<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 March 31, 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 April 30, 1997, there were 4,744,597 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
March 31, 1997 and December 31, 1996 1
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 1997 and March 31, 1996 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1997 and March 31, 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 2. CHANGES IN SECURITIES 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
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>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 8,996 $ 8,378
Trade accounts receivable........................... 4,154 5,712
Prepaid expenses and other current assets........... 510 541
------- -------
Total current assets............................... 13,660 14,631
Computer and other equipment, at cost................ 2,542 2,335
Less accumulated depreciation........................ 708 589
------- -------
1,834 1,746
Computer software, maintenance contracts, and other
assets, net of accumulated amortization of $1,611
and $1,482 at March 31, 1997 and December 31, 1996,
respectively........................................ 843 982
------- -------
Total assets....................................... $16,337 $17,359
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 2,083 $ 1,865
Accrued liabilities................................. 1,548 1,041
Sales tax payable................................... 333 568
Unearned software and hardware revenues............. 1,029 2,006
Unearned maintenance revenues....................... 4,504 5,567
------- -------
Total current liabilities.......................... 9,497 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--4,718 and 4,598 at
March 31, 1997 and December 31, 1996,
respectively....................................... 47 46
Additional paid-in capital.......................... 7,875 7,720
Accumulated deficit................................. (760) (1,254)
Treasury stock, at cost --22 and 1 at
March 31, 1997 and December 31, 1996,
respectively....................................... (134) (1)
Unearned compensation............................... (188) (199)
------- -------
Total stockholders' equity......................... 6,840 6,312
------- -------
Total liabilities and stockholders' equity......... $16,337 $17,359
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Software license and installation fees.................. $2,788 $1,925
Hardware and equipment sales............................ 2,886 2,115
Maintenance, service and processing fees................ 1,877 1,419
------ ------
Total revenues....................................... 7,551 5,459
Cost of revenues:
Cost of software license and installation fees.......... 1,112 798
Cost of hardware and equipment sales.................... 2,096 1,634
Cost of maintenance, service and processing fees........ 1,478 1,129
------ ------
Total cost of revenues............................... 4,686 3,561
------ ------
Gross margin.............................................. 2,865 1,898
Operating costs and expenses:
Research and development................................ 483 414
Selling and marketing................................... 1,007 737
General and administrative.............................. 712 378
------ ------
Total operating costs and expenses................... 2,202 1,529
------ ------
Income from operations.................................... 663 369
Other income (expense):
Interest expense........................................ (5) (165)
Interest income......................................... 136 32
------ ------
Total other income (expense)............................ 131 (133)
------ ------
Income before income taxes................................ 794 236
Provision for income taxes................................ 300 35
------ ------
Net income................................................ $ 494 $ 201
====== ======
Net income per common and common equivalent share......... $ 0.10 $ 0.05
====== ======
Shares used in computing net income per
common and common equivalent share....................... 5,144 3,716
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 494 $ 201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 269 145
Compensation expense................................... 19 16
Changes in operating assets and liabilities:
Trade accounts receivable........................... 1,558 1,710
Prepaid expenses and other current assets........... 31 4
Accounts payable and accrued liabilities............ 489 (242)
Unearned software and hardware revenues............. (977) (297)
Unearned maintenance revenues....................... (1,063) (1,043)
------- -------
Net cash provided by operating activities................ 820 494
INVESTING ACTIVITIES
Additions to computer and other equipment................ (217) (123)
Other.................................................... -- (40)
------- -------
Net cash used in investing activities.................... (217) (163)
FINANCING ACTIVITIES
Payments on borrowings................................... -- (494)
Issuance of common stock................................. 15 --
Other.................................................... -- 20
------- -------
Net cash provided by (used in) financing activities...... 15 (474)
------- -------
Net increase (decrease) in cash and cash equivalents..... 618 (143)
Cash and cash equivalents at beginning of period......... 8,378 1,394
------- -------
Cash and cash equivalents at end of period............... $ 8,996 $ 1,251
======= =======
</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-month period ended March 31,
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.
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.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options and warrants will be excluded. The impact is
expected to result in an increase in primary earnings per share for the quarters
ended March 31, 1997 and March 31, 1996 of $0.01 and $0.05 per share,
respectively. The impact of Statement No. 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be material.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues for the three months ended March 31, 1997 increased $2.1
million, or 38.3%, over the corresponding period of the previous year. This
increase was primarily a result of a higher number of installations of
Peerless21 in larger community banks. Installations of Peerless21 contributed
$1.8 million in software license and installation fees, as well as additional
software license fees and hardware revenues associated with the shipment and
installation of ancillary products, compared to $0.8 million in the
corresponding period of the previous year. Revenue gains associated with
Peerless21 were partially offset by lower shipments and installations of check
and statement imaging systems. Check and statement imaging systems accounted
for 10.9% of total revenues during the three months ended March 31, 1997 as
compared to 31.1% for the corresponding period in 1996.
Gross Margin. Gross margin for the three months ended March 31, 1997
increased to 37.9% of total revenues from 34.8% for the corresponding prior year
period. Gross margin percentages improved in each revenue category, the most
significant being an increase of 4.7% in the gross margin percentage on
hardware and equipment sales due to fewer shipments of imaging systems, which
have lower hardware margins. Additionally, gross margin was positively impacted
by an increase in the revenues from software license and installation fees
relative to total revenues, as these products contribute a higher margin content
than other products and services.
