Peerless Systems (PRLS) 10-Q 2011 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2010

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission File Number: 000-21287

PEERLESS SYSTEMS CORPORATION

(Exact name of Registrant as Specified in its Charter)

Delaware	95-3732595
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or Organization)	Identification No.)
2361 Rosecrans Avenue Suite 440, El Segundo, CA	90245
(Address of Principal Executive Offices)	(Zip Code)

(310) 536-0908

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer¨  (Do not check if a smaller reporting company) Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨  Yes    þ  No

The number of shares of common stock outstanding as of December 7, 2010 was 3,357,519.

PEERLESS SYSTEMS CORPORATION

INDEX

	Page No
PART I — FINANCIAL INFORMATION
Forward-looking Statements	3
Item 1.  Financial Statements
Unaudited Condensed Consolidated Balance Sheets at October 31, 2010 and January 31, 2010	4
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended October 31, 2010 and 2009	5
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended October 31, 2010 and 2009	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.  Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.  Controls and Procedures	17
PART II — OTHER INFORMATION
Item 1.  Legal Proceedings	18
Item 1A.  Risk Factors	18
Item 6.  Exhibits	19
Signatures

2

FORWARD—LOOKING STATEMENTS

Statements made by us in this report and in other reports and statements released by us that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements are necessarily estimates reflecting the judgment of our senior management based on our current estimates, expectations, forecasts and projections and include comments that express our current opinions about trends and factors that may impact future operating results.  Disclosures that use words such as “believe,” “anticipate,” “estimate,” “intend,” “could,” “plan,” “expect,” “project” or the negative of these, as well as similar expressions, are intended to identify forward-looking statements.  These statements are not guarantees of future performance, rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievement, or industry results, to differ materially from any future results, performance or achievements, expressed or implied by such forward-looking statements.  We discuss such risks, uncertainties and other factors which could cause results to differ materially from management’s expectations throughout this report.  Additional information regarding factors that could cause results to differ materially from management's expectations is found in the section entitled "Risk Factors" in our 2010 Annual Report on Form 10-K and in Item 1A of Part II hereof.  Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures made by us about our businesses including, without limitation, the risk factors discussed below.

We intend that the forward-looking statements included herein be subject to the above-mentioned statutory safe harbor.  Investors are cautioned not to rely on forward-looking statements.  Except as required under the federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, changes in assumptions, or otherwise.

3

PART I—FINANCIAL INFORMATION

Item 1 — Financial Statements.

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	October 31,				January 31,
	2010				2010
ASSETS
Current assets:
Cash and cash equivalents		$	54,990			$	36,684
Marketable securities			-				17,924
Trade accounts receivable, net			2,650				1,135
Income tax receivable			-				234
Deferred tax asset			779				-
Prepaid expenses and other current assets			105				380
Total current assets			58,524				56,357
Property and equipment, net			21				24
Other assets			6				7
Total assets		$	58,551			$	56,388
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	-			$	4
Accrued wages and compensated absenses			66				143
Accrued product licensing costs			999				269
Other current liabilities			360				286
Income taxes payable			1,215				-
Deferred tax liability			-				2,114
Deferred revenue			-				372
Total current liabilities			2,640				3,188
Other liabilities
Tax liabilities			1,572				645
Total liabilities			4,212				3,833
Stockholders’ equity:
Common stock			19				19
Additional paid-in capital			56,518				55,874
Retained earnings (deficit)			3,309				(635	)
Accumulated other comprehensive income			43				2,847
Treasury stock, 2,937 shares at October 31, 2010 and January 31, 2010			(5,550	)			(5,550	)
Total stockholders’ equity			54,339				52,555
Total liabilities and stockholders’ equity		$	58,551			$	56,388

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except share and per share amounts)

	Three Months Ended					Nine Months Ended
	October 31,					October 31,
	2010		2009			2010		2009
Revenues:
Product licensing	$	2,827	$	682		$	4,381	$	3,359
Engineering services and maintenance		-		273			122		613
Total revenues		2,827		955			4,503		3,972
Cost of revenues:
Product licensing		826		248			1,134		(1,437	)
Engineering services and maintenance		59		54			202		199
Total cost of revenues		885		302			1,336		(1,238	)
Gross margin		1,942		653			3,167		5,210
Sales and marketing		49		143			377		512
General and administrative		749		851			2,252		2,286
Gain on sale of operating assets		-		-			-		(3,759	)
		798		994			2,629		(961	)
Income (loss) from operations		1,144		(341	)		538		6,171
Other income, net		74		4,813			6,023		5,029
Income before income taxes		1,218		4,472			6,561		11,200
Provision for income taxes		492		929			2,617		4,145
Net income	$	726	$	3,543		$	3,944	$	7,055
Basic earnings per share	$	0.04	$	0.21		$	0.25	$	0.42
Diluted earnings per share	$	0.04	$	0.21		$	0.24	$	0.42
Weighted average common shares - outstanding — basic		16,174		16,505			16,047		16,888
Weighted average common shares - outstanding — diluted		16,459		16,699			16,328		16,835

