<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant []
Check the appropriate box:
[] Preliminary Proxy Statement
[] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[] Definitive Additional Materials
[] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Peerless Group, Inc.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-----------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------
[] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$7,740.24
(2) Form, Schedule or Registration Statement No.:
333-66185
(3) Filing Party:
Jack Henry & Associates, Inc.
(4) Date Filed:
October 27, 1998
<PAGE> 2
PEERLESS GROUP, INC.
1021 CENTRAL EXPRESSWAY SOUTH
ALLEN, TEXAS 75013
TELEPHONE (972) 359-5500
November 10, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of Peerless Group, Inc. ("Peerless") on December 16, 1998, at 10:00 a.m.,
local time (the "Special Meeting"). The Special Meeting will be held at
Peerless' principal executive offices located at 1021 Central Expressway South,
Allen, Texas. Your Board of Directors and management look forward to greeting
those stockholders able to attend in person.
At the Special Meeting, you will be asked to consider and vote upon the
combination of Peerless with Jack Henry and Associates, Inc. ("Jack Henry")
through the merger (the "Merger") of Peerless Acquisition Corp., a wholly owned
subsidiary of Jack Henry ("Newco"), with and into Peerless. Information about
the business to be conducted at the Special Meeting is set forth in the attached
Proxy Statement/Prospectus, which you are urged to read carefully. Officers of
Peerless will be present at the Special Meeting to respond to questions from
stockholders.
The Merger is subject to the terms and conditions of an Agreement and
Plan of Merger, dated as of August 18, 1998 (the "Merger Agreement"), by and
among Peerless, Newco and Jack Henry. Pursuant to the Merger Agreement, each
outstanding share of the common stock of Peerless ("Peerless Common Stock") will
be converted, without any action on the part of the holder thereof, into the
right to receive 0.16145 of a share of Jack Henry common stock ("Jack Henry
Common Stock"), subject to adjustment as described in the attached Proxy
Statement/Prospectus. The shares of Jack Henry Common Stock held by Jack Henry
stockholders prior to the Merger will remain unchanged by the Merger. The
attached Proxy Statement/Prospectus provides a detailed description of the
Merger Agreement, certain business and financial information of Jack Henry and
Peerless, and other important information, which you are urged to read
carefully. A copy of the Merger Agreement is attached to the Proxy
Statement/Prospectus as Annex A.
THE PEERLESS BOARD OF DIRECTORS (THE "BOARD") HAS CAREFULLY REVIEWED
AND CONSIDERED THE TERMS AND CONDITIONS OF THE MERGER AGREEMENT AND THE PROPOSED
MERGER. THE BOARD UNANIMOUSLY (I) DEEMS THE MERGER TO BE ADVANTAGEOUS TO AND IN
THE BEST INTERESTS OF PEERLESS, (II) DEEMS THE MERGER TO BE FAIR TO AND IN THE
BEST INTERESTS OF THE PEERLESS STOCKHOLDERS, (III) APPROVES, ADOPTS AND DECLARES
THE ADVISABILITY OF THE MERGER AGREEMENT AND (IV) RECOMMENDS THAT THE PEERLESS
STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND THE
CONSUMMATION OF THE MERGER.
The Board has received a written opinion dated August 18, 1998 (the
"DRW Opinion") from Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated ("DRW"), Peerless' financial advisor, that, as of such date, based
upon and subject to the factors and assumptions set forth in such written
opinion, the consideration to be received by the holders of Peerless Common
Stock pursuant to the Merger Agreement was fair from a financial point of view.
A copy of the opinion is attached to the Proxy Statement/Prospectus as Annex C.
You are urged to read the DRW Opinion in its entirety.
The Merger Agreement and the consummation of the Merger must be
approved by the holders of Peerless Common Stock representing a majority of the
outstanding shares of Peerless Common Stock entitled to vote. Your vote on this
matter is very important. We urge you to review carefully the enclosed material
and to return your proxy promptly.
<PAGE> 3
The Board appreciates and encourages stockholder participation in
Peerless' affairs. There is a space on the enclosed proxy for you to indicate if
you will be able to attend the Special Meeting. Whether or not you plan to
attend the Special Meeting, please sign, date, and return the enclosed proxy
promptly in the envelope provided. Your shares will then be represented at the
Special Meeting, and Peerless will be able to avoid the expense of further
solicitation. If you attend the Special Meeting, you may, at your discretion,
withdraw the proxy and vote in person.
On behalf of the Board, thank you for your cooperation and continued
support.
Sincerely,
/s/ Rodney L. Armstrong, Jr.
RODNEY L. ARMSTRONG, JR.
Chairman and Chief Executive Officer
<PAGE> 4
PEERLESS GROUP, INC.
1021 CENTRAL EXPRESSWAY SOUTH
ALLEN, TEXAS 75013
TELEPHONE (972) 359-5500
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 1998
---------------------
The Special Meeting (the "Special Meeting") of Stockholders of Peerless
Group, Inc., a Delaware corporation ("Peerless"), will be held at Peerless'
principal executive offices located at 1021 Central Expressway South, Allen,
Texas, on December 16, 1998, at 10:00 a.m., local time, for the following
purposes:
(1) To consider and vote upon a proposal to approve the Agreement and
Plan of Merger dated as of August 18, 1998 (the "Merger Agreement"), by and
among Jack Henry and Associates, Inc., a Delaware corporation ("Jack Henry"),
Peerless Acquisition Corp., a Delaware corporation and newly formed, wholly
owned subsidiary of Jack Henry ("Newco"), and Peerless, pursuant to which Newco
will merge with and into Peerless (the "Merger") and Peerless will become a
wholly owned subsidiary of Jack Henry; and
(2) To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement/Prospectus, a copy of which is attached hereto and which you are urged
to read carefully.
The Board of Directors of Peerless has fixed the close of business on
October 30, 1998 as the record date for determining stockholders entitled to
notice of and to vote at the Special Meeting and any adjournment or postponement
thereof. Approval of the Merger Agreement and the Merger will require the
affirmative vote of the holders of Peerless common stock ("Peerless Common
Stock") representing a majority of the outstanding shares of Peerless Common
Stock entitled to vote.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, YOU
ARE URGED TO FILL OUT, SIGN, AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
PROXIES FORWARDED BY OR FOR BROKERS OR FIDUCIARIES SHOULD BE RETURNED AS
REQUESTED BY THEM. THE PROMPT RETURN OF PROXIES WILL SAVE THE EXPENSE INVOLVED
IN FURTHER COMMUNICATION.
By Order of the Board of Directors,
/s/ Ann L. Puddister
ANN L. PUDDISTER
Corporate Secretary
Allen, Texas
November 10, 1998
<PAGE> 5
PROXY STATEMENT
OF
PEERLESS GROUP, INC.
--------------
PROSPECTUS
OF
JACK HENRY & ASSOCIATES, INC.
Jack Henry & Associates, Inc. and Peerless Group, Inc. have entered
into a merger agreement whereby Peerless will merge with a wholly owned
subsidiary of Jack Henry. After the merger, Peerless will continue as the
surviving corporation and become a wholly owned subsidiary of Jack Henry. Upon
completion of the merger, Peerless stockholders will receive 0.16145 of a share
of Jack Henry common stock, subject to certain adjustments, for each outstanding
share of Peerless common stock they own.
