts. 9 Customers and Markets Customers Peerless markets its imaging technology to OEMs manufacturing digital document products for the high performance sector of the office market and to semiconductor OEMs in the low cost sector of the office and personal use market. In addition, the Company markets its imaging technology to technology partners, which incorporate certain components of the Company's technology into integrated product offerings that are ultimately marketed to digital document OEMs. With the exception of technology partners such as Adobe and Conexant, the Company has derived substantially all of its revenues in recent years from direct sales to digital document product OEMs. The Company's customers that individually comprised more than 10% of the Company's total revenues for fiscal 1999 were Adobe, Canon, Conexant, IBM, Minolta, Ricoh. Revenues from the Company's top four customers accounted for 58%, 60% and 60% of the Company's total revenues for fiscal years 1999, 1998 and 1997, respectively. The Company anticipates that its future revenues will be similarly concentrated with a limited number of customers. The Company's largest customers vary to some extent from year to year as product cycles end, contractual relationships expire and new products and customers emerge. Many of the engineering services and licensing arrangements with the Company's customers are provided on a project-by-project basis, are terminable with limited or no notice, and in certain instances, are not governed by long-term agreements. Markets Enterprise Office Market. The office sector of the digital document product market is characterized by digital document products ranging in price from approximately $1,000 to in excess of $20,000 each. These products typically offer high performance differentiated by customized features. In many cases, digital document product manufacturers demand turnkey, customized embedded imaging solutions that include imaging software, controller design and network interface card design. As a result of these unique requirements, Peerless typically addresses the high performance sector of the digital document product market via direct OEM relationships with individual digital document product manufacturers. The Company's major customers in the office market in the fiscal year ended January 31, 1999 included Adobe, Canon, IBM, Minolta and Ricoh. Small Office/Home Office Market. The low-cost sector of the digital document product market, sometimes called the Small Office/Home Office ("SOHO") market, is characterized by digital document products with prices under $1,000 that typically emphasize price/performance over customized features. For the SOHO market, Peerless has entered into a joint development agreement with Conexant to produce a chipset that integrates components of the Company's imaging software and Rockwell's fax technology into semiconductor firmware. Peerless has licensed its technology to Conexant, which has the rights to manufacture and sell this chipset directly to digital document product manufacturers. Conexant is presently the Company's primary customer in the SOHO market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion on the Company's dependence on sole source providers. International Markets. Revenues from customers outside the United States accounted for 61%, 46% and 38% of the Company's total revenues for fiscal years 1999, 1998 and 1997, respectively. Further, the Company expects that sales to customers located outside the United States may increase in absolute dollars in the future. Peerless' international customers are comprised primarily of companies headquartered in Japan. These Japanese customers sell products containing Peerless' technology primarily in the North America and European marketplaces. Despite a continued downturn in the Asian economy, the Company has not experienced a decrease in its sales to Asian customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on Asian markets. 10 All of the Company's contracts with international customers are, and the Company expects that in the future will be, denominated in U.S dollars. As a result, the Company is currently not subject to foreign currency transaction and translation gains and losses. Seasonality The Company believes that its business may be subject to seasonal trends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on seasonality. Sales and Marketing The Company markets its products to the leading OEMs that sell digital document products into the worldwide market. The Company directs most of its sales efforts through its headquarters in California and its subsidiary in Japan. Sales to European digital document product manufacturers are conducted out of the Company's California headquarters. The Company markets directly to OEMs and through focused public relations and branding programs. Direct OEM marketing consists of focused public relations activities and the development of sales collateral, mailers, trade show attendance and sales support. The Company focuses its public relations effort on media read by OEM customers. The Company directs its branding programs toward building the Company's brand awareness. These programs consist of public relations and Peerless product branding on its silicon and software products. Product Development and Engineering Services The Company's product development activities are located at the Company's headquarters in El Segundo, California. These activities primarily consist of new product development, enhancement of existing products, product testing and technical documentation development. Accordingly, the Company's engineering personnel are divided into two primary development areas: research and development, which focuses on development and enhancement of the Company's core technologies; and engineering services, which focuses on customized customer design activities. The Company's engineering services personnel work closely with OEMs that desire a turnkey solution, developing customized interfaces and applications specific to individual OEMs. The Company typically receives a fee for such engineering services. As part of its corporate strategy, the Company leverages its engineering services capability to penetrate emerging market sectors where applications and interfaces have not fully evolved. Intellectual Property and Proprietary Rights The Company's success is heavily dependent upon its proprietary technology. To protect its proprietary rights, the Company relies on a combination of patent, copyright, trade secret and trademark laws as well as nondisclosure and other contractual restrictions. The Company holds six patents issued in the United States, one of which is also issued in France, Germany and Great Britain. The issued patents relate to techniques developed by the Company for generating output for continuous synchronous raster output devices, such as laser printers. The Company has four applications pending in Japan, three applications pending in the European Patent Office and three applications pending in the United States. There can be no assurance that patents held by the Company 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 is not well defined and will evolve as the United States Patent and Trademark Office grants additional patents. Patents have been 11 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 part of its confidentiality procedures, the Company generally enters into nondisclosure agreements with its employees, consultants, OEMs and strategic partners and limits access to and distribution of its software and other proprietary information. Despite these efforts, the Company may be unable to effectively protect its proprietary rights and, in any event, enforcement of the Company's proprietary rights may be expensive. The Company's source code also is protected as a trade secret. However, the Company from time to time licenses its source code to OEMs, which subjects the Company to the risk of unauthorized use or misappropriation despite the contractual terms restricting disclosure. In addition, it may be possible for unauthorized third parties to copy the Company's products or to reverse engineer or obtain and use the Company's proprietary information. As the number of patents, copyrights, trademarks and other intellectual property rights in the Company's industry increases, products based on its technology increasingly 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 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 affect on the Company's operating results. In addition, the Company 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 favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In addition, the Company may lack sufficient resources to initiate a meritorious claim. In the event of an adverse ruling in any litigation regarding intellectual property, the Company may be required to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing or substituted technology. The failure of the Company to develop, or license on acceptable terms, a substitute technology if required could have a material adverse effect on the Company's operating results. Competition The market for embedded imaging systems for digital document products is highly competitive and characterized by continuous pressure to enhance performance, add functionality, reduce costs and accelerate the release of new products. The Company competes on the basis of technology expertise, product functionality, development time and price. The Company's technology and services primarily compete with solutions developed internally by OEMs. Virtually all of the Company's OEMs 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 future opportunities for the Company. The Company therefore is required to persuade these OEMs to outsource the development of their embedded imaging systems and to provide products and solutions to these OEMs that cost-effectively compete favorably with their internally developed products. The Company also competes with software and engineering services provided in the digital document product marketplace by other systems suppliers to OEMs. In this regard, the Company competes with, among others, Electronics for Imaging and Xionics Document Technologies. As the industry continues to develop, the Company expects that competition and pricing pressures will increase from OEMs, existing competitors and other companies 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. The Company anticipates increasing competition for its color and multifunction products, particularly as new competitors develop and enter products in this emerging market. Some of the Company's existing competitors, many of its potential competitors and virtually all of the Company's OEMs have substantially greater financial, technical, marketing and 12 sales resources than the Company. In the event that price competition increases, competitive pressures could cause the Company to reduce the amount of royalties received on new licenses and to reduce the cost of its engineering services in order to maintain existing business and generate additional product licensing revenues, which could reduce profit margins and result in losses and a decrease in market share. No assurance can be given as to the ability of the Company to compete favorably with the internal development capabilities of its 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. Employees As of January 31, 1999, the Company had a total of approximately 170 employees and independent contractors. None of the Company's employees is represented by a labor union, and the Company has never experienced any work stoppage. The Company considers its relations with its employees to be good. Item 2 -- Properties. The Company leases its principal facilities in El Segundo, California. The Company expanded its facilities during the fiscal year ended January 31, 1999 from 47,000 square feet to 56,000 square feet as part of an amendment to the existing lease agreement. The lease, as amended, expires in March 2007. The Company also leases office space in Japan. The Company believes that suitable additional facilities or alternative space will be available in the future on commercially reasonable terms as needed. Item 3 -- Legal Proceedings. The Company is not a party to any material litigation or legal proceedings. Item 4 -- Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's stockholders during the fourth quarter of fiscal 1999. 13 PART II ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is traded on the Nasdaq National Market under the symbol "PRLS". The table below sets forth, during the periods indicated, the high and low sales price for the Company's common stock as reported on the Nasdaq National Market.