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	October 31,
	2010			2009
Cash flows from operating activities:
Net income	$	3,944		$	7,055
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization		27			56
Share-based compensation		174			347
Income tax receivable		234			2,991
Tax liabilities		927			(867	)
Deferred tax asset and liability		(982	)		1,868
Realized gain on investment		(2,804	)		-
Gain on sale of operating assets		-			(3,759	)
Changes in operating assets and liabilities:
Trade accounts receivables		(1,515	)		(922	)
Prepaid expenses and other assets		252			(185	)
Accounts payable		(4	)		(70	)
Accrued product licensing costs		730			(3,861	)
Deferred revenue		(372	)		(247	)
Income taxes payable		1,215			-
Other liabilities		(3	)		(195	)
Net cash provided by operating activities		1,823			2,211
Cash flows from investing activities:
Purchases of marketable securities		(3,224	)		(12,506	)
Proceeds from sale of securities		19,237			3,759
Purchases of software licenses		-			(13	)
Net cash provided by (used in) investing activities		16,013			(8,760	)
Cash flows from financing activities:
Purchase of treasury stock		-			(1,279	)
Purchase of employee stock option		-			(30	)
Proceeds from exercise of common stock options		470			37
Net cash provided (used) by financing activities		470			(1,272	)
Net increase (decrease) in cash and cash equivalents		18,306			(7,821	)
Cash and cash equivalents, beginning of period		36,684			44,689
Cash and cash equivalents, end of period	$	54,990		$	36,868

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Peerless Systems Corporation (the “Company” or “Peerless”) have been prepared pursuant to the rules of the SEC for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles.  The financial statements and notes herein are unaudited, but in the opinion of management, include all the adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company.  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.

These statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010, filed with the SEC on May 1, 2010.  The results of operations for the interim periods shown herein are not necessarily indicative of the results to be expected for any future interim period or for the entire year.

2.  Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009, “Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force” (ASU No. 2009-14).  It amends Accounting Standards Codification (“ASC”) 985-605 and ASC 985-605-15-3 (Issue 03-5) to exclude from their scope all tangible products containing both software and non-software components that function together to deliver the product’s essential functionality.  The ASU includes factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality and are thus outside the revised scope of ASC 985-605.  ASU 2009-14 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption.  We do not expect the adoption of this accounting standard to have a material effect on our results of operations and financial condition.

3.  Cash, and Cash Equivalents

On February 1, 2008, the Company adopted the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures (formerly known as FAS 157 Fair Value Measurements), which clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, Topic 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.  This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.  On a recurring basis, the Company measures its investments, cash equivalents or marketable securities at fair value.  Cash, cash equivalents and marketable securities are classified within Level I of the fair value hierarchy because they are valued using quoted market prices in an active market.

As of October 31, 2010, cash and cash equivalents included the following (in thousands):

	Cost		Unrealized Gains		Unrealized Losses Less Than 12 Months		Unrealized Losses 12 Months or Longer		Estimated Fair Value
Cash and cash equivalents	$	54,990	$	-	$	-	$	-	$	54,990
Total	$	54,990	$	-	$	-	$	-	$	54,990

Cash equivalents are comprised of money market funds traded in an active market with no restrictions.

7

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4.  Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from certain defined transactions and other events.  The Company’s comprehensive income consists of its reported net income and the net unrealized gains or losses on marketable securities and foreign currency translation adjustments.  Comprehensive income for each of the periods presented is comprised as follows:

	Three Months Ended October 31,					Nine Months Ended October 31,
	2010		2009			2010		2009
Net income	$	726	$	3,543		$	3,944		$	7,055
Changes in unrealized gains/losses in available for sale securities, net of taxes		-		(2,231	)		-			(162	)
Foreign currency translation adjustment, net of taxes		-		13			-			44
Total comprehensive income, net of taxes	$	726	$	1,325		$	3,944		$	6,937

5.  Earnings Per Share

Earnings per share (EPS) for the three and nine months ended October 31, 2010 and 2009 are calculated as follows (in thousands, except for per share amounts):

