<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-21399
PEERLESS GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 75-2275966
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1212 EAST ARAPAHO ROAD
RICHARDSON, TEXAS 75081
(972) 497-5500
(Address, including zip code, and telephone number,
including area code, of issuer's principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
On October 31, 1996, there were 4,573,262 outstanding shares of Common Stock,
$0.01 par value per share.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes No X
--- ---
<PAGE>
PEERLESS GROUP, INC.
INDEX TO FORM 10-QSB
Page
PART I - FINANCIAL INFORMATION Number
- ------ ----------------------------------------------------------------------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, 1996 (unaudited) and December 31, 1995 1
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three and nine months ended September 30, 1996 and
September 30, 1995 2
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months ended September 30, 1996 and September 30, 1995 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5
PART II - OTHER INFORMATION
- ------- -----------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 7
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEERLESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 835 $ 1,394
Trade accounts receivable 2,574 4,206
Prepaid expenses 230 90
Note receivable from officer - 271
------- -------
Total current assets 3,639 5,961
Computer and other equipment, at cost 1,644 995
Less accumulated depreciation 589 413
------- -------
1,055 582
Computer software and maintenance contracts, net of accumulated
amortization of $1,372 and $1,079 at September 30, 1996,
and December 31, 1995, respectively 602 455
Other assets 64 132
------- -------
$ 5,360 $ 7,130
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt due to related parties $ 3,133 $ 494
Accounts payable 1,643 859
Accrued liabilities 1,105 892
Sales tax payable 300 370
Unearned software and hardware revenues 2,551 3,096
Unearned maintenance revenues 1,589 5,048
------- -------
Total current liabilities 10,321 10,759
Long-term debt due to related parties - 3,133
Redeemable common stock 1,011 967
Stockholders' deficit:
Preferred stock, $.01 par value:
Authorized shares--5,000
Issued shares--none
Common stock, $.01 par value:
Authorized shares--10,000
Issued shares--2,464 and 2,242 at September 30, 1996, and
December 31, 1995 25 22
Additional paid-in capital (3,675) (3,574)
Accumulated deficit (2,103) (3,547)
Treasury stock, at cost (0 and 304 at September 30, 1996,
and December 31, 1995, respectively) - (435)
Unearned compensation (219) (195)
------- -------
Total stockholders' deficit (5,972) (7,729)
------- -------
$ 5,360 $ 7,130
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation fees $2,689 $1,517 $ 7,330 $ 5,565
Hardware and equipment sales 2,514 1,502 7,366 4,859
Maintenance and service fees 1,497 1,379 4,284 3,962
Other operating revenues 43 117 203 248
------ ------ ------- -------
Total revenues 6,743 4,515 19,183 14,634
Cost of revenues:
Cost of license and installation fees 880 556 2,674 1,932
Cost of hardware and equipment sales 1,885 1,112 5,546 3,882
Cost of maintenance and service fees and
other operating revenues 1,366 1,061 3,770 3,145
------ ------ ------- -------
Total cost of revenues 4,131 2,729 11,990 8,959
------ ------ ------- -------
Gross margin 2,612 1,786 7,193 5,675
Operating costs and expenses:
Research and development 392 342 1,232 1,004
Selling and marketing 971 589 2,506 1,842
General and administrative 357 301 1,070 898
Special severance charge (Note 2) - - 341 -
------ ------ ------- -------
Total operating costs and expenses 1,720 1,232 5,149 3,744
------ ------ ------- -------
Income from operations 892 554 2,044 1,931
Other income (expense):
Interest expense (156) (153) (485) (424)
Interest income 13 13 70 47
------ ------ ------- -------
Total other income (expense) (143) (140) (415) (377)
------ ------ ------- -------
Income before income taxes 749 414 1,629 1,554
Provision for income taxes 106 16 185 48
------ ------ ------- -------
Net income $ 643 $ 398 $ 1,444 $ 1,506
====== ====== ======= =======
Net income per common and common
equivalent share $ 0.17 $ 0.10 $ 0.38 $ 0.40
====== ====== ======= =======
Shares used in computing net income per
common and common equivalent share 3,742 3,661 3,707 3,696
====== ====== ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,444 $ 1,506
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 517 380
Compensation expense 347 39
Changes in operating assets and liabilities:
Trade accounts receivable 1,632 2,141
Prepaid expenses (140) (2)
Accounts payable and accrued liabilities 537 56
Unearned software and hardware revenues (545) (859)
Unearned maintenance revenues (3,482) (3,043)
------- -------
Net cash provided by operating activities 310 218
------- -------
INVESTING ACTIVITIES:
Additions to computer and other equipment (626) (221)
Other (50) -
------- -------
Net cash used in investing activities (676) (221)
------- -------
FINANCING ACTIVITIES:
Note receivable from officer 271 (26)
Proceeds from borrowings - 1,060
Payments on borrowings (494) (1,596)
Proceeds from issuance of common stock 17 3
Purchase of treasury stock (7) (151)
Other 20 -
------- -------
Net cash used in financing activities (193) (710)
