Mail Stop 4-06
January 23, 2006
Howard J. Nellor
President and Chief Executive Officer
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
Re: Peerless Systems Corporation
Form 10-K for Fiscal Year Ended January 31, 2005
Forms 10-Q for Fiscal Quarters Ended April 30, 2005, July 31, 2005
and October 31, 2005
File No. 000-21287
Dear Mr. Nellor:
We have reviewed the above referenced filing and have the
following comments. Please note that we have limited our review
to
the matters addressed in the comments below. We may ask you to
provide us with supplemental information so we may better
understand
your disclosure. Please be as detailed as necessary in your
explanation. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for Fiscal Year Ended January 23, 2005
Critical Accounting Policies, page 30
1. Please provide a historical analysis of such adjustments to
estimated costs for the three years and interim periods ended
October
31, 2005. Describe for us in greater detail the process used to
derive the estimates and the causes for the fiscal 2006 control
deficiencies related to the adjustments to the components of
product
licensing reserve. Your response should clarify how "projections"
of
revenues are used to estimate these costs.
2. Explain why you characterize adjustments for actual costs to
your
estimates as "losses". Clarify whether the term "losses" refers
to
your estimated accrual or additional adjustments based on actual
results. Clarify whether these adjustments have historically been
losses or credits to the expense actual.
Item 9A. Controls and Procedures, page 36
3. We note your disclosure deficiencies in internal controls
related
to the estimation process for the timely recording of accruals of
third party product licensing costs and excess ESPP purchases as
of
July 31, 2005. Tell us whether these deficiencies existed at
January
31, 2005 and April 30, 2005 and the basis for your conclusions
that
the Company`s disclosure controls and procedures were nonetheless
effective at the end of those periods. In addition, provide a
materiality assessment inclusive of the balance sheet impact for
each
of the affected periods from January 31, 2005 through July 31,
2005.
Your current disclosure on page 29 of the July 31, 2005 Form 10-Q
indicates that matters were not material to "financial results"
for
the three and six months ended July 31, 2005.
Note 1. Organization, Business and Summary of Significant
Accounting
Policies, page F-7
Revenue Recognition, page F-10
4. Explain to us and disclose any material revenue contingencies
such
as return rights, acceptance conditions (i.e., sell-through to
customer, etc.), warranties and price concessions offered to your
customers. Describe your accounting for these contingencies and
the
related significant assumptions. Material changes and reasonably
likely uncertainties associated with these contingencies should be
addressed in MD&A.
5. For modification or customization of development license
software
that is essential to software functionality revise your disclosure
to
explain the basis for recognizing revenue "over the course of the
modification work." Tell us and disclose how your accounting
complies with paragraphs 74-91 of SOP 97-2. Disclose how progress
is
measured, identify contract milestones and explain how milestones
relate to performance and revenue recognition.
6. Explain to us the nature of the elements included in the
engineering services contracts accounted for under percentage of
completion contract accounting. Tell us how you classify contract
elements of hardware, software license product and services
revenues
and costs from those contracts on the face of the statement of
operations following Rules 5-03.1 and 2 of Regulation S-X.
7. We note your discussion of hardware product offerings in your
Part
I., Item 1 Business discussion beginning on page 5. Tell us and
disclose how hardware product sales are accounted for and
classified
in the statement of operations and reference the applicable
accounting guidance supporting your hardware offerings. For
example,
the Company`s revenue recognition policy does not address the
hardware chip sales of application specific integrated circuit
("ASIC") compression technology. Clarify and/or disclose if
hardware
sales may be standalone product sales or are an element of
multiple-
element or arrangements. Explain how classification in the
statement
of operations for stand-alone or multiple-element hardware sales
complies with Rules 5-03.1 and 2 of Regulation S-X.
8. Your disclosure indicates that you are reporting gross revenue
as
it relates to sublicense revenue in accordance with EITF 99-19.
Provide us with your analysis of why gross revenue presentation is
appropriate under EITF 99-19. Your response should address each
of
the criteria outlined in this EITF. This analysis should clearly
explain in detail why you satisfy each criterion by identifying
the
specific terms of your transactions and nature of relationship
with
your customers and suppliers.
9. Your disclosure indicates that you recognize revenues relating
to
the sale of block licenses when an agreement between the Company
and
an OEM exists and delivery and acceptance of the intellectual
property has occurred (page 30). Clarify for us whether the block
license allows the reseller to market multiple copies of the
software
under one license or allows the reseller to market multiple single
licenses of the same software. Clarify when delivery and
acceptance
of the intellectual property has occurred (i.e., upon delivery to
the
reseller or the end user). Tell us how your policy complies with
paragraph 21 of SOP 97-2.
10. We note your disclosure that revenue from arrangements
involving
multiple elements is allocated to each element based on the
relative
fair value. Describe the nature of the elements included in these
arrangements.
11. VSOE of fair value is limited to the price charged when the
same
element is sold separately. See paragraph 10 of SOP 97-2. Tell
us
why you believe standalone sales of "similar products or services"
constitute VSOE which is limited to same element sales.
12. If you offer discounts describe and disclose how you account
for
those discounts and how they impact your determination of VSOE of
fair value.
13. As applicable, revisions to your revenue recognition policy
should be addressed in your critical accounting policy disclosures
on
page 30.
Form 10-Q for the quarter ending October 31, 2005
Note 1. Revenue recognition, page F-6
14. The Kyocera Mita Corporation "Memorandum of Understanding"
(the
"MOU") notes that Peerless is to provide what appear to be three
immediate Target Product deliverables, maintenance services
consisting of bug fix and error correction for each Target Product
and maintenance services over the term of the MOU. Software
license
rights and intellectual property will also be produced under the
MOU.
Tell us and disclose how you are accounting for each identified
element of the arrangement clarifying the point in time that
revenue
and related cost is recognized, the basis for any revenue or cost
deferral. If revenue is recognized over a performance period
disclose
how progress is measured, identify contract milestones and explain
how they relate to performance and revenue recognition. Explain
and
disclose how contract revenue is allocated among elements and
disclose contingencies, assumptions and reasonably likely
uncertainties. Reference the authoritative literature supporting
your accounting. See paragraph 12 of APBO No. 22.
15. Explain to us the basis for your classification of the Kyocera
revenue and cost elements within service or product revenues on
the
face of the statement of operations following Rules 5-03.1 and 2
of
Regulation S-X.
Note 10. Commitment, page 12
16. We note that in July 2005, the Company decided to discontinue
its
line of Everest controller products. Tell us how you considered
paragraphs 30 and 41-43 of SFAS 144 in determining that
classification of the operations of this product line as
discontinued
operations was not necessary.
******
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. You may wish to provide us with marked copies of
any amendment to expedite our review. Please furnish a cover
letter
with any amendment that keys your responses to our comments and
provides any requested information. Detailed cover letters
greatly
facilitate our review. Please understand that we may have
additional
comments after reviewing any amendment and your responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Megan Akst, Staff Accountant, at (202) 551-
3407
or Craig Wilson, Senior Assistant Chief Accountant who supervised
this review, at (202) 551-3226 if you have questions regarding
comments on the financial statements and related matters, or me at
(202) 551-3730 with any other questions.
Very truly yours,
Kathleen Collins
Accounting Branch Chief
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Howard J. Nellor
Peerless Systems Corporation
January 23, 2006
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