-----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, DXKv2UuPHcicGO/W7Wf7ynpgaNsibdKbHMFn/a696RMsymv1muFr9FoYtBbiR8or 3FmdokZbjsMJaV8KKCy1Hg== 0000944209-98-000847.txt : 19980427 0000944209-98-000847.hdr.sgml : 19980427 ACCESSION NUMBER: 0000944209-98-000847 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980424 SROS: NASD 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: 98600861 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, 1998 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 20, 1998 was approximately $162,750,072. The number of shares of Common Stock outstanding as of April 20, 1998 was 10,769,844. 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 18, 1998 (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; 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" (which includes "Risk Factors"), "Properties", "Market for Registrant's Common Equity and Related Stockholder Matters" and "Management 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 risk factors on pages 12 through 18, among other things, should be considered in evaluating the Company's prospects and future financial performance. 2 PEERLESS SYSTEMS CORPORATION 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PAGE ---- PART I
Item 1. BUSINESS........................................... 4 Item 2. PROPERTIES......................................... 18 Item 3. LEGAL PROCEEDINGS.................................. 18 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS................................ 19 Item 6. SELECTED FINANCIAL DATA............................ 20 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 21 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 27 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 27 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS.................. 28 Item 11. EXECUTIVE COMPENSATION............................ 29 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... 29 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.... 29 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................................... 30
TRADEMARKS Memory Reduction Technology (MRT)(R) is a registered trademark of Peerless Systems Corporation. WINEXPRESS(TM), PeerlessPrint(TM) and QuickPrint(TM) are trademarks of Peerless Systems Corporation and are subjects of applications pending for registration with United States Patent and Trademark Office. Peerless Systems(TM) (in English and Japanese Katakana), PEERLESS(TM) (in logo) and P(TM) (in logo) are trademarks and service marks 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 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 market for embedded imaging systems represents a small portion of the worldwide market for digital document products. The Company estimates the digital document market, based in part upon data and projections provided by International Data Corporation ("IDC"), was approximately $26 billion in 1996. 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 600 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 applications 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 4 power of the digital document product. In response, embedded imaging systems have evolved from 8-bit to 32-bit platforms that 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 this trend towards 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 "Risk Factors--Technological Change; Dependence on the Digital Document Product Market" 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, 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 5 introduced MFPs, which have required each of them to broaden their imaging expertise. At the same time, the need for 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, 70% 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 87% by 2001. See "Risk Factors--Developing Markets" for a discussion of this forward-looking statement. 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: 6 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, 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 XL. 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 5M and high-end inkjet products. PeerlessPrintXL provides monochrome and color compatibility with HP's latest PCL XL 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. 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 planned as a 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 and the QP 1800 ASICs. Additionally, the Company has introduced the QP+401 which is expected to be available in fiscal 1999. In addition, the Company, in partnership with Rockwell Semiconductor Systems, Inc. ("Rockwell"), is developing an integrated processor solution for the multifunction SOHO 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. 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 utilized by open industry-standard network management systems. 7 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 inkjet products (currently under development), fax or laser-based workgroup MFP products and high-speed copier-based MFP products. The lower-cost inkjet solution, currently under joint development with Rockwell, will combine Peerless imaging technology and Rockwell fax technology. The higher-end solutions combine the Company's networkable imaging products with MFP-specific extensions to facilitate printing, copying, faxing and scanning by 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 1998, the Company announced its first object-based embedded imaging system for a color MFP, a fax-based MFP and a high-speed MFP capable of print speeds of up to 40 pages per minute. 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 image system reduces memory requirements for printing color pages while simultaneously accelerating the document imaging process and increasing print quality. During fiscal 1998, the Company released its first embedded object- based imaging system for a desktop color laser printer to an OEM customer. 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 compression technologies frequently result in a loss of clarity and detail in the printed document and require significant processing power. 8 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 three patents in the United States covering 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. Furthermore, the Company has established relationships with Emulex and Osicom that allow the Company to support network printing under a wide range of networking technologies. The Company also has an agreement with HDE, Inc. for an internet printing solution and has licensed MFP host software from Jetfax. 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 coprocessor solutions. The integrated processors combine the Company's basic digital document product functionality with an industry-standard microprocessor. In October 1996, the Company entered into an agreement with Rockwell Semiconductor Systems, Inc. ("Rockwell"), 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 Rockwell and Peerless to specify, design and produce an integrated semiconductor solution for multifunction products that combines Rockwell's fax technology and Peerless' embedded imaging technology. See "Risk Factors - Potential Fluctuations in Quarterly Results; Seasonality; Revenue Reporting" for further discussion of this agreement. 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 Rockwell, the Company has derived substantially all of its revenues in recent years from direct sales to digital document product OEMs, including Canon, IBM and Minolta. 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, 1998 included Adobe, Canon, IBM and Minolta. 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 Rockwell 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 Rockwell, which has the rights to manufacture and sell this chipset directly to digital document product manufacturers. Rockwell is presently the Company's sole customer in the SOHO market. See "Risk Factors-- Dependence on Sole Source Providers." Asian Markets. Peerless' Asian 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 recent downturn in the Asian economy, the Company has not experienced a decrease in its sales to Asian customers. See "Risk Factors - International Activities" for further discussion on Asian markets. 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 products 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 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 at building the Company's brand awareness. These programs consist of public relations and Peerless product branding on its silicon and software products. 10 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 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 three 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 three applications pending in Japan, three applications pending in the European Patent Office and five application 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 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 subject 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 11 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 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, 1998, the Company had a total of approximately 160 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. RISK FACTORS Investors in the Company should be aware of the following risks and uncertainties that could materially affect the Company's results of operations and the market for the Company's securities. 12 History of Operating Losses; Accumulated Deficit. The Company has been profitable only since the quarter ended December 31, 1995. The Company recognized net losses of approximately $639,000 and $1.2 million for the fiscal years ended December 31, 1995 and 1994, respectively. The Company's historical losses have resulted in an accumulated deficit of approximately $3.9 million as of January 31, 1998. Although the Company reported net income of $4.9 million and $4.4 million for the fiscal years ended January 31, 1998 and 1997, respectively, there can be no assurance that the Company will maintain profitability on a quarterly or annual basis in the future. Potential Fluctuations in Quarterly Results; Seasonality; Revenue Reporting. The Company in the past has experienced, and in the future may experience, significant fluctuations in quarterly operating results that have been and may be caused by many factors including: initiation or termination of arrangements between the Company and its existing and potential OEM customers; the timing of introductions of new products or product enhancements by the Company, its OEMs and their competitors; the phase-out or early termination of OEM products incorporating the Company's technology; the size and timing of engineering services contracts, one-time software licensing transactions and recurring licensing fees; the size and timing of and fluctuations in end-user demand for the OEM products incorporating the Company's technology; inventories of digital document products carried by the OEMs' distributors that exceed current or projected end-user demand; performance by the Company and its OEM customers pursuant to their plans and agreements; seasonal trends; the mix of services provided or products sold and the gross margins attributable to such services or products; competition and pricing; customer order deferrals in anticipation of new products or product enhancements; industry and technology developments; changes in the Company's operating expenses: software bugs, product delays or other product quality problems; currency fluctuations; and general economic conditions. For example, in recent quarters the Company's quarterly revenues have been significantly affected by the timing of one-time licensing transactions, by decreases in recurring product licensing revenues resulting from the phase-out by the Company's OEMs of products incorporating the Company's technology and by variations in end-user demand. The Company expects that its operating results will continue to fluctuate significantly in the future as a result of these and other factors. A substantial portion of the Company's costs and expenses is related to costs of engineering services and maintenance, other personnel costs, product development, facilities and marketing programs. 