This Proxy Statement/Prospectus is being furnished to stockholders of
Peerless in connection with the solicitation by the Board of Directors of
Peerless of proxies for use at the Special Meeting of Stockholders to be held at
Peerless' principal executive offices located at 1021 Central Expressway South,
Allen, Texas, at 10:00 a.m., local time, on Wednesday, December 16, 1998. At
this meeting, Peerless stockholders will be asked to consider and vote
upon the approval of the merger. This Proxy Statement/Prospectus also
constitutes the prospectus of Jack Henry with respect to the shares of Jack
Henry common stock to be issued to Peerless stockholders if the merger is
approved.
Shares of Jack Henry common stock and Peerless common stock are
currently listed for trading on the NASDAQ National Market System under the
symbols "JKHY" and "PLSS," respectively. On November 6, 1998, the last trading
day for which information was available prior to the printing of this Proxy
Statement/Prospectus, the closing sales price of Jack Henry common stock and
Peerless common stock on the NASDAQ National Market System was $48.38 per share
and $7.25 per share, respectively.
All information concerning Jack Henry contained in this Proxy
Statement/Prospectus has been furnished by Jack Henry, and all information
concerning Peerless contained in this Proxy Statement/Prospectus has been
furnished by Peerless. Stockholders are encouraged to read all information
contained in this Proxy Statement/Prospectus carefully and understand it before
they vote.
SEE "CERTAIN RISK FACTORS AND INVESTMENT CONSIDERATIONS" BEGINNING ON
PAGE 13 FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY THE
STOCKHOLDERS OF PEERLESS IN DETERMINING HOW TO VOTE UPON THE MERGER PROPOSAL.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE SECURITIES TO BE ISSUED IN THIS TRANSACTION OR
DETERMINED THAT THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED NOVEMBER 10, 1998 AND IS FIRST BEING
MAILED TO STOCKHOLDERS ON OR ABOUT November 11, 1998.
<PAGE> 6
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER............................................................................1
SUMMARY .........................................................................................................3
JACK HENRY SELECTED HISTORICAL FINANCIAL DATA.....................................................................8
PEERLESS SELECTED HISTORICAL FINANCIAL DATA.......................................................................9
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA.............................................................11
COMPARATIVE PER SHARE DATA.......................................................................................12
CERTAIN RISK FACTORS AND INVESTMENT CONSIDERATIONS...............................................................13
Change in Merger Consideration Caused by Changes in Stock Price.........................................13
Integration of Operations...............................................................................13
Technological Change in Hardware and Software Markets...................................................13
Competition.............................................................................................13
Dependence on IBM Relationship..........................................................................13
Rapid Growth............................................................................................14
Changes in the Banking and Financial Services Industries................................................14
Year 2000 Compliance....................................................................................14
Tax Risks Associated with the Merger....................................................................14
Substantial Expenses Resulting from the Merger..........................................................14
THE MERGER.......................................................................................................15
General ...............................................................................................15
Background of the Merger................................................................................15
Reasons for the Merger - Peerless.......................................................................16
Reasons for the Merger - Jack Henry.....................................................................18
Recommendation of the Peerless Board....................................................................18
Opinion of Peerless' Financial Advisor..................................................................18
Certain Federal Income Tax Consequences.................................................................21
Accounting Treatment....................................................................................22
Regulatory Approvals....................................................................................22
Interests of Certain Persons in the Merger..............................................................22
Stock Option Agreement..................................................................................23
Other Agreements........................................................................................24
No Appraisal Rights.....................................................................................25
Resale of Jack Henry Common Stock by Affiliates.........................................................26
Forward-Looking Statements May Prove Inaccurate.........................................................26
THE SPECIAL MEETING..............................................................................................27
Purpose, Time and Place.................................................................................27
Record Date; Voting Power...............................................................................27
Voting of Proxies.......................................................................................27
Required Vote; Certain Voting Information...............................................................27
Solicitation of Proxies and Expenses....................................................................27
Quorum; Abstentions and Broker Non-Votes................................................................28
Revocation of Proxies...................................................................................28
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.......................................................................29
Structure of the Merger; Effective Time.................................................................29
Consideration to be Paid in the Merger..................................................................29
Treatment of Peerless Stock Options and Warrants........................................................30
</TABLE>
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Fractional Shares.......................................................................................30
Exchange of Certificates................................................................................30
Representations and Warranties..........................................................................31
No Solicitation.........................................................................................31
Conditions to the Merger................................................................................32
Termination.............................................................................................33
Termination Fee.........................................................................................34
The Special Meeting.....................................................................................34
Consents, Approvals and Filings.........................................................................34
Insurance and Indemnification...........................................................................35
NASDAQ Listing..........................................................................................35
Fees and Expenses.......................................................................................35
Amendment...............................................................................................35
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION................................................................36
Comparative Market Price Data...........................................................................36
Historical Market Prices and Dividends..................................................................36
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS................................................................37
Jack Henry & Associates, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet.......................................................38
Jack Henry & Associates, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statements of Income................................................39
DESCRIPTION OF PEERLESS' BUSINESS................................................................................41
General ...............................................................................................41
Market ...............................................................................................41
Products and Services...................................................................................41
Seasonality and Cyclicality.............................................................................42
Principal Suppliers.....................................................................................42
Intellectual Property...................................................................................43
Backlog ...............................................................................................43
Competition.............................................................................................43
Sales and Marketing.....................................................................................44
Year 2000...............................................................................................44
Employees...............................................................................................44
Executive Officers......................................................................................44
Government Regulation...................................................................................45
Description of Property.................................................................................45
Legal Proceedings.......................................................................................45
PEERLESS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................46
General ...............................................................................................46
Six Months Ended June 30, 1998 and 1997.................................................................46
Years Ended December 31, 1997 and 1996..................................................................47
Years Ended December 31, 1996 and 1995..................................................................48
Provision for Income Taxes..............................................................................49
Investment in Online....................................................................................49
Liquidity and Capital Resources.........................................................................49
Impact of Recently Issued Accounting Standards..........................................................50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF PEERLESS.......................................................................51
DESCRIPTION OF JACK HENRY'S BUSINESS.............................................................................53
Overview ...............................................................................................53
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Markets and Competition.................................................................................53
Products and Services...................................................................................54
Marketing and Sales.....................................................................................56
Backlog ...............................................................................................56
Factors Affecting Jack Henry's Business and Prospects...................................................56
Subsidiaries............................................................................................57
Employees...............................................................................................57
Directors and Executive Officers........................................................................57
Year 2000...............................................................................................58
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF PEERLESS AND JACK HENRY..............................................................................59
Authorized and Issued Capital Stock.....................................................................59
Number of Directors.....................................................................................59
Election of Directors...................................................................................59
Special Stockholder Meetings............................................................................60
Advance Notice Requirements for Nominations of Directors and Stockholder Proposals......................60
Provisions Affecting Business Combinations with Interested Persons......................................60
Action by Written Consent...............................................................................60
Amendment to Certificate of Incorporation...............................................................61
Removal of Directors....................................................................................61
Director Indemnification................................................................................61
Amendment, Repeal of Bylaws.............................................................................61
DESCRIPTION OF JACK HENRY CAPITAL STOCK..........................................................................62
Authorized Capital Stock................................................................................62
Jack Henry Common Stock.................................................................................62
Jack Henry Preferred Stock..............................................................................62
Transfer Agent and Registrar............................................................................63
NASDAQ Listing; Delisting and Deregistration of Peerless Common Stock...................................63
STOCKHOLDER PROPOSALS............................................................................................63
LEGAL MATTERS....................................................................................................63
EXPERTS ........................................................................................................63
WHERE YOU CAN FIND MORE INFORMATION..............................................................................64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF PEERLESS..........................................................F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS...............................................................F-2
Annex A -- Agreement and Plan of Merger.........................................................................A-1
Annex B -- Stock Option Agreement...............................................................................B-1
Annex C -- Opinion of Dain Rauscher Wessels.....................................................................C-1
</TABLE>
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<PAGE> 9
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are the two companies proposing to merge?