Year Ended ----------------------------------------------------------------- January 31, 1999 January 31, 1998 ----------------------------- ------------------------------ Quarter High Low High Low ------- ------------ ------------- ------------- -------------- First $21.250 $11.000 $20.750 $ 8.500 Second $24.375 $15.500 $17.000 $10.250 Third $21.375 $ 2.813 $17.250 $12.500 Fourth $10.875 $ 6.750 $16.375 $ 9.000
As of April 13, 1999, there were approximately 145 holders of record of the Company's common stock. Dividend Policy The Company has not declared or paid any cash dividends on its common stock during any period for which financial information is provided in this Annual Report on Form 10-K. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends on its common stock in the foreseeable. 14 ITEM 6 - Selected Financial Data The statement of operations data for the years ended January 31, 1999, 1998 and 1997 and the balance sheet data at January 31, 1999 and 1998, are derived from, and should be read in conjunction with, the audited financial statements and notes thereto included elsewhere in this Form 10-K. The statement of operations data for the years ended December 31, 1995 and 1994 and the balance sheet data at January 31, 1997 and 1996 and December 31, 1995 and 1994 are derived from audited financial statements not included in this Form 10-K. The data set forth below (in thousands, except per share data) are qualified in their entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Years Ended Years Ended January 31, (1) December 31, ------------------------------------- ---------------------------- 1999 1998 1997 1995 1994 ---------- ---------- ---------- ---------- ---------- Statement of Operations Data: Revenues: Product licensing $20,882 $15,806 $ 8,322 $ 4,774 $ 4,394 Engineering services and maintenance 11,701 9,557 7,699 5,639 4,942 ---------- ---------- ---------- ---------- ----------- Total revenues 32,583 25,363 16,021 10,413 9,336 ---------- ---------- ---------- ---------- ----------- Cost of revenues: Product licensing 139 141 144 143 218 Engineering services and maintenance 10,526 7,974 6,123 5,111 5,457 ---------- ---------- ---------- ---------- ----------- Total cost of revenues 10,665 8,115 6,267 5,254 5,675 ---------- ---------- ---------- ---------- ----------- Gross margin 21,918 17,248 9,754 5,159 3,661 ---------- ---------- ---------- ---------- ----------- Operating expenses: Research and development 7,220 4,604 2,701 2,088 1,767 Sales and marketing 4,212 3,732 2,746 2,142 1,878 General and administrative 4,797 2,915 2,546 1,293 1,000 ---------- ---------- ---------- ---------- ----------- Total operating expenses 16,229 11,251 7,993 5,523 4,645 ---------- ---------- ---------- ---------- ----------- Income (loss) from operations 5,689 5,997 1,761 (364) (984) Interest income (expense), net 1,333 1,391 186 (176) (118) ---------- ---------- ---------- ---------- ----------- Income (loss) before income taxes 7,022 7,388 1,947 (540) (1,102) Provision (benefit) for income taxes 2,458 2,444 (2,500) 99 124 ---------- ---------- ---------- ---------- ----------- Net income (loss) $ 4,564 $ 4,944 $ 4,447 $ (639) $(1,226) ========== ========== ========== ========== =========== Net income (loss) per share - assuming dilution (2) $ 0.39 $ 0.42 $ 0.46 $ (0.24) $ (0.47) ========== ========== ========== ========== =========== Shares used in per share calculation (2) 11,821 11,652 9,893 2,664 2,599 ========== ========== ========== ========== ===========
January 31, (1) December 31, -------------------------------------------------------- ------------------------- 1999 1998 1997 1996 1995 1994 ------------ ------------ ----------- ------------- ----------- ----------- Balance Sheet Data: Cash and cash equivalents $ 5,250 $ 3,199 $24,162 $ 722 $ 1,184 $ 393 Working capital (deficit) 31,084 23,713 25,056 (2,608) (2,307) (3,192) Total assets 47,174 40,095 35,109 4,041 4,185 3,541 Long-term obligations 1,625 421 317 4,286 4,299 2,594 Redeemable Preferred Stock - - - 5,932 5,931 6,645 Total stockholders' equity (deficit) 39,799 33,807 28,064 (11,867) (11,596) (11,941)
- -------------- (1) The Company changed its fiscal year end to January 31, beginning February 1, 1996. (2) See Note 7 of Notes to Financial Statements for a description of the computation of the net income per share and the number of shares used in the per share calculation for the years ended January 31,1999, 1998 and 1997. 15 Selected Quarterly Financial Data (Unaudited):
Year Ended January 31, 1999 Year Ended January 31, 1998 ----------------------------------------- --------------------------------------- Quarter Fourth Third Second First Fourth Third Second First ----------------------------------------- --------------------------------------- Revenues $8,387 $7,313 $8,454 $8,429 $7,853 $6,423 $5,959 $5,128 Gross margin 5,904 4,738 5,987 5,289 5,386 4,237 3,992 3,633 Gross margin % 70% 65% 71% 63% 69% 66% 67% 71% Income from operations $1,490 $ 538 $1,907 $1,754 $2,220 $1,460 $1,355 $ 962 Net income 1,181 556 1,456 1,371 1,958 1,145 1,046 795 Net income per common share $ 0.10 $ 0.05 $ 0.12 $ 0.12 $ 0.17 $ 0.11 $ 0.09 $ 0.07
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. This Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this report 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 document are based on current expectations, estimates, forecasts and projections about the industry in which Peerless operates, management's beliefs and assumptions made by management. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which 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. Highlights . Fiscal 1999 revenues grew 28%, an increase of $7.2 million, over fiscal 1998 . Fiscal 1999 gross profit grew 27% over the previous fiscal year. . The Company invested an incremental $2.6 million in research and development, an increase of 65% over the previous fiscal year. The Peerless solution is based on a combination of software and imaging ASICs, which together form a low cost-effective embedded imaging system that addresses virtually all sectors of the printing market, from low-end SOHO inkjets to high end laser digital color copiers and printers. The low-cost, high-performance printers and MFPs that the Company's imaging solutions drive are increasingly replacing expensive standalone copiers and printers in corporate offices. Peerless' markets are continuing to expand, driven by the transition from analog to digital in the copier sector, by improving price- performance, and by the broadening role of color in office printing. 16 During fiscal 1999, Peerless continued to enhance its technical solution for the digital camera sector. Peerless' PicturePrint technology, together with technology that the Company has recently licensed from FotoNation, can be embedded into electronic consumer appliance products to enable image capture from some of the most popular digital cameras and can output to a variety of photo quality inkjet printers and color laser devices. After OEMs have mastered the major image quality barriers into the digital camera market, the Company believes it will be able to capitalize on benefits that universal printing functionality can deliver. In the fourth quarter of fiscal 1999, the Company announced a strategic development agreement with Minolta that encompasses a range of future products spanning printers to digital copiers and includes monochrome and color technologies. This agreement will ultimately encompass at least two entire Minolta product families and that will yield multiple products from each product family. This agreement was made possible by the scalable nature of Peerless' embedded imaging solution, which can span low-end inkjets priced under $500 to high-end production copier/printers priced over $20,000. During fiscal 1999, Peerless increased its focus and success in selling its source code development kits, which allow the OEMs to access Peerless' technology and perform their own customization. The development kit sales increase the OEMs commitment to Peerless' embedded imaging technology from a single point product solution to a broad product platform solutions for multiple printing products. During fiscal 1999, the Company focused on implementing structural and process improvements in the engineering services group. This effort started to become visible when the Company hired a new Vice President of Technical Operations, David Emmett, in mid-fiscal 1999. As a result of Mr. Emmett's guidance, the Company was able to deliver a record number of products to OEMs in the last two quarters of fiscal 1999. Management expects that, under Mr. Emmett's leadership, the Company will be able to improve productivity, quality control and time to market which should reflect positively in the Company's results of operations for fiscal 2000. As part of Peerless' efforts to focus on increasing its market penetration in the embedded imaging industry, the Company seeks to strategically acquire selected companies that complement its existing product offerings and its internal product development efforts. On April 6, 1999, Peerless entered into a merger agreement with Auco, Inc. ("Auco"), a privately held developer of embedded networking technology based in Redwood City, California. The transaction is structured as a merger in which the Company will exchange 2.5 million shares of its common stock for all currently outstanding shares of Auco capital stock, on a fully-diluted basis, and its convertible note payable. It is expected that the merger will be accounted for as a pooling of interests. As a result of the merger, Auco will become a subsidiary of the Company. Consummation of the merger is subject to terms and conditions customary for a transaction of this type, including approval of certain matters by the shareholders of the Company and Auco. The Company estimates that it will incur transaction costs, consisting primarily of fees for investment bankers, attorneys, accountants, consultants, financial printing and other related charges, of approximately $2.3 million which will be expensed upon consummation of the merger. Results of Operations The following table sets forth, for the periods indicated, the percentage relationship of certain items from the Company's statements of operations to total revenues. 17
Percentage of Total Revenues ---------------------------------------------- Years Ended January 31, ---------------------------------------------- 1999 1998 1997 ----------- ----------- ------------ Statement of Operations Data: Revenues: Product licensing 64.1% 62.3% 51.9% Engineering services and maintenance 35.9 37.7 48.1 ----------- ----------- ------------ Total revenues 100.0 100.0 100.0 ----------- ----------- ------------ Cost of revenues: Product licensing 0.4 0.6 0.9 Engineering services and maintenance 32.3 31.4 38.2 ----------- ----------- ------------ Total cost of revenues 32.7 32.0 39.1 ----------- ----------- ------------ Gross margin 67.3 68.0 60.9 ----------- ----------- ------------ Operating expenses: Research and development 22.2 18.2 16.9 Sales and marketing 12.9 14.7 17.1 General and administrative 14.7 11.5 15.9 ----------- ----------- ------------ Total operating expenses 49.8 44.4 49.9 ----------- ----------- ------------ Income from operations 17.5 23.6 11.0 Interest income, net 4.1 5.5 1.2 ----------- ----------- ------------ Income before income taxes 21.6 29.1 12.2 Provision (benefit) for income taxes 7.6 9.6 (15.6) ----------- ----------- ------------ Net income 14.0% 19.5% 27.8% =========== =========== ============
Comparison of Fiscal 1999 and 1998 Fiscal 1999 revenues increased 28% over the previous year. The revenue growth was driven by a 32% increase in product licensing revenues and a 22% increase in engineering services and maintenance revenues over the prior fiscal year. Product licensing revenues increased due to an increase in the number of products shipped into the marketplace incorporating Peerless' imaging technology and an increase in the market penetration of existing products. Most of the increase in recurring license fees can be attributed to an increase in penetration in the color and multi-function markets. Adding to the product licensing revenues were strong sales of source code development kits. The growth in engineering services and maintenance revenues was the direct result of an increase in the dollar value of engineering services design wins in fiscal 1999 over fiscal 1998. The Company's gross margin as a percentage of total revenues decreased to 67% in fiscal 1999 from 68% in fiscal 1998. Although the current year revenue mix included a higher percentage of licensing fees, which have relatively low costs associated with the revenues being recognized, the margin on engineering services and maintenance declined in 1999. The deterioration in the engineering services margins from 17% in fiscal 1998 to 10% in fiscal 1999 was attributable to a mid-year refocusing of the engineering services department. This change yielded a record number of product deliveries, but resulted in lower margins as additional resources were allocated to projects in process in an effort to reduce the time-to-market. 