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, in any event, if revenues are below expectations, the Company's quarterly and annual operating results will be adversely affected, which could have a material adverse effect on the price of the Company's Common Stock. The Company in the past has experienced, and in the future may experience, significant fluctuations in quarterly engineering services results that have been and may be caused by many factors including: an increase in the estimated hours to completion associated with a particular engineering services project; 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. For example, if the estimated hours to completion associated with a particular engineering services project increases during the course of the project, the estimated percentage that has been completed will subsequently decrease, and the portion of the total fixed engineering services project revenue that the Company will be able to recognize at that point in time will decrease as a result. For these and other reasons, it is likely that in future quarters the Company's operating results from time to time may be below the expectations of public market analysts and investors, which also could have a material adverse effect on the price of the Company's Common Stock. 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. As a result, the Company's product licensing revenues associated with unit shipments by its OEMs may be subject to similar fluctuations, although no assurance can be given that the Company's OEMs will experience such fluctuations or as to the effect of such fluctuations, if any, on the Company's revenues. In addition, because one or more key OEM transactions, milestones or OEM product 13 shipments that are scheduled to be realized by the Company or its OEMs at the end of a quarter may be delayed until the beginning of the next quarter, quarterly revenues are subject to significant fluctuations. The recurring product licensing revenues reported by the Company are dependent 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 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. As a result, the Company may be unable to estimate such revenues accurately prior to public announcement of the Company's quarterly results. In such event, the Company subsequently may be required to restate its recognized revenues or adjust revenues for subsequent periods, which could have a material adverse effect on the Company's operating results. In October 1996, the Company entered into an agreement with Rockwell Semiconductor Systems, Inc., a major developer and manufacturer of fax and modem chips, relating to the licensing of Peerless technologies and engagement of Peerless technical personnel for engineering development services. Pursuant to the agreement, the Company is entitled to engineering service payments, development license fees and prepayment of royalty guarantees. The agreement provides that Rockwell may terminate the relationship for any reason upon 60 days notice and with notice in the event of a material breach. If the agreement is terminated for a material breach by Peerless prior to the shipment of the licensed product developed under this agreement, Peerless is obligated to a return a portion of the licensing fees previously paid. No assurance can be given as to the ability of the Company to perform in accordance with the terms of the agreement or as to the ability or willingness of Rockwell to continue developing, marketing and selling proposed products covered by the agreement. Thus, the achievement of, or failure to achieve, certain milestones under this agreement, the development and sale of, or failure to develop and sell, products under this agreement, or the termination, with or without a material breach, of this agreement, may cause the Company's revenues to fluctuate significantly from quarter to quarter. Dependence on Market Success of Third Parties. With the exception of Adobe and Rockwell, 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. The ability and willingness of these OEMs to do so is based upon a number of factors, such as: the timely development by the Company and the OEMs of new products with new functionality, increased speed and enhanced performance at acceptable prices to end users; development costs of the OEMs; licensing and engineering fees of the Company; compatibility with emerging industry standards; technological advances; patent and other intellectual property issues; competition generally; and overall economic conditions. Many of these factors are beyond the control of the Company and, to a lesser extent, also may be beyond the control of any of the OEMs. 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. Since the Company's business is entirely dependent on its relationships with its OEMs, the inability or unwillingness of any of the Company's significant OEMs to continue its relationship with the Company and to develop and promote products incorporating the Company's technology would have a material adverse effect on the Company's operating results. Concentration of Revenues. The Company's customers that individually comprised more than 10% of the Company's total revenues for the year ended January 31, 1998 were Adobe, Canon, IBM, Minolta and Rockwell. Revenues from the Company's top four customers accounted for approximately 60%, 61% and 74% of the Company's total revenues for the fiscal years ended January 31, 1998 and 1997 and December 31, 1995, respectively, and the Company anticipates that its revenues in the future 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 14 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. 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. In addition, 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. The Company also is subject to a credit risk associated with the concentration of its accounts receivable from these customers. No assurance can be given as to the ability or willingness of any of the Company's customers to continue utilizing the Company's services and technology consistent with past practice or at all, or as to the ability of the Company in the future to sell its services and technology consistent with past practice or at all to its existing or new customers. Any significant decrease in sales of products by, or a reduction in licensing or engineering services to, the Company's larger customers, any failure of the Company to replace its existing customers or to enter into relationships with new customers in accordance with the Company's expectations, or any delay in or failure to make the payments due to the Company from such customers could have a material adverse effect on the Company's operating results. Technological Change; Dependence on the Digital Document Product Market. 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 currently derives substantially all of its revenues from the licensing of technology and the sale of related engineering services that enable the printing and imaging of digital documents, and the Company anticipates that these sources of revenue will continue to account for substantially all of the Company's revenues for the foreseeable future. The Company and its OEMs are required to develop and release in a regular and timely manner new digital document products with increased speed, enhanced resolution, reduced memory requirements, multifunction capability, network compatibility and color imaging. The acceptable amount of time to develop these products is continuing to decrease, which increases the complexity for and costs to the Company and its OEMs. In addition, the Company, its OEMs and their competitors from time to time may announce new products, capabilities or technologies that may replace or shorten the life cycles of the OEM products incorporating the Company's technology. 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. Product Development; Product Delays. The Company in the past has experienced delays in product development, and the Company may experience similar delays in the future. 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 15 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 errors will not be found, that the Company will not experience development challenges resulting in unanticipated problems or delays in the acceptance of products by the Company's OEMs or shipment of the OEMs' products, or 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. Developing Markets. A substantial portion of the Company's recent development efforts has been directed at the development of new embedded imaging technologies, particularly for laser and inkjet MFPs, color products and digital photography. The markets for these products are new and rapidly evolving. The Company's OEMs currently are selling laser monochrome and color network printers and MFPs incorporating the Company's technology. Although certain of the Company's technology currently is available to OEM customers, once an agreement with an OEM is entered into, the technology must undergo further development, or customization, before it can be incorporated into an OEM's specific digital document product. The Company's OEMs have not yet shipped any inkjet products incorporating the Company's technology, and the Company has limited experience in the SOHO market to date. Further, the Company's digital photography effort remains in the early start-up phase and the Company has signed no OEM contracts for this technology to date. The Company's future success will be dependent to a significant degree upon broad market acceptance of its technologies under development. This success will be dependent in part on the ability of the Company's OEMs to develop new products that provide the functionality, performance, speed and network connectivity demanded by the market at acceptable prices, and to convince end users to adopt new generation products for office and desktop use. There can be no assurance that: the market for MFP, color printing and other products proposed by the Company will develop or continue to expand; the Company will be able to offer in a timely manner, if at all, its new technologies; the Company's OEM customers will choose the Company's technology for use in their MFPs, color printers, digital cameras or other products; the Company's OEM customers will be successful in developing such MFPs, color printers, digital cameras and other products; or such products will gain market acceptance. The failure of any of these events to occur would 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. 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, and is currently seeking to license color matching technology from Adobe. 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. 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 16 the inability to hire or retain qualified personnel could have a material adverse effect on the Company's operating results. International Activities. Revenues from sales to the Company's customers outside the United States accounted for 46%, 38% and 41% of the Company's total revenues for the fiscal years ended January 31, 1998 and 1997 and December 31, 1995, respectively. Therefore, the Company is substantially dependent on its international business activities. Further, 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 year, the Asian economy has experienced a downturn. As a result, some members of the imaging industry have recently 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. These market fluctuations may adversely affect the market price of the Common Stock. Effect of Anti-Takeover Provisions. Certain provisions of the Company's Certificate of Incorporation (the "Charter") and Bylaws (the "Bylaws") and certain provisions of Delaware law could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that investors might be willing to pay in the future for the Company's Common Stock. These provisions permit the issuance of "blank check" preferred stock by the Board of Directors without stockholder approval, require super- majority approval to amend certain provisions in the Charter and Bylaws, require that all stockholder actions be taken at duly called annual or special meetings and not by written consent, and impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate action. Furthermore, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. The application of Section 203 could also have the effect of delaying or preventing a change of control of the Company. 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- 17 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. Based on a recent assessment, the Company will be required to modify certain support software so that its computer systems will properly utilize dates beyond December 31, 1999. Management believes that the Company's engineering and development tools will not be impacted by the Year 2000 Issue as they are not date sensitive. The Company believes that the exposure, if any, to contingencies related to the Year 2000 Issue for products developed for OEMs is not material. The Company is currently developing a plan that would include initiating formal communications with all of its significant vendors, large customers and development partners to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issues. The estimated cost to complete the project is not expected to have a material effect on the financial position or results of operations of the Company. The Company will utilize both internal and external resources for Year 2000 software modifications. 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. ITEM 2 -- PROPERTIES. The Company leases its principal facilities in El Segundo, California. The Company expanded its facilities during the year ended January 31, 1998 from 30,000 square feet to 47,000 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 1998. 18 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, 1998 January 31, 1997 -------------------- ----------------------- Quarter High Low High Low - -------- ------- -------- ---------- --------- First $20.750 $8.500 Not Yet Publicly Traded Second $17.000 $10.250 Not Yet Publicly Traded Third $17.250 $12.500 $13.000 $10.250 Fourth $16.375 $9.000 $23.000 $10.500