A: Jack Henry and Peerless believe that their combination will create value
for both companies' stockholders. The merger will allow Jack Henry to add
over 350 community banking, credit union and service bureau customers to
its current installed base. Jack Henry hopes to introduce Peerless'
customers to Jack Henry's core software products and cross-sell other
products and services. In addition, Jack Henry hopes to obtain cost savings
based on operating synergies caused by the merger. The combination of
increased customer access and cost savings should result in added earnings
per share for Jack Henry. The merger will also result in Peerless
stockholders receiving stock in a much larger organization at a conversion
ratio that represents a significant premium over the trading price of
Peerless common stock before the announcement of the merger.
Q: WHAT WILL I RECEIVE IN THE MERGER FOR MY PEERLESS STOCK?
A: If the merger is completed, Peerless stockholders will have the right to
receive 0.16145 of a share of Jack Henry common stock in exchange for each
share of Peerless common stock they own, subject to certain adjustments
described below. Jack Henry will not issue fractional shares. Instead, you
will receive cash for any fractional shares of Jack Henry common stock owed
to you based on the average share price of such stock during the ten
consecutive trading days ending on the fifth day prior to the Special
Meeting.
Example: If you currently own 1,000 shares of Peerless common stock, then
after the merger you will receive 161 shares of Jack Henry common stock and
cash for the 0.45 of a share of Jack Henry common stock remaining, assuming
the conversion ratio is not adjusted. On November 6, 1998, the closing
price of Jack Henry common stock on the NASDAQ National Market System was
$48.38. Applying the conversion ratio of 0.16145, each holder of Peerless
common stock would be entitled to receive Jack Henry common stock with a
market value on that date of approximately $7.81 for each share of
Peerless common stock. Of course, the market price for Jack Henry common
stock is likely to change between now and the merger.
Q: HOW WAS THE CONVERSION RATIO DETERMINED?
A: The conversion ratio was determined by assigning a $7.25 value per share to
Peerless common stock and dividing that value by the "Pre-Announcement
Average Price" of Jack Henry common stock. The "Pre-Announcement Average
Price" is the average of the last sale price per share of Jack Henry common
stock during the three consecutive trading days prior to the public
announcement of the merger on August 19, 1998. The Pre-Announcement Average
Price used to determined the conversion ratio is $44.91.
Q: CAN THE CONVERSION RATIO CHANGE?
A: Yes. Prior to the Special Meeting, the companies will determine a
"Pre-Closing Average Price" of Jack Henry common stock. The "Pre-Closing
Average Price" is the average of the last sale price per share of Jack
Henry common stock for the 10 consecutive trading days ending on the
trading day which is five days prior to the Special Meeting. In the event
the Pre-Closing Average Price of Jack Henry common stock is at least 15%
higher than the Pre-Announcement Average Price (i.e. $51.64) or at least
15% lower than the Pre-Announcement Average Price (i.e. $38.17), then the
conversion ratio will be adjusted.
1
<PAGE> 10
Q: What do I need to do now?
A: Please complete and mail your signed proxy card in the enclosed postage
prepaid return envelope as soon as possible, so that your shares may be
represented and voted at the Special Meeting. You should sign and mail your
proxy card even if you are planning to attend the meeting.
Q: WHEN IS THE SPECIAL MEETING?
A: The Special Meeting will take place on December 16, 1998. At the
meeting, Peerless stockholders will be asked to approve the merger and the
related merger agreement signed by Peerless and Jack Henry on August 18,
1998. Jack Henry stockholders do not need to vote on the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, you will receive a letter of transmittal
from Jack Henry's transfer agent containing written instructions for
exchanging your Peerless stock certificates. Do not send your certificates
to Jack Henry or Peerless.
Q: CAN I CHANGE MY VOTE AFTER HAVING MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
Special Meeting in one of three ways. First, you can send a written notice
to the Corporate Secretary of Peerless stating that you would like to
revoke your proxy; second, you can complete and submit a new proxy card; or
third, you can attend the Special Meeting and vote in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should instruct your broker to vote your shares, following the
directions provided by your broker. Without instructions, your shares will
not be voted.
Q: WILL I OWE ANY FEDERAL INCOME TAX AS A RESULT OF THE MERGER?
A: No. The exchange of shares resulting from the merger will be tax-free for
federal income tax purposes to Peerless stockholders (except as to the
small amount of cash that Peerless stockholders may receive instead of
receiving fractional shares).
YOU SHOULD CONSULT WITH YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF THE
TAX CONSEQUENCES OF THE MERGER TO YOU.
Q: DOES JACK HENRY PAY DIVIDENDS?
A: Yes, Jack Henry does pay dividends. However, after the merger, Jack Henry's
Board of Directors may change that policy based on business conditions,
Jack Henry's financial condition and earnings and other factors.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. In
addition to Peerless stockholder approval, Peerless and Jack Henry must
also obtain regulatory approvals. We intend to complete the merger as
soon as possible after the Special Meeting.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A. If you have any questions about the merger, please call Douglas K. Hansen,
Treasurer of Peerless, at (972) 359-5686.
2
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SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information."
THE COMPANIES
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Jack Henry ............................... Jack Henry Provides data processing solutions through proprietary applications
software, operating primarily on IBM computers, to more than 1515 commercial banking
customers in the united states and several foreign countries. Jack Henry frequently
sells the hardware with its software products, and provides customer support and
related services for all of its products. Banks can purchase these systems for
in-house data processing or they can use Jack Henry's resources through service bureau
and facilities management operations. Jack Henry also sells automatic teller machine
(ATM) software and processes atm network transactions through its Commlink Corp.
Subsidiary. The principal executive offices of Jack Henry are located at 663 Highway
60, Monett, Missouri 65708, and its telephone number is (417) 235-6652.
Peerless.................................. Peerless designs, develops, installs and supports integrated information systems,
including proprietary computer software and third-party software and hardware, for
community banks and credit unions in the United States and Canada. Peerless currently
provides integrated information systems and check and statement processing solutions
to more than 350 community banks and credit unions nationwide and in Canada. The
principal executive offices of Peerless are located at 1021 Central Expressway South,
Allen, Texas 75013, and its telephone number is (972) 359-5500.
SUMMARY OF THE TRANSACTION.................. Pursuant to the merger agreement, Peerless will merge with a wholly owned subsidiary
of Jack Henry, with Peerless continuing as the surviving corporation and becoming a
wholly owned subsidiary of Jack Henry. The merger requires the approval of the holders
of a majority of Peerless common stock.
RECOMMENDATION OF THE PEERLESS At a meeting held on August 18, 1998, the Board of Directors of Peerless unanimously
BOARD....................................... adopted the merger agreement. The Peerless Board of Directors also believes that the
merger is in the best interests of Peerless and its stockholders, and unanimously
recommends that Peerless stockholders vote "FOR" approval of the merger agreement.