18 Peerless continues to invest heavily in the future by funding the research and development of new technology solutions. Research and development expenses increased 57% between fiscal 1999 and 1998. The expense increases resulted primarily from a growth in the development staff headcount and the use of outside development partners. The increased funding was used for, among other things, development programs associated with the Company's color technology, multi-function technology, application specific integrated circuit ("ASIC") designs and digital photography technology. Management anticipates that research and development costs will continue to increase. Sales and marketing expenses increased 13% between fiscal years 1999 and 1998. The increase reflected a growth in the sales and marketing headcount and an expanded emphasis on penetrating new OEM customers. As a result of this additional effort, the Company added several new OEMs to its customer list during fiscal 1999. Sales and marketing expenses, however, decreased to 13% of total revenues for fiscal 1999 from 15% for fiscal 1998. General and administrative expense for fiscal 1999 increased 65% over fiscal 1998. The expense growth related primarily to an increase in personnel and expenses necessary to support the growth in the Company's operations, which included the formation of a new mergers and acquisition department in support of the Company's strategy to acquire complimentary technology. A portion of the expense growth related to professional costs associated with proposed transactions that were terminated. Interest income earned in fiscal years 1999 and 1998 was attributable to interest and investment income earned on cash and cash equivalents and investment balances resulting primarily from the $26.3 million in proceeds received upon the closing of the Company's initial public offering in September 1996. The Company's effective tax rate for fiscal 1999 was 35%. Due to a reduction in the valuation allowance, the Company's effective tax rate for fiscal 1998 was 33%. As of January 31, 1999, the Company had $673,000 of foreign tax credits available to offset future federal taxes otherwise payable. Once the foreign tax credits are fully utilized, the Company will be subject to an estimated annual tax rate in the range of 35% to 40%. Comparison of Fiscal 1998 and 1997 The 58% increase in revenues in fiscal 1998 over fiscal 1997 was driven by an increase in product licensing revenues of 90%. This increase in product licensing revenues was generated by an increase in the shipments and number of products incorporating Peerless' imaging technology, as well as high, one-time licensing fees for source code. Most of the growth in the fiscal 1998 can be attributed to new color laser printers introduced by the Company's OEMs in early fiscal 1998 and an increase in the market penetration of existing products. Growth in the Company's engineering services and maintenance revenues also contributed to the increase in total revenues during the current fiscal year with an increase of 24% over the prior fiscal year. The growth in engineering services and maintenance revenues was the direct result of an increase in the number of design wins in fiscal 1998 over fiscal 1997. The Company's gross margin as a percentage of total revenues increased to 68% for fiscal 1998 from 61% for fiscal 1997. The improvements in gross margin in the current fiscal year are primarily attributable to a shift in the revenue mix toward product licensing revenues, which have relatively low costs associated with the revenues being recognized. Product licensing revenues as a percentage of total revenues increased to 62% in fiscal 1998 from 52% in fiscal 1997. Research and development expenses increased 71% between fiscal years 1998 and 1997. The expense increases resulted primarily from a growth in the development staff headcount. The increased funding was used for, among other things, development programs associated with the Company's color technology, multi-function technology and ASIC designs. Additionally, the Company began investing in digital photography technology during fiscal 1998. 19 Sales and marketing expenses increased 36% between fiscal years 1998 and 1997. The increase reflected a growth in the sales and marketing headcount and an expanded emphasis on industry trade shows and other opportunities to promote the Company's embedded imaging. General and administrative expense for fiscal 1998 increased 15% over fiscal 1997. The expense growth related primarily to an increase in personnel and expenses, necessary to support the growth in the Company's operations. Interest income earned in fiscal 1998 was attributable to interest and investment income earned on cash and cash equivalents and investment. Interest income of $329,000 earned for the fiscal 1997 was offset by $143,000 of interest expense associated with borrowings under the Company's line of credit and the convertible notes payable, which converted to shares of common stock upon the closing of the Company's initial public offering in September 1996. Due to a reduction in the valuation allowance during fiscal, 1997, the Company's financial statements reflect a benefit for income taxes rather than a provision for income taxes for that fiscal year. A further reduction in the valuation allowance in fiscal 1998 resulted in an effective tax rate of 33%. Liquidity and Capital Resources Compared to January 31, 1998, total assets at January 31, 1999 grew 18% to $47.2 million and stockholders' equity grew 18% to $39.8 million. The Company's cash and short-term investment portfolio was $21.4 million at January 31, 1999 and the current ratio was 6.4:1. The Company's operations generated cash of $707,000 during fiscal 1999. During fiscal 1998, the Company began an expansion of its operating facilities from 30,000 square feet to 47,000 square feet in order to accommodate the current and expected growth in operations. As part of the expansion, which was completed in early fiscal 1999, the Company made leasehold improvements in the amount of $1.4 million and $1.8 million in fiscal years 1999 and 1998, respectively. The remaining additions to property and equipment of $407,000 and $1.4 million for fiscal years 1999 and 1998, respectively, related to furniture, computer and equipment purchases associated with the growth in headcount. Investments in securities generated net cash of $1.8 million in fiscal 1999 while a net $20 million was invested in fiscal 1998. 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. Net cash provided by financing activities during fiscal years 1999 and 1998 related to the issuance of common stock under the Company's employee stock purchase plan and the exercise of common stock options. Risks and Uncertainties While Peerless' management is optimistic about the Company's long-term prospects, the following risks and uncertainties, among other things, should be considered in evaluating the growth outlook: Future Growth Rate and Operating Results: The revenue growth rate in fiscal 2000 may not approach the level attained in fiscal 1999. Further, although the Company has been profitable since the quarter ended December 31, 1995, there can be no assurance that the Company will maintain profitability on a quarterly or annual basis in the future. Factors noted below, as well as others in the aggregate, may have a material adverse affect on the Company's future revenue growth and/or results of operations. Engineering Services Results: In the past, the Company has experienced significant fluctuations in quarterly engineering services results that have been caused by many factors including: product development delays (see 20 below), third party delays (see below), increases in the estimated hours to complete particular engineering services projects; cancellation or redirection of engineering services projects by the Company's OEMs and delays in the availability or stability of third-party technology that the Company's OEMs are also incorporating into the same product for which the Company is performing engineering services. There can be no assurance that similar factors will not impact future engineering services results. Product Development Delays: The Company in the past has experienced, and may experience in the future, delays in product development. Prior delays have resulted from numerous factors such as changing OEM product specifications, difficulties in hiring and retaining necessary personnel, difficulties in reallocating engineering resources and other resource limitations, difficulties with independent contractors, changing market or competitive product requirements and unanticipated engineering complexity. In addition, the Company's software and hardware have in the past, and may in the future, contain undetected errors or failures that become evident upon product introduction or as product production volumes increase. There can be no assurance, despite testing by the Company and its OEMs that the Company's new products and technology will meet performance specifications under all conditions or for all anticipated applications. Given the short product life cycles in the digital document products market, any delay or unanticipated difficulty associated with new product introductions or product enhancements could have a material adverse effect on the Company's operating results. Third Party Delays: Quarterly revenues would be adversely impacted if one or more key OEM transactions, milestones or OEM product shipments that are scheduled to be realized by the Company or its OEMs at the end of a quarter were to be delayed until a subsequent quarter. Seasonality: The Company believes that its business may be subject to seasonal trends. In the digital document product industry, it is not unusual for vendors to experience an increase in demand in the fourth calendar quarter followed by a significant decrease in the following quarter. Although the Company has attempted to manage this risk with the incorporation of guaranteed minimum royalty commitments, the Company's product licensing revenues may be negatively impacted by seasonality, if any, of unit shipments experienced by its OEMs. Recurring Product Licensing Reporting: The recurring product licensing revenues reported by the Company are dependent, in part, on the timing and accuracy of product sales reports received from the Company's OEM customers. These reports are provided only on a calendar quarter basis and, in any event, are subject to delay and potential revision by the OEM. Therefore, the Company is required to estimate all of the recurring product licensing revenues for the last month of each fiscal quarter and to further estimate all of its quarterly revenues from an OEM when the report from such OEM is not received in a timely manner. In the event the Company is unable to estimate such revenues accurately prior to public announcement of the Company's quarterly results, the Company may be required to restate its recognized revenues or adjust revenues for subsequent periods. Dependence on Third Parties: With the exception of Adobe and Conexant substantially all of the Company's revenues in recent years have been derived from digital document product OEMs. The Company's revenues are dependent upon, among other things, the ability and willingness of these OEMs to timely develop and promote digital document products that incorporate the Company's technology. Additionally, many of these OEMs are concurrently developing and promoting products that do not incorporate the Company's technology. In such cases, the OEMs may have profitability or other incentives to promote internal solutions or competing products in lieu of products incorporating the Company's technology. No assurance can be given as to the ability or willingness of the Company's OEMs to continue developing, marketing and selling products incorporating the Company's technology. Concentration of Revenues: Historically, a limited number of customers have provided a substantial portion of Peerless' revenues. There presently are only a limited number of customers in the digital document product market to which the Company markets its technology and services. Therefore, the ability of the Company to replace a lost customer or offset a significant decrease in the revenues from a customer may be significantly limited. 21 Technology Licensing: The Company's larger customers at times have required that the Company offer new technology directly to them prior to offering it to other customers and have attempted to restrict the Company from licensing the technology utilized by these customers to customers developing potentially competing products. Although the Company has not granted exclusive rights with respect to its core technologies, the Company has granted exclusive rights in unusual circumstances with respect to derivative software developed by the Company in support of a specific customer's proprietary products or technologies. No assurance can be given, however, that the Company will not, in the future, grant broader exclusive rights to its technology in order to enter into a licensing agreement with a customer, or that an unwillingness to grant such exclusive rights will prevent the Company from entering into such a licensing agreement. Technological Changes: The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards and needs, and frequent new product introductions. The Company's success will depend on, among other things: market acceptance of the Company's technology and the digital document products of the Company's OEM customers; the ability of the Company and its OEM customers to meet industry changes and market demands in a timely manner; achievement of new design wins by the Company followed by the OEMs' development of associated new digital document products; and the regular and continued introduction of new and enhanced technology and services by the Company and its OEMs on a timely and cost-effective basis. There can be no assurance that the products and technology of competitors of the Company or its OEMs will not render the Company's technology or its OEMs' products noncompetitive or obsolete. Any failure by the Company or its OEMs 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, could result in a loss of competitiveness or revenues, which could have a material adverse effect on the Company's operating results. Dependence on Sole Source Providers: The Company is dependent on three independent parties, Motorola, IBM Microelectronics and Intel, each of which provides unique application specific integrated circuits ("ASICs") incorporating the Company's imaging technology to certain of the Company's OEMs. Additionally, the Company has a set of relationships with Adobe that address many critical aspects of the Company's OEM customers' needs. The Company has licensed (for internal development purposes) from Adobe the right to use Adobe's PostScript Software to enable the Company's products to be used with Adobe's PostScript Software, has licensed to Adobe several of the Company's technologies and has developed technologies for Adobe for which the Company receives royalties and engineering services fees. 