As of April 20, 1998, there were approximately 128 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. Under the terms of the Company's revolving line of credit, the Company currently is prohibited from paying dividends on its Common Stock. 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 future even after the prohibition on paying dividends under the revolving line of credit is no longer effective. 19 ITEM 6 - SELECTED FINANCIAL DATA The statement of operations data for the years ended January 31, 1998 and 1997 and December 31, 1995 and the balance sheet data at January 31, 1998 and 1997, 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, 1994 and 1993 and the balance sheet data at January 31, 1996 and at December 31, 1995, 1994, and 1993 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 JANUARY 31, (1) YEARS ENDED DECEMBER 31, ----------------------- ------------------------------------ 1998 1997 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenues: Product licensing $15,806 $ 8,322 $ 4,774 $ 4,394 $ 1,586 Engineering services and maintenance 9,557 7,699 5,639 4,942 3,655 -------- --------- -------- --------- --------- Total revenues 25,363 16,021 10,413 9,336 5,241 -------- --------- -------- --------- --------- Cost of revenues: Product licensing 141 144 143 218 341 Engineering services and maintenance 7,974 6,123 5,111 5,457 5,095 -------- -------- -------- --------- --------- Total cost of revenues 8,115 6,267 5,254 5,675 5,436 -------- -------- -------- --------- --------- Gross margin 17,248 9,754 5,159 3,661 (195) -------- -------- -------- --------- --------- Operating expenses: Research and development 4,604 2,701 2,088 1,767 1,766 Sales and marketing 3,732 2,746 2,142 1,878 1,656 General and administrative 2,915 2,546 1,293 1,000 1,048 -------- -------- -------- --------- --------- Total operating expenses 11,251 7,993 5,523 4,645 4,470 -------- -------- -------- --------- --------- Income (loss) from operations 5,997 1,761 (364) (984) (4,665) Interest income (expense), net 1,391 186 (176) (118) (96) -------- -------- -------- --------- --------- Income (loss) before income taxes 7,388 1,947 (540) (1,102) (4,761) Provision (benefit) for income taxes 2,444 (2,500) 99 124 63 -------- -------- -------- --------- --------- Net income (loss) $ 4,944 $ 4,447 $ (639) $ (1,226) $ (4,824) ======== ======== ======== ========= ========= Net income (loss) per share - assuming dilution (2) $ 0.42 $ 0.46 $ (0.24) $ (0.47) $ (1.89) ======== ======== ======== ========= ========= Shares used in per share calculation (2) 11,652 9,893 2,664 2,599 2,556 ======== ======== ======== ========= ========= JANUARY 31, (1) DECEMBER 31, ------------------------------------ ------------------------------------ 1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Cash and cash equivalents $ 3,199 $24,162 $ 722 $ 1,184 $ 393 $ 771 Working capital (deficit) 23,713 25,056 (2,608) (2,307) (3,192) (2,477) Total assets 40,095 35,109 4,041 4,185 3,541 3,221 Long-term obligations 421 317 4,286 4,299 2,594 2,296 Redeemable Preferred Stock - - 5,932 5,931 6,645 6,422 Total stockholders' equity (deficit) 33,807 28,064 (11,867) (11,596) (11,941) (10,528)
_________ (1) The Company changed its fiscal year end to January 31, beginning February 1, 1996. (2) See Note 8 of Notes to Financial Statements for a description of the computation of the net income (loss) per share and the number of shares used in the per share calculation for the years ended January 31, 1998 and 1997 and December 31, 1995. 20 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 information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements as a result of certain factors, including those set forth below, under "Risk Factors" and elsewhere in this report. OVERVIEW The Company provides software-based embedded imaging systems to OEMs of digital document products. The Peerless family of products and engineering services provides advanced embedded imaging technologies that enable the Company's customers to develop digital printers, copiers and MFPs quickly and cost effectively. The Company's revenues are comprised of both recurring and one-time development licensing fees, as well as engineering services and maintenance fees related to the Company's embedded imaging software and supporting technologies. The Company changed its fiscal year end from December 31 to January 31, commencing February 1, 1996, in order to better align the timing of the Company's financial reporting with the timing of receipt of royalty information by the Company from its OEMs. Accordingly, information for the year ended January 31, 1997 is compared with the information for the year ended December 31, 1995. No analysis is provided for the month ended January 31, 1996. The Company's product licensing revenues are comprised of both recurring licensing fees and one-time development licensing fees for source code. Recurring licensing revenues are derived from per unit fees paid quarterly by the Company's OEMs upon shipment or manufacture of products incorporating the Company's technology. Recurring licensing revenues are derived to a lesser extent from arrangements in which the Company enables its products to be used with third-party technology, such as certain arrangements with Adobe. The Company's one-time development licensing fees for source code are paid by OEMs for access to the Company's software, which in turn generates recurring licensing revenues if the software is incorporated into OEM products that are subsequently developed and shipped. The Company's engineering services revenues are derived primarily from adapting the Company's software and supporting electronics to specific OEM requirements. The Company provides its engineering services to OEMs seeking an embedded imaging solution for their digital document products. The Company's maintenance revenues are derived from software maintenance agreements. Maintenance revenues constitute a small portion of engineering services and maintenance revenues. The Company recognizes its recurring product licensing revenues on a royalty basis generally when the Company's OEM customers ship or manufacture products that incorporate the Company's technology. Generally, the Company recognizes its one-time development licensing revenues for source code upon shipment to and acceptance by the Company's OEMs. The Company recognizes engineering services revenues over the course of the development work on a percentage-of-completion basis. Maintenance revenues are recognized ratably over the term of the maintenance contract, which generally is 12 months. Licensing revenues are recognized in accordance with Statement of Position 91-1 "Software Revenue Recognition." (See the "Future Developments" section of Management's Discussion and Analysis of Financial Condition and Results of Operations). The recurring product licensing revenues reported by the Company are dependent on the timing and accuracy of royalty 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 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. As a result, 21 the Company may be unable to estimate such revenues accurately prior to public announcement of the Company's quarterly results. In such event, the Company subsequently may be required to restate its recognized revenues or adjust revenues for subsequent periods, which could have a material adverse effect on the Company's operating results. The Company frequently receives payments from its OEMs in advance of recognition of the associated revenues and, in some cases, the Company receives guaranteed minimum payments in advance of per unit licensing royalties. These amounts are recorded as deferred revenue. Deferred revenue consists of prepaid licensing fees as well as payments received in advance for engineering services and maintenance to be performed. In October 1996, the Company entered into an agreement with Rockwell Semiconductor Systems, Inc., 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. Pursuant to the agreement, the Company is entitled to engineering service payments, development license fees and prepayment of royalty guarantees. The Company's operating results for fiscal 1998 and 1997 were favorably impacted by revenues received pursuant to this agreement and the Company anticipates that revenues from this agreement will continue to favorably impact the Company in fiscal 1999. No assurance can be given as to the ability of the Company to perform in accordance with the terms of the agreement or as to the ability or willingness of Rockwell to continue developing, marketing and selling proposed products covered by the agreement, which is subject to termination by Rockwell upon notice. The failure to achieve certain milestones under this agreement, the failure to develop or sell products under this agreement or the termination of this agreement could have a material adverse effect on the Company's operating results. The Company's customers currently include, among others, Adobe and Rockwell and OEM customers Canon, IBM and Minolta. A significant portion of the Company's revenues in recent years has been concentrated with a limited number of customers, and the Company anticipates that its revenues in the future will be similarly concentrated. In the fiscal years ended January 31, 1998 and 1997 and December 31, 1995, the Company's top four customers accounted for an aggregate of 60%, 61% and 74% of total revenues, respectively. Revenues from sales to the Company's customers outside the United States accounted for 46%, 38% and 41% of the Company's total revenues for the fiscal years ended January 31, 1998 and 1997 and December 31, 1995, respectively. Therefore, the Company is substantially dependent on its international business activities. 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 customers 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. The Company has a history of operating losses which have contributed to an accumulated deficit of approximately $3.9 million at January 31, 1998. Although the Company has reported net income for the fiscal years ended January 31, 1998 and 1997, there can be no assurance that the Company will continue to achieve taxable income in the future. Further, the Company's operating results for fiscal years 1998 and 1997 were favorably affected by a non-recurring benefit for income taxes of $369,000 and $2.5 million, in the fourth quarters of each fiscal year, respectively. The Company's cost of revenues includes product licensing costs as well as engineering services and maintenance costs. Cost of engineering services and maintenance is comprised primarily of salaries and benefits for engineering personnel, materials and an allocation of corporate facilities overhead costs. Maintenance costs constitute a small portion of engineering services and maintenance costs. Research and development expenses are comprised primarily of employee salaries and benefits, an allocation of engineering management and administrative staff expenses and an allocation of the corporate facilities overhead. Sales and marketing expenses are comprised primarily of employee salaries and benefits, commissions and bonuses, advertising and promotional expenses, the cost of operating the Japan sales office and an allocation of the corporate facilities overhead. 22 General and administrative expenses are comprised primarily of salaries and benefits, fees paid to the Company's external auditors, counsel and other corporate consultants, an allocation of the corporate facilities overhead and expenses required of a public company. 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. See "Risk Factors - Year 2000 Compliance" for further discussion of this issue. 23 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.
