<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 registrant 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 August 1, 1997, there were 4,766,142 outstanding shares of Common Stock,
$0.01 par value per share.
<PAGE>
PEERLESS GROUP, INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
- ------ -------------------------------------------------------------------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996 1
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and six months ended June 30, 1997 and June 30, 1996 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1997 and June 30, 1996 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5
PART II - OTHER INFORMATION
- ------- -----------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 8
<PAGE>
PART 1
ITEM 1. FINANCIAL STATEMENTS
PEERLESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 3,160 $ 8,378
Trade accounts receivable.................. 4,126 5,712
Unbilled trade accounts receivable......... 1,156 -
Prepaid expenses and other current
assets.................................... 800 541
------- -------
Total current assets...................... 9,242 14,631
Computer and other equipment, at cost....... 3,522 2,335
Less accumulated depreciation............... 764 589
------- -------
2,758 1,746
Computer software, maintenance
contracts, and other assets, net of
accumulated amortization of $282 and
$1,482 at June 30, 1997 and December
31, 1996, respectively.................... 1,012 982
Investment in preferred stock, at cost...... 2,500 -
------- -------
Total assets.............................. $15,512 $17,359
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 2,190 $ 1,865
Accrued liabilities........................ 1,550 1,041
Sales tax payable.......................... 400 568
Unearned revenues.......................... 3,923 7,573
------- -------
Total current liabilities................. 8,063 11,047
Commitments
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares--5,000
Issued shares--none
Common stock, $.01 par value:
Authorized shares--10,000
Issued shares--4,766 and 4,598 at
June 30, 1997 and December 31, 1996,
respectively............................. 48 46
Additional paid-in capital................. 7,966 7,720
Accumulated deficit........................ (217) (1,254)
Treasury stock, at cost--29 and 1 at
June 30, 1997 and December 31, 1996,
respectively.............................. (184) (1)
Unearned compensation...................... (164) (199)
------- -------
Total stockholders' equity................ 7,449 6,312
------- -------
Total liabilities and stockholders'
equity................................... $15,512 $17,359
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
------- ------- ------ -------
Revenues:
<S> <C> <C> <C> <C>
Software license and installation
fees................................... $3,254 $2,716 $ 6,042 $ 4,641
Hardware and equipment sales............ 3,408 2,737 6,294 4,852
Maintenance, service and processing
fees................................... 2,046 1,528 3,923 2,947
------ ------ ------- -------
Total revenues....................... 8,708 6,981 16,259 12,440
------ ------ ------- -------
Cost of revenues:
Cost of hardware and equipment sales.... 2,683 2,027 4,779 3,661
Cost of maintenance and services........ 3,231 2,271 5,821 4,198
------ ------ ------- -------
Total cost of revenues............... 5,914 4,298 10,600 7,859
------ ------ ------- -------
Gross margin.............................. 2,794 2,683 5,659 4,581
Operating costs and expenses:
Research and development................ 524 426 1,007 840
Selling and marketing................... 892 798 1,899 1,535
General and administrative.............. 599 335 1,311 713
Severance charge........................ - 341 - 341
------ ------ ------- -------
Total operating costs and expenses... 2,015 1,900 4,217 3,429
------ ------ ------- -------
Income from operations.................... 779 783 1,442 1,152
Other income (expense):
Interest expense........................ (5) (164) (10) (329)
Interest income......................... 95 25 231 57
------ ------ ------- -------
Total other income (expense)......... 90 (139) 221 (272)
------ ------ ------- -------
Income before income taxes................ 869 644 1,663 880
Provision for income taxes................ 326 44 626 79
------ ------ ------- -------
Net income................................ $ 543 $ 600 $ 1,037 $ 801
====== ====== ======= =======
Net income per common and common
equivalent share......................... $ 0.11 $ 0.16 $ 0.20 $ 0.21
====== ====== ======= =======
Shares used in computing net income per
common and common equivalent share....... 5,161 3,757 5,150 3,740
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1997 1996
------- -------
OPERATING ACTIVITIES
<S> <C> <C>
Net income............................... $ 1,037 $ 801
Adjustments to reconcile net income to
net cash provided by
(used in) operating activities:
Depreciation and amortization.......... 525 334
Compensation expense................... 42 326
Changes in operating assets and
liabilities:
Trade accounts receivable........... 1,586 1,628
Unbilled trade accounts receivable.. (1,156) -
Prepaid expenses and other current
assets............................. (259) (43)
Accounts payable and accrued
liabilities........................ 666 455
Unearned revenues................... (3,650) (3,007)
------- -------
Net cash provided by (used in)
operating activities.................... (1,209) 494
INVESTING ACTIVITIES
Additions to computer and other
equipment............................... (1,439) (264)
Investment in preferred stock............ (2,500) -
Other.................................... (120) (50)
------- -------
Net cash used in investing activities.... (4,059) (314)
FINANCING ACTIVITIES
Note receivable from officer............. - 271
Payments on borrowings................... - (494)
Issuance of common stock................. 108 14
Purchase of treasury stock............... (50) (7)
Other.................................... (8) 20
------- -------
Net cash provided by (used in)
financing activities.................... 50 (196)
------- -------
Net decrease in cash and cash
equivalents............................. (5,218) (16)
Cash and cash equivalents at beginning
of period............................... 8,378 1,394
------- -------
Cash and cash equivalents at end of
period.................................. $ 3,160 $ 1,378
======= =======
</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. (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 was incorporated in 1989 when a group of management executives from
Electronic Data Systems Corporation ("EDS") purchased EDS's turnkey community
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/R/, the Company's flagship
banking product. In September 1996, the Company began an outsourcing service
bureau. On October 3, 1996, the Company completed an initial public offering of
its Common Stock, resulting in the issuance of 2,440,000 shares and net proceeds
to the Company of approximately $10.1 million.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ended
June 30, 1997 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Peerless
Group, Inc. Annual Report on Form 10-K for the year ended December 31, 1996.