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 and thereby adversely affect 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. Costs and Expenses: A substantial portion of the Company's costs and expenses is 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. If such commitments do not materialize or are terminated or if revenues are below expectations, the Company's quarterly and annual operating results will be adversely affected. Dependence on Key Personnel: The Company is largely dependent upon the skills and efforts of its senior management and other officers and key employees. The Company believes that its future success will depend in large part upon its ability to attract and retain highly skilled managerial, engineering, sales, marketing and operations personnel, many of whom are in great demand. Competition for such personnel recently has increased significantly. The Company does not maintain any key person life insurance policies. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the Company's operating results. 22 International Activities: Peerless is substantially dependent on its international business activities and the Company expects that sales to customers located outside the United States may increase in absolute dollars in the future. The international market for products incorporating the Company's technology is highly competitive, and the Company expects to face substantial competition in this market from established and emerging companies and technologies developed internally by its OEMs. Risks inherent in the Company's international business activities also include currency 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 the Company expects that its future contracts will be, denominated in U.S. dollars, there can be no assurance that its contracts with international OEMs in the future will be denominated in U.S. dollars. In the event that one or more contracts are denominated in foreign currencies, the Company will be subject to additional risks associated with currency fluctuations, which could have a material adverse effect on the Company's operating results. During the past few years, the Asian economy has been financially depressed. As a result, some members of the imaging industry have reported negative financial impacts attributable to a decrease in demand from Asian customers. Peerless' Asian customers are comprised primarily of companies headquartered in Japan. These Japanese customers sell products containing Peerless' technology primarily in the North American and European marketplaces. There can be no assurance that revenues from Asian customers will not decline in future quarters. Volatility of Stock Price: The Company's common stock has experienced significant price volatility and such volatility may occur in the future. Factors that could affect the trading price of the common stock include variations in quarterly results of operations, announcements of new products by the Company or its competitors, developments or disputes with respect to proprietary rights, general trends in the industry, 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 high technology companies and which at times have been unrelated or disproportionate to the operating performance of such companies. Year 2000 Compliance: The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has divided its review of the Year 2000 Issue into three major areas: (1) internal systems, (2) Company products and (3) potential year 2000 problems associated with outside development partners, vendors and customers. The Company has substantially completed its review of its internal system, including its development tools and business critical applications such as general ledger, accounts payable, accounts receivable, job cost, and purchasing. The Company has identified certain systems that require updating and has begun to purchase and install updates that have been certified as year 2000 compliant by vendors. The Company expects to complete its review of internal systems by July 31, 1999 and does not expect the review to uncover a risk that would result in a material adverse effect on its operations. The Company is in the process of reviewing the year 2000 compliance of its products developed for OEMs. Based on an initial review, the Company believes that its products do not contain date sensitive fields. Testing to validate this assumption is expected to be completed in July 31, 1999. At this time, the Company does not believe that product updates will be necessary. The Company is in the process of identifying any potential year 2000 problems from outside development partners who work on engineering services projects, vendors whose facilities manufacture ASICs that incorporate the Company's technology or whose systems interface with the Company's internal systems as well as customers whose products contain technology licensed from the Company. The Company expects to complete its review by 23 July 31, 1999. However, since third-party year 2000 compliance is not within the Company's control, the Company cannot assure the stockholders that the year 2000 problems affecting the systems of other companies will not have a material adverse effect on the Company's operations. This impact could include, among other things, product time to market delays caused by year 2000 problems associated with development partners which would negatively impact engineering services revenues and delays in customer shipments which could negatively impact the Company's recurring licensing revenues. Costs to address the Year 2000 Issue include hardware, software and implementation costs for internal work are not expected to exceed $200,000. To date, the Company has incurred approximately $75,000 of these costs, all of which have been expensed. The Company presently believes that with the identified modifications, the Year 2000 Issue can be mitigated. However, if the modifications are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. Further, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Market Risk: The Company is exposed to various market risks including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. The Company is not at risk from adverse changes in foreign currency exchange rates as all transactions are denominated in U.S. dollars. The Company does not enter into derivatives or other financial instruments for trading purposes. Peerless' exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company invests its 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. The Company, 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, Peerless' 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 which have declined in market value due to changes in interest rates. Future Developments In December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, Modification of SOP 97-2, "Software Revenue Recognition," with Respect to Certain Transactions ("SOP 98-9"). SOP 98-9 retains the limitations of SOP 97-2 on what is considered vendor-specific objective evidence (VSOE) of fair value in a software arrangement. Accordingly, the limitation on VSOE of fair value that were deferred by SOP 98-4 will be effective for transactions entered into in fiscal years beginning after December 15, 1998. In order to recognize revenue upon delivery of individual elements, VSOE of the fair value of each element (which is limited to the vendor's selling price of each element when sold separately or the price established by management when it is probable that the established price will not change) will be required. The adoption of SOP 98-9 is not expected to have a material impact on the Company's results of operations, financial position or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The adoption of SFAS No. 133 will not have a material impact on the Company's results of operations, financial position or cash flows. 24 ITEM 8 - Financial Statements and Supplementary Data. See Index to Financial Statements on page F-1. ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 25 PART III Item 10 -- Directors and Executive Officers. The information required by this item, insofar as it relates to the Company's directors, will be contained under the captions "Election of Directors" and "Section 16 Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. The information relating to the Company's executive officers as of January 31, 1999 is contained in the following table:
Name Age Position - ---- --- -------- Edward A. Gavaldon 53 President, Chief Executive Officer and Chairman of the Board David M. Emmett 57 Senior Vice President, Engineering and Technical Operations David R. Fournier 45 Vice President, Sales, Marketing and Field Operations Thomas B. Ruffolo 45 Vice President, Corporate Development Charles R. Boelig 45 Senior Vice President, Sales, Marketing and Field Operations
Edward A. Gavaldon has served the Company as President, Chief Executive Officer and a director since January 1995 and as Chairman of the Board since July 1996. Prior to joining the Company, Mr. Gavaldon worked at Xerox Corporation for 23 years in various positions including: Manager, Strategy and Programs for Printing Products; Chief Engineer, High Speed Laser Printers; Vice President, Worldwide Marketing, Laser Printers; and most recently as Vice President/General Manager in the Desktop Laser Printer Business Unit. Mr. Gavaldon received an M.B.A. degree from the University of Southern California and a B.A. degree in economics from the University of California at Los Angeles. David M. Emmett has served the Company as Vice President of Engineering and Technical Operations since July 1998. Mr. Emmett was promoted to the position of Senior Vice President in February 1999. Prior to joining the Company, Mr. Emmett served as Vice President of Engineering for the Printing & Systems Division at Adobe Systems. During his tenure at Adobe, Mr. Emmett was also Vice President of Engineering for Enterprise Printing Systems and Vice President of Acrobat Production Unit and Director of Acrobat Capture. Prior to his 4 years at Adobe, Mr. Emmett was Vice President of Product Operations for PixelCraft; Director of Engineering at Sunpics and Vice President of Engineering for Calera Recognition Systems. Mr. Emmet received his M.B.A. degree from Pepperdine University and studied Physics and Pure Mathematics at Exeter University in England. David R. Fournier has served the Company as Vice President, Sales, Field Operations and Marketing since November 1997, as Vice President of Sales and Field Operations from January 1994 to November 1997 and served as Director of Sales from November 1991 to January 1994. Prior to joining the Company, Mr. Fournier held various sales management positions at Hamilton/Avnet, a semiconductor and computer systems distribution company, and Wyle Lab, a semiconductor and computer systems distribution company. Mr. Fournier resigned from the Company in March 1999, however, he will be acting as a consultant to the Company as needed. Thomas B. Ruffolo has served the Company as Vice President, Corporate Development since November 1997, as Vice President, Marketing from August 1994 to November 1997 and as Director of Marketing from August 1991 to August 1994. Prior to joining the Company, Mr. Ruffolo was Director of Marketing at NewGen Systems, a page printer manufacturer, which he co-founded in 1988. Mr. Ruffolo received an M.B.A. degree from Pepperdine University and a B.S. degree in computer science from Colorado State University. Charles R. Boelig was appointed Senior Vice President, Sales, Marketing and Field Operations upon Mr. Fournier's resignation from the Company in March 1999. Prior to joining Peerless, Mr. Boelig served for a year as President and Chief Operating Officer of Spacetec IMC (now Labtec), a supplier of interactive motion control input hardware and software. In addition, Mr. Boelig spent ten years at Bitstream, Inc. where he held various positions, 26 including his most recent role as Chairman, President and Chief Executive Officer. Bitstream is a leading supplier of technologies and portable font resources for the embedded marketplace and the Internet. Prior to joining Bitstream, he spent seven years in various sales and sales management positions. Mr. Boelig received a B.A in Business Administration from the University of New Hampshire. Item 11 -- Executive Compensation. The information required by this item will be contained in the Proxy Statement under the caption "Executive Compensation" and is incorporated herein by reference. Item 12 -- Security Ownership of Certain Beneficial Owners and Management. The information required by this item will be contained in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference. Item 13 -- Certain Relationships and Related Transactions. The information required by this item will be contained in the Proxy Statement under the caption "Certain Transactions" and is incorporated herein by reference. 27 PART IV Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents filed as a part of this Form 10-K: (1) Financial Statements Report of PricewaterhouseCoopers LLP, Independent Accountants Statements of Income Balance Sheets Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements (2) Financial Statement Schedules: The following financial statement schedule of Peerless Systems Corporation is filed as part of this Report and should be read in conjunction with the Financial Statements of Peerless Systems Corporation. Schedule Page - -------- ---- II Valuation and Qualifying Accounts S-2 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or Notes thereto. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year ended January 31, 1999. (c) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Form 10-K. Exhibit Number - ------ 3.1(1) Certificate of Incorporation of the Company. 3.2(4) Amended and Restated Bylaws of the Company. 4.1 Instruments defining the rights of security holders. Reference is made to Exhibits 3.1 and 3.2. 4.2(4) Rights Agreement, dated October 7, 1998, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent. 10.1(1) Form of Indemnity Agreement. 10.2(1)(2) 1992 Stock Option Plan (the "Option Plan"), as amended. 10.3(1)(2) 1996 Equity Incentive Plan. 10.4(1)(2) Form of Incentive Stock Option. 