	2010						2009
	Net Income (Loss)		Shares		Per Share Amount		Net Income		Shares		Per Share Amount
Basic EPS for three months ended October 31,
Earnings available to common stockholders	$	726		16,174	$	0.04	$	3,543		16,505	$	0.21
Effect of Dilutive Securities
Options		-		285		-		-		194		-
Diluted EPS
Earnings available to common stockholders with assumed conversions	$	726		16,459	$	0.04	$	3,543		16,699	$	0.21
	2010						2009
	Net Income		Shares		Per Share Amount		Net Income		Shares		Per Share Amount
Basic EPS for nine months ended October 31,
Earnings available to common stockholders	$	3,944		16,047	$	0.25	$	7,055		16,888	$	0.42
Effect of Dilutive Securities
Options		-		281		-		-		147		-
Diluted EPS
Earnings available to common stockholders with assumed conversions	$	3,944		16,328	$	0.24	$	7,055		16,835	$	0.42

Potentially dilutive options in the aggregate of approximately 163,000 and 320,000 for the three months ended October 31, 2010 and 2009, respectively, and 159,000 and 528,000 for the nine months ended October 31, 2010 and 2009, respectively, have been excluded from the calculation of the diluted income per share, because their effect would have been anti-dilutive.

8

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

6.  Stock-Based Compensation Plans

The Company has certain plans which provide for the grant of incentive stock options to employees and non- statutory stock options, restricted stock purchase awards and stock bonuses to employees, directors and consultants.  The terms of stock options granted under these plans generally may not exceed 10 years.  Options granted under the incentive plans vest at the rate specified in each optionee’s agreement, generally over three or four years.  An aggregate of 6.2 million shares of common stock have been authorized for issuance under the various option plans.

Compensation expense for share-based awards granted on or after February 1, 2006 is recognized using a straight-line, or single-option method.  The Company recognizes these compensation costs over the service period of the award, which is generally the option vesting term of three or four years.  In determining the fair value of options granted the Company primarily used the Black-Scholes model and assumed no dividends per year.  During fiscal year 2011, the Company used a weighted average expected life of 3.25 years, expected volatility of 56%, and weighted average risk free interest rate of 1.99%.

For the three months ended October 31, 2010, the Company recorded a total of $121,000 in share based compensation related to stock options and restricted stock.  Share-based compensation expense was allocated as follows for the three months ending October 31, 2010: (1) $4,500 in sales and marketing expense; and (2) $116,500 in general and administrative expense.

For the nine months ended October 31, 2010, the Company recorded a total of $174,000 in share based compensation related to stock options and restricted stock.  Share-based compensation expense was allocated as follows for the nine months ending October 31, 2010: (1) $13,500 in sales and marketing expense; and (2) $160,500 in general and administrative expense.  

The Company granted its directors a total of 110,000 options to purchase common stock, issued 50,000 shares of restricted stock upon the reelection of the five directors and issued 200,000 shares of restricted stock to the Chief Executive Officer in the nine months ended October 31, 2010.

The following represents option activity under the 1996 Equity Incentive Plan and 2005 Incentive Award Plan, as amended and restated, for the nine months ended October 31, 2010:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(In thousands, except per share amounts)
Outstanding at January 31, 2010		1,038		$	1.93
Granted		-			-
Exercised		-			-
Canceled or expired		(10	)		10.95
Outstanding at April 30, 2010		1,028		$	1.83
Granted		110			2.77
Exercised		(1	)		1.33
Canceled or expired		-			-
Outstanding at July 31, 2010		1,137		$	1.93
Granted		-			-
Exercised		(376	)		1.73
Canceled or expired		-			-
Outstanding at October 31, 2010		761		$	1.99
Stock options exercisable at quarter-end		475		$	1.80	3.96	$	721

The weighted-average grant date fair value of the options granted during the nine months ended October 31, 2010 was $1.17.  As of October 31, 2010, there was $269,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 1996 and 2005 plans, and certain employee options issued outside these plans.  That cost is expected to be recognized over a weighted-average period of 2.5 years.