THE SPECIAL MEETING......................... The Special Meeting will be held at Peerless' principal executive offices at 1021
Central Expressway South, Allen, Texas, on Wednesday, December 16, 1998, at 10:00
a.m., local time. The purpose of the meeting is for stockholders of peerless to
consider and vote upon the approval of the merger agreement and the transactions
contemplated thereby.
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RECORD DATE; VOTING POWER................... You are entitled to vote at the Special Meeting if you owned shares of Peerless common
stock as of the close of business on the record date of October 30, 1998. On the
record date, there were 4,922,660 shares of Peerless common stock entitled to vote at
the Special Meeting. Peerless stockholders will have one vote for each share of
Peerless common stock owned on the record date.
REQUIRED VOTE............................... A majority of the shares of Peerless common stock outstanding on the record date must
vote to adopt the merger. Your failure to vote will have the effect of a vote against
the merger. Brokers who hold shares of Peerless common stock as nominees will not have
discretionary authority to vote such shares unless you provide voting instructions.
The merger does not require the approval of Jack Henry stockholders.
SHARE OWNERSHIP OF MANAGEMENT; On the record date, directors and executive officers of Peerless and their affiliates
VOTING ARRANGEMENTS......................... beneficially owned, in the aggregate, approximately 24.3% of the outstanding shares
of Peerless common stock.
All members of the Peerless Board of Directors and Steven W. Tomson and Kevin W.
Marsh, both executive officers of Peerless, have agreed to vote their shares of
Peerless common stock for the approval of the merger agreement and against any
competing proposals.
REVOCATION OF PROXIES....................... Any proxy given pursuant to this solicitation may be revoked by the person giving it
at any time before the proxy is voted at the Special Meeting. A proxy may be revoked
by filing with the Corporate Secretary of Peerless prior to the voting of the proxy
either a written instrument revoking the proxy or an executed proxy bearing a later
date, or by voting in person at the Special Meeting. Attendance at the Special Meeting
will not, in itself, constitute the revocation of a proxy.
INTERESTS OF CERTAIN PERSONS IN THE Certain executive officers and directors of Peerless may be deemed to have certain
MERGER...................................... interests in the merger that are in addition to their interests as stockholders of
Peerless generally. Such interests include, among other things, provisions in the
merger agreement regarding the treatment of outstanding Peerless options and payments
under a non-competition agreement. In addition, certain indemnification and insurance
arrangements for existing directors and officers of Peerless will be continued.
Peerless' Board of Directors was aware of these interests and considered them, among
other matters, in adopting the merger agreement.
FAIRNESS OPINION OF FINANCIAL In deciding to approve the merger, the Peerless Board of Directors considered the
ADVISOR..................................... opinion of its financial advisor, Dain Rauscher Wessels, as to the fairness of the
merger to its stockholders from a financial point of view. The opinion is attached as
Annex C. WE ENCOURAGE YOU TO READ THIS OPINION CAREFULLY.
</TABLE>
4
<PAGE> 13
<TABLE>
<S> <C>
CONVERSION OF PEERLESS COMMON Upon completion of the merger, each then-outstanding share of Peerless common stock
STOCK....................................... (other than shares of Peerless common stock owned by Peerless or any subsidiary of
Peerlesss or by Jack Henry or any subsidiary of Jack Henry, which shares will be
canceled) will be converted into the right to receive 0.16145 Of a share of Jack Henry
common stock, subject to certain adjustments.
No certificates representing fractional shares of Jack Henry common stock will be
issued pursuant to the merger. Instead, you will receive cash for any fractional
shares of Jack Henry common stock owed to you based on the average closing price of
Jack Henry common stock on the ten consecutive trading days ending on the fifth day
prior to the Special Meeting (i.e. Pre-Closing Average Price).
COMPARISON OF PER SHARE MARKET Peerless and Jack Henry common stock are both listed on the NASDAQ National Market
Prices...................................... System. On August 18, 1998, the last full trading day before the public announcement
of the proposed merger, Peerless common stock closed at $4.88 And Jack Henry common
stock closed at $45.59. On November 6, 1998, Peerless common stock closed at $7.25
and Jack Henry common stock closed at $48.38. At the conversion ratio of 0.16145 Of a
share of Jack Henry common stock per share of Peerless common stock, the equivalent
price of a share of Peerless common stock on August 18, 1998 was $7.36 And on
November 6, 1998 was $7.81. As previously discussed, however, the conversion ratio of
0.16145 may change prior to the Special Meeting.
CONDITIONS TO THE MERGER.................... The obligation of each party to complete the merger is conditioned upon, among other
things:
- the approval of the merger agreement by Peerless' stockholders;
- the absence of any order or injunction that prohibits the
consummation of the merger;
- the registration statement for Jack Henry common stock
not being subject to any stop order or proceeding seeking
a stop order;
- the waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements
act of 1976, as amended, having expired or been terminated;
- the receipt by Peerless of a tax opinion regarding the tax
free nature of the merger; and
- the receipt of certain accounting opinions as to pooling
of interests accounting treatment of the merger.
Unless prohibited by law, either Jack Henry or Peerless could elect to waive a
condition that has not been satisfied and complete the merger.
</TABLE>
5
<PAGE> 14
<TABLE>
<S> <C>
TERMINATION................................. The merger agreement may be terminated under the following conditions:
- by mutual written consent;
- by either party, if the merger is not completed on or before February 19,
1999 (other than as a result of a material breach of the merger agreement
by the party seeking to effect such termination);
- by either party, if an order, decree or ruling has been issued or other action
taken by a court of competent jurisdiction which permanently restrains,
enjoins or otherwise prohibits the merger;
- by either party upon receipt of an opinion of counsel or accountants that the
merger is not reasonably likely to qualify for pooling of interests accounting
treatment;
- by either party, if the Special Meeting has been held and the merger
agreement has not been approved by the affirmative vote of holders of Peerless
common stock;
- by either party, if the other party materially breaches any of its
representations, warranties or covenants contained in the merger agreement; or
- by Peerless, if prior to the Special Meeting, the Peerless Board of Directors
determines in good faith that its fiduciary duties require execution of
another acquisition agreement, and Peerless executes a written agreement with
a third party to consummate an acquisition transaction other than the merger.
TERMINATION FEE............................. Jack Henry will be entitled to a termination fee under the following conditions:
- If the merger agreement is terminated based upon Peerless stockholders
failing to approve the merger at the Special Meeting, then Peerless will be
required to pay a termination fee of $500,000.
- If the merger agreement is terminated based upon Peerless stockholders failing
to approve the merger at the Special Meeting, and (i) at the time of
termination, an acquisition proposal had been made by another party and (ii)
within 12 months after the termination, Peerless enters into an agreement to
consummate such proposal, then Peerless must pay Jack Henry an additional fee
of $500,000 and an additional $500,000 on the effective date of such
acquisition.
- If Peerless calls off the merger after entering into an agreement with a third
party for a proposal which the Peerless Board of Directors determines is
superior to the merger, then Peerless must pay a termination fee of $750,000
at termination and an additional $750,000 on the effective date of such
acquisition.