PERCENTAGE OF TOTAL REVENUES -------------------------------- YEARS ENDED YEAR ENDED JANUARY 31, DECEMBER 31, ------------------ ------------ 1998 1997 1995 -------- -------- ------------ STATEMENT OF OPERATIONS DATA: Revenues: Product licensing 62.3 % 51.9 % 45.8 % Engineering services and maintenance 37.7 48.1 54.2 ------- ------- ------- Total revenues 100.0 100.0 100.0 ------- ------- ------- Cost of revenues: Product licensing 0.6 0.9 1.4 Engineering services and maintenance 31.4 38.2 49.1 ------- ------- ------- Total cost of revenues 32.0 39.1 50.5 ------- ------- ------- Gross margin 68.0 60.9 49.5 ------- ------- ------- Operating expenses: Research and development 18.2 16.9 20.0 Sales and marketing 14.7 17.1 20.5 General and administrative 11.5 15.9 12.4 ------- ------- ------- Total operating expenses 44.4 49.9 52.9 ------- ------- ------- Income (loss) from operations 23.6 11.0 (3.4) Interest income (expense), net 5.5 1.2 (1.7) ------- ------- ------- Income (loss) before income taxes 29.1 12.2 (5.1) Provision (benefit) for income taxes 9.6 (15.6) 1.0 ------- ------- ------- Net income (loss) 19.5 % 27.8 % (6.1) % ======= ======= =======
Years Ended January 31, 1998 and 1997 Revenues for the year ended January 31, 1998 increased 58% to $25.4 million from the $16.0 million for the year ended January 31, 1997. The increase in revenues was driven by an increase in product licensing revenues of 90% to $15.8 million in the current year from $8.3 million in the prior year. 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 current fiscal year 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% to $9.6 million from $7.7 million reported for 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 to 25 in fiscal 1998 from 19 in fiscal 1997. 24 The Company's gross margin as a percentage of total revenues increased to 68% for the year ended January 31, 1998 from 61% for the year ended January 31, 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% for the year ended January 31, 1998 from 52% for the year ended January 31, 1997. Peerless continues to invest heavily in the future by funding the research and development of new technology solutions. Research and development expenses increased 71% between the years ending January 31, 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 application specific integrated circuit ("ASIC") designs. Additionally, the Company invested in digital photography technology during the year ended January 31, 1998. Management anticipates that research and development costs will continue to increase. Research and development costs as a percentage of total revenues were 18% and 17% in fiscal years 1998 and 1997, respectively. 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 solutions. Sales and marketing expenses decreased to 15% of total revenues for the year ended January 31, 1998 from 17% for the year ended January 31, 1997. This decrease in expenses as a percentage of total revenues indicates that the Company's revenues are growing at a faster rate than its discretionary expenses. General and administrative expense for the year ended January 31, 1998 increased 15% from the year ended January 31, 1997. The expense growth related primarily to an increase in personnel and expenses, including staff and costs, necessary to support the growth in the Company's operations. General and administrative expenses decreased to 12% of total revenue for the year ended January 31, 1998 as compared to 16% of total revenues for the years ended 1997. This decrease over the prior year is the result of an increased revenue base in the current year. The Company earned interest income of $1.4 million for the year ended January 31, 1998. Interest income earned in fiscal 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. Interest income of $329,000 earned for the year ended January 31, 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. Due to a reduction in the valuation allowance during the year ended January 31, 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%. As of January 31, 1998, the Company had research and experimentation credits for federal and state tax purposes of approximately $215,000 and $213,000, respectively. The Company also had approximately $789,000 of foreign tax credits available to offset future federal taxes otherwise payable. Once the available research and experimentation and foreign tax credits are fully utilized, the Company will be subject to an estimated annual tax rate in the range of 35% to 40%. Years Ended January 31, 1997 and December 31, 1995 Revenues for the year ended January 31, 1997 increased 54% to $16.0 million from $10.4 million for the year ended December 31, 1995. Product licensing revenues increased 73% to $8.3 million in the year ended January 31, 1997 from $4.8 million in the year ended December 31, 1995, due to increased shipments of products that 25 incorporate the Company's technology. Engineering services and maintenance revenues increased 37% to $7.7 million from $5.6 million due to an increase in design wins. The Company's gross margin as a percentage of total revenues increased to 61% for the year ended January 31, 1997 from 50% for the year ended December 31, 1995. This increase was primarily due to a shift in the Company's revenue mix toward higher-margin product license fees. Research and development expenses increased 29% to $2.7 million for the year ended January 31, 1997 from $2.1 million for the year ended December 31, 1995 Research and development expenses increased primarily due to an increase in research and development personnel, principally associated with the Company's color development efforts. Sales and marketing expenses for the year ended January 31, 1997 increased 29% to $2.7 million from $2.1 million for the year ended December 31, 1995. The increase was primarily due to hiring of additional sales and marketing personnel and added promotional activities. General and administrative expenses for the year ended January 31, 1997 increased 92% to $2.5 million from $1.3 million for the year ended December 31, 1995, and increased as a percentage of total revenues to 15.9% from 12.4%. The increase was primarily due to the hiring of additional management and administrative personnel and the enhancement of information systems support. LIQUIDITY AND CAPITAL RESOURCES Compared to January 31, 1997, total assets at January 31, 1998 grew 14% to $40.1 million and stockholders' equity grew 20% to $33.8 million. The Company's cash and short-term investment portfolio was $20.2 million at January 31, 1998 and the current ratio was 5.0:1. Cash generated by operations during the year ended January 31, 1998 was $1.8 million as compared to the $1.0 million generated in the previous fiscal year. Net cash used for investing activities during the year ended January 31, 1998 was $23.5 million and was comprised primarily of purchases and sales of investments. During fiscal 1998, the Company expanded its operating facilities 57% from 30,000 square feet to 47,000 square feet in order to accommodate the current and expected growth in operations. Additions to property and equipment during the year ended January 31, 1998 totaled $3.2 million and related primarily to leasehold improvements made to the operating facilities and furniture, computer and equipment purchases associated with the growth in headcount. Net cash provided by financing activities during fiscal 1998 was $736,000 and related to the issuance of common stock under the Company's employee stock purchase plan and the exercise of common stock options. Cash provided by financing activities of $25.8 million during fiscal 1997 was generated primarily by net proceeds from the Company's initial public offering in September 1996. At present, the Company has available a $2.0 million revolving line of credit with a bank, which is collateralized by substantially all assets of the Company. The cash available under the line may be used for term loans, letters of credit, or spot and future exchange rate contracts (subject to limitations). The line of credit, which terminates in May 1998, unless extended, requires the Company to maintain compliance with certain financial covenants. As of January 31, 1998, the Company had no outstanding obligations under the line of credit. FUTURE DEVELOPMENTS In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which supersedes Statement of Position 91-1, "Software Revenue 26 Recognition". SOP 97-2, and amendments thereto, provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and is effective for transactions entered into in fiscal years beginning after December 15, 1997. Retroactive application of the provisions of SOP 97-2 is prohibited. Management is currently evaluating the requirements of SOP 97-2 and the impact that adoption of SOP 97-2 will have on the financial statements of the Company. Such adoption, however, may delay the timing of revenue recognition on certain of the Company's contracts. In June 1997, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. An enterprise that has no items of other comprehensive income in any period presented is not required to report comprehensive income. SFAS 130 is effective for fiscal years beginning after December 15, 1997 and may require additional disclosures for all periods presented, however, it will not impact the Company's reported amounts of net income (loss). In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management is currently evaluating the requirements of SFAS 131 and the impact that adoption of SFAS 131 will have on the financial statements of the Company. 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. 27 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, 1998 is contained in the following table
Name Age Position - ---- --- -------- Edward A. Gavaldon 52 President, Chief Executive Officer and Chairman of the Board Hoshi Printer 55 Vice President, Finance and Administration, Chief Financial Officer and Secretary Reginald Cardin 50 Vice President, Engineering David R. Fournier 44 Vice President, Sales, Field Operations and Marketing Thomas B. Ruffolo 44 Vice President, Corporate Development
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. Hoshi Printer has served the Company as Vice President, Finance and Administration, Chief Financial Officer and Secretary since June 1996. Prior to joining the Company, Mr. Printer was Chief Financial Officer of Neuron Data, a software tools company, from July 1995 to May 1996; Soane Technologies, a polymer technology company, from July 1994 to June 1995; and Catalytica, an environmental technology company, from January 1990 to June 1994. Mr. Printer also worked at Xerox Corporation for over 17 years in various positions including 6 years as Vice President of Finance. Mr. Printer received an M.B.A. degree from Stanford University. Reginald Cardin has served the Company as Vice President, Engineering since February 1997 and served as Vice President and Chief Technology Officer from August 1995 to February 1997. Prior to joining the Company, Mr. Cardin worked at IBM for over 20 years in various positions including Manager, Presentation Integration and Programming Center Manager, Printing Systems. Mr. Cardin received a B.A. degree in biology and English from Tufts University. 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. 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 a B.S. degree in computer science from Colorado State University and an M.B.A. degree from Pepperdine University. 28 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. 29 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 Coopers & Lybrand L.L.P., Independent Accountants Balance Sheets Statements of Operations 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, 1998. (c) EXHIBITS. The following exhibits are filed as part of, or incorporated by reference into, this Form 10-K.
EXHIBIT Exhibit Number - ------- 3.1(1) Certificate of Incorporation of the Company. 3.2(1) 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(1) Amended and Restated Investor Rights Agreement dated October 6, 1995. 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"), 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
30 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 10.17(1) Amended and Restated Investor Rights Agreement, dated October 6, 1995 10.18(1)(2) Employment Agreement with Lauren Shaw 10.19(1)(2) Employment Agreement with Edward Gavaldon 10.20 Second Amendment to Office Lease dated April 8, 1997 between the Company and Continental Development Corporation 10.21 Third Amendment to Office Lease dated December 16, 1997 between the Company and Continental Development Corporation 23.1 Consent of Coopers & Lybrand L.L.P. 24.1 Power of Attorney. Reference is made to page 32. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule. 27.4 Financial Data Schedule. 27.5 Financial Data Schedule. 27.6 Financial Data Schedule.