------- -------
Net decrease in cash and cash equivalents (559) (713)
Cash and cash equivalents at beginning of period 1,394 1,081
------- -------
Cash and cash equivalents at end of period $ 835 $ 368
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE COMPANY
Peerless Group, Inc., formerly known as TPG Holdings, Inc. (the Company),
designs, develops, installs and supports integrated information systems,
including proprietary computer software and third-party software and hardware,
for community banks and credit unions. The Company's two core software products
are Peerless21, its proprietary information system for community banks, and
PeerlessCU, its proprietary information system for credit unions. The Company
also markets a check and imaging system that is fully integrated with
Peerless21. Recently, the Company established an outsourcing service bureau to
serve those community banks and credit unions that choose to use a service
bureau for their information processing and check and statement imaging
requirements, a market previously unserved by the Company. The Company markets
these systems and services along with the computer equipment (hardware) to
financial institutions primarily located in the United States.
In conjunction with an initial public offering (the Offering), TPG Holdings,
Inc. formed a new wholly-owned Delaware subsidiary, Peerless Group, Inc., and
TPG Holdings, Inc. was merged into this new corporation on August 1, 1996.
Peerless Group, Inc. was the surviving entity of the merger and was the
corporation participating in the Offering. The financial statements included
herein reflect the merger, the cancellation of all treasury stock, and the
resulting change in capitalization as all share and per share amounts have been
retroactively restated to reflect the merger.
The consolidated financial statements of the Company include the accounts of
the Company and all its subsidiaries. All significant intercompany transactions
and balances are eliminated.
These statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Form SB-2 filing
effective with the Securities and Exchange Commission on October 3, 1996.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial information as of September 30, 1996, and
for the nine month periods ended September 30, 1995 and 1996, has not been
audited but, in the opinion of the management of the Company, includes all
adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the Company's financial position
at September 30, 1996, and results of operations and cash flows for the nine
month periods ended September 30, 1995 and 1996. The results of operations for
the nine month period ended September 30, 1996, are not necessarily indicative
of the results to be expected for any subsequent period or the full year.
2. SUBSEQUENT EVENTS
During the nine months ended September 30, 1996, the Company incurred a
nonrecurring special severance charge of $341,000 related to the resignation of
a former officer ($289,000 of which were non-cash compensation charges related
to the extension of the exercise period of certain stock options and the
acceleration of vesting of restricted stock awards).
On October 8, 1996, the Company consummated its initial public offering of
common stock at a price of $8.00 per share. Of the 2,440,000 shares sold in the
offering, 1,440,000 were sold by the Company and the remaining 1,000,000 were
sold by selling stockholders. The Company used a portion of the net proceeds to
repay the debt due to related parties of $3,133,000.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
General. Peerless was formed in 1989 when a group of management executives
from Electronic Data Systems Corporation (EDS) purchased EDS's turnkey bank data
processing systems division, which EDS had acquired in 1980. In 1992, the
Company acquired and began offering a credit union information software system.
In 1994, the Company began marketing a check and statement imaging system that
is fully integrated with Peerless21, the Company's flagship banking product. The
Company has recently established an outsourcing service bureau to serve those
community banks and credit unions that choose to use a service bureau for their
information processing and check and statement imaging requirements, a market
previously unserved by the Company.
Revenues. Revenues for the three months ended September 30, 1996 increased
$2.2 million, or 49.3%, over the comparable prior year period. Revenues for the
nine months ended September 30, 1996 increased $4.5 million, or 31.1%, over the
comparable prior year period. These increases resulted from increases in all
major product categories. Software license and installation fees increased
primarily due to increased installations of Peerless21 and check and statement
imaging processing systems. Hardware and equipment sales increased primarily due
to an increase in shipments of check and statement imaging processing systems.
Gross Margin. Gross margin as a percentage of total revenues for the three
and nine months ended September 30, 1996 decreased slightly to 38.7% and 37.5%,
respectively, from 39.6% and 38.8% for the comparable prior year periods. These
slight decreases were attributable to increases in operating costs associated
with the hiring and training of additional employees necessary to develop the
infrastructure to support anticipated revenue growth.