</TABLE>
6
<PAGE> 15
<TABLE>
<S> <C>
APPRAISAL RIGHTS............................ Both companies are organized under Delaware law. Under Delaware law, Peerless
stockholders have no right to an appraisal of the value of their shares in connection
with the merger. Accordingly, holders of Peerless common stock who do not wish to
receive Jack Henry common stock in exchange for their shares must liquidate their
investment by selling their shares before the consummation of the merger.
OPERATIONS FOLLOWING THE MERGER............. Following the merger, Peerless will continue its operations as a wholly owned
subsidiary of Jack Henry.
REGULATORY APPROVAL......................... The companies are prohibited by United States antitrust laws from completing the merger
until after they have furnished certain information and materials to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and a required
waiting period has ended. We have filed the required forms, and the initial waiting
period will end on November 27, 1998. However, the Department of Justice and the
Federal Trade Commission will continue to have the authority to challenge the
transaction on antitrust grounds even after the waiting period has ended.
ACCOUNTING TREATMENT........................ The companies expect the merger will be accounted for as a pooling of interests, which
means that the companies will be treated as if they had always been combined for
accounting and financial reporting purposes.
CERTAIN FEDERAL INCOME TAX Peerless and Jack Henry have structured the merger so that neither Peerless nor its
CONSEQUENCES................................ stockholders will recognize gain or loss for federal income tax purposes as a result of
the merger, except for taxes payable on cash received for fractional shares. However,
you should consult your own tax advisor for a full understanding of the tax
consequences of the merger to you.
LISTING OF JACK HENRY STOCK................. Jack Henry will list the shares of its common stock to be issued in the merger on the
NASDAQ National Market System.
STOCK OPTION AGREEMENT...................... Jack Henry and Peerless have entered into a stock option agreement that permits Jack
Henry under certain circumstances to purchase 979,815 shares, representing
approximately 19.9% Of the outstanding Peerless common stock, at a price of $7.25 Per
share. The Stock Option Agreement is attached as Annex B.
FORWARD-LOOKING STATEMENTS MAY Both companies have made forward-looking statements in this document (and in documents)
PROVE INACCURATE............................ that are incorporated by reference) that are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or assumed
future results of operations of Jack Henry, Peerless or the combined companies. When
words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," or
similar expressions are used, the companies are often making forward-looking
statements. Stockholders should note that actual events and results may differ
materially from those expressed in forward-looking statements due to a number of
factors. See "Certain Risk Factors and Investment Considerations" below.
</TABLE>
7
<PAGE> 16
JACK HENRY SELECTED HISTORICAL FINANCIAL DATA
The following selected historical consolidated financial data of Jack Henry
should be read in conjunction with, and is qualified by reference to, the
audited consolidated financial statements and accompanying notes in the
documents which are incorporated by reference in this Proxy Statement/Prospectus
(see "Where You Can Find More Information").
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA 1998 1997 1996 1995 1994
- --------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross revenue (a)............................ $ 113,423 $ 82,600 $ 67,558 $ 46,124 $ 38,390
Income from continuing operations ........... 22,237 15,755 12,268 7,978 6,259
Loss from discontinued operations (b) ....... (668) (450) (2,620) -- --
Net income................................... 21,569 15,305 9,648 7,978 6,259
Income (loss) per share (c):
Continuing operations...................... 1.13 .83 .65 .44 .35
Discontinued operations.................... (.04) (.03) (.14) -- --
Net income................................. 1.09 .80 .51 .44 .35
Dividends declared per share (c)............. .24 .20 .17 .15 .13
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------
(IN THOUSANDS)
--------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
- ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficit).................... $ 29,878 $ 15,490 $ 6,895 $ (666) $ 11,181
Total assets................................. 115,286 82,069 60,401 58,721 38,347
Long-term debt............................... -- -- -- -- --
Stockholders' equity......................... 73,500 52,782 37,418 29,484 23,650
</TABLE>
- ----------
(a) Gross Revenue includes software licensing and installation revenues; support
revenues; and hardware sales; less sales returns and allowances.
(b) Losses from discontinued operations are reported as such from the
appropriate date.
(c) Per share data have been adjusted to reflect the 50% stock dividends paid in
prior years and are based on the number of diluted shares as required by
Financial Accounting Standards Board Statement No. 128, Earnings Per Share.
8
<PAGE> 17
PEERLESS SELECTED HISTORICAL FINANCIAL DATA
The following selected historical consolidated financial data of Peerless
should be read in conjunction with, and is qualified by reference to, the
audited and unaudited, respectively, consolidated financial statements and
accompanying notes which are located elsewhere in this Proxy Statement/
Prospectus.
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------
1998 1997 1997 1996 1995
-------- ------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Software license and installation ........... $ 5,475 $ 6,042 $ 10,339 $ 9,987 $ 7,181
Hardware and equipment ...................... 3,960 6,294 11,171 10,303 6,727
Maintenance and services .................... 5,066 3,923 8,621 6,235 5,782
-------- -------- -------- -------- --------
Total revenues .......................... 14,501 16,259 30,131 26,525 19,690
-------- -------- -------- -------- --------
COST OF REVENUES:
Hardware and equipment ...................... 3,037 4,779 8,528 7,754 5,258
Software license and installation,
maintenance and services .................... 6,513 5,821 11,794 8,882 6,872
-------- -------- -------- -------- --------
Total cost of revenues .................. 9,550 10,600 20,322 16,636 12,130
-------- -------- -------- -------- --------
GROSS MARGIN ................................ 4,951 5,659 9,809 9,889 7,560
OPERATING COSTS AND EXPENSES:
Research and development .................... 990 1,007 2,004 1,696 1,398
Selling and marketing ....................... 1,464 1,899 3,412 3,477 2,502
General and administrative .................. 1,170 1,311 2,216 1,512 1,222
Severance charge(a) ......................... -- -- -- 341 --
-------- -------- -------- -------- --------
Total operating costs and expenses ...... 3,624 4,217 7,632 7,026 5,122
-------- -------- -------- -------- --------
Income (loss) from operations ............... 1,327 1,442 2,177 2,863 2,438
OTHER INCOME (EXPENSE):
Interest expense ............................ (8) (10) (20) (548) (612)
Interest income ............................. 66 231 280 133 68
-------- -------- -------- -------- --------
Total other income (expense) ............ 58 221 260 (415) (544)
-------- -------- -------- -------- --------
Income (loss) before income taxes ........... 1,385 1,663 2,437 2,448 1,894
Provision for income taxes .................. 538 626 534(b) 155(c) 64(c)
-------- -------- -------- -------- --------
NET INCOME (LOSS) ........................... $ 847 $ 1,037 $ 1,903 $ 2,293 $ 1,830
======== ======== ======== ======== ========
Basic earnings (loss) per share(d) .......... $ 0.17 $ 0.22 $ 0.40 $ 0.82 $ 0.90
======== ======== ======== ======== ========
Diluted earnings (loss) per share(d) ........ $ 0.17 $ 0.20 $ 0.37 $ 0.55 $ 0.49
======== ======== ======== ======== ========
Shares used in computing basic earnings
(loss) per share ............................ 4,895 4,695 4,712(e) 2,745 1,976
Shares used in computing diluted earnings
(loss) per share ............................ 5,088 5,150 5,130(e) 4,055 3,648
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES:
Software license and installation ........... $ 4,558 $ 4,789
Hardware and equipment ...................... 5,019 7,118
Maintenance and services .................... 5,165 4,382
-------- --------