_____________ (1) Incorporated by reference from the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 333-09357), as amended. (2) Management contract or compensatory plan or arrangement. (3) Subject to Confidential Treatment Order. 31 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 24th day of April, 1998. PEERLESS SYSTEMS CORPORATION By: /s/ Hoshi Printer ------------------------------ Hoshi Printer Chief Financial Officer and Secretary (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 Officer April 24, 1998 ----------------------------- and Chairman of the Board Edward A. Gavaldon (Principal Executive Officer) /s/ HOSHI PRINTER Chief Financial Officer and April 24, 1998 - ------------------------------ Secretary (Principal Financial and Hoshi Printer Accounting Officer) /s/ ROBERT V. ADAMS Director April 24, 1998 - ------------------------------ Robert V. Adams /s/ ROBERT G. BARRETT Director April 24, 1998 - ------------------------------ Robert G. Barrett /s/ ROBERT L. NORTH Director April 24, 1998 - ------------------------------ Robert L. North
32 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Coopers & Lybrand L.L.P., Independent Accountants F-2 Balance Sheets F-3 Statements of Operations 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 Peerless Systems Corporation We have audited the accompanying balance sheets of Peerless Systems Corporation as of January 31, 1998 and 1997 and the related statements of operations, stockholders' equity, and cash flows for the years ended January 31, 1998 and 1997, the one month period ended January 31, 1996 and for the year ended December 31, 1995. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peerless Systems Corporation at January 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended January 31, 1998 and 1997, the one month period ended January 31, 1996 and for the year ended December 31, 1995, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Newport Beach, California March 12, 1998 F-2 PEERLESS SYSTEMS CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 31, ------------------------------------ 1998 1997 ------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 3,199 $24,162 Short term investments 16,982 2,000 Trade accounts receivable, less allowance for doubtful accounts of $100 at January 31, 1998 and 1997 5,577 3,314 Unbilled receivables 1,386 363 Deferred tax asset 1,544 1,692 Prepaid expenses and other current assets 892 253 ------- ------- Total current assets 29,580 31,784 Investments 5,501 - Property and equipment, net 4,426 1,665 Deferred tax asset 249 1,207 Other assets 339 453 ------- ------- Total assets $40,095 $35,109 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,149 $ 568 Accrued wages 1,065 711 Accrued compensated absences 501 345 Other current liabilities 392 337 Income taxes payable 406 100 Deferred rent, current portio 76 76 Deferred revenue, current portion 2,278 4,591 ------- ------- Total current liabilities 5,867 6,728 Deferred rent 421 217 Deferred revenue - 100 ------- ------- Total liabilities 6,288 7,045 ------- ------- Commitments and contingencies (Note 6) Stockholders' equity: Common stock, $.001 par value, 30,000 shares authorized, 10,696 and 10,484 shares issued and outstanding at January 31, 1998 and 1997, respectively 11 10 Additional paid-in capital 37,952 37,225 Deferred compensation (275) (346) Accumulated deficit (3,881) (8,825) ------- ------- Total stockholders' equity 33,807 28,064 ------- ------- Total liabilities and stockholders' equity $40,095 $35,109 ======= =======
The following notes are an integral part of these financial statements. F-3 PEERLESS SYSTEMS CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JANUARY 31, MONTH ENDED YEAR ENDED ------------------------ JANUARY 31, DECEMBER 31, 1998 1997 1996 1995 ------- ------- ----- ------- Revenues: Product licensing $15,806 $ 8,322 $ 329 $ 4,774 Engineering services and maintenance 9,557 7,699 396 5,639 ------- ------- ----- ------- Total revenues 25,363 16,021 725 10,413 ------- ------- ----- ------- Cost of revenues: Product licensing 141 144 5 143 Engineering services and maintenance 7,974 6,123 564 5,111 ------- ------- ----- ------- Total cost of revenues 8,115 6,267 569 5,254 ------- ------- ----- ------- Gross margin 17,248 9,754 156 5,159 ------- ------- ----- ------- Operating expenses: Research and development 4,604 2,701 127 2,088 Sales and marketing 3,732 2,746 156 2,142 General and administrative 2,915 2,546 119 1,293 ------- ------- ----- ------- Total operating expenses 11,251 7,993 402 5,523 ------- ------- ----- ------- Income (loss) from operations 5,997 1,761 (246) (364) Interest income (expense), net 1,391 186 (17) (176) ------- ------- ----- ------- Income (loss) before income taxes 7,388 1,947 (263) (540) Provision (benefit) for income taxes 2,444 (2,500) 7 99 ------- ------- ----- -------- Net income (loss) $ 4,944 $ 4,447 $(270) $ (639) ======= ======= ===== ======== Net income (loss) per common share $ 0.47 $ 0.90 $(0.24) ======= ======= ======== Net income (loss) per common share - assuming dilution $ 0.42 $ 0.46 $(0.24) ======= ======= ======== Weighted average common shares outstanding 10,608 4,964 2,664 ======= ======= ======== Weighted average common shares outstanding and dilutive shares 11,652 9,893 2,664 ======= ======= =======
The following notes are an integral part of these financial statements. F-4 PEERLESS SYSTEMS CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK -------------------- ADDITIONAL TOTAL NUMBER OF PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY(DEFICIT) --------- ------ -------- ------------ ----------- --------------- Balances, December 31, 1994 2,635 $ 3 $ 235 $(12,179) $(11,941) Issuance of common stock for cash 202 270 270 Increase in redemption value of Series A and Series B Preferred Stock (175) (175) Decrease in redemption value of Series A Preferred Stock 889 889 Net loss (639) (639) ------ --- ------- ----- -------- -------- Balances, December 31, 1995 2,837 3 1,394 (12,993) (11,596) Increase in redemption value of Series A and Series B Preferred Stock (1) (1) Net loss (270) (270) ------ --- ------- ----- -------- -------- 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 shares 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 ====== === ======= ===== ======== ========
The following notes are an integral part of these financial statements. F-5 PEERLESS SYSTEMS CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED JANUARY 31, MONTH ENDED YEAR ENDED ---------------------- JANUARY 31, DECEMBER 31, 1998 1997 1996 1995 -------- ------- ------ ------- Cash flows from operating activities: Net income (loss) $ 4,944 $ 4,447 $(270) $ (639) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Depreciation and amortization 832 488 15 203 Amortization of securities (247) - - - Amortization of deferred compensation 63 106 - - Changes in operating assets and liabilities: Trade accounts receivable (2,263) (1,301) (267) 735 Unbilled receivables (1,023) (118) (34) (200) Prepaid expenses and other current assets (639) (151) 1 63 Deferred income taxes 1,106 (2,899) - - Other assets (27) - 5 (241) Accounts payable 581 137 36 (117) Accrued wages 354 88 29 24 Accrued compensated absences 156 35 (42) 37 Other current liabilities 55 128 135 (231) Income taxes payable 306 100 - - Deferred rent (9) (74) (8) (203) Deferred revenue (2,413) 20 (24) (767) -------- ------- ------ ------- Net cash provided (used) by operating activities 1,776 1,006 (424) (1,336) -------- ------- ------ ------- Cash flows from investing activities: Purchases of property and equipment (3,239) (1,105) (38) (47) Purchases of held-to-maturity securities (24,244) - - - Purchases of available-for-sale securities (2,992) (2,000) - - Proceeds from held-to-maturity securities 7,000 - - - Purchase of software license - (250) - - -------- ------- ------ ------- Net cash used by investing activities (23,475) (3,355) (38) (47) -------- ------- ------ ------- Cash flows from financing activities: Proceeds from issuance of common stock 407 26,295 - 270 Proceeds from exercise of common stock options 329 149 - - Proceeds from issuance of convertible notes payable - - - 3,070 Net payments on line of credit - - - (1,095) Payments on obligations under capital leases - (655) - (71) -------- ------- ------ ------- Net cash provided by financing activities 736 25,789 - 2,174 -------- ------- ------ ------- Net (decrease) increase in cash and cash equivalents (20,963) 23,440 (462) 791 Cash and cash equivalents, beginning of period 24,162 722 1,184 393 -------- ------- ------ ------- Cash and cash equivalents, end of period $ 3,199 $24,162 $ 722 $ 1,184 ======== ======= ====== =======
The following 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, YEAR ENDED -------------------- DECEMBER 31, 1998 1997 1995 ------ ------- ------ Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $ 151 $ 321 $ 111 ====== ======= ====== Interest $ - $ 250 $ 175 ====== ======= ====== Supplemental schedule of noncash investing and finance activities: Tenant improvements paid by the Company's landlord $ 213 $ - $ - ====== ======= ====== 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 $ 175 ====== ======= ====== 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 $ 366 ====== ======= ====== Deferred compensation related to stock option grants $ - $ 452 $ - ====== ======= ====== Decrease in redemption value of Series A Preferred Stock $ - $ - $ 889 ====== ======= ======
The following 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. 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, as well as multifunction products which combine printer, fax, copier and scanner capabilities. The Company changed its fiscal year end from December 31 to January 31, commencing February 1, 1996. Upon the closing of the Company's initial public offering in September 1996, the Company reincorporated in the state of Delaware and changed the par value of its common stock to $0.001 per share. 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. Short Term Investments: The Company's investments at January 31, 1998 consisted of held-to-maturity and available-for-sale U.S. government debt, corporate debt, and other debt securities. Investments at January 31, 1997 consisted entirely of other debt securities and were classified as available-for-sale. 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 interest income. 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 over estimated useful lives of 5-10 years, and over the lesser of the term of the lease or the estimated useful life of leasehold improvements and assets under capital leases. 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 operations. F-8 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Capitalization of Software Development Costs: The Company follows the working model approach to determine technological feasibility of its products. Costs that are incurred subsequent to establishing technological feasibility are immaterial and, therefore, the Company expenses all costs associated with the development of its products as such costs are incurred. Revenue Recognition: Development license revenue from the licensing of source code for the Company's standard products to customers is recognized upon shipment and customer acceptance. Recurring licensing revenue is recognized on a royalty basis, generally when the Company's OEM customers ship or manufacture products that incorporate Peerless' technology to their end-user customers. 