Shifts in the mix of the sources of the Company's revenues, including software
license and installation fees and check and statement imaging and processing
sales, may cause significant fluctuations in total revenue and gross margin. In
addition, the Company manages its expenses based on anticipated revenue levels,
and a high percentage of these expenses are relatively fixed. Therefore,
variations in the amount and timing of revenue may cause significant variations
in operating results from period to period. Further, in response to a changing
competitive environment, the Company may elect to make certain pricing, product
or marketing decisions that could have a material adverse effect on the
Company's results of operations.
Research and Development. Research and development expenses for the three and
nine months ended September 30, 1996 increased 14.6% and 22.7%, respectively,
over the comparable prior year periods. These increases primarily resulted from
hiring additional research and development employees to support development of
new client/server products and other modifications and enhancements to existing
products.
Selling and Marketing. Selling and marketing expenses as a percentage of total
revenues for the three and nine months ended September 30, 1996 increased to
14.4% and 13.1%, respectively, from 13.0% and 12.6% for the comparable prior
year periods. These increases as a percentage of total revenues primarily
resulted from an increase in the number of employees in sales and marketing to
support anticipated revenue growth and increased compensation levels for
existing employees due to increased production.
5
<PAGE>
General and Administrative. General and administrative expenses for the three
and nine months ended September 30, 1996 increased 18.6% and 19.2%,
respectively, over the comparable prior year periods primarily due to costs
associated with the hiring of additional employees. However, as a percentage of
total revenues, general and administrative expenses for the three and nine
months ended September 30, 1996 decreased to 5.3% and 5.6%, respectively, from
6.7% and 6.1% for the comparable prior year periods.
Special Severance Charge. During the nine months ended September 30, 1996,
the Company incurred a nonrecurring special severance charge of $341,000 related
to the resignation of a former officer ($289,000 of which were non-cash
compensation charges related to the extension of the exercise period of certain
stock options and the acceleration of vesting of restricted stock awards).
Interest Expense. Interest expense for the three and nine months ended
September 30, 1996 increased over the comparable prior year periods primarily
due to the amortization of deferred debt costs associated with the Company's
line of credit, which the Company obtained in October 1995.
Provision for Income Taxes. The Company's provision for income taxes for the
nine months ended September 30, 1996 and 1995 included the Alternative Minimum
Tax under the Internal Revenue Code of 1986, as amended, and state income taxes.
At December 31, 1995, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $2.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended September
30, 1996 was $310,000 compared to $218,000 for the comparable prior year period.
Net cash provided by operations for the nine months ended September 30, 1996 was
primarily the result of net income adjusted for depreciation, amortization and
compensation expense and a significant decrease in trade accounts receivable,
partially offset by decreases in unearned revenues. The decreases in trade
accounts receivable and unearned revenues are primarily due to collections of
maintenance and service fees billed in December 1995 and the recognition of the
related unearned revenues during the year as the services were performed. During
the nine months ended September 30, 1996, the Company invested $626,000 in
capital expenditures, including capital purchases for the Company's outsourcing
service bureau operations.
The Company has a $2.0 million line of credit (the "Credit Agreement") with
State Street Bank and Trust ("State Street") that expires on January 15, 1997.
Amounts available under the Credit Agreement are reduced by the value of
outstanding letters of credit issued by State Street on behalf of the Company.
As of September 30, 1996, no amounts were outstanding under the Credit
Agreement, and State Street had issued a letter of credit with a value of
$600,000 on behalf of the Company.
On October 8, 1996 the Company consummated its initial public offering of
common stock at a price of $8.00 per share. Of the 2,440,000 shares sold in the
offering, 1,440,000 shares were sold by the Company and 1,000,000 were sold by
selling stockholders. Of the net proceeds to the Company from the offering of
approximately $10.3 million, the Company used approximately $3.1 million to
repay the debt due to related parties.
The Company believes that the net proceeds from its initial public offering,
together with cash and cash equivalents, amounts available under the Credit
Agreement and operating cash flows, will be sufficient to meet its anticipated
capital expenditure requirements at least through the next twelve months.