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
months ended March 31, 1997 increased $69,000, or 16.7%, over the corresponding
period of the previous year. As a percentage of total revenues, research and
development expenses decreased to 6.4% from 7.6% in the corresponding prior year
period.
Selling and Marketing. Selling and marketing expenses for the three months
ended March 31, 1997 increased $270,000, or 36.6%, over the corresponding period
of the previous year. This increase primarily resulted from an increase in the
number of employees in sales and marketing to support increased revenues. This
increase is consistent with the increase in total revenues, as selling and
marketing expenses as a percentage of total revenues decreased slightly, to
13.3% from 13.5%.
General and Administrative. General and administrative expenses for the three
months ended March 31, 1997 increased $334,000, or 88.4%, over the corresponding
period of the previous year. This increase is primarily attributable to the
additional costs associated with being a publicly reporting entity. Such costs
include additional professional fees, insurance and stockholder related costs.
As a percentage of total revenues, general and administrative expenses increased
to 9.4% from 6.9% in the corresponding period in 1996.
Interest Expense. Interest expense for the three months ended March 31, 1997
decreased $160,000 from the corresponding prior year period. This decrease was
a result of the repayment of all outstanding debt subsequent to the initial
public offering on October 3, 1996.
5
<PAGE>
Provision for Income Taxes. The Company's provision for income taxes for the
three month period ended March 31, 1996 included the Alternative Minimum Tax
under the Internal Revenue Code of 1986, as amended, and state income taxes. The
majority of remaining net operating loss carryforwards were utilized in 1996;
therefore, the effective tax rate increased to 37.8% for the three month period
ended March 31, 1997, from 14.8% for the corresponding prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 1997 were $9.0 million, an increase of
$0.6 million over the balance at December 31, 1996. During the three months
ended March 31, 1997, net cash provided by operating activities was $0.8 million
and $0.2 million was used for capital expenditures, compared to net cash
provided by operating activities of $0.5 million and cash used for capital
expenditures of $0.1 million during the corresponding period of the previous
year.
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 March 31, 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 March 31, 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 March 31, 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
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. The impact of the implementation of this standard is discussed in Note 2
of the Notes to Consolidated Financial Statements.
6
<PAGE>
PART II
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 1997, the Company sold shares of Common
Stock to its employees for nominal per share cash consideration as bonuses in
lieu of cash compensation. These issuances were made in the following amount
and on the following date for the consideration described:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF AGGREGATE
DATE OF SALE SHARES EMPLOYEES CONSIDERATION
- --------------- --------- --------- -------------
<S> <C> <C> <C>
March 3, 1997 1,675 58 $167.50
</TABLE>
The sales of such Common Stock described in the preceding table were made
pursuant to the exemption from registration under Section 4(2) of the Securities
Act of 1933 (the "Securities Act") or are not considered sales of securities
under Section 5 of the Securities Act.
In February, 1997, the Company issued 120,000 shares of its Common Stock upon
the exercise of stock options by certain employees and a director of the
Company. The aggregate exercise price was paid by these individuals through the
delivery of 22,560 shares of the Company's Common Stock having a value of $6.25
per share and the payment of $15,000 in cash. The issuance of stock to these
individuals was made pursuant to exemptions from registration under Section 4(2)
of the Securities Act and Rule 701 promulgated under the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Peerless Group, Inc. was held on April
22, 1997, for the following purposes and with the results of matters voted upon
indicated:
(1) To elect two persons to serve as Class I directors until the 2000
Annual Meeting of Stockholders and until their successors are elected.
Management's nominees for director, both incumbents, were elected as
follows:
For Withheld
--------- --------
Rodney L. Armstrong, Jr. 4,091,784 9,630
Gary J. Austin 4,091,784 9,630
(2) To approve the Peerless Group, Inc. 1997 Stock Option Plan, which was
approved as follows:
Broker
For Against Abstain Non-Votes
--------- ------- ------- ---------
2,863,638 300,110 17,165 920,501
(3) To approve the appointment of Ernst & Young LLP as independent
auditors of the Company for the year ending December 31, 1997. This
appointment was approved as follows:
For Against Abstain
--------- ------- -------
4,061,774 33,400 6,240
7
<PAGE>
Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities and Exchange Act of 1934. There was no solicitation in opposition to
management's solicitations as listed in the Proxy Statement.
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 net income per share (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: May 9, 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
March 31
--------------------
1997 1996
---------- ---------
EARNINGS
- --------
<S> <C> <C>
Net income $ 494 $ 201
Less accretion to redemption value
relating to redeemable common stock - (14)
--------- --------
Adjusted net income $ 494 $ 187
========= ========
SHARES
- ------
Weighted average common shares outstanding 4,645 2,007
Common shares issued on assumed
exercise of stock options and warrants 720 1,824
Less: Shares assumed repurchased (221) (115)
--------- --------
Weighted average common and common
equivalent shares 5,144 3,716
========= ========
Net income per common and common
equivalent share $ 0.10 $ 0.05
========= ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,996
<SECURITIES> 0
<RECEIVABLES> 4,154
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,660
<PP&E> 2,542
<DEPRECIATION> 708
<TOTAL-ASSETS> 16,337
<CURRENT-LIABILITIES> 9,497
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 6,793
<TOTAL-LIABILITY-AND-EQUITY> 16,337
<SALES> 5,674
<TOTAL-REVENUES> 7,551
<CGS> 3,208
<TOTAL-COSTS> 4,686
<OTHER-EXPENSES> 483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 794
<INCOME-TAX> 300
<INCOME-CONTINUING> 494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 494
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