10.5(1)(2) Form of Nonstatutory Stock Option. 10.6(1)(2) 1996 Employee Stock Purchase Plan. 10.7(1) Third Party Development and License Agreement (the "Adobe Third Party License"), dated September 18, 1992, between the Registrant and Adobe Systems Incorporated ("Adobe"). 10.8(1)(3) Reference Post Appendix #2 to the Adobe Third Party License, dated February 11, 1993. 10.9(1) Amendment No. 1 to the Adobe Third Party License, dated November 29, 1993. 28 10.10(1)(3) PCL Development and License Agreement (the "PCL License"), dated June 14, 1993, between the Registrant and Adobe. 10.11(1)(3) Amendment No. 1 to the PCL License, dated October 31, 1993. 10.12(1)(3) Letter Modification to the PCL License, dated August 5, 1994. 10.13(1)(3) Addendum No. 1 to the PCL License, dated March 31, 1995. 10.14(1)(3) Letter Modification to the PCL License, dated August 30, 1995. 10.15(1) Lease Agreement between the Company and Continental Development Corporation, dated February 6, 1992, and Addendum, dated February 6, 1992. 10.16(1) First Amendment to Office Lease, dated December 1, 1995, between the Company and Continental Development Corporation. 10.18(1)(2) Employment Agreement with Lauren Shaw. 10.19(1)(2) Employment Agreement with Edward Gavaldon. 10.20(5) Second Amendment to Office Lease, dated April 8, 1997, between the Company and Continental Development Corporation. 10.21(5) Third Amendment to Office Lease dated, December 16, 1997, between the Company and Continental Development Corporation. 10.22 Fourth Amendment to Office Lease, dated April 22, 1998, between the Company and Continental Development Corporation. 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney. Reference is made to page 30. 27.1 Financial Data Schedule. _____________ (1) Previously filed in the Company's Registration Statement on Form S-1 (File No. 333-09357), as amended and incorporated herein by reference. (2) Management contract or compensatory plan or arrangement. (3) Subject to Confidential Treatment Order. (4) Previously filed in the Company's Current Report on Form 8-K, filed October 8, 1998, and incorporated herein by reference. (5) Previously filed in the Company's 1998 Annual Report filed on Form 10-K, filed April 24, 1998, and incorporated herein by reference. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of April, 1999. Peerless Systems Corporation By: /s/ EDWARD A. GAVALDON ----------------------------------- Edward A. Gavaldon President, Chief Executive Officer, Chairman of the Board and acting Chief Financial Officer (duly authorized representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ EDWARD A. GAVALDON President, Chief Executive April 23, 1999 ------------------------- Officer, Chairman of the Board Edward A. Gavaldon and acting Chief Financial Officer (Principal Executive Officer) /s/ ROBERT V. ADAMS Director April 23, 1999 ------------------------- Robert V. Adams /s/ ROBERT G. BARRETT Director April 23, 1999 ------------------------ Robert G. Barrett /s/ ROBERT L. NORTH Director April 23, 1999 ----------------------- Robert L. North 30 PEERLESS SYSTEMS CORPORATION INDEX TO FINANCIAL STATEMENTS
Page ---- Report of PricewaterhouseCoopers LLP, Independent Accountants F-2 Statements of Income F-3 Balance Sheets F-4 Statements of Stockholders' Equity F-5 Statements of Cash Flows F-6 Notes to Financial Statements F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Peerless Systems Corporation In our opinion, the accompanying balance sheets and the related statements of income, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Peerless Systems Corporation at January 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Woodland Hills, California March 5, 1999, except for the subsequent event described in Note 14 as to which the date is April 6, 1999 F-2 PEERLESS SYSTEMS CORPORATION STATEMENTS OF INCOME (in thousands, except per share amounts)
Years Ended January 31, ----------------------------------------- 1999 1998 1997 -------- -------- -------- Revenues: Product licensing $20,882 $15,806 $ 8,322 Engineering services and maintenance 11,701 9,557 7,699 ------- ------- ------- Total revenues 32,583 25,363 16,021 ------- ------- ------- Cost of revenues: Product licensing 139 141 144 Engineering services and maintenance 10,526 7,974 6,123 ------- ------- ------- Total cost of revenues 10,665 8,115 6,267 ------- ------- ------- Gross margin 21,918 17,248 9,754 ------- ------- ------- Operating expenses: Research and development 7,220 4,604 2,701 Sales and marketing 4,212 3,732 2,746 General and administrative 4,797 2,915 2,546 ------- ------- ------- Total operating expenses 16,229 11,251 7,993 ------- ------- ------- Income from operations 5,689 5,997 1,761 Interest income, net 1,333 1,391 186 ------- ------- ------- Income before income taxes 7,022 7,388 1,947 Provision (benefit) for income taxes 2,458 2,444 (2,500) ------- ------- ------- Net income $ 4,564 $ 4,944 $ 4,447 ======= ======= ======= Net income per common share $0.42 $0.47 $0.90 ======= ======= ======= Net income per common share, assuming dilution $0.39 $0.42 $0.46 ======= ======= ======= Weighted average common shares outstanding 10,958 10,608 4,964 ======= ======= ======= Weighted average common shares outstanding and dilutive shares 11,821 11,652 9,893 ======= ======= =======
The accompanying notes are an integral part of these financial statements F-3 PEERLESS SYSTEMS CORPORATION BALANCE SHEETS (in thousands)
January 31, ---------------------------------- 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 5,250 $ 3,199 Short term investments 16,158 16,982 Trade accounts receivable, less allowance for doubtful accounts of $175 in 1999 and $100 in 1998 9,186 5,577 Unbilled receivables 2,994 1,386 Deferred tax asset 2,615 1,544 Prepaid expenses and other current assets 631 892 ------- ------- Total current assets 36,834 29,580 Investments 4,605 5,501 Property and equipment, net 5,186 4,426 Deferred tax asset - 249 Other assets 549 339 ------- ------- Total assets $47,174 $40,095 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 672 $ 1,149 Accrued wages 1,557 1,065 Accrued compensated absences 672 501 Other current liabilities 867 392 Income taxes payable 788 406 Deferred rent, current portion 76 76 Deferred revenue, current portion 1,118 2,278 ------- ------- Total current liabilities 5,750 5,867 Deferred tax liability 394 - Deferred rent 431 421 Deferred revenue 800 - ------- ------- Total liabilities 7,375 6,288 ------- ------- Commitments and contingencies (Note 5) Stockholders' equity: Common stock, $.001 par value, 30,000 shares authorized, 11,084 shares issued and outstanding in 1999 and 10,696 in 1998 11 11 Additional paid-in capital 39,293 37,952 Deferred compensation (188) (275) Retained earnings (deficit) 683 (3,881) ------- ------- Total stockholders' equity 39,799 33,807 ------- ------- Total liabilities and stockholders' equity $47,174 $40,095 ======= =======
The accompanying notes are an integral part of these financial statements F-4 PEERLESS SYSTEMS CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Common Stock --------------------- Additional Retained Total Number of Paid-In Deferred Earnings Stockholders' Shares Amount Capital Compensation (Deficit) Equity (Deficit) --------- ------ ---------- ------------ --------- ---------------- Balances, January 31, 1996 2,837 $ 3 $ 1,394 $(13,264) $(11,867) Issuance of common stock for cash, less issuance costs of $1,302 2,698 3 26,292 26,295 Exercise of stock options 150 149 149 Conversion of convertible notes payable to share of common stock, less unamortized issuance costs of $68 1,169 1 3,001 3,002 Conversion of Series A and Series B Preferred Stock to shares of common stock 2,647 3 5,937 5,940 Conversion of warrants to shares of common stock 983 Deferred compensation related to stock option grants 452 $(452) - Amortization of deferred compensation 106 106 Increase in redemption value of Series A and Series B Preferred Stock (8) (8) Net income 4,447 4,447 ------ --- ------- ----- -------- -------- Balances, January 31, 1997 10,484 10 37,225 (346) (8,825) 28,064 Issuance of common stock for cash 26 1 406 407 Exercise of stock options 186 329 329 Amortization of deferred compensation 63 63 Cancellation of stock options granted (8) 8 - Net income 4,944 4,944 ------ --- ------- ----- -------- -------- Balances, January 31, 1998 10,696 11 37,952 (275) (3,881) 33,807 Issuance of common stock 72 481 481 Exercise of stock options 316 860 860 Amortization of deferred compensation 87 87 Net income 4,564 4,564 ------ --- ------- ----- -------- -------- Balances, January 31, 1999 11,084 $11 $39,293 $(188) $ 683 $ 39,799 ====== === ======= ===== ======== ========
The accompanying notes are an integral part of these financial statements F-5 PEERLESS SYSTEMS CORPORATION STATEMENTS OF CASH FLOWS (in thousands)
Years Ended January 31, ---------------------------------------------- 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income $ 4,564 $ 4,944 $ 4,447 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,144 832 488 Amortization of investment discounts and premiums (125) (247) - Amortization of deferred compensation 87 63 106 Compensation expense on common stock issued to employees 78 - - Allowance for bad debt 75 - - Changes in operating assets and liabilities: Trade accounts receivable (3,684) (2,263) (1,301) Unbilled receivables (1,608) (1,023) (118) Prepaid expenses and other assets (48) (666) (151) Deferred income taxes (428) 1,106 (2,899) Accounts payable (477) 581 137 Accrued wages 492 354 88 Accrued compensated absences 171 156 35 Other current liabilities 475 55 128 Income taxes payable 382 306 100 Deferred rent (31) (9) (74) Deferred revenue (360) (2,413) 20 -------- -------- ------- Net cash provided by operating activities 707 1,776 1,006 -------- -------- ------- Cash flows from investing activities: Purchases of property and equipment (407) (1,444) (1,105) Purchases of leasehold improvements (1,357) (1,795) Purchases of held-to-maturity securities - (24,244) - Purchases of available-for-sale securities (18,155) (2,992) (2,000) Proceeds from held-to-maturity securities 12,000 7,000 - Proceeds from available-for-sale securities 8,000 - - Purchase of software license - - (250) -------- -------- ------- Net cash provided (used) by investing activities 81 (23,475) (3,355) -------- -------- ------- Cash flows from financing activities: Proceeds from issuance of common stock 403 407 26,295 Proceeds from exercise of common stock options 860 329 149 Payments on obligations under capital leases - - (655) -------- -------- ------- Net cash provided by financing activities 1,263 736 25,789 -------- -------- ------- Net increase (decrease) in cash and cash equivalents 2,051 (20,963) 23,440 Cash and cash equivalents, beginning of period 3,199 24,162 722 -------- -------- ------- Cash and cash equivalents, end of period $ 5,250 $ 3,199 $24,162 ======== ======== =======
The accompanying notes are an integral part of these financial statements F-6 PEERLESS SYSTEMS CORPORATION STATEMENTS OF CASH FLOWS (Continued) (in thousands)
Years Ended January 31, ----------------------------------- 1999 1998 1997 ----- ----- ------ Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $2,268 $ 151 $ 321 ====== ===== ====== Interest $ - $ - $ 250 ====== ===== ====== Supplemental schedule of noncash investing and financing activities: Tenant improvements paid by the Company's landlord $ 41 $ 213 $ - ====== ===== ====== Common stock issued to employees $ 78 $ - $ - ====== ===== ====== Cancellation of stock options granted with exercise prices below market on the date of grant $ - $ 8 $ - ====== ===== ====== Increase in redemption value of Series A and Series B Preferred Stock $ - $ - $ 8 ====== ===== ====== Conversion of convertible notes payable to shares of common stock, less unamortized issuance costs of $68 $ - $ - $3,002 ====== ===== ====== Conversion of Series A and Series B Preferred stock to shares of common stock $ - $ - $5,940 ====== ===== ====== Security deposits applied to fixed asset purchases $ - $ - $ 94 ====== ===== ====== Software and equipment acquired under capital lease obligation $ - $ - $ 360 ====== ===== ====== Deferred compensation related to stock option grants $ - $ - $ 452 ====== ===== ======
The accompanying notes are an integral part of these financial statements F-7 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (in thousands, except per share amounts) 1. Organization and Summary of Significant Accounting Policies: Organization: Peerless Systems Corporation ("Peerless" or the "Company") was incorporated in the state of California in April 1982 and reincorporated in the state of Delaware in September 1996. Peerless develops and licenses embedded imaging software and supporting electronic technologies and provides custom engineering services to Original Equipment Manufacturers ("OEMs"), located primarily in the United States and Japan. These OEMs sell monochrome and color printers and copiers, as well as multifunction products that combine printer, fax, copier and scanner capabilities. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Investments: The Company's investments at January 31, 1999 and 1998 consisted of held-to- maturity and available-for-sale U.S. government debt, corporate debt, and other debt securities Held-to-maturity securities are carried at amortized cost. Amortization of the purchase discounts and premiums is included in interest income. Available- for-sale securities are carried at fair value. Unrealized gains and losses, if material, are reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary are included in results of operations. Realized gains and losses are calculated using the specific identification method and were not material to the Company's results of operations in any period presented. Property and Equipment: Property and equipment, including any assets under capital leases, are stated at cost, less accumulated depreciation and amortization. Depreciation on property and equipment is calculated using the straight-line method as follows: Computers and equipment 3 to 5 years Furniture 10 years Leasehold improvements shorter of useful life or lease term