6
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The stockholders of TPG Holdings, Inc., the predecessor of the Company,
approved the change-of-domicile merger of the Company described in Note
1 of Notes to Consolidated Financial Statements at a special meeting of
stockholders held on July 16, 1996. The stockholders voted either in
person or by proxy as follows: holders of 934,827 shares cast votes in
favor of the merger, no stockholders abstained from voting on the
merger and no stockholders cast votes against the merger.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
2.1 Plan of Merger dated as of June 17, 1996 by and between Peerless
Group, Inc. (the "Company") and TPG Holdings, Inc., filed as Exhibit
2.2 to the Registration Statement of the Company on Form SB-2
(Registration Statement number 333-5058-D), dated September 27, 1996
(the "Registration Statement"), and incorporated herein by reference
4.1 Certificate of Incorporation of the Company filed as Exhibit 3.1 to
the Registration Statement, and incorporated herein by reference
4.2 Bylaws of the Company filed as Exhibit 3.2 to the Registration
Statement, and incorporated herein by reference
4.3 Specimen Common Stock Certificate filed as Exhibit 4.3 to the
Registration Statement, and incorporated herein by reference
10.1 Amended and Restated Consent and Agreement dated July 12, 1996 by and
among the Company, Rodney L. Armstrong, Jr., Allied Investment
Corporation, Allied Capital Corporation, Allied Capital Corporation II
and Allied Venture Partnership, filed as Exhibit 10.13 to the
Registration Statement, and incorporated herein by reference
10.2 Consent and Agreement dated July 8, 1996 by and among the Company,
Harrell J. Stringer, Harrell J. Stringer Individual Retirement
Account, Betty Stringer and Betty Stringer Individual Retirement
Account, filed as Exhibit 10.38 to the Registration Statement, and
incorporated herein by reference
10.3 First Amendment to Credit Agreement dated as of August 20, 1996 by and
among the Company, Peerless Data Services, Inc., Peerless Systems,
Inc., Peerless Systems CU Services, Inc., Peerless Recovery Services,
Inc. and State Street Bank and Trust Company, filed as Exhibit 10.42
to the Registration Statement, and incorporated herein by reference
10.4 Amendment Number One to Consent and Agreement dated July 8, 1996 by
and among the Company, Harrell J. Stringer, Harrell J. Stringer
Individual Retirement Account, Betty Stringer and Betty Stringer
Individual Retirement Account, filed as Exhibit 10.43 to the
Registration Statement, and incorporated herein by reference
10.5 First Amendment to Agreement Relating to Loan and Stock Pledge dated
September 4, 1996 by and among the Company, North Dallas Bank & Trust
Co. and Rodney L. Armstrong, Jr., filed as Exhibit 10.44 to the
Registration Statement, and incorporated herein by reference
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule
7
<PAGE>
(B) REPORTS ON FORM 8-K
none
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEERLESS GROUP, INC.
By: /s/ Rodney L. Armstrong, Jr.
---------------------------------------
Rodney L. Armstrong, Jr.
Chairman of the Board and Chief
Executive Officer
(Principal Financial Officer)
By: /s/ Douglas K. Hansen
---------------------------------------
Douglas K. Hansen
Treasurer and Controller
(Principal Accounting Officer)
Date: November 14, 1996
-----------------
8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
- -------------------------------------------------------------------------------
11.1 Statement re computation of per share earnings
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 11.1
PEERLESS GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS (LOSS)
- ---------------
Net income $ 643 $ 398 $1,444 $1,506
Less accretion to redemption value
relating to redeemable common stock 15 14 44 44
-------- -------- -------- --------
Adjusted net income $ 628 $ 384 $1,400 $1,462
======== ======== ======== ========
SHARES
- ------
Weighted average common shares 2,500 1,958 2,175 1,978
outstanding
Weighted average common equivalent
shares
Add: Common shares issued on assumed
exercise of stock options and warrants 1,332 1,830 1,638 1,846
Less: Shares assumed repurchased (90) (127) (106) (128)
-------- -------- -------- --------
Weighted average common and common
equivalent shares 3,742 3,661 3,707 3,696
======== ======== ======== ========
Earnings per common and common
equivalent shares $0.17 $0.10 $0.38 $0.40
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
OF PEERLESS GROUP, INC. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 835
<SECURITIES> 0
<RECEIVABLES> 2,599
<ALLOWANCES> 25
<INVENTORY> 57
<CURRENT-ASSETS> 3,639
<PP&E> 1,644
<DEPRECIATION> 589
<TOTAL-ASSETS> 5,360
<CURRENT-LIABILITIES> 10,321
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (5,997)
<TOTAL-LIABILITY-AND-EQUITY> 5,360
<SALES> 6,743
<TOTAL-REVENUES> 6,743
<CGS> 4,131
<TOTAL-COSTS> 4,131
<OTHER-EXPENSES> 1,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 749
<INCOME-TAX> 106
<INCOME-CONTINUING> 643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 643
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