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. 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 billing 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, "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. F-9 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Income (Loss) Per Common Share: Net income (loss) per common share ("basic EPS") is computed by dividing net income available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. The computation of net income (loss) 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 8 to the Company's financial statements. 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 10 to the Company's financial statements. Statements of Cash Flows: For purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Reclassifications: Certain previously reported financial information has been reclassified to conform to the current year's presentation. Future Developments: In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which supersedes Statement of Position 91-1, "Software Revenue Recognition". SOP 97-2, and amendments thereto, provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and is effective for transactions entered into in fiscal years beginning after December 15, 1997. Retroactive application of the provisions of SOP 97-2 is prohibited. Management is currently evaluating the requirements of SOP 97-2 and the impact that adoption of SOP 97-2 will have on the financial statements of the Company. Such adoption, however, may delay the timing of revenue recognition on certain of the Company's contracts. F-10 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) In June 1997, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. An enterprise that has no items of other comprehensive income in any period presented is not required to report comprehensive income. SFAS 130 is effective for fiscal years beginning after December 15, 1997 and may require additional disclosures for all periods presented, however, it will not impact the Company's reported amounts of net income (loss). In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. Management is currently evaluating the requirements of SFAS 131 and the impact that adoption of SFAS 131 will have on the financial statements of the Company. 2. INVESTMENTS:
Investments at January 31 consisted of the following: 1998 1997 ------- ------ HELD-TO-MATURITY SECURITIES: Maturities within one year: U.S. government debt securities $ 6,007 $ - Corporate debt securities 3,979 - Certificates of deposit 2,000 - ------- ------ 11,986 - Maturities after one year through five years: U.S. government debt securities 5,501 - ------- ------ 17,487 - ------- ------ AVAILABLE-FOR-SALE SECURITIES: Maturities within one year: Corporate debt securities 2,996 - Maturities after ten years: Other debt securities 2,000 2,000 ------- ------ 4,996 2,000 ------- ------ Total investments $22,483 $2,000 ======= ======
The fair value of held-to-maturity securities at January 31, 1998 and 1997 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: 1998 1997 -------------- -------------- Computers and other equipment $ 3,671 $ 2,682 Furniture 182 130 Leasehold improvements 3 88 Construction-in-progress 1,795 - -------------- -------------- 5,651 2,900 Less, accumulated depreciation and amortization (1,225) (1,235) -------------- -------------- $ 4,426 $ 1,665 ============== ==============
Depreciation for the years ended January 31, 1998 and 1997 and December 31, 1995 was $691, $426, and $203, respectively. 4. LINE OF CREDIT: The Company has a revolving bank line of credit which is collateralized by substantially all of the assets of the Company. The maximum amount available under the line of credit is $2 million, of which up to $1 million can be used for either term loans, letters of credit, or spot and future foreign exchange contracts. The interest rate on this line of credit is the bank's prime interest rate plus 0.25% (an effective rate of 8.75% at January 31, 1998). Under the terms of this agreement, which expires in May 1998, the Company is required to maintain compliance with certain financial ratios (as defined in the agreement), the most restrictive of which are a quick asset ratio of not less than 3:1 and a debt to tangible net worth ratio of 0.5:1. The Company is also required to report net income for each fiscal quarter. As of January 31, 1998, the Company had no outstanding obligations under the line of credit. 5. 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. F-12 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. COMMITMENTS AND CONTINGENCIES: Operating Leases: The Company leases its offices and certain operating equipment under operating leases that expire through 2007. Future minimum rental payments under long-term operating leases are as follows:
FOR THE YEARS ENDING JANUARY 31, ------------------ 1999 $ 964 2000 960 2001 987 2002 1,006 2003 1,041 Thereafter 4,467 ------ $9,425 ======
Total rental expense was $881, $906, and $1,059 for the years ended January 31, 1998 and 1997 and December 31, 1995, respectively. Concentration of Credit Risk: At January 31, 1998 and 1997, the Company had cash and certificates of deposit on deposit at banks that were in excess of federally-insured limits. The aggregate excess amounts were $2,132 and $23,981, respectively. 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 accounting loss, should a customer be unable to meet its obligation to the Company, would be equal to the recorded accounts receivable. At January 31, 1998 and 1997, three customers represented 64% and four customers represented 66% of total accounts receivable, respectively. For the years ended January 31, 1998 and 1997 and December 31, 1995, five customers represented 71% and three customers represented 53% and 62% of total revenues, respectively. 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 or results of operations of the Company. F-13 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. INCOME TAXES: The income tax provision (benefit) consists of:
YEAR ENDED JANUARY 31, YEAR ENDED -------------------------------------- DECEMBER 31, 1998 1997 1995 ------------- -------------- ---------------- Current: Federal $ 786 $ 64 $ - State 461 15 - Foreign 92 320 99 -------- ---------- -------- 1,339 399 99 -------- ---------- -------- Deferred: Federal 887 (2,151) - State 218 (748) - -------- ---------- -------- 1,105 (2,899) - -------- ---------- -------- $2,444 $(2,500) $ 99 ======== ========== ========
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) consist of:
YEAR ENDED JANUARY 31, YEAR ENDED -------------------------------------- DECEMBER 31, 1998 1997 1995 ------------- ------------- --------------- Property and equipment $ 125 $ 19 $ (19) Accrued liabilities (58) 13 (42) Allowance for doubtful accounts - (43) - Deferred revenue 698 149 332 Deferred expenses (86) 32 (43) State taxes (69) 249 - Tax credit carryforwards 823 (497) (253) Net operating loss carryforwards 1,315 908 (317) Other (2) (20) 3 --------- -------- -------- 2,746 810 (339) Change in valuation allowance (1,641) (3,709) 339 --------- -------- -------- Net deferred income tax provision (benefit) $ 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:
1998 1997 ------------- ------------- Deferred tax assets: Accrued liabilities $ 206 $ 147 Allowance for doubtful accounts 43 43 Deferred revenue 1,175 1,874 Deferred expenses 213 127 Tax credit carryforwards 1,274 2,097 Net operating loss carryforwards - 1,316 Other 22 20 ------------- ------------- Total deferred tax assets 2,933 5,624 ------------- ------------- Deferred tax liabilities: Property and equipment (171) (46) State taxes (180) (249) ------------- ------------- Total deferred tax liabilities (351) (295) ------------- ------------- Subtotal 2,582 5,329 Valuation allowance (789) (2,430) ------------- ------------- Net deferred income tax asset $1,793 $ 2,899 ============= =============
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 differs from the amount that would result from applying the federal statutory rate as follows:
YEAR ENDED JANUARY 31, YEAR ENDED ---------------------------- DECEMBER 31, 1998 1997 1995 --------- --------- ------------ Statutory regular federal income tax rate 34.0 % 34.0 % (34.0)% Foreign provision 1.2 16.4 18.3 Nondeductible expenses 0.4 1.2 3.2 State tax 8.2 - - Foreign tax and research and experimentation credits - (13.3) (23.4) Change in valuation allowance (12.3) (168.2) 55.7 Other 1.6 1.5 (1.5) -------- --------- -------- Provision (benefit) for income taxes 33.1 % (128.4)% 18.3 % ======== ========= ========
F-15 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) As of January 31, 1998, the Company has research and experimentation credit carryforwards for federal and state purposes of approximately $215 and $213, respectively. The research and experimentation credits begin to expire in 2000 for federal purposes. The Company also has foreign tax credits of approximately $789 for federal purposes, which begin to expire in 1998, and alternative minimum tax credit carryforwards for federal and state purposes of approximately $42 and $15, respectively. 8. NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share is calculated as follows:
YEAR ENDED JANUARY 31, ----------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 1997 1995 ---------------------------- ---------------------------- -------------------------- NET PER-SHARE NET PER-SHARE NET PER-SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT LOSS SHARES AMOUNT ------ ------ ------ ------ ------ ------ ---- ------ ------ BASIC EPS Net income (loss) available to the common stockholders $4,944 10,608 $0.47 $4,447 4,964 $0.90 $(639) 2,664 $ (0.24) ===== ===== ======= EFFECT OF DILUTIVE SECURITIES Options - 1,044 - 1,729 - - Warrants - - - 655 - - Convertible preferred stock - - - 1,765 - - 7% convertible notes payable - - 143 780 - - ------ ------ ------ ----- ----- ----- DILUTED EPS Net income (loss) available to common stockholders with assumed conversions $4,944 11,652 $0.42 $4,590 9,893 $0.46 $(639) 2,664 $ (0.24) ====== ====== ===== ====== ===== ===== ===== ===== =======