The total fair value of stock awards vested during the nine months ended October 31, 2010 was $43,000.  A summary of the Company’s non-vested stock awards as of October 31, 2010 is as follows:

9

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Number of Shares			Weighted Average Grant Date Fair Value
Non-vested stock awards as of January 31, 2010		44,481			1.95
Granted		250,000			3.85
Vested		(22,240	)		1.95
Forfeited		-			-
Non-vested stock awards as of October 31, 2010		272,241			3.70

The Company used a Monte Carlo simulation model valuation technique to determine the fair value of the 200,000 restricted shares(CEO grant) that vest based upon achievement of market price targets or a “market condition” issued during the fiscal quarter ended October 31, 2010.  The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each share of the restricted stock.  The Company used the following assumptions in determining the fair value of the awards granted on August 26, 2010:

Daily expected stock price volatility			Daily expected mean return on equity			Daily Expected dividend yield			Avg. daily risk free interest rate
	2.683	%		0.046	%		0.000	%		0.003	%

The daily expected stock price volatility is based on three-year historical volatility of the Company’s common stock. The daily expected dividend yield is based on annual expected dividend payments and the closing price of the Company’s common stock on the Nasdaq Capital Market on the date of the grant. The average daily risk-free interest rate is based on the three-year treasury yield as of the grant date. Each of the four tranches of the restricted stock grant is calculated to have its own fair value and requisite service period.  The fair value of each tranche is amortized over the lesser of the requisite or derived service period which is up to three years.  These shares had a grant date fair value of $423,000.  As of October 31, 2010, no shares were vested under the CEO grant.  Stock compensation expense of approximately $74,000 was recorded during the quarter.

7.  Concentration of Revenues

During the third quarter of fiscal year 2011, two customers, Konica Minolta and Novell Inc. (“Novell”), totaled approximately 88% of the revenues of the Company.  During the third quarter of fiscal year 2010, three customers Seiko Epson Corporation, Oki Data and Novell, totaled approximately 70% of the revenues of the Company.

During the nine months ended October 31, 2010, two customers, Konica Minolta and Novell, totaled approximately 76% of the revenues of the Company.  During the nine months ended October 31, 2009, three customers, Konica Minolta, Novell and TallyGenicom, to taled approximately 73% of the revenues of the Company.

8. Sale of operating assets to Kyocera-Mita Corporation (“KMC”)

In the first quarter of fiscal 2010, the Company entered into an agreement with KMC providing for the early release of certain escrow funds. The Company received approximately $3.8 million which was recognized as a gain and $0.2 million was paid to KMC as a discount for the early release of the $4.0 million held in escrow.

9. Product License Revenues and Costs

In the first quarter of fiscal 2010, the Company amended a third party technology license agreement which resulted in a $2.6 million change in estimate and resulting reduction in certain licensing costs.  The Company recorded the gain as a reduction in the cost of revenues.

10. Employment Agreement with Timothy E. Brog

The Company entered into an Employment Agreement (the “Employment Agreement”), dated August 26, 2010, with Timothy E. Brog pursuant to which Mr. Brog was appointed the Chief Executive Officer of the Company.  

10

PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Employment Agreement provides that Mr. Brog will receive a base salary of $340,000 and will be eligible for a cash bonus and stock options semi-annually.  The Employment Agreement will renew on each of August 26, 2011 and August 26, 2012, unless either party provides 120 days’ prior notice to the other party.  Thereafter, it may be terminated by either party with 90 days’ prior notice to the other party.

Mr. Brog received a grant of 200,000 shares of restricted common stock.  The shares  of restricted stock received by Mr. Brog pursuant to  the Employment Agreement, dated August 26, 2010, vest if the average closing price of the Company’s common stock on the Nasdaq Capital Market is greater than or equal to the target prices of $3.75, $4.00, $4.25 and $4.50, respectively, for 15 consecutive trading days. Any shares that do not vest before August 26, 2010 will be forfeited.

If Mr. Brog’s employment is terminated without Cause (as defined in the Employment Agreement), he will receive unpaid salary and benefits, plus a severance payment equal to six months’ salary.  Additionally, if Mr. Brog is terminated without Cause prior to August 26, 2013, 100,000 shares of his restricted stock will vest (or 50,000 shares, if the remaining shares have already vested).

11. Tender Offer

On August 26, 2010, the Board of Directors (the “Board”) approved a tender offer by the Company to purchase up to 13,846,153 shares of its common stock at a cash price of $3.25 per share (the “Offer”) in an amount up to $45 million.

The Company entered into an Amended and Restated Nomination Agreement (the “Amended Nomination Agreement”), dated August 26, 2010, with Bandera Partners LLC and its affiliates (“Bandera”), which amended and restated the Nomination Agreement, dated May 14, 2009, entered into between the Company and such persons.  The Amended Nomination Agreement  provided that Bandera would tender all of its shares of common stock in the Offer and that its representatives on the Board, Gregory Bylinsky and Jefferson Gramm, would resign immediately following the closing of the Offer if Bandera owned less than 360,000 shares of Common Stock.