Maintenance and repairs are expensed as incurred, while renewals and betterments are capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation or amortization, and any resulting gain or loss is included in results of operations. Long-Lived Assets: The Company identifies and records impairment of long-lived assets when events and circumstances indicate that such assets may be impaired. To date, no such impairment has been recorded. Capitalization of Software Development Costs: The Company follows the working model approach to determine technological technological feasibility are immaterial and, therefore, the Company expenses all costs associated with the development of its products as such costs are incurred. F-8 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) Revenue Recognition: Development license revenue from the licensing of source code for the Company's standard products is recognized upon delivery and customer acceptance of the source code 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, revenue is recognized over the course of the modification work or deferred until the modification is complete. Recurring licensing revenue is recognized when due from the Company's customers based on the number of products shipped incorporating the Company's technology. In certain cases, the fixed or determinable portion of the recurring licensing fee is recognized as revenue upon delivery and customer acceptance of the underlying technology. The Company also enters into engineering services contracts with OEMs to adapt the Company's software and supporting electronics to specific OEM requirements. Revenue on such contracts is recognized over the course of the development work on a percentage-of-completion basis. The Company provides for any anticipated losses on such contracts in the period in which such losses are first determinable. Maintenance revenues are recognized ratably over the term of the maintenance contract. Deferred revenue consists of prepayments of recurring licensing royalties, 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. Research and Development Costs: Research and development costs are expensed as incurred. Income Taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting For Income Taxes." Under this method, deferred income taxes are recognized for the tax consequences in future years resulting from differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Income tax provision (benefit) is the tax payable for the period and the change during the period in deferred income tax assets and liabilities. 2-for-3 Reverse Stock Split: On July 25, 1996, the board of Directors approved a 2-for-3 reverse split of the then outstanding common stock, series A and Series B Preferred Stock, stock options and warrants. All share and per share amounts have been adjusted to give retroactive effect to this reverse split for all periods presented. Net Income Per Common Share: Net income per common share ("basic EPS") is computed by dividing net income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. The computation of net income per common share - assuming dilution ("diluted EPS") is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back the after-tax amount of interest recognized in the period associated with any convertible debt. A reconciliation of basic EPS to diluted EPS is presented in Note 7 to the Company's financial statements. F-9 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) Common Stock Options: During 1997, the Company implemented the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement sets forth alternative standards of recognition of the cost of stock-based compensation and requires that the Company's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. As permitted by this statement, the Company continues to apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in recording compensation related to its plans. The supplemental disclosure requirements and further information related to the Company's stock option plans are presented in Note 9 to the Company's financial statements. Segment Reporting: The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" for the year ended January 31, 1999. SFAS No. 131 requires that companies report financial and descriptive information about operating segments and establishes disclosures about products and services, geographic areas, and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company believes that is operates in only one reportable business segment, the development and sale of embedded imaging software and related services. The Company's adoption of SFAS No. 131 did not affect the results or disclosure of segment information as the Company's management financial information provides for only one segment. Cash and Cash Equivalents: Cash and cash equivalents represent cash and highly liquid investments with an original maturity of three months or less. Reclassifications: Certain previously reported financial information has been reclassified to conform to the fiscal 1999 presentation. Future Developments: In December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, Modification of SOP 97-2, "Software Revenue Recognition," with Respect to Certain Transactions ("SOP 98-9"). SOP 98-9 retains the limitations of SOP 97-2 on what is considered vendor-specific objective evidence (VSOE) of fair value in a software arrangement. Accordingly, the limitation on VSOE of fair value that were deferred by SOP 98-4 will be effective for transactions entered into in fiscal years beginning after December 15, 1998. In order to recognize revenue upon delivery of individual elements, VSOE of the fair value of each element (which is limited to the vendor's selling price of each element when sold separately or the price established by management when it is probable that the established price will not change) will be required. The adoption of SOP 98-9 is not expected to have a material impact on the Company's results of operations, financial position or cash flows. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The adoption of SFAS No. 133 will not have a material impact on the Company's results of operations, financial position or cash flows. F-10 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) 2. Investments: Investments at January 31 consisted of the following:
1999 1998 -------- -------- Held-to-maturity securities: Maturities within one year: U.S. government debt securities $ 5,503 $ 6,007 Corporate debt securities - 3,979 Certificates of deposit - 2,000 -------- -------- 5,503 11,986 Maturities after one year through five years: U.S. government debt securities - 5,501 -------- -------- Total held-to-maturity securities 5,503 17,487 -------- -------- Available-for-sale securities: Maturities within one year: U.S. government debt securities 979 - Corporate debt securities 4,976 2,996 Other debt securities 2,000 - -------- -------- 7,955 2,996 -------- -------- Maturities after one year through five years: U.S. government debt securities 1,503 - Corporate debt securities 3,102 - -------- -------- 4,605 - -------- -------- Maturities after ten years: U.S. government debt securities 2,700 - Other debt securities - 2,000 -------- -------- 2,700 2,000 -------- -------- Total available-for-sale securities 15,260 4,996 -------- -------- Total investments $ 20,763 $ 22,483 ======== ========
In February 1999, $2,700 of U.S. government securities with maturities in excess of ten years was sold and the proceeds were invested in short-term, available-for-sale securities. Accordingly, the securities have been classified as current in the 1999 balance sheet. The fair value of held-to-maturity securities at January 31, 1999 and 1998 approximated amortized cost. Unrealized gains or losses on available-for-sale securities were immaterial for all periods presented. F-11 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) 3. Property and Equipment: Property and equipment at January 31 consisted of the following:
1999 1998 ---------- ---------- Computers and other equipment $ 4,852 $ 3,671 Furniture 361 182 Leasehold improvements 2,202 3 Construction-in-progress - 1,795 ---------- ---------- 7,415 5,651 Less, accumulated depreciation and amortization (2,229) (1,225) ---------- ---------- $ 5,186 $ 4,426 ========== ==========
Depreciation and amortization for the years ended January 31, 1999, 1998 and 1997 was $1,004, $691 and $426, respectively. 4. Convertible Notes Payable: In October 1995, the Company issued 7.00% Senior Convertible Subordinated Debentures ("Debentures") to holders of the Company's Preferred Stock, with an aggregate principal amount of $3,070 and a maturity date of June 1, 2001. The Debentures had a stated interest rate of 7% per annum with interest due June 1 and December 1 of each year. The Debentures were convertible, at the option of the holder, to shares of common stock at a specified conversion price of $2.63 per common share, subject to dilution adjustments. The Debentures were subordinate to all bank indebtedness. In September 1996, upon the closing of the Company's initial public offering, the Debentures automatically converted to 1,169 shares of the Company's common stock. 5. Commitments and Contingencies: Operating Leases: The Company leases its offices and certain operating equipment under operating leases that expire through 2007. The principal operating lease, covering the office space for the Company's headquarters, contains certain predetermined rent increases calculated at the inception of the lease based on the lessor's estimate of expected increases in the fair market value of the leased space. This lease does not specifically provide for renewal options. F-12 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) Future minimum rental payments under long-term operating leases are as follows:
For the Years Ending January 31, -------------------- 2000 $ 1,087 2001 1,072 2002 1,179 2003 1,214 2004 1,255 Thereafter 5,375 --------- $11,182 =========
Total rental expense was $1,101, $881 and $906 for the years ended January 31, 1999, 1998 and 1997, respectively. In conjunction with an expansion of its leased office space, subsequent to year-end, the Company entered into certain contracts to improve and furnish the new space. The Company expects that the cost of these commitments will total $800. Concentration of Credit Risk: The Company had cash and certificates of deposit on deposit at banks at certain times throughout the year that were in excess of federally-insured limits. The Company's credit risk in accounts receivable, which are generally not collateralized, is concentrated with customers which are OEMs of laser printers and printer peripheral technologies. The financial loss, should a customer be unable to meet its obligation to the Company, would be equal to the recorded accounts receivable. At January 31, 1999 and 1998, three customers collectively represented 50% and 64% of total accounts receivable, respectively. For the years ended January 31 the following customers, not necessarily the same from year to year, represented greater than ten percent of total revenues:
1999 1998 1997 ---------------- ---------------- ----------------- Customer A $6,665 20% $5,444 21% $3,123 19% Customer B 4,637 14% 3,544 14% 2,767 17% Customer C 3,986 12% 3,216 13% 2,243 14% Customer D 3,925 12% 3,134 12% Customer E 3,691 11% 2,898 11% Customer F 3,289 10%
Legal Proceedings: The Company is not a party to any pending legal proceedings which management believes will have a material adverse effect on the financial position, results of operations or cash flows of the Company. F-13 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) 6. Income Taxes: The income tax provision (benefit) for the years ended January 31, consists of:
1999 1998 1997 -------- -------- -------- Current: Federal $ 1,804 $ 786 $ 64 State 380 461 15 Foreign 702 92 320 -------- -------- -------- 2,886 1,339 399 -------- -------- -------- Deferred: Federal (491) 887 (2,151) State 63 218 (748) -------- -------- -------- (428) 1,105 (2,899) -------- -------- -------- $ 2,458 $ 2,444 $(2,500) ======== ======== ========
The foreign tax provision is comprised of foreign withholding taxes on license fees and royalty payments. Temporary differences that give rise to the deferred tax provision (benefit) for the years ended January 31, consist of:
1999 1998 1997 -------- -------- -------- Property and equipment $ 172 $ 125 $ 19 Accrued liabilities (162) (58) 13 Allowance for doubtful accounts (32) - (43) Deferred revenue (848) 698 149 Deferred expenses 76 (86) 32 State taxes (141) (69) 249 Tax credit carryforwards 623 823 (497) Net operating loss carryforwards - 1,315 908 Other - (2) (20) -------- -------- -------- (312) (2,746) 810 Change in valuation allowance (116) (1,641) (3,709) -------- -------- -------- Net deferred income tax provision (benefit) $ (428) $ 1,105 $(2,899) ======== ======== ========
F-14 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) Temporary differences at January 31 which give rise to deferred income tax assets and liabilities are as follows:
1999 1998 -------- -------- Deferred tax assets: Accrued liabilities $ 368 $ 206 Allowance for doubtful accounts 75 43 Deferred revenue 2,023 1,175 Deferred expenses 136 213 Tax credit carryforwards 673 1,274 Other - 22 -------- -------- Total deferred tax assets 3,275 2,933 -------- -------- Deferred tax liabilities: Property and equipment (342) (171) State taxes (39) (180) -------- -------- Total deferred tax liabilities (381) (351) -------- -------- Subtotal 2,894 2,582 Valuation allowance (673) (789) -------- -------- Net deferred income tax asset $ 2,221 $ 1,793 ======== ========
The Company periodically evaluates the sufficiency of its deferred tax asset valuation allowance, which is adjusted as deemed appropriate based on operating results. The provision (benefit) for income taxes for the years ended January 31, differs from the amount that would result from applying the federal statutory rate as follows:
1999 1998 1997 ------------ ------------ ------------ Statutory regular federal income tax rate 34.0% 34.0% 34.0% Foreign provision 10.0 1.2 16.4 Nondeductible expenses 0.5 0.4 1.2 State tax 4.0 8.2 - Foreign tax and research and experimentation credits (12.1) - (13.3) Change in valuation allowance (1.7) (12.3) (168.2) Other 0.3 1.6 1.5 ------------ ------------ ------------ Provision (benefit) for income taxes 35.0% 33.1% (128.4)% ============ ============ ============
