<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 September 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 issuerOs 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, 1997, there were 4,694,891 outstanding shares of Common Stock,
$0.01 par value per share.
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PEERLESS GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
- ------ --------------------- ------
<S> <C>
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996 1
CONSOLIDATED STATEMENTS OF INCOME
Three and nine months ended September 30, 1997 and September 30, 1996 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and September 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
</TABLE>
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PART 1
Item 1. Financial Statements
PEERLESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 1,471 $ 8,378
Trade accounts receivable................................................... 4,691 5,712
Prepaid expenses and other current assets................................... 919 541
------------ ------------
Total current assets....................................................... 7,081 14,631
Computer and other equipment, at cost........................................ 4,220 2,335
Less accumulated depreciation................................................ 969 589
------------ ------------
3,251 1,746
Computer software, maintenance contracts, and other assets, net of accumulated
amortization of $339 and $1,482 at September 30, 1997 and December 31, 1996,
respectively............................................................... 955 982
Investment in preferred stock, at cost....................................... 2,500 -
------------ ------------
Total assets............................................................... $13,787 $17,359
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 1,260 $ 1,865
Accrued liabilities......................................................... 967 1,041
Sales tax payable........................................................... 358 568
Unearned revenues........................................................... 3,443 7,573
------------ ------------
Total current liabilities.................................................. 6,028 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 September 30, 1997 and December 31,
1996, respectively....................................................... 48 46
Additional paid-in capital.................................................. 7,954 7,720
Retained earnings (deficit)................................................. 213 (1,254)
Treasury stock, at cost--60 and 1 shares at September 30, 1997 and
December 31, 1996, respectively............................................ (317) (1)
Unearned compensation....................................................... (139) (199)
------------ ------------
Total stockholders' equity................................................. 7,759 6,312
------------ ------------
Total liabilities and stockholders' equity................................. $ 13,787 $ 17,359
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
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PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Software license and installation fees................ $ 1,999 $ 2,689 $ 8,041 $ 7,330
Hardware and equipment sales.......................... 1,664 2,514 7,958 7,366
Maintenance, service and processing fees.............. 2,216 1,540 6,139 4,487
-------------- -------------- -------------- --------------
Total revenues..................................... 5,879 6,743 22,138 19,183
Cost of revenues:
Cost of hardware and equipment sales.................. 1,273 1,885 6,052 5,546
Cost of maintenance and services...................... 2,676 2,246 8,497 6,444
-------------- -------------- -------------- --------------
Total cost of revenues............................. 3,949 4,131 14,549 11,990
-------------- -------------- -------------- --------------
Gross margin............................................ 1,930 2,612 7,589 7,193
Operating costs and expenses:
Research and development.............................. 523 392 1,530 1,232
Selling and marketing................................. 802 971 2,701 2,506
General and administrative............................ 419 357 1,730 1,070
Severance charge...................................... - - - 341
-------------- -------------- -------------- --------------
Total operating costs and expenses................. 1,744 1,720 5,961 5,149
-------------- -------------- -------------- --------------
Income from operations.................................. 186 892 1,628 2,044
Other income (expense):
Interest expense...................................... (6) (156) (16) (485)
Interest income....................................... 32 13 263 70
-------------- -------------- -------------- --------------
Total other income (expense)....................... 26 (143) 247 (415)
-------------- -------------- -------------- --------------
Income before income taxes.............................. 212 749 1,875 1,629
Income tax expense (benefit)............................ (218) 106 408 185
-------------- -------------- -------------- --------------
Net income.............................................. $ 430 $ 643 $ 1,467 $ 1,444
============== ============== ============== ==============
Net income per common and common equivalent share....... $ 0.08 $ 0.17 $ 0.28 $ 0.38
============== ============== ============== ==============
Shares used in computing net income per common and
common equivalent share........................... 5,147 3,742 5,151 3,707
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
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PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1996
------------ ------------