Options to purchase 157 shares of common stock at $14.63 to $18.50 per share were outstanding during the year ended January 31, 1998 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. These options, which expire in December 2006 and December 2007, were still outstanding at January 31, 1998. All potentially dilutive securities were included in the calculation of diluted EPS for the year ended January 31, 1997. All potentially dilutive securities were excluded from the computation of diluted EPS for the year ended December 31, 1995 because they would have an antidilutive effect on net loss per share. 9. 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. F-16 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Shares of Series A Preferred Stock were convertible into the Company's common stock at a rate of $2.22 per share of common stock, subject to anti-dilution adjustments. Conversion into the Company's common stock could occur at any time at the holder's option, but would automatically occur upon the effective date of a registration statement relating to a public offering of at least $10,000 of the Company's common stock under the Securities Act of 1933. Holders of Series A Preferred Stock were entitled to a noncumulative annual dividend of $0.18 per share, payable only when and as declared by the Board of Directors out of legally available funds. Until October 1995, the Company was required to redeem all shares of Series A Preferred Stock in three equal installments on June 1, 1997, 1998 and 1999 upon the request of a majority of the holders of the outstanding Series A Preferred Stock received prior to May 1, 1997. The redemption amount was based on $2.25 per share of Common Stock plus a redemption premium equal to $0.045 per share times the number of calendar quarters that elapsed between March 31, 1991 and the date of redemption. As a result of this provision for a redemption premium, the Company recorded the incremental increases in Series A Preferred Stock and charged the like amount to Accumulated Deficit. As a result of an amendment of the Company's Articles of Incorporation in 1995, the Series A Preferred Stock redemption dates were changed to June 1, 1999, 2000 and 2001, redeemable upon the request of a majority of the holders of the outstanding Series A Preferred Stock received prior to April 1, 1999 and consent of the holders of a majority of the then outstanding principal amount of the Debentures (Note 5). All redemption premiums relating to Series A Preferred Stock were retroactively eliminated. As a result of this amendment, $889 of accumulated incremental increases to Series A Preferred Stock relating to redemption premiums, including $150 and $200 recognized in 1995 and 1994, respectively, was added to Additional Paid-In Capital and charged to Series A Preferred Stock in 1995. The Company continued to accrete for the difference between the carrying values and the redemption values of its Series A and B Preferred Stock until September 1996. 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. The Company's Series B Preferred Stock had substantially the same rights, privileges and restrictions as those of Series A Preferred Stock. Shares of Series B Preferred Stock were convertible into the Company's common stock at a rate of $2.30 per share of common stock, subject to anti-dilution adjustments, and would also automatically convert into common stock upon the effective date of a registration statement relating to a public offering of at least $10,000 of the Company's common stock under the Securities Act of 1933. 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 of the Company's common stock, respectively. F-17 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. 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. 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 under the nonstatutory option plan:
YEAR ENDED JANUARY 31, ----------------------------------------------- YEAR ENDED 1998 1997 DECEMBER 31, 1995 ---------------------- -------------------- ----------------------- 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 22 $0.50 65 $0.52 88 $0.43 Options exercised (20) $0.53 (42) $0.53 (13) $0.20 Options forfeited - (1) $0.53 (10) $0.42 ------ -------- -------- Options outstanding at end of year 2 $0.20 22 $0.50 65 $0.52 ------ -------- -------- Options exercisable at year-end 2 $0.20 22 $0.50 46 $0.52 ====== ======== ======== Options available for future grant - - - ====== ======== ======== Weighted average remaining contractual life in years 2 ====== Per share exercise prices for options outstanding at year-end $0.20 ======
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. F-18 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following represents option activity under the 1992 Stock Option Plan:
YEARS ENDED JANUARY 31, ------------------------------------------------------ YEAR ENDED 1998 1997 DECEMBER 31, 1995 ------------------------- ----------------------- --------------------- 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 810 $1.36 774 $1.26 309 $0.92 Options granted - 188 $1.65 503 $1.43 Options exercised (120) $1.07 (100) $1.19 (3) $0.66 Options forfeited (7) $1.02 (52) $1.22 (35) $0.73 ----------- ---- ------ Options outstanding at end of year 683 $1.41 810 $1.36 774 $1.26 =========== ==== ====== Options exercisable at year-end 340 $1.33 301 $1.16 162 $0.88 =========== ==== ====== Options available for future grant - - 277 =========== ==== ====== Weighted average remaining contractual life in years 8 =========== Range of per share exercise prices for options outstanding at year-end $0.53-$1.65 ===========
In May 1996, the Board adopted the Company's 1996 Stock Option Plan (the "1996 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. The Board has authorized and reserved an aggregate of 1,267 shares of common stock 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. F-19 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following represents option activity under the Incentive Plan for the years ended January 31,:
1998 1997 --------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE PER SHARE PER SHARE NUMBER OF EXERCISE NUMBER OF EXERCISE OPTIONS PRICE OPTIONS PRICE -------- --------- ---------- --------- Options outstanding at beginning of year 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 245 $14.83 141 $10.74 Options exercised (46) $ 3.47 (8) $ 3.30 Options forfeited (38) $ 9.01 (20) $ 3.48 ---- ---- Options outstanding at end of year 799 $ 8.61 638 $ 5.09 ==== ==== Options available for future grant 415 621 ==== ====
For various price ranges, weighted average characteristics of outstanding stock options at January 31, 1998 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 $ 4.95 414 9 $ 3.30 80 $ 3.30 $8.25 to $12.38 144 9 $10.22 26 $ 9.99 $2.39 to $18.50 241 9 $15.26 8 $16.36
During the year ended January 31, 1997, the Company recognized deferred compensation expense 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 $63 and $106 as compensation expense during the twelve months ended January 31, 1998 and 1997, respectively. The remaining deferred compensation expense will be amortized over the remaining vesting periods of the options, which range from 15 to 63 months. F-20 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 72.55% for the year ended January 31, 1998 and 65.2% for the years ended January 31, 1997 and December 31, 1995 and risk free interest rates ranging from 5.75% to 7.25% for the year ended January 31, 1998 and 7.0% for the years ended January 31, 1997 and December 31, 1995, respectively. 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 $10.83, $3.94, and $0.99 for the years ended January 31, 1998 and 1997 and December 31, 1995, 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, 1998 and December 31, 1995. 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.
YEAR ENDED JANUARY 31, YEAR ENDED ----------------------------------- DECEMBER 31, 1998 1997 1995 ------------- ------------- ------------- Net income (loss) as reported $ 4,944 $ 4,447 $ (639) =========== =========== ============ Proforma net income (loss) $ 3,794 $ 3,710 $ (776) =========== =========== ============ Net income (loss) per share as reported: Basic $ 0.47 $ 0.90 $ (0.24) =========== =========== ============ Diluted $ 0.42 $ 0.46 $ (0.24) =========== =========== ============ Proforma net income (loss) per share: Basic $ 0.36 $ 0.78 $ (0.29) =========== =========== ============ Diluted $ 0.33 $ 0.39 $ (0.29) =========== =========== ============
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. F-21 PEERLESS SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) During the year ended January 31, 1998, employees purchased 26 shares of common stock at a weighted average per share price of $10.88. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations to account for the Purchase Plan. Accordingly, $105 and $73 in compensation expense related to this plan was charged to income for the years ended January 31, 1998 and 1997, respectively. 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, pro forma net income (loss) per share would not differ from the reported amounts for all periods presented. 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, 1998 and 1997 and December 31, 1995 were $192, $0 and $0, respectively. 12. RELATED PARTIES: During the years ended January 31, 1997 and December 31, 1995, the Company recognized revenues of $2,244 and $707 respectively, from transactions with a shareholder. At January 31, 1997, the Company had $894 of deferred revenue relating to license fees prepaid by this related party. Included in accounts receivable at January 31, 1997 is $288, due from this related party. As of January 31, 1998, this former related party was no longer a shareholder of the Company. 13. INTERNATIONAL OPERATIONS: The Company's revenues, which are transacted in U.S. dollars, are derived from the following geographic regions:
YEAR ENDED JANUARY 31, YEAR ENDED ------------------------------ DECEMBER 31, 1998 1997 1995 ------------ ------------ ------------- United States $ 13,620 $ 9,890 $ 6,139 Japan 11,726 5,978 4,221 Other 17 153 53 ---------- ---------- ---------- $ 25,363 $ 16,021 $ 10,413 ========== ========== ==========
F-22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Peerless Systems Corporation Our report on the financial statements of Peerless Systems Corporation is included on page F-2 of this 1998 Annual Report filed on Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 30 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Newport Beach, California March 12, 1998 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 December 31, 1995 Reserves deducted from assets to which they apply: Allowance for uncollectible accounts receivable $ - $ - $ - $ - Month Ended January 31, 1996 Reserves deducted from assets to which they apply: Allowance for uncollectible accounts receivable $ - $ - $ - $ - 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
- ----- (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(1) 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(1) Amended and Restated Investor Rights Agreement dated October 6, 1995. 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"), 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 10.17(1) Amended and Restated Investor Rights Agreement, dated October 6, 1995 10.18(1)(2) Employment Agreement with Lauren Shaw 10.19(1)(2) Employment Agreement with Edward Gavaldon 10.20 Second Amendment to Office Lease dated April 8, 1997 between the Company and Continental Development Corporation 10.21 Third Amendment to Office Lease dated December 16, 1997 between the Company and Continental Development Corporation 23.1 Consent of Coopers & Lybrand L.L.P. 24.1 Power of Attorney. Reference is made to page 32. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule. 27.4 Financial Data Schedule. 27.5 Financial Data Schedule. 27.6 Financial Data Schedule.