As of January 31, 1999, the Company has foreign tax credits of approximately $673 for federal purposes, which begin to expire in 1999. F-15 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) 7. Net Income Per Common Share: Net income per common share for the years ended January 31, is calculated as follows:
1999 1998 ---------------------------------- ---------------------------------- Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------- ------ --------- ------- ------ --------- Basic EPS Net income available to the common stockholders $4,564 10,958 $0.42 $4,944 10,608 $0.47 ======== ========= Effect of Dilutive Securities Options - 863 - 1,044 Warrants - - - - Convertible preferred stock - - - - 7% convertible notes payable - - - - -------- -------- --------- --------- Diluted EPS Net income available to common stockholders with assumed conversions $4,564 11,821 $0.39 $4,944 11,652 $0.42 ======== ========= ======== ========= ========= =========
1997 ---------------------------------------- Net Per-Share Income Shares Amount ------- ------- --------- Basic EPS Net income available to the common stockholders $4,447 4,964 $0.90 ========= Effect of Dilutive Securities Options - 1,729 Warrants - 655 Convertible preferred stock - 1,765 7% convertible notes payable 143 780 ------- ------- Diluted EPS Net income available to common stockholders with assumed conversions $4,590 9,893 $0.46 ======= ======= =========
Options to purchase 629 shares of common stock at $13.50 to $22.38 and 157 shares of common stock at $14.63 to $18.50 per share were outstanding during the years ended January 31, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. All potentially dilutive securities were included in the calculation of diluted EPS for the year ended January 31, 1997. 8. Convertible, Redeemable Preferred Stock: Prior to September 1996, the Company had authorized 15,000 shares of Preferred Stock, of which 1,736 were designated as Series A Preferred Stock, 1,736 were designated as Series A1 Preferred Stock, 3,200 were designated as Series B Preferred Stock, 3,200 were designated as Series B1 Preferred Stock, and 5,128 were undesignated. During 1991, the Company issued 1,111 shares of Series A Preferred Stock at a price of $2.25 per share in exchange for $2,500 of cash, less $51 of offering expenses. During 1993, the Company issued 1,501 shares of Series B Preferred Stock at a per share price of $2.33 in exchange for $1,435 of convertible notes payable, including $27 of accrued interest, and $2,055 of cash, less $85 of offering expenses. In September 1996, upon the closing of the Company's initial public offering, all outstanding shares of Series A Preferred Stock and Series B Preferred Stock converted to 1,126 and 1,521 shares, after adjustment for redemption premiums, of the Company's common stock, respectively. 9. Warrants and Stock Options: Warrants: In September 1996, upon the closing of the Company's initial public offering, all outstanding warrants were converted to 983 shares of the Company's common stock on a cashless basis. F-16 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) Stock Option Plans: During 1992, the Board of Directors authorized a nonstatutory stock option program for the purpose of granting options to purchase a total of 222 shares of the Company's common stock to employees. The Board of Directors reduced the number of shares authorized to 133 during 1994. Options vest annually, pro rata over a five-year period, retroactive to the date of hire for each recipient. The following represents option activity for the years ended January 31 under the nonstatutory option plan:
1999 1998 1997 ---------------------- ----------------------- ------------------------ Weighted Weighted Weighted Average Average Average Per Share Per Share Per Share Number of Exercise Number of Exercise Number of Exercise Options Price Options Price Options Price -------- --------- --------- --------- --------- --------- Options outstanding at beginning of year 2 $0.20 22 $0.50 65 $0.52 Options exercised (2) $0.20 (20) $0.53 (42) $0.53 Options forfeited - - (1) $0.53 -------- --------- --------- Options outstanding at year-end - 2 $0.20 22 $0.50 ======== ========= ========= Options exercisable at year-end - 2 $0.20 22 $0.50 ======== ========= ========= Options available for future grant - - - ======== ========= =========
During 1992, the Board of Directors authorized the 1992 Stock Option Plan for the purpose of granting options to purchase the Company's common stock to employees, directors and consultants. The Board of Directors determines the form, term, option price and conditions under which each option becomes exercisable. Options to purchase a total of 1,055 shares of common stock have been authorized by the Board under this plan. The following represents option activity for the years ended January 31 under the 1992 Stock Option Plan:
1999 1998 1997 ----------------------- ----------------------- ----------------------- Weighted Weighted Weighted Average Average Average Per Share Per Share Per Share Number of Exercise Number of Exercise Number of Exercise Options Price Options Price Options Price ------------- --------- --------- --------- --------- --------- Options outstanding at beginning of year 683 $1.33 810 $1.36 774 $1.26 Options granted - - 188 $1.65 Options exercised (202) $1.42 (120) $1.07 (100) $1.19 Options forfeited (37) $1.41 (7) $1.02 (52) $1.22 ------------- --------- --------- Options outstanding at year-end 444 $1.43 683 $1.41 810 $1.36 ============= ========= ========= Options exercisable at year-end 393 $1.39 340 $1.33 301 $1.16 ============= ========= ========= Options available for future grant - - - ============= ========= ========= Weighted average remaining contractual life in years 5.5 ============= Range of per share exercise prices for options outstanding at year-end $0.53 - $1.65 =============
F-17 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) In May 1996, the Board adopted the Company's 1996 Stock Option Plan. The Company's 1996 Equity Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors in July 1996 as an amendment and restatement of the Company's 1996 Plan. At that time, the Board had authorized and reserved an aggregate of 1,267 shares of common stock for issuance under the Incentive Plan. In June 1998, 1,200 additional shares of common stock were authorized and reserved for issuance under the Incentive Plan. The Incentive Plan provides for the grant of incentive stock options to employees and nonstatutory stock options, restricted stock purchase awards and stock bonuses to employees, directors and consultants. The terms of stock options granted under the Incentive Plan generally may not exceed 10 years. The exercise price of options granted under the Incentive Plan is determined by the Board of Directors, provided that the exercise price for an incentive stock option cannot be less than 100% of the fair market value of the common stock on the date of the option grant and the exercise price for a nonstatutory stock option cannot be less than 85% of the fair market value of the common stock on the date of the option grant. Options granted under the Incentive Plan vest at the rate specified in each optionee's option agreement. The following represents option activity under the Incentive Plan for the years ended January 31,:
1999 1998 1997 ------------------------ ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Per Share Per Share Per Share Number of Exercise Number of Exercise Number of Exercise Options Price Options Price Options Price --------- --------- --------- --------- --------- --------- Options outstanding at beginning of year 799 $8.61 638 $ 5.09 - $ - Options granted with exercise prices below market on the date of grant - $ - - $ - 525 $ 3.49 Options granted with exercise prices equal to market on the date of grant 973 $9.97 245 $14.83 141 $10.74 Options exercised (88) $6.07 (46) $ 3.47 (8) $ 3.30 Options forfeited (221) $7.58 (38) $ 9.01 (20) $ 3.48 ----- --- --- Options outstanding at year-end 1,463 $9.68 799 $ 8.61 638 $ 5.09 ===== === === Options exercisable at year-end 218 $6.87 114 $ 5.74 16 $ 3.30 ===== === === Options available for future grant 862 414 621 ===== === ===
F-18 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) For various price ranges, weighted average characteristics of outstanding stock options under the Incentive Plan at January 31, 1999 were as follows:
Outstanding Options Exercisable Options ---------------------------------------- ------------------------ Weighted Weighted Average Average Shares Remaining Per Share Shares Per Share Under Life Exercise Under Exercise Range of Exercise Prices Option (Years) Price Option Price - ------------------------ ------ --------- --------- ------ --------- $3.30 to $4.63 237 5.7 $ 3.30 137 $ 3.30 $4.64 to $6.94 448 9.1 $ 5.17 - $ - $6.95 to $9.25 63 8.4 $ 8.41 17 $ 8.61 $9.26 to $11.56 78 7.9 $10.97 20 $11.01 $11.57 to $13.88 64 8.5 $13.21 11 $13.35 $13.89 to $16.19 417 8.2 $14.16 16 $14.81 $16.20 to $18.50 110 7.5 $17.37 17 $17.34 $18.51 to $20.81 17 7.5 $19.56 - $ - $20.82 to $23.13 29 9.4 $22.28 - $ - ----- --- Total 1,463 218 ===== ===
During the year ended January 31, 1999, the Company granted 5 shares of common stock as stock bonuses to certain employees. The Company recorded $78 of compensation expense related to these stock bonuses during the year ended January 31, 1999. During the year ended January 31, 1997, the Company recorded deferred compensation costs of $452 for the difference between the exercise price and the deemed fair value of the Company's common stock at the date of grant for options issued under the Incentive Plan. Of the total deferred expense, the Company recognized $87, $63 and $106 as compensation expense during the years ended January 31, 1999, 1998 and 1997, respectively. The remaining deferred compensation expense will be amortized over the remaining vesting periods of the options, which range from 3 to 51 months. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations to account for its stock option plans. Under SFAS No. 123, compensation cost would be recognized for the fair value of the employee's option rights. In determining the fair value, the Company used the Black-Scholes model, assumed no dividend per year, used expected lives ranging from 2 to 10 years, expected volatility of 100.0%, 72.55%, and 65.2% for the years ended January 31, 1999, 1998 and 1997, and risk free interest rates ranging from 4.0% to 5.75% for the year ended January 31, 1999, 5.75% to 7.25% for the year ended January 31, 1998 and 7.0% for the years ended January 31, 1997. The weighted average per share fair value of options granted during the year with exercise prices equal to market price on the date of grant was $8.66, $10.83 and $3.94 for the years ended January 31, 1999, 1998 and 1997, respectively. The weighted average per share fair value of the options granted during the year ended January 31, 1997 with exercise prices below market price on the date of grant was $3.58. There were no options granted with exercise prices below market price on the date of grant during the years ended January 31, 1999 or 1998. Had compensation cost for the Company's grants for stock- based compensation plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro-forma amounts indicated below. F-19 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts)
Year Ended January 31, ----------------------------------------------- 1999 1998 1997 ------ ------ ------ Net income as reported $4,564 $4,944 $4,447 ====== ====== ====== Proforma net income $1,193 $3,794 $3,710 ====== ====== ====== Net income per share as reported: Basic $ 0.42 $ 0.47 $ 0.90 ====== ====== ====== Diluted $ 0.39 $ 0.42 $ 0.46 ====== ====== ====== Proforma net income per share: Basic $ 0.11 $ 0.36 $ 0.78 ====== ====== ====== Diluted $ 0.10 $ 0.33 $ 0.39 ====== ====== ======