Total revenues .......................... 14,742 16,289
-------- --------
COST OF REVENUES:
Hardware and equipment ...................... 3,892 5,380
Software license and installation,
maintenance and services .................... 5,855 6,306
-------- --------
Total cost of revenues .................. 9,747 11,686
-------- --------
GROSS MARGIN ................................ 4,995 4,603
OPERATING COSTS AND EXPENSES:
Research and development .................... 1,365 1,404
Selling and marketing ....................... 2,301 2,610
General and administrative .................. 1,181 853
Severance charge(a) ......................... -- --
-------- --------
Total operating costs and expenses ...... 4,847 4,867
-------- --------
Income (loss) from operations ............... 148 (264)
OTHER INCOME (EXPENSE):
Interest expense ............................ (776) (494)
Interest income ............................. 63 15
-------- --------
Total other income (expense) ............ (713) (479)
-------- --------
Income (loss) before income taxes ........... (565) (743)
Provision for income taxes .................. -- --
-------- --------
NET INCOME (LOSS) ........................... $ (565) $ (743)
======== ========
Basic earnings (loss) per share(d) .......... $ (0.32) $ (0.36)
======== ========
Diluted earnings (loss) per share(d) ........ $ (0.32) $ (0.36)
======== ========
Shares used in computing basic earnings
(loss) per share ............................ 1,949 2,054
Shares used in computing diluted earnings
(loss) per share ............................ 1,949(f) 2,054(f)
</TABLE>
9
<PAGE> 18
<TABLE>
<CAPTION>
(UNAUDITED)
AS OF JUNE 30, AS OF DECEMBER 31,
------------------ ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- ----------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents................... $ 1,377 $ 3,160 $ 2,845 $ 8,378 $ 1,394 $ 1,081 $ 1,554
Total assets................................ 16,892 15,512 19,942 17,359 7,130 6,346 6,555
Unearned revenues........................... 4,849 3,923 7,121 7,573 8,144 8,231 5,046
Current and long-term debt due to related
parties..................................... -- -- -- -- 3,627 5,469 7,479
Stockholders' equity (deficit).............. 9,112 7,449 8,159 6,312 (7,729) (9,586) (7,807)
</TABLE>
- ------------------
(a) During the year ended December 31, 1996, Peerless incurred a severance
charge related to the resignation of a former officer.
(b) Peerless' effective income tax rate was positively impacted by the
utilization of research and development tax credits.
(c) Peerless' effective income tax rate was positively impacted by the
utilization of previously unbenefitted net operating loss carryforwards.
(d) For a description of the calculation of basic and diluted earnings (loss)
per share, see Note 12 of Notes to Consolidated Financial Statements. All
earnings (loss) per share amounts have been presented, and where
appropriate, restated to conform to the requirements of Financial
Accounting Standards Board Statement No. 128, Earnings Per Share.
(e) The increase in share basis in 1997 as compared to 1996 is due primarily to
the additional shares issued in Peerless' October 3, 1996 initial public
offering.
(f) The exercise of options and warrants is not assumed in the calculation of
diluted loss per share as the result would be antidilutive.
10
<PAGE> 19
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected unaudited pro forma combined financial data has been derived
from, or prepared on a basis consistent with, the Unaudited Pro Forma Combined
Financial Statements included elsewhere in this Proxy Statement/Prospectus. This
data is presented for illustrative purposes only and is not necessarily
indicative of the combined results of operations or financial position that
would have occurred if the merger had occurred at the beginning of each period
presented or on the dates indicated, nor is it necessarily indicative of future
operating results or the financial position of the combined companies.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JUNE 30,
1998 1997 1996
------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF INCOME DATA(a):
Revenues........................................................... $ 141,796 $ 112,944 $ 89,569
Net Income......................................................... 23,282 17,834 11,171
EARNINGS PER COMMON SHARE (b):
Diluted........................................................... 1.13 .90 .58
Basic............................................................. 1.19 .96 .62
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE (b):
Diluted........................................................... 20,584 19,845 19,322
Basic............................................................. 19,627 18,639 17,979
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA: (IN THOUSANDS)
Working Capital................................................... $ 31,649
Total Assets...................................................... 132,178
Long-Term Debt.................................................... --
Stockholders' Equity.............................................. 82,612
</TABLE>
- ----------------------
(a) Statement of income data reflects the combination of Jack Henry data for
the fiscal years ended June 30, 1998, 1997 and 1996, and unaudited
Peerless data for the twelve-month periods ended June 30, 1998, 1997 and
1996.
(b) The pro forma earnings per common share assume that all shares of
Peerless common stock were converted into shares of Jack Henry common
stock at the conversion ratio of 0.16145.
11
<PAGE> 20
COMPARATIVE PER SHARE DATA
The following table sets forth earnings, dividends and book value per
common share for Jack Henry and Peerless on an historical, pro forma combined
and equivalent basis. You should read this table in conjunction with the
consolidated financial statements and notes thereto of Jack Henry and Peerless
included or incorporated by reference in this Proxy Statement/Prospectus, the
selected historical and unaudited pro forma financial data set forth on the
previous pages and the Unaudited Pro Forma Combined Financial Statements. You
should not rely on the pro forma combined information as being indicative of the
results that would have been achieved had the companies been combined or the
future results that the combined company will experience after the merger.
Peerless has never paid cash dividends on its common stock.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1998(a) JUNE 30, 1997(a) JUNE 30, 1996(a)
------------------------------------------------------------------------------
HISTORICAL: JACK HENRY PEERLESS JACK HENRY PEERLESS JACK HENRY PEERLESS
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Earnings per share
Diluted....................... $ 1.09 $ .34 $ .80 $ .53 $ .51 $ .40
Basic......................... 1.14 .36 .85 .61 .55 .73
Cash dividends paid per share... .24 -- .20 -- .17 --
Book value per share(b)......... 3.72 1.79 2.77 1.56 2.00 (1.79)
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
PRO FORMA COMBINED: TWELVE MONTHS ENDED TWELVE MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1998(a) JUNE 30, 1997(a) JUNE 30, 1996(a)
------------------- ------------------ -------------------
<S> <C> <C> <C>
Earnings per share
Diluted......................... $ 1.13 $ .90 $ .58
Basic........................... 1.19 .96 .62
Cash dividends per share.......... .24 .20 .17
Book value per share(2)........... 4.01 3.03 1.59
</TABLE>
<TABLE>
<CAPTION>
PEERLESS PRO FORMA (UNAUDITED) (UNAUDITED) (UNAUDITED)
EQUIVALENTS(c): TWELVE MONTHS ENDED TWELVE MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1998(a) JUNE 30, 1997(a) JUNE 30, 1996(a)
------------------ ------------------- ------------------
<S> <C> <C> <C>
Earnings per share
Diluted......................... $ .18 $ .15 $ .09
Basic........................... .19 .15 .10
Cash dividends per share.......... .04 .03 .03
Book value per share.............. .65 .49 .26
</TABLE>
- ----------------------
(a) Information is presented for Jack Henry's fiscal year ended June 30, 1998,
1997 and 1996 and peerless' unaudited twelve-month period ended June 30,
1998, 1997 and 1996.
(b) Historical book value per share is computed by dividing stockholders'
equity by the number of diluted shares of common stock outstanding on June
30, 1998, 1997 and 1996. The pro forma combined book value is computed by
dividing the pro forma combined stockholders' equity by the pro forma
number of diluted shares of Jack Henry common stock outstanding at June 30,
1998, 1997 and 1996.