The Company also received a letter agreement from Edward Ramsden, a director of the Company and representative of Caburn Management, LP, stating that Caburn would tender its 323,672 shares of Common Stock in the Offer and that Mr. Ramsden would resign from the Board immediately following the closing of the Offer.  

The Company commenced the Offer on October 5, 2010, but did not complete the Offer or purchase any shares pursuant thereto until the fourth fiscal quarter.

12. Subsequent Events

The Offer expired on November 4, 2010.  Giving effect to shares properly tendered pursuant to a notice of guaranteed delivery, a total of 13,214,401 shares were properly tendered and not withdrawn in the Offer at a total purchase price of approximately $42.9 million.  The Company completed the purchase of shares on November 10, 2010.    The Offer was undersubscribed and all properly tendered shares were purchased by the Company.  The Company had 3,357,519 shares outstanding as of November 11, 2010.  Total costs in connection with the Offer were approximately $0.1 million.

On November 11, 2010, pursuant to the Amended Nomination Agreement, Gregory Bylinsky and Jefferson Gramm, Bandera’s representatives on the Board, resigned from the Board and Edward Ramsden, representative of Caburn Management LP, also resigned from the Board.  Additionally, the Board resolved to fix the size of the Board to six directors and Robert Frankfurt and Eric Kuby were appointed as directors of the Company.

11

PEERLESS SYSTEMS CORPORATION

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Highlights

Consolidated revenues for the nine months ended October 31, 2010 was $4.5 million, a 13% increase from the nine months ended October 31, 2009.  Engineering services and maintenance revenues decreased 80% , which was primarily attributable to declines in the demand for technologies we offer to OEMs and the requirement for traditional engineering services which we have decided not to offer.   One new perpetual license was executed during each of the first nine months of fiscal year 2011 and 2010

On August 26, 2010, we entered into an Employment Agreement with Timothy E. Brog, whereby he became the Chief Executive Officer of the Company.

On August 26, 2010, our Board of Directors approved a tender offer to acquire its common stock at a cash price of $3.25 per share in an amount up to $45 million.  The tender offer was commenced on October 5, 2010 and expired on November 4, 2010.  Giving effect to shares properly tendered pursuant to a notice of guaranteed delivery, a total of 13,214,401 shares were properly tendered and not withdrawn in the Offer at a total purchase price of $42,946,803.  We completed the purchase of shares on November 10, 2010.  The offer was undersubscribed and we purchased all properly tendered shares.  As of November 11, 2010, the Company had 3,357,519 shares outstanding.

On November 11, 2010, pursuant to the Amended Nomination Agreement, Gregory Bylinsky and Jefferson Gramm, Bandera’s representatives on the Board, resigned from the Board and Edward Ramsden, representative of Caburn Management LP, also resigned from the Board.  Additionally, the Board resolved to fix the size of the Board to six directors and Robert Frankfurt and Eric Kuby were appointed as directors of the Company.

General

We continue to generate revenue from our OEMs through the licensing of imaging solutions.  Our product licensing revenues are comprised of recurring per unit and block licensing revenues, perpetual licenses, and development licensing fees for source code or software development kits (“SDKs”).  Licensing revenues are derived from per unit fees paid periodically by our OEM customers upon manufacturing and subsequent commercial shipment of products incorporating the technology which we license.  Licensing revenues are also derived from arrangements in which we enable third party technology, such as solutions from Adobe Systems Inc. (“Adobe”) or Novell, to be used with our OEM partners’ products.

Block licenses are per-unit licenses in large volume quantities to an OEM for products either in or about to enter into distribution into the marketplace. Perpetual licenses allow OEMs to ship products using licensed technology without the further payment of licensing fees. Payment schedules for these licenses are negotiable and payment terms are often dependent on the size and other terms and conditions of the license being acquired.  Typically, payments are made in either one lump sum or over a period of four or fewer quarters.

Revenue received for block and perpetual licenses is recognized in accordance with provisions of ASC 985-605, Software – Revenue Recognition and ASC 605-25, Revenue Recognition – Multiple-Element Arrangements, which requires that revenue be recognized after the following conditions have been met: (1) delivery has occurred; (2) fees have been determined and are fixed; (3) collection of fees is probable; and (4) and evidence of an arrangement exists.  For block licenses that have a significant portion of the payments due within twelve months, revenue is generally recognized at the time the block license becomes effective assuming all other revenue recognition criteria have been met.