__________ (1) Incorporated by reference from the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 333-09357), as amended. (2) Management contract or compensatory plan or arrangement. (3) Subject to Confidential Treatment Order. EX-10.20 2 SECOND AMENDMENT TO OFFICE LEASE EXHIBIT 10.20 SECOND AMENDMENT TO OFFICE LEASE THIS AMENDMENT made this 8th day of April, 1997, (the "Amendment") by and between CONTINENTAL TERRACE CORPORATION, a Texas corporation, 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, and by a second agreement, dated July 29, 1992, and by a First Amendment to Office Lease, dated December 1, 1995; and WHEREAS, Continental Terrace Corporation is successor in interest to Continental Development Corporation; and WHEREAS, Lessor and Lessee are desirous of amending said Lease by this Second 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. TERM The Term in Paragraph 1.5 of the Lease, as amended, shall be extended for three (3) years and nine (9) months, terminating December 31, 2004. 2. ADDITIONAL DEMISED PREMISES (a) Suite 475, consisting of 1,763 rentable square feet, is hereby added to the Premises effective as of the date such premises become available or April 1, 1997, whichever is later. (b) Suites 450 and 460 consisting of 12,683 rentable square feet shall be added to the Premises effective as of June 15, 1997, or the date the present tenant in such premises has vacated, whichever is the later to occur. (c) Suite 495 consisting of 2,872 rentable square feet shall be added to the Premises effective as of the date such premises becomes available, but in any event, no later than by December 31, 1997. See Paragraph 7 below. The description of the Premises (appearing in Paragraph 1.2 and depicted in Exhibits "A" and "AA") in the Lease is hereby modified by the addition of said Suites 475, 450, 460 and 495 on and as of the effective dates as set forth in this paragraph 2. Also upon such effective dates, the size of the Premises shall be increased by the additional square feet shown for each additional suite so added and all amounts of rent payable by Lessee to Lessor which are based upon rentable square feet shall be automatically adjusted based upon such new square footage. A depiction of the additional premises added hereby is shown in Exhibit "A-2" which is attached hereto and made a part hereof and shall supplement Exhibits "A" and "AA" of the Lease. 1 3. BASE RENTAL The Base Rental set forth in Paragraph 1.6 of the Lease, as amended, shall be increased as follows: (a) For the Premises existing as of the date of this Amendment the Base Rental shall be increased starting on April 1, 2001 through September 30, 2002 to $1.75 per rentable square foot. Beginning October 1, 2002 through December 31, 2004, the Base Rental shall be increased to $1.85 per rentable square foot. (b) The Base Rental for the additional Premises, Suite 475, shall be equal to $1.60 per rentable square foot from the date of delivery through March 31, 2001 and increase to $1.75 per rentable square foot as of April 1, 2001 through September 30, 2002. Beginning October 1, 2002 through December 31, 2004, the Base Rental shall be increased to $1.85 per rentable square foot. (c) The Base Rental for the Additional Premises, Suites 450 and 460, shall be equal to $0.00 per rentable square foot from June 15, 1997 or the date the present tenant in such premises has vacated whichever is the later to occur through December 31, 1997 and shall be increased to $1.60 per rentable square foot as of January 1, 1998 through March 31, 2001. As of April 1, 2001 through September 30, 2002, the Base Rental shall be increased to $1.75 per rentable square foot and beginning October 1, 2002 through December 31, 2004, the Base Rental shall be increased to $1.85 per rentable square foot. (d) The Base Rental for the Additional Premises, Suite 495, shall be equal to $1.60 per rentable square foot from delivery through March 31, 2001. The Base Rental shall be increased to $1.75 per rentable square foot from April 1, 2001 through September 30, 2002 and beginning October 1, 2002, through December 31, 2004, the Base Rental shall be increase to $1.85 per rentable square foot. 4. LESSEE IMPROVEMENT ALLOWANCE Lessee shall receive an allowance for improvements to Suites 450, 460 and 475 in the amount of $192,615.00 ($15.00 per usable square foot) and for Suite 495 in the amount of $20,424.00 ($8.00 per usable square foot) at the time upon completion of the Lessee Improvements. 5. REFURBISHMENT Lessor shall, if and when Lessee has committed in writing to occupy those premises which would give Lessee occupancy of the entire 4th floor, replace the carpet in the main corridor of 2361 Rosecrans and replace the wall covering and paint elevator doors and surrounding casements, as nearly as possible, to match the colors of such items on the 4th floor of 2381 Rosecrans as part of the final improvements to be made to any of the suites described herein. 6. PARKING Lessee shall be entitled to four (4) parking permits per 1,000 usable square feet of the Premises (comprised of the original Premises, the first expansion of the original Premises, and the expansion pursuant hereto) of which up to thirty (30) may be reserved permits. Lessee shall be entitled to these spaces as of the date hereof. The current rates in effect as of the date hereof for such permits are $45.00 each and $65.00 each for non-reserved and reserved, respectively. See Exhibit "A" attached hereto which by this reference is made a part hereof. 7. EXPANSION SPACE Lessee hereby gives notice to Lessor to notify Lessee of the amount of any and all costs and expenses which would be incurred in relocating the now current lessee in Suite 495. Lessee shall 2 then have five (5) business days to review and approve any such costs. If Lessee approves of such costs and expenses which costs and expenses shall include but not be limited to special improvements, installations of telephone, data and computer wiring, broker commissions, rent differential, printing of stationery and related items, and moving, Lessee shall have the option to pay such costs and expenses as they arise or aggregate them and amortize them monthly over the then remaining Term of the Lease at the interest rate of 9% per year. Payments would be due and payable monthly at the same time as the rent and would be defined as Rent. If Lessee fails to approve the costs and expenses within such five (5) business day period, then Lessee's option to expand shall thereupon expire and be of no further force or effect. 8. SIGNAGE Subject to compliance with all Laws, Lessee shall have the right to install a sign on the top facia of the 2361 Rosecrans Building facing east onto Rosecrans Avenue. Lessee shall pay all costs of the sign including but not limited to the costs of design, engineering, fabrication, delivery and installation of such sign. This right must be exercised by Lessee, if at all, within one hundred twenty (120) days from and after the date hereof. The installation of the sign shall be completed within one hundred eighty (180) days thereafter. In the event Lessee shall fail to meet either of these requirements, its right to such sign shall terminate and be of no further force or effect. The sign's size, design, specifications and exact location shall be subject to the express approval of the Lessor. At Lessee's sole cost and expense, at all times during the Term and any extension thereof, Lessee shall be solely responsible for maintaining such sign in a first-class condition and good repair. Lessor shall have the right at any time after the sign is installed to move such sign to a location on the south east facade of the Building facing Aviation Boulevard. All costs to relocate the sign shall be paid by Lessor. 9. EXPANSION In addition to those rights of Lessee set forth in the First Amendment to Office Lease, dated December 1, 1995, when Lessee shall desire to expand its Premises into premises in buildings in Continental Park other than the Building, it shall give written notice thereof to Lessor and Lessor shall forthwith notify Lessee of the availability of space into which Lessee could expand. Within five (5) days after Lessee receives Lessor's notice, Lessee shall notify Lessor of its intent to expand, which notice shall specify the amount and location of the space Lessee desires from that space which Lessor's notice has indicated is available for such expansion. If Lessee fails to so notify Lessor within such period then thereafter Lessor shall have the right to lease any such available space to any person or entity including Lessee, as the case may be. 10. EFFECTIVE DATE This Amendment shall take effect as of April 8, 1997. 11. 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. 3 IN WITNESS WHEREOF, Lessor and Lessee have caused this Second Amendment to Office Lease to be executed on the day and year first above written. CONTINENTAL TERRACE PEERLESS SYSTEMS, INC. CORPORATION LESSOR LESSEE /s/ Richard C. Lundquist By: /s/ Hoshi Printer - ------------------------------- ------------------------ Richard C. Lundquist, President Hoshi Printer, Chief Financial Officer, Vice President/Finance & Administration /s/ Leonard E. Blakesley, Jr. - ------------------------------------ Leonard E. Blakesley, Jr., Secretary 4 EX-10.21 3 THIRD AMENDMENT TO OFFICE LEASE THIRD AMENDMENT EXHIBIT 10.21 THIS AMENDMENT made this 16th day of December, 1997, (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". WITNESSETH: 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, and by a second agreement, dated July 29, 1992, and by a First Amendment to Office Lease dated December 1, 1995, and by a Second Amendment to Office Lease, dated April 8, 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 Third 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. TERM The Term in Paragraph 1.5 of the Lease, as amended, shall be extended for three (3) years, terminating December 31, 2007. 2. BASE RENTAL The Base Rental set forth in Paragraph 1.6 of the Lease, as amended, shall be increased as follows: (a) For the entire Premises as of the date of this Amendment, the Base Rental shall be abated starting on January 1, 2005 through February 28, 2005. Beginning March 1, 2005, through June 30, 2006, the Base Rental shall be increased to $2.15 per rentable square foot. Beginning July 1, 2006 through December 31, 2007, the Base Rental shall be increased to $2.25 per rentable square foot. 3. TENANT IMPROVEMENT FEE Upon execution of this Amendment, Lessor agrees to reimburse Lessee for $2078.16 of the Architectural Fees for the Tenant Improvement Construction, and Lessee agrees to pay $7500 of Lessor's Project Management Fees. 4. EFFECTIVE DATE This Amendment shall take effect as of December 16, 1997. 1 5. 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. IN WITNESS WHEREOF, Lessor and Lessee have caused this Third 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, Jr. - ------------------------------------- Leonard E. Blakesley, Jr., Secretary 2 EX-23.1 4 CONSENT OF COOPERS & LYBRAND L.L.P. 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 12, 1998 on our audits of the financial statements and financial statement schedule of Peerless Systems Corporation as of and for the years ended January 31, 1998 and 1997, the one month period ended January 31, 1996 and the year ended December 31, 1995, which reports are included in this 1998 Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Newport Beach, California April 23, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE PERIOD ENDED APRIL 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-31-1998 FEB-01-1997 APR-30-1997 26,257 2,000 2,592 (100) 0 33,028 3,100 (1,394) 36,358 6,907 0 0 0 10 29,142 36,358 5,128 5,128 1,495 1,495 2,671 0 (321) 1,283 488 795 0 0 0 795 0.08 0.07
EX-27.2 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE PERIOD ENDED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-31-1997 FEB-01-1996 OCT-31-1996 25,047 0 4,738 0 0 30,992 2,727 (1,154) 33,031 7,865 0 0 0 10 24,321 33,031 11,465 11,465 5,001 5,001 5,480 0 125 859 206 653 0 0 0 653 0.19 0.15
EX-27.3 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FOR THE PERIOD ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-31-1997 FEB-01-1996 JAN-31-1997 24,162 2,000 3,414 (100) 0 31,784 2,900 (1,235) 35,109 6,728 0 0 0 10 28,054 35,109 16,021 16,021 6,267 6,267 7,893 100 (186) 1,947 (2,500) 4,447 0 0 0 4,447 0.90 0.46
EX-27.4 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE PERIOD ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-31-1997 FEB-01-1997 JUL-31-1997 8,963 19,809 3,647 (100) 0 27,737 3,455 (1,667) 39,149 8,308 0 0 0 10 30,331 39,149 11,087 11,087 3,462 3,462 5,308 0 (653) 2,970 1,129 1,841 0 0 0 1,841 0.17 0.16
EX-27.5 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE PERIOD ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-31-1998 FEB-01-1998 OCT-31-1997 5,442 22,436 4,675 (100) 0 29,810 3,883 (1,853) 40,427 8,086 0 0 0 10 31,849 40,427 17,510 17,510 5,648 5,648 8,085 0 (1,040) 4,817 1,831 2,986 0 0 0 2,986 0.28 0.26
EX-27.6 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FOR THE PERIOD ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-31-1998 FEB-01-1997 JAN-31-1998 3,199 22,483 5,677 (100) 0 29,580 5,651 (1,225) 40,095 5,867 0 0 0 11 33,796 40,095 25,363 25,363 8,115 8,115 11,251 0 (1,391) 7,388 2,444 4,944 0 0 0 4,944 0.47 0.42
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