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. Certain prior year amounts have been reclassified
to conform to the current year presentation.
2. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods presented.
Statement No. 128 requires a basic earnings per share calculation which excludes
the dilutive effect of stock options and warrants. Basic earnings per share for
the three and six month periods ended June 30, 1997 and June 30, 1996 are as
follows:
Three months ended June 30, 1997..$0.11 Three months ended June 30, 1996..$0.29
Six months ended June 30, 1997....$0.22 Six months ended June 30, 1996....$0.39
The impact of Statement No. 128 on the calculation of fully diluted earnings per
share for these periods is not expected to be material.
4
<PAGE>
3. INVESTMENT IN PREFERRED STOCK
In May of 1997 the Company purchased 25,000 shares of the preferred stock of
Online Resources & Communications Corporation ("Online"), a private electronic
financial services company, for $2.5 million. This preferred stock is
convertible into approximately 833,000 shares of Online's common stock. The
Company also received warrants to purchase approximately 333,000 shares of
Online's common stock at $3.00 per share.
4. COMMITMENTS
In May of 1997 the Company entered into an agreement to lease a building and
certain real property for fifteen years. This operating lease requires monthly
base rent payments of approximately $84,000 plus operating expenses and taxes,
with the monthly base rent amount escalating every five years during the lease
term. The lease is expected to commence in the first quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues for the three months ended June 30, 1997 increased $1.7
million, or 24.7%, over the corresponding period of the previous year. This
increase was primarily a result of a higher number of shipments of check and
statement imaging systems during the period. Check and statement imaging systems
contributed $3.3 million, or 37.5%, to revenues during the period, as compared
to $1.7 million, or 24.7%, of revenues during the three months ended June 30,
1996. Revenue increases associated with check and statement imaging systems were
partially offset by lower revenues from installations of Peerless21. Revenues
from Peerless21 decreased to $0.9 million during the three months ended June 30,
1997, from $1.3 million in the corresponding period in 1996. This decrease was
due primarily to the smaller size of the Peerless21 installations during the
three months ended June 30, 1997.
Revenues for the six months ended June 30, 1997 increased $3.8 million, or
30.7% over the corresponding period in 1996. This increase was attributable to
strong revenues from installations of Peerless21 in the first quarter and
shipments of check and statement imaging systems in the second quarter.
Peerless21 revenues increased $0.7 million, or 35.5% and check and statement
imaging system revenues increased $0.7 million, or 19.6% over the comparable
prior year period. Additionally, revenues from sales of hardware (excluding
check and statement imaging hardware) increased by $0.9 million.
Gross Margin. Gross margin for the three months ended June 30, 1997 decreased
to 32.1% of total revenues from 38.4% for the corresponding prior year period.
For the six months ended June 30, 1997, gross margin decreased to 34.8% of total
revenues from 36.8% for the corresponding prior year period. Increased shipments
of check and statement imaging systems, which have lower margins than other
Company products, and continuing investment in the Company's service bureau
contributed to the lower margins for both periods.
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.
5
<PAGE>
Research and Development. Research and development expenses for the three and
six months ended June 30, 1997 increased $98,000, or 23.0%, and $167,000, or
19.9%, respectively, over the corresponding periods of the previous year. These
expenses have increased as a result of the Company's focus on product upgrades
that will complete the Millennium 2000 solution and provide its customers with
the most current technology.
Selling and Marketing. Selling and marketing expenses for the three and six
months ended June 30, 1997 decreased to 10.2% and 11.7%, respectively, of total
revenues from 11.4% and 12.3%, respectively, for the comparable prior periods.
These decreases are due to cost control initiatives undertaken by management in
the second quarter of 1997.
General and Administrative. General and administrative expenses for the three
and six months ended June 30, 1997 increased to 6.9% and 8.1%, respectively, of
total revenues from 4.8% and 5.7%, respectively, for the corresponding periods
of the previous year. These increases are primarily attributable to the
additional costs associated with being a public reporting entity. Such costs
include additional professional fees, insurance and stockholder related costs.