Historically, a limited number of customers have provided a substantial portion of our revenues.  Therefore, the availability and successful closing of new contracts, or modifications and additions to existing contracts with these customers may materially impact our financial position and results of operations from quarter to quarter.

The technology we license has addressed the worldwide market for monochrome printers (21-69 pages per minute) and multifunction printers (“MFP”) (21-110 pages per minute).  This market has been consolidating, and the demand for the technology offered by us has continued to decline since fiscal year 2008. The document imaging industry has changed.  Lower cost of development and production overseas as well as increasing complexity of imaging requirements makes us unable to effectively compete in this environment.  As a result, we sold our imaging and networking technologies and certain other assets to KMC in April 2008.  As part of the transaction we retained the right, subject to certain restrictions, to continue licensing the imaging technology that we had previously developed and continue to license third party imaging technologies.  We are currently pursuing other potential investment opportunities.  The strategy calls for aligning our cost structure with our current and projected revenue streams, maximizing the value of our licensed back technologies and expanding our business through investment opportunities.

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Our inability to implement our strategy to enhance stockholder value as well as the declining sales trend of our existing licenses, downward price pressure on the technologies we license, downward price pressure on original equipment manufacturer (“OEM”) products and the anticipated consolidation of the number of OEMs in the marketplace, may have a material adverse effect on our business and financial results.  See “Forward Looking Statements” above.

Liquidity and Capital Resources

Our total assets at October 31, 2010 were $58.6 million, an increase of 3.8% from $56.4 million as of January 31, 2010.   Stockholders’ equity at October 31, 2010 was $54.3 million, an increase of 3.4% from $52.6 million as of January 31, 2010.  Our ratio of current assets to current liabilities was 22.2:1, which is an increase from the 17.7:1 ratio as of January 31, 2010.  Our operations provided $1.8 million mainly because of the operating profits and timing of receipts and payments associated with those operations during the nine months ended October 31, 2010, compared to $2.2 million in cash provided by operations during the nine months ended October 31, 2009.

During the nine months ended October 31, 2010, $16.0 million in cash was generated by our investing activities, mainly due to the proceeds received from the sale of the Company’s investment in Highbury Financial, Inc.

At October 31, 2010, our principal source of liquidity, cash and cash equivalents was $55.0 million; an increase of $18.3 million from January 31, 2010.  The increase is primarily due to the marketable securities which were sold during the nine months ended October 31, 2010. We do not have a credit facility and may require additional long-term capital to finance our strategy to enhance value for stockholders.

On August 26, 2010, the Company’s Board of Directors approved a tender offer by the Company to acquire its common stock at a cash price of $3.25 per share in an amount up to $45 million.  The Offer was commenced on October 5, 2010 and expired on November 4, 2010.  Giving effect to shares properly tendered pursuant to a notice of guaranteed delivery, a total of 13,214,401 shares were properly tendered and not withdrawn in the Offer at a total purchase price of $42,946,803.  The Company completed the purchase of shares on November 10, 2010.  As of November 11, 2020, the Company had 3,357,519 shares outstanding.

Critical Accounting Policies

We describe our significant accounting policies in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended January 31, 2010. There has been no change in our significant accounting policies since the end of fiscal 2010.

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.

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Results of Operations

Comparison of Quarters Ended October 31, 2010 and 2009

	Percentage of Total Revenues Three Months Ended October 31,						Percentage Change Three Months Ended October 31,
	2010			2009			2010 vs. 2009
Revenues:
Product licensing		100	%		71	%		315	%
Engineering services and maintenance		-			29			(100	)
Total revenues		100			100			196
Cost of revenues:
Product licensing		29			26			233
Engineering services and maintenance		2			6			9
Total cost of revenues		31			32			193
Gross margin		69			68			197
Sales and marketing		2			15			(66	)
General and administrative		26			89			(12	)
		28			104			(20	)
Income (loss) from operations		40			(36	)		(435	)
Other income, net		3			504			(98	)
Income before income taxes		43			468			(73	)
Provision for income taxes		17			97			(47	)
Net income		26	%		371	%		(80	)%

Net Income

Our net income in the third quarter of fiscal year 2011 was $0.7 million, or $0.04 per basic and diluted share, compared to a net income of $3.5 million, or $0.21 per basic share and diluted share, in the third quarter of fiscal year 2010.