(c) Amounts are calculated by multiplying the respective pro forma combined
amounts by the conversion ratio of 0.16145.
12
<PAGE> 21
CERTAIN RISK FACTORS AND INVESTMENT CONSIDERATIONS
The following factors should be considered carefully by Peerless
stockholders in evaluating whether to approve and adopt the merger agreement.
These factors should be considered in conjunction with the other information
included or incorporated by reference in this Proxy Statement/Prospectus.
CHANGE IN MERGER CONSIDERATION CAUSED BY CHANGES IN STOCK PRICE
Upon completion of the merger, each share of Peerless common stock will
be converted into the right to receive 0.16145 of a share of Jack Henry common
stock. This conversion ratio of 0.16145 will only be adjusted if the Pre-Closing
Average Price of Jack Henry common stock is 15% higher or lower than the
Pre-Announcement Average Price, which was $44.91. Therefore, the price of Jack
Henry common stock received by Peerless stockholders when the merger occurs may
vary from the Pre-Announcement Average Price and its price at the date of this
Proxy Statement/Prospectus and at the date of the Special Meeting. Such
variation may be the result of changes in the business, operations or prospects
of Jack Henry, market assessments of the likelihood that the merger will be
consummated, the timing thereof and the prospects of the merger and post-merger
operations, regulatory considerations, general market and economic conditions
and other factors.
INTEGRATION OF OPERATIONS
The merger involves the integration of two companies that have
previously operated independently. No assurance can be given that Jack Henry
will be able to integrate Peerless' operations without encountering difficulties
or experiencing the loss of key personnel or that the benefits expected from
such integration will be realized. In addition, there can be no assurance that
Jack Henry will realize anticipated operating synergies from the merger, or that
current customers of Peerless will remain with either company.
TECHNOLOGICAL CHANGE IN HARDWARE AND SOFTWARE MARKETS
The market for Jack Henry's software and hardware is characterized by
technological advances and evolving standards. In addition, changes in banking
requirements and new equipment introductions and enhancements could render Jack
Henry's existing products less marketable. Accordingly, Jack Henry's future
success depends heavily upon its ability to enhance its current products in a
timely fashion and develop and introduce new products that keep pace with
technological developments and banking requirements.
COMPETITION
Competition in the banking software and services industries is expected
to remain vigorous. Some of Jack Henry's competitors have strong financial,
marketing, manufacturing and technological resources, broad product lines and
larger installed customer bases. Jack Henry believes that its ability to compete
successfully depends on numerous factors, including product quality,
reliability, performance, ease of use, quality of support and product pricing.
DEPENDENCE ON IBM RELATIONSHIP
Jack Henry's products incorporate and use computer hardware and
equipment developed by IBM. Jack Henry's relationship with IBM is therefore
critical to its business and financial performance. There can be no assurance
that IBM will continue to manufacture hardware that supports Jack Henry's
product lines or that IBM's products will be available to Jack Henry on a timely
basis.
13
<PAGE> 22
RAPID GROWTH
Jack Henry has grown at a rapid pace, both internally and through
acquisitions, requiring enhancement and expansion of its management team,
information systems, operations and other aspects of its infrastructure. Jack
Henry's ability to compete effectively and to manage future growth, if any, also
will depend on its ability to implement and improve operational, financial and
management information systems on a timely basis. Jack Henry's continued success
and profitability partly depends on its ability to continue to improve its
infrastructure to keep pace with this growth in its business activities.
CHANGES IN THE BANKING AND FINANCIAL SERVICES INDUSTRIES
Jack Henry's primary market for its products consists of approximately
9,200 commercial banks in the United States. The number of commercial banks in
the United States has decreased and will continue to decrease due to the
increasing consolidation of banks around the country. While Jack Henry to date
has generally profited from this consolidation trend, over the long term Jack
Henry's growth could be affected by the shrinking pool of bank customers.
YEAR 2000 COMPLIANCE
Jack Henry currently does not expect that the cost of its Year 2000
compliance program to be material to its financial condition or results of
operations or that its business will be adversely affected by the Year 2000
issue in any material respect. Nevertheless, achieving Year 2000 compliance is
dependent on many factors, some of which are not completely within Jack Henry's
control. Should either Jack Henry's internal systems or the internal systems of
one or more significant vendors or suppliers fail to achieve Year 2000
compliance, Jack Henry's business and its results of operations could be
adversely affected. See "Description of Jack Henry's Business -- Year 2000."
TAX RISKS ASSOCIATED WITH THE MERGER
The merger agreement provides that Peerless will merge with a wholly
owned subsidiary of Jack Henry, and Peerless will be the surviving corporation
and become a wholly owned subsidiary of Jack Henry. Although the parties intend
for the merger to constitute a tax-free reorganization, neither Jack Henry nor
Peerless has sought or obtained a ruling from the Internal Revenue Service.
There is therefore a risk that all the gain or loss realized by a Peerless
stockholder as a result of the merger will be subject to tax. However, even if
the merger does not constitute a tax-free reorganization, neither Jack Henry nor
its stockholders, as such, will realize taxable income or loss in the merger.
SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER
The negotiation and implementation of the merger will result in
significant pre-tax expenses to Jack Henry and Peerless. Excluding costs
associated with combining the operations of the two companies, pre-tax expenses
are estimated at approximately $2 million, primarily consisting of fees for
investment bankers, attorneys, accountants, regulatory compliance, financial
printing and other related charges. The aggregate amount of such expenses may be
greater and unanticipated contingencies could occur that would substantially
increase the costs of combining the operations of the two companies. A
substantial portion of these costs will have been incurred whether or not the
merger is approved or consummated.
14
<PAGE> 23
THE MERGER
GENERAL
Jack Henry and Peerless are furnishing this Proxy Statement/Prospectus
to holders of shares of Peerless common stock, par value $0.01 per share
("Peerless Common Stock"), in connection with the solicitation of proxies by the
Board of Directors of Peerless (the "Peerless Board") for use at the Special
Meeting of Stockholders of Peerless to be held on December 16, 1998, or any
adjournment or postponement thereof (the "Special Meeting").
At the Special Meeting, holders of Peerless Common Stock will be asked
to vote upon a proposal to approve and adopt the Agreement and Plan of Merger,
dated as of August 18, 1998, between Jack Henry, Peerless Acquisition Corp., a
newly formed and wholly owned subsidiary of Jack Henry ("Newco"), and Peerless
(the "Merger Agreement"), which provides, among other things, that Newco will
merge with and into Peerless (the "Merger"), with Peerless becoming the
surviving corporation (the "Surviving Company"). As a result of the Merger,
Peerless will become a wholly owned subsidiary of Jack Henry.
Upon consummation of the Merger, each share of Peerless Common Stock
will be converted automatically into the right to receive 0.16145 of a share of
Jack Henry common stock, par value $0.01 per share ("Jack Henry Common Stock"),
subject to adjustment as described below (as adjusted, the "Conversion Ratio").
In connection with the issuance of Jack Henry Common Stock to Peerless
stockholders, an aggregate of 794,764 shares of Jack Henry Common Stock have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to the registration statement of which this Proxy
Statement/Prospectus is a part (the "Registration Statement").