Operating Activities
<S> <C> <C>
Net income................................................................. $ 1,467 $ 1,444
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................................ 787 517
Compensation expense..................................................... 63 347
Changes in operating assets and liabilities:
Trade accounts receivable............................................. 1,021 1,632
Prepaid expenses and other current assets............................. (378) (140)
Accounts payable and accrued liabilities.............................. (700) 537
Unearned revenues..................................................... (4,130) (4,027)
------------ ------------
Net cash provided by (used in) operating activities........................ (1,870) 310
INVESTING ACTIVITIES
Additions to computer and other equipment.................................. (2,136) (626)
Investment in preferred stock.............................................. (2,500) -
Other ..................................................................... (120) (50)
------------ ------------
Net cash used in investing activities...................................... (4,756) (676)
Financing Activities
Note receivable from officer............................................... - 271
Payments on borrowings..................................................... - (494)
Issuance of common stock................................................... 107 17
Purchase of treasury stock................................................. (380) (7)
Other...................................................................... (8) 20
------------ ------------
Net cash used in financing activities...................................... (281) (193)
------------ ------------
Net decrease in cash and cash equivalents.................................. (6,907) (559)
Cash and cash equivalents at beginning of period........................... 8,378 1,394
------------ ------------
Cash and cash equivalents at end of period................................. $ 1,471 $ 835
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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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 (registered), 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 nine month periods ended
September 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. INCOME TAXES
During the three months ended September 30, 1997, the Company identified
research and development tax credits totaling approximately $500,000. As a
result, the estimated effective tax rate for the fiscal year was lowered to
21.8%, and a net tax benefit of $218,000 was recorded for the three months ended
September 30, 1997.
4
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3. 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 nine month periods ended September 30, 1997 and September 30, 1996
are as follows:
Three months ended September 30:
1997..........$0.09 1996.........$0.26
Nine months ended September 30:
1997..........$0.31 1996.........$0.65
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. 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.
5. 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 second 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 September 30, 1997 decreased
$864,000, or 12.8%, from the corresponding period of the previous year.
Increases in revenues from shipments of check and statement imaging systems and
from the Company's outsourcing service bureau were offset by decreases in
revenues from implementations of Peerless21 and in revenues from hardware
shipments. For the quarter, revenues from the shipments of check and statement
imaging systems increased 66.0% to $1.1 million, while revenues from outsourcing
services increased $0.4 million from the corresponding prior year period.
Conversely, revenues from implementations of Peerless21 decreased 50.7% to $0.8
million and hardware shipments (excluding imaging hardware) decreased 51.8% to
$1.0 million during the quarter as compared to the corresponding period in the
previous year. The decrease in the revenues from implementations of Peerless21
is primarily due to the smaller size of the implementations in the three months
ended September 30, 1997.
Revenues for the nine months ended September 30, 1997 increased $3.0
million, or 15.4% over the corresponding period in 1996. Revenues from check and
statement imaging systems and from maintenance, service and processing fees
contributed most significantly to the increase. Increases from these sources
were $1.1 million and $1.7 million, respectively, in the nine month period as
compared to the corresponding prior year period.
5
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Gross Margin. Gross margin for the three months ended September 30, 1997
decreased to 32.8% of total revenues from 38.7% for the corresponding prior year
period. For the nine months ended September 30, 1997, gross margin decreased to
34.3% of total revenues from 37.5% 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. Excluding the
service bureau component, gross margin for the three and nine months ended
September 31, 1997 is 36.0% and 36.5%, respectively, of total revenues.
Shifts in the mix of the sources of the Company's revenues, including software
license and installation fees, revenues from check and statement imaging systems
and processing fees, 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, 1997 increased $131,000, or 33.4%, and $298,000,
or 24.2%, 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 nine
months ended September 30, 1997 decreased to 13.6% and 12.2% of total revenues,
respectively, from 14.4% and 13.1%, respectively, for the comparable prior
periods. These decreases were due to cost control initiatives undertaken by
management in the second and third quarters of 1997.