Revenues

Consolidated revenues were $2.8 million for the third quarter of fiscal year 2011, compared to $1.0 million for the third quarter of fiscal year 2010. We experienced an increase in licensing revenues because of a non-recurring increase in product licensing during the current quarter versus the third quarter of fiscal year 2010. Engineering services and maintenance revenues were $0 and $0.3 million, for the third quarter of fiscal year 2011 and 2010, respectively. The decrease was due to the expiration of service and maintenance contracts with customers which we decided not to renew.

Cost of Revenues

Total cost of revenues was $0.9 million in the third quarter of fiscal year 2011, compared to $0.3 million in the third quarter of fiscal year 2010. Product licensing costs increased $0.6 million in the third quarter of fiscal year 2011 primarily due to license fees incurred in connection with new product licensing. Engineering services and maintenance costs in the third quarter of fiscal year 2011 were comparable to the third quarter of fiscal year 2010.

Gross Margin

Our gross margins were 69% and 68% for the third quarters of fiscal years 2011 and 2010.

Operating Expenses

Total operating expenses decreased 20% to $0.8 million in the third quarter of fiscal year 2011, compared with $1.0 million in the third quarter of fiscal year 2010.

• Sales and marketing expenses decreased 66% to $49,000 in the third quarter of fiscal year 2011 from $143,000 in the comparable quarter of fiscal year 2010.  The decrease was mainly due to reduction in compensation expenses and commissionable sales following the resignation of the Company’s President and Vice President of Sales.

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• General and administrative expenses decreased 12% to $0.7 million in the third quarter of fiscal year 2011, which included expenses associated with the tender offer of approximately $0.1 million, from $0.9 million in the comparable quarter of fiscal year 2010.  The decrease was due to lower staffing levels and a lower level of professional fees.

Income Taxes

Our $0.5 million tax provision for the third quarter of fiscal 2011 was the result of a pretax operating income.  Our $0.9 million tax provision for the third quarter of fiscal year 2010 was primarily due to the gain associated with an amended third party license agreement and the Highbury dividend.

Comparison of Nine Months Ended October 31, 2010 and 2009

	Percentage of Total Revenues Nine Months Ended October 31,						Percentage Change Nine Months Ended October 31,
	2010			2009			2010 vs. 2009
Revenues:
Product licensing		97	%		85	%		30	%
Engineering services and maintenance		3			15			(80	)
Total revenues		100			100			13
Cost of revenues:
Product licensing		25			(36	)		(179	)
Engineering services and maintenance		4			5			2
Total cost of revenues		30			(31	)		(208	)
Gross margin		70			131			(39	)
Sales and marketing		8			13			(26	)
General and administrative		50			58			(1	)
Gain on sale of operating assets		-			(95	)		(100	)
		58			(24	)		(374	)
Income from operations		12			155			(91	)
Other income, net		134			127			20
Income before income taxes		146			282			(41	)
Provision for income taxes		58			104			(37	)
Net income		88	%		178	%		(44	)%

Net Income

Our net income in the first nine months of fiscal year 2011 was $3.9 million, or $0.25 per basic and $0.24 per diluted share, compared to a net income of $7.1 million, or $0.42 per basic and diluted share, in the first nine months of fiscal year 2010.

Revenues

Consolidated revenues were $4.5 million for the first nine months of fiscal year 2011, compared to $4.0 million for the first nine months of fiscal year 2010.  Licensing revenues increased $1.0 million in the first nine months of fiscal year 2011 primarily resulting from non-recurring new product licensing during the third quarter of fiscal 2011 offset by a decline in the demand for the other technologies we license.  Engineering services and maintenance revenues decreased $0.5 million, primarily as a result of the expiration of service and maintenance contracts which we decided not to renew.

Cost of Revenues

Total cost of revenues was $1.3 million in the first nine months of fiscal year 2011, compared to a gain of $1.2 million in the first nine months of fiscal year 2010. Product licensing costs increased $2.5 million in the first nine months of fiscal year 2011 primarily resulting from the reversal of accrued licensing cost of $2.6 million during the first quarter of fiscal year 2010. Excluding this reversal, product licensing costs were comparable fiscal year over year. Engineering services and maintenance costs in the first nine months of fiscal year 2011 and 2010 were $0.2 million.

Gross Margin

Our gross margin decreased to 70% for the first nine months of fiscal year 2011 compared with 131% in the first nine months of fiscal year 2010, because the reversal of the accrued licensing cost that occurred in fiscal year 2010. Excluding the reversal of accrued licensing cost, our gross margin increased to 70% compared with 66%. The increase was primarily the result of lower mix of products being sold for which we pay license fees to a third party.