Employee Stock Purchase Plan. In July 1996, the Company's Board of Directors approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 300 shares of the Company's common stock. Under the Purchase Plan, the Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. The offering period for any offering will be no more than 27 months. Plan offering periods have been six months since the inception of the plan. Employees are eligible to participate if they are employed by the Company or an affiliate of the Company designated by the Board of Directors and meet eligibility standards established by the Board of Directors. Employees who participate in an offering can have up to 15% of their earnings withheld pursuant to the Purchase Plan and applied, on specified dates determined by the Board of Directors, to the purchase of shares of common stock. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock on the commencement date or the purchase date of each offering period. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company and its affiliates. The Purchase Plan will terminate at the Board of Directors' discretion. During the year ended January 31, 1999 and 1998, employees purchased 87 and 26 shares of common stock at weighted average per share prices of $6.04 and $10.88, respectively. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations to account for the Purchase Plan. Had compensation cost been determined based on the fair value at the grant dates for awards under the Purchase Plan using the Black-Scholes model, the Company's net income would have been reduced by $229 for the year ended January 31, 1999 and would not have differed from reported amounts for the years ended January 31, 1998 and 1997. 10. Shareholder Rights Plan: In October 1998, the Board of Directors of the Company adopted a stockholder rights plan, as set forth in the Rights Agreement, dated as of October 7, 1998 by and between the Company and Norwest Bank Minnesota, N.A., as rights agent. Pursuant to the Rights Agreement, one Right was issued for each share of the Company's common stock outstanding as of October 15, 1998. Each of the Rights entitles the registered holder to purchase, from the Company, one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $35.50 per one one-thousandth of a share. The Rights generally will not become exercisable unless and until, among other things, any person or group not approved by the Board of Directors acquires beneficial ownership of 15% or more F-20 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (in thousands, except per share amounts) of the Company's outstanding common stock or commences a tender offer or exchange offer which would result in a person or group beneficially owning 15% or more of the Company's outstanding common stock. Upon the occurrence of certain events, each holder of a Right, other than such person or group, would thereafter have the right to purchase, for the then exercise price of the Right, shares of common stock of the Company, or a corporation or other entity acquiring the Company, having a value equal to two times the exercise price of the Right. The Rights are redeemable by the Company under certain circumstances at $0.01 per Right and will expire, unless earlier redeemed or extended, on October 15, 2008. 11. Employee Benefit Plan: The Company maintains an employee savings plan that qualifies under Section 401(k) of the Internal Revenue Code (the "Code") for all of its full-time employees. The plan allows employees to make specified percentage pretax contributions up to the maximum dollar limitation prescribed by the Code. The Company has the option to contribute to the plan up to a maximum of $2,000 per employee per year. Company contributions to the plan during the years ended January 31, 1999, 1998 and 1997 were $253, $192 and $0, respectively. 12. Related Parties: During the years ended January 31, 1997 the Company recognized revenues of $2,244 from transactions with a shareholder. As of January 31, 1998, this former related party was no longer a shareholder of the Company. 13. International Operations: The Company's long-lived assets are located principally in the United States. The Company's revenues for the years ended January 31, which are transacted in U.S. dollars, are derived based on sales to customers in the following geographic regions:
1999 1998 1997 ---- ---- ---- United States $12,735 $13,620 $ 9,890 Japan 19,256 11,726 5,978 Other 592 17 153 ------- ------- ------- $32,583 $25,363 $16,021 ======= ======= =======
14. Subsequent Event: On April 6, 1999, the Company entered into an Agreement and Plan of Reorganization and Merger with Auco, Inc. ("Auco), a privately held developer of embedded networking technology based in Redwood City, California. The transaction is structured as a merger in which the Company will exchange 2.5 million shares of its common stock for all currently outstanding shares of Auco capital stock, on a fully-diluted basis, and its convertible note payable. It is expected that the merger will be accounted for as a pooling of interests. As a result of the merger, Auco will become a subsidiary of the Company. Consummation of the merger is subject to terms and conditions customary for a transaction of this type, including approval of certain matters by the shareholders of the Company and Auco. F-21 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Stockholders Peerless Systems Corporation Our audits of the financial statements referred to in our report dated March 5, 1999, except for the subsequent event described in Note 14, as to which the date is April 6, 1999, appearing on page F-2 of this 1999 Annual Report on Form 10-K, also included an audit of the financial statement schedule listed in Item 14(a)(2) of the Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. PRICEWATERHOUSECOOPERS LLP Woodland Hills, California March 5, 1999 S-1 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Additions Charged Balance at to Costs Balance at Beginning and Deductions End Description of Period Expenses (a) of Period - ------------------------------------------------------- --------- -------- ---------- ---------- Year Ended January 31, 1997 Reserves deducted from assets to which they apply: Allowance for uncollectible accounts receivable $ - $ 100 $ - $ 100 Year Ended January 31, 1998 Reserves deducted from assets to which they apply: Allowance for uncollectible accounts receivable $ 100 $ - $ - $ 100 Year Ended January 31, 1999 Reserves deducted from assets to which they apply: Allowance for uncollectible accounts receivable $ 100 $ 75 $ - $ 175
- ---- (a) Accounts written off, net of recoveries S-2 INDEX TO EXHIBITS
Exhibit Number - ------ 3.1(1) Certificate of Incorporation of the Company. 3.2(4) Amended and Restated Bylaws of the Company. 4.1 Instruments defining the rights of security holders. Reference is made to Exhibits 3.1 and 3.2. 4.2(4) Rights Agreement, dated October 7, 1998, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent. 10.1(1) Form of Indemnity Agreement. 10.2(1)(2) 1992 Stock Option Plan (the "Option Plan"), as amended. 10.3(1)(2) 1996 Equity Incentive Plan. 10.4(1)(2) Form of Incentive Stock Option. 10.5(1)(2) Form of Nonstatutory Stock Option. 10.6(1)(2) 1996 Employee Stock Purchase Plan. 10.7(1) Third Party Development Agreement (the "Adobe Third Party License"), dated and September 18, 1992, between the Registrant and Adobe Systems Incorporated ("Adobe"). 10.8(1)(3) Reference Post Appendix #2 to the Adobe Third Party License, dated February 11, 1993. 10.9(1) Amendment No. 1 to the Adobe Third Party License, dated November 29, 1993. 10.10(1)(3) PCL Development and License Agreement (the "PCL License"), dated June 14, 1993, between the Registrant and Adobe. 10.11(1)(3) Amendment No. 1 to the PCL License, dated October 31, 1993. 10.12(1)(3) Letter Modification to the PCL License, dated August 5, 1994. 10.13(1)(3) Addendum No. 1 to the PCL License, dated March 31, 1995. 10.14(1)(3) Letter Modification to the PCL License, dated August 30, 1995. 10.15(1) Lease Agreement between the Company and Continental Development Corporation, dated February 6, 1992, and Addendum, dated February 6, 1992. 10.16(1) First Amendment to Office Lease, dated December 1, 1995, between the Company and Continental Development Corporation. 10.18(1)(2) Employment Agreement with Lauren Shaw. 10.19(1)(2) Employment Agreement with Edward Gavaldon. 10.20(5) Second Amendment to Office Lease, dated April 8, 1997, between the Company and Continental Development Corporation. 10.21(5) Third Amendment to Office Lease dated, December 16, 1997, between the Company and Continental Development Corporation. 10.22 Fourth Amendment to Office Lease, dated April 22, 1998, between the Company and Continental Development Corporation. 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney. Reference is made to page 30. 27.1 Financial Data Schedule.
_____________ (1) Previously filed in the Company's Registration Statement on Form S-1 (File No. 333-09357), as amended and incorporated herein by reference. (2) Management contract or compensatory plan or arrangement. (3) Subject to Confidential Treatment Order. (4) Previously filed in the Company's Current Report on Form 8-K, filed October 8, 1998, and incorporated herein by reference. (5) Previously filed in the Company's 1998 Annual Report filed on Form 10-K, filed April 24, 1998, and incorporated herein by reference. EX-10.22 2 FOURTH AMENDMENT TO OFFICE LEASE, DATED APRIL 22 EXHIBIT 10.22 FOURTH AMENDMENT TO OFFICE LEASE THIS AMENDMENT made this 22nd day of April, 1998, (the "Amendment") by and between CONTINENTAL ROSECRANS AVIATION, L. P., a California limited partnership, hereinafter referred to as "Lessor", and PEERLESS SYSTEMS, INC., a Delaware corporation, hereinafter referred to as "Lessee." W I T N E S S E T H: WHEREAS, Lessee entered into a certain Office Lease ("Lease"), dated February 6, 1992, with Lessor leasing certain premises together with appurtenances in Continental Park, commonly known as 2361-2381 Rosecrans Avenue, El Segundo, California; and WHEREAS, said Lease was amended in certain particulars by a Letter Amendment, dated March 31, 1992; by a second agreement dated July 29, 1992; by a First Amendment to Office Lease dated December 1, 1995; by a Second Amendment to Office Lease dated April 8, 1997; and by a Third Amendment to Office Lease dated December 16, 1997; and WHEREAS, Continental Rosecrans Aviation, L. P. is successor in interest to Continental Terrace Corporation, and Continental Terrace Corporation is successor in interest to Continental Development Corporation; and WHEREAS, Lessor and Lessee are desirous of amending said Lease by this Fourth Amendment to Office Lease in the manner set forth below. NOW, THEREFORE, in consideration of the mutual promises herein contained, Lessor and Lessee hereby agree to amend said Lease as follows: 1. PREMISES Suite 330 at 2381 Rosecrans Avenue in El Segundo, consisting of 9,118 rentable square feet (8,150 usable square feet) shall be added to the Premises. 2. TERM The term for the added premises shall commence upon delivery of the premises to Lessee, estimated to be October 1, 1998 and shall be co-terminus with the term dictated in the Lease, as amended, and shall terminate on December 31, 2007. 3. BASE RENTAL The Base Rental set forth in Paragraph 1.6 of the Lease, as amended, shall be increased to reflect the additional rent for the added premises as follows: a) Month 1: no rent or parking fees; b) Months 2 through 30 at $16,412.40 per month; c) Months 31 through 60 at $17,324.20 per month; d) Months 61 through 90 at $18,691.90 per month; and e) The remainder of the lease term at $20,059.60 per month. 1 4. TENANT IMPROVEMENTS For the taking of additional space at Suite 330, Lessor shall pay Lessee Five Dollars ($5.00) per usable square foot, or $40,750.00, to be used for tenant improvements. 5. EFFECTIVE DATE This Amendment shall take effect as of April 1, 1998. 6. PARKING Lessee must take at least an additional fifty (50) parking permits, of which no more than thirteen (13) may be for reserved spaces. Parking permits will be charged to Lessee at the prevailing monthly rates for parking permits at the Property. 7. BROKERAGE Lessee represents that Lessee has dealt with no broker in connection with this modification of the Lease, except for Lee & Associates, and that insofar as Lessee knows, no other broker negotiated this modification of Lease or is entitled to any commission in connection therewith. 8. SIGNAGE Lessee shall be permitted to display its name in the building standard font on the existing east entrance monument sign to the Building (the Monument Sign). Lessee's right to maintain said name shall be subject to the following conditions: a. That Lessee will pay Lessor (1) the sum of Fifty Dollars and No Cents ($50.00) per month, for as long as Lessee should choose to display its name on said Monument Sign, and which sum shall represent the monthly rental rate for said privilege, and (2) all cost and materials related to the installation and/or fabrication of the name on the sign. b. That the design, font, size, location, specification, graphics, materials, colors, and lighting (if applicable) with respect to Lessee's name on the Monument Sign must be consistent with Lessor's signage program as determined by Lessor in Lessor's sole discretion; c. That Lessee shall pay to Landlord, from time to time and within thirty (30) days after receipt of written demand, Lessee's portion of all expenses incurred by Lessor that are attributable to the insurance, lighting (if applicable), maintenance, and repair of the Monument Sign during the period of time that Lessee's name is one the Monument Sign. Lessee's portion of such expenses shall be calculated by Lessor by dividing such expenses equally among all lessees and occupants that have signs on the Monument Sign; d. That Lessor shall have the right to relocate, redesign, and/or reconstruct the Monument Sign from time to time as determined by Lessor in Lessor's sole discretion; and e. That upon Lessee's request to remove its name from the sign, or upon termination and/or expiration of the Lease Term, Lessor shall have the right to permanently remove the Lessee's name from the Monument Sign, repair any damage to the Monument Sign that may result from the removal of Lessee's name, and charge Lessee for all expenses and costs incurred in connection with said removal and repair. 2 9. GENERAL TERMS Except as amended and supplemented herein, all of the other terms, covenants, conditions, provisions and agreements of the Lease shall continue in full force and effect. IN WITNESS WHEREOF, Lessor and Lessee have caused this Fourth Amendment to Office Lease to be executed on the day and year first above written. LESSOR LESSEE CONTINENTAL ROSECRANS PEERLESS SYSTEMS, INC. AVIATION, L.P. a Delaware corporation a California limited partnership BY: CONTINENTAL DEVELOPMENT CORPORATION, general partner /s/ Richard C. Lundquist /s/ Hoshi Printer - ------------------------------------ --------------------------------- Richard C. Lundquist, President Hoshi Printer, Chief Financial Officer, Vice President/Finance & Administration /s/ Leonard E. Blakesley - ------------------------------------ Leonard E. Blakesley, Jr., Secretary 3 EX-23.1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 PEERLESS SYSTEMS CORPORATION CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Peerless Systems Corporation on Form S-8 (File No. 000-21287) of our reports dated March 5, 1999, except for the subsequent event described in Note 14, as to which the date is April 6, 1999, on our audits of the financial statements and financial statement schedule of Peerless Systems Corporation as of January 31, 1999 and 1998 and for the each of the three years in the period ended January 31, 1999, which reports are included in this 1999 Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Woodland Hills, California April 22, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FOR THE PERIOD ENDED JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-31-1999 FEB-01-1998 JAN-31-1999 5,250 20,763 9,361 (175) 0 36,834 7,415 (2,229) 47,174 5,750 0 0 0 11 39,788 47,174 32,583 32,583 10,665 10,665 16,154 75 (1,333) 7,022 2,458 4,564 0 0 0 4,564 0.42 0.39
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