Interest Expense. Interest expense for the three and six months ended June
30, 1997 decreased $159,000 and $319,000, respectively, from the corresponding
prior year periods. This decrease was a result of the repayment of all
outstanding debt subsequent to the Company's initial public offering on October
3, 1996.
Interest Income. Interest income for the three and six months ended June 30,
1997 increased $70,000 and $174,000, respectively, from the corresponding prior
year periods. This increase was a result of the investment of cash obtained in
the Company's initial public offering on October 3, 1996.
Provision for Income Taxes. The Company's provision for income taxes for the
three and six month periods ended June 30, 1996 included the Alternative Minimum
Tax under the Internal Revenue Code of 1986, as amended, and state income taxes.
The majority of the Company's net operating loss carryforwards were utilized in
late 1996; therefore, the effective tax rates increased to 37.5% and 37.6%,
respectively, for the three and six month periods ended June 30, 1997, from 6.8%
and 9.0%, respectively, for the corresponding prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 1997 were $3.2 million, a decrease of
$5.2 million from the balance at December 31, 1996. Net cash used in operating
activities was $1.2 million for the six months ended June 30, 1997, compared to
net cash provided by operating activities of $0.5 million for the comparable
prior year period. The decrease in the cash provided from operating activities
from the prior year period was due to an additional decrease in unearned
revenues of $0.6 million and to a lesser reduction in trade accounts receivable
of $1.2 million. Capital expenditures for the six months ended June 30, 1997
were $1.4 million compared to $0.3 million during the corresponding period of
the previous year. This increase was due primarily to investments made in the
Company's service bureau operations, including the addition of the Southeast
Texas processing center. Additionally, the Company invested $2.5 million in the
preferred stock of Online Resources & Communications Corporation, a private
electronic financial services company, during the six months ended June 30,
1997. This investment will give the Company the ability to expand its electronic
banking services, including Internet banking and bill payment, to its bank and
credit union customers.
6
<PAGE>
The Company has a $2.5 million line of credit (the "Credit Agreement") with
State Street Bank and Trust ("State Street") that expires on February 1, 1999.
Borrowings under the Credit Agreement bear interest at State Street's prime rate
(8.50% at June 30, 1997) plus 1/2% and are secured by the assets and stock of
the Company's wholly owned subsidiaries. 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 June 30, 1997, 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.
The Company believes that its cash and cash equivalents at June 30, 1997,
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.
7
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Except as otherwise specifically noted, the following documents are
incorporated by reference as exhibits hereto pursuant to Rule 12b-32:
3.1 Certificate of Incorporation of the Company filed as Exhibit 3.1 to
the Company's Registration Statement No. 333-5058-D on Form SB-2,
declared effective October 3, 1996 (the "Registration Statement").
3.2 Bylaws of the Company filed as Exhibit 3.2 to the Registration
Statement.
11.1 Statement re: computation of per share earnings (filed herewith).
27.1 Financial Data Schedule (filed herewith).
(B) REPORTS ON FORM 8-K
None.
8
<PAGE>
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 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: August 12, 1997
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
- --------------------------------------------------------------------------------
11.1 Statement re computation of net income per share
27.1 Financial Data Schedule
<PAGE>
Exhibit 11.1
PEERLESS GROUP, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
------- ------- ------- ------
EARNINGS
- --------
<S> <C> <C> <C> <C>
Net income $ 543 $ 600 $1,037 $ 801
Less accretion to redemption value
relating to redeemable common stock - (15) - (29)
------ ------ ------ ------
Adjusted net income $ 543 $ 585 $1,037 $ 772
====== ====== ====== ======
SHARES
- ------
Weighted average common shares
outstanding 4,745 2,059 4,695 2,039
Common shares issued on assumed
exercise of stock options and warrants 605 1,806 659 1,818
Less: Shares assumed repurchased (189) (108) (204) (117)
------ ------ ------ ------
Weighted average common and common
equivalent shares 5,161 3,757 5,150 3,740
====== ====== ====== ======
Net income per common and common
equivalent share $ 0.11 $ 0.16 $ 0.20 $ 0.21
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,160
<SECURITIES> 0
<RECEIVABLES> 5,282
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,242
<PP&E> 3,522
<DEPRECIATION> 764
<TOTAL-ASSETS> 15,512
<CURRENT-LIABILITIES> 8,063
<BONDS> 0
0
0
<COMMON> 48
<OTHER-SE> 7,401
<TOTAL-LIABILITY-AND-EQUITY> 15,512
<SALES> 12,336
<TOTAL-REVENUES> 16,259
<CGS> 4,779
<TOTAL-COSTS> 10,600
<OTHER-EXPENSES> 1,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 1,663
<INCOME-TAX> 626
<INCOME-CONTINUING> 1,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,037
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