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Operating Expenses

Total operating expenses increased by 374% to $2.6 million for the first nine months of fiscal year 2011, compared to a gain of $1.0 million for the first nine months of fiscal year 2010. Excluding the gain associated with the escrow payment in the first nine months of fiscal year 2010, total operating expenses decreased 10%.

• Sales and marketing expenses decreased 26% to $377,000 in the first nine months of fiscal year 2011 from $512,000 in the first nine months of fiscal year 2010.  The decrease was due to the reduction of staffing which was no longer required in the sale of current product offerings.

• General and administrative expenses decreased 1% to $2.2 million in the first nine months of fiscal year 2011 from $2.3 million in the first nine months of fiscal year 2010.  The decrease was a result of lower staffing levels and professional fees.

Other Income, net

Total other income was $6.0 million for the first nine months of fiscal 2011, compared to $5.0 million for the first nine months of fiscal 2010.  Other income for the first nine months of fiscal year 2011 was mainly due to dividends received of $3.1 million, and a $3.7 million realized gain on the Company’s investment in Highbury Financial, Inc. Other income for the first nine months of fiscal year 2010 was mainly attributable to $4.8 million dividend received from Highbury Financial, Inc.

Income Taxes

Our effective income tax rate was 39.9% for the nine months ended October 31, 2010 compared to 37.0% for the nine months ended October 31, 2009. The increase in tax rate is associated with the gain on our investment in Highbury.

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Item 3 — Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to a variety of risks in investments, mainly a lowering of interest rates. The primary objective of our investment activities is to preserve the principal of our investments, while at the same time maximizing yields without significantly increasing risk. To achieve this objective, from time to time, we maintain our portfolio of cash equivalents, fixed rate debt instruments of the U.S. Government and high-quality corporate issuers and short-term investments in money market funds. Although we are subject to interest rate risks, we believe an effective increase or decrease of 10% in interest rate percentages would not have a material adverse effect on our results from operations.

Currently all of our contracts, including those involving foreign entities, are denominated in U.S. dollars. We have experienced no significant foreign exchange gains or losses to date. We have not engaged in foreign currency hedging activities to date and have no intention of doing so. Our international business is subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and to a lesser extent foreign exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors.

Item 4 — Controls and Procedures.

(a) Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, comprised of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

For the period ending October 31, 2010 (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2010, our disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting

In the nine months ended October 31, 2010, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II-OTHER INFORMATION

Item 1 — Legal Proceedings.

We are involved in various legal proceedings incidental to the conduct of our business. In accordance with SFAS No. 5, “Accounting for Contingencies,” we record a provision for liability when management believes that it is probable that a liability has been incurred and we can reasonably estimate the amount of loss. We do not believe there is a need for such a provision at this time. We review these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular proceeding.

Item 1A — Risk Factors.

There have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 (the “Form 10-K”), except as set forth below. Please refer to that section of the Form 10-K for disclosures regarding the risks and uncertainties related to our business.

Since the closing of the tender offer on November 10, 2010, the Company has fewer resources to pursue its strategy to enhance stockholder value.

 On August 26, 2010, the Company’s Board of Directors approved a tender offer by the Company to acquire its common stock at a cash price of $3.25 per share in an amount up to $45 million.  The Offer was commenced on October 5, 2010 and expired on November 4, 2010.  Giving effect to shares properly tendered pursuant to a notice of guaranteed delivery, a total of 13,214,401 shares were properly tendered and not withdrawn in the Offer at a total purchase price of $42,946,803.  The Company completed the purchase of shares on November 10, 2010. The Company’s total costs in connection with the Offer were approximately $0.1 million. As of November 11, 2010, the Company had 3,357,519 shares outstanding. Following completion of the Offer, the Company intends to continue to pursue its strategy to enhance stockholder value.  With a reduced cash balance, the Company has fewer resources to explore opportunities that enhance value for stockholders.

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Item 6 —Exhibits.

EXHIBIT 10.1 Amended and Restated 2005 Equity Incentive Plan, dated November 1, 2010.

EXHIBIT 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section302 of the Sarbanes-Oxley Act of 2002

EXHIBIT 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section302 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32.1  Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EXHIBIT 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

Peerless Systems Corporation
By:	/s/ Timothy E. Brog
	Chief Executive Officer
	/s/ William R. Neil
	Chief Financial Officer

Date: December 15, 2010

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
EXHIBIT 10.1*	Amended and Restated 2005 Equity Incentive Plan, dated November 1. 2010.
EXHIBIT 31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1*	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2*	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*Filed herewith.

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