General and Administrative. General and administrative expenses for the three
and nine months ended September 30, 1997 increased to 7.1% and 7.8%,
respectively, of total revenues from 5.3% and 5.6%, respectively, for the
corresponding periods of the previous year. These increases were 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 nine months ended
September 30, 1997 decreased $150,000 and $469,000, respectively, from the
corresponding prior year periods. These decreases were 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 nine months ended
September 30, 1997 increased $19,000 and $193,000, respectively, from the
corresponding prior year periods. These increases were a result of the
investment of cash obtained in the Company's initial public offering on October
3, 1996.
Income Tax Expense (Benefit). The Company's provision for income taxes for
the three and nine month periods ended September 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. During the three months ended
September 30, 1997, the Company identified research and development tax credits
of approximately $0.5 million, which resulted in a net tax benefit of $218,000
for the quarter based on an estimated effective tax rate of 21.8% for the fiscal
year. The effective tax rate for the nine months ended September 30, 1997 was
21.8%, up from 11.4% for the comparable prior year period.
6
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1997 were $1.5 million, a decrease
of $6.9 million from the balance at December 31, 1996. Net cash used in
operating activities was $1.9 million for the nine months ended September 30,
1997, compared to net cash provided by operating activities of $0.3 million for
the comparable prior year period. The decrease in the cash provided from
operating activities from the prior year period was primarily due to decreases
in accounts payable and accrued liabilities of $1.2 million and to a lesser
reduction in trade accounts receivable of $0.6 million. Capital expenditures for
the nine months ended September 30, 1997 were $2.1 million compared to $0.6
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 nine months ended September 30, 1997.
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 September 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 September 30, 1997, no amounts were
outstanding under the Credit Agreement, and no letters of credit had been issued
on behalf of the Company.
The Company believes that its cash and cash equivalents at September 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
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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
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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 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 13, 1997
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EXHIBIT INDEX
-------------
Exhibit
No. Description
- -----------------------------------------------------------------------------
11.1 Statement re computation of net income per share
27.1 Financial Data Schedule
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Exhibit 11.1
PEERLESS GROUP, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
EARNINGS
- --------
<S> <C> <C> <C> <C>
Net income $ 430 $ 643 $ 1,467 $ 1,444
Less accretion to redemption value
relating to redeemable common stock - (15) - (44)
------- ------- ------- -------
Adjusted net income $ 430 $ 628 $ 1,467 $ 1,400
======= ======= ======= =======
SHARES
- ------
Weighted average common shares 4,734 2,500 4,708 2,175
outstanding
Common shares issued on assumed
exercise of stock options and warrants 607 1,332 644 1,638
Less: Shares assumed repurchased (194) (90) (201) (106)
------- ------- ------- -------
Weighted average common and common
equivalent shares 5,147 3,742 5,151 3,707
======= ======= ======= =======
Net income per common and common
equivalent share $ 0.08 $ 0.17 $ 0.28 $ 0.38
======= ======= ======= =======
</TABLE>
Fully diluted net income per common and common equivalent share is not presented
since the dilutive effect is less than three percent for the three and nine
month periods ended September 30, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,471
<SECURITIES> 0
<RECEIVABLES> 4,691
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,081
<PP&E> 4,220
<DEPRECIATION> 969
<TOTAL-ASSETS> 13,787
<CURRENT-LIABILITIES> 6,028
<BONDS> 0
0
0
<COMMON> 48
<OTHER-SE> 7,711
<TOTAL-LIABILITY-AND-EQUITY> 13,787
<SALES> 15,999
<TOTAL-REVENUES> 22,138
<CGS> 6,052
<TOTAL-COSTS> 14,549
<OTHER-EXPENSES> 1,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 1,875
<INCOME-TAX> 408
<INCOME-CONTINUING> 1,467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,467
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