BACKGROUND OF THE MERGER
For many years, management of Jack Henry and Peerless met informally to
discuss business and other matters on an annual basis. Jack Henry had discussed
several informal acquisition/merger proposals with Peerless during the last
several years. In response to these and other expressions of interest, the
Peerless Board on September 25, 1997 hired Dain Bosworth Incorporated (currently
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, "DRW") to
evaluate and advise on all outstanding expressions of interest from Jack Henry
and other parties.
On November 21, 1997, Mike Henry, Chairman and Chief Executive Officer
of Jack Henry and Rodney L. Armstrong, Jr., Chairman and Chief Executive Officer
of Peerless, met for an informal luncheon in Dallas, Texas, at which they
discussed various business matters. During the conversation and consistent with
prior conversations, Mike Henry indicated that Jack Henry had an interest in
acquiring Peerless and discussed possible business strategies for both
companies.
On February 25, 1998, the Board of Directors of Jack Henry (the "Jack
Henry Board") discussed the terms and strategies of a potential merger, and the
Jack Henry Board authorized management to send an unsolicited letter to the
Peerless Board offering to purchase 100% of the outstanding shares of Peerless
Common Stock, which was sent on that date. In response to the Jack Henry offer,
the Peerless Board met on March 5, 1998 to discuss potential issues involved
with the offer. At this meeting, the Peerless Board formally rejected the Jack
Henry offer as being inadequate. On March 19, 1998, Mr. Armstrong sent a letter
to Jack Henry stating that Peerless would not accept the offer and was electing
to pursue its own strategic plan.
On May 5, 1998, Peerless engaged DRW as an investment banker
for financial advisory and investment banking services, and to review all
possible strategic alternatives, including a possible sale of Peerless.
Subsequently, DRW contacted fifteen potential acquirors to solicit potential
offers for Peerless. All formal offers, including an offer from Jack Henry, were
received by June 29, 1998.
On July 10, 1998, the Peerless Board accepted the Jack Henry bid for
100% of the outstanding shares of Peerless Common Stock, subject to due
diligence. During the following several weeks, Jack Henry conducted a due
diligence review of Peerless and the parties and their respective legal counsel
began drafting the Merger Agreement, as well as the ancillary agreements and
documents.
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On August 18, 1998, the Peerless Board met to consider and act upon the
proposed Merger Agreement and the transactions contemplated thereby. At such
meeting, members of the Peerless Board and representatives of DRW discussed
their views and analysis of various aspects of the proposed transaction. The
Peerless Board reviewed and discussed, among other things, (i) the background of
the proposed transaction; (ii) strategic alternatives potentially available to
Peerless; (iii) financial and valuation analysis of the proposed transaction;
(iv) potential benefits from the combination of Jack Henry and Peerless; (v) the
terms of the proposed Merger Agreement, a stock option agreement permitting Jack
Henry to purchase approximately 19.9% of the outstanding shares of Peerless
Common Stock under certain circumstances (the "Stock Option Agreement") and the
voting agreements with Peerless management; (vi) regulatory and tax aspects of
the proposed transaction; and (vii) other matters described below. Based upon
its review of such factors, the Peerless Board unanimously approved the Merger
and authorized the execution, delivery and performance of the Merger Agreement.
The Merger Agreement, Stock Option Agreement and all voting agreements
were signed on August 18, 1998, and a joint press release was issued shortly
before the opening of trading on August 19, 1998.
REASONS FOR THE MERGER - PEERLESS
The Peerless Board has unanimously approved, adopted and declared the
advisability of the Merger Agreement and has determined that the Merger is (i)
advantageous to and in the best interests of Peerless and (ii) fair to and in
the best interests of the Peerless stockholders. The Peerless Board unanimously
recommends that the holders of shares of Peerless Common Stock vote FOR approval
and adoption of the Merger Agreement and the consummation of the Merger. The
Peerless Board has explored other strategic directions, including continuing to
execute on its business plan as an independent company.
The Peerless Board's decision to approve the Merger Agreement and the
consummation of the Merger was based primarily on its assessment that the
financial institution management information systems market is intensely
competitive and that companies who are able to provide a complete information
management solution will be well positioned to compete in such an environment.
In light of the competitive direction of the marketplace and the competitive
positions of both Peerless and Jack Henry, the Peerless Board has concluded that
the Merger represents the best long-term strategy for Peerless. The above
strategic factors, together with the fact that the Conversion Ratio for Peerless
Common Stock represents a premium over the trading price of Peerless Common
Stock prior to the announcement of the Merger, led the Peerless Board to
conclude that the Merger is in the best interests of Peerless and its
stockholders.
In reaching its decision to approve, adopt and declare the advisability
of the Merger Agreement and the consummation of the Merger and to recommend that
Peerless' stockholders vote to approve the Merger Agreement and the consummation
of the Merger, the Peerless Board also considered, in addition to other matters,
the following factors:
(i) Historical information concerning Jack Henry's and Peerless'
respective businesses, operations, properties, assets, financial condition and
operating results, including public reports concerning results of operations
during the most recent fiscal year and fiscal quarter of each company, filed
with the Securities and Exchange Commission ("SEC");
(ii) Detailed financial analysis and other information with respect to
Jack Henry and Peerless presented by DRW in its presentations to the Peerless
Board as well as the oral opinion of DRW that, as of August 18, 1998, and based
upon and subject to certain factors and assumptions, the consideration to be
received by the stockholders of Peerless pursuant to the Merger Agreement was
fair from a financial point of view. In addition, such analysis included an
evaluation of the consideration to be received by the Peerless stockholders
pursuant to the Merger Agreement based on (a) a comparable company analysis; (b)
a comparable transaction analysis; and (c) a discounted cash flow analysis, each
of which are more fully described under "-- Opinion of Peerless' Financial
Advisor" below;
(iii) The prices of Jack Henry and Peerless Common Stock prior to the
announcement of the Merger, as well as a review of historical trading prices of
Jack Henry and Peerless Common Stock, the implied premium reflected in the
proposed Conversion Ratio and premiums in similar transactions in the financial
institution management information systems and technology industries. In
particular, the Peerless Board concluded that the
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implied premium reflected in the Merger of 48.7% (based on the trading price of
Peerless Common Stock immediately prior to the announcement of the Merger),
represented a very significant premium over the recent trading price for
Peerless Common Stock;
(iv) The risk of stock price fluctuations prior to and following the
consummation of the Merger and the effect of such fluctuations on the Conversion
Ratio;
(v) Internal projections as to possible results of operations for
Peerless and publicly available forecasts of securities analysts as to possible
future results of operations for Jack Henry;
(vi) Oral summaries of the presentation of management of Jack Henry
concerning publicly available forecasts from securities analysts as to possible
financial results of Jack Henry in fiscal 1998 and fiscal 1999 and the
discussion by Jack Henry's management of certain forward-looking information
concerning Jack Henry;
(vii) Discussions with Jack Henry's management reflecting the
compatibility of the respective business philosophies of Jack Henry and
Peerless. In particular, the Peerless Board considered (a) the similar
commitment of both companies to product quality and leading technology in the
financial institution management information systems market; and (b) the
similarity of organizational structures which do not include numerous layers of
management;
(viii) The potential effect on stockholder value of Peerless (a)
continuing as an independent entity; (b) combining with other financial
institution management information systems companies; or (c) combining with Jack
Henry. In particular, the Merger was evaluated in light of (1) the evolution of
trends in the financial institution management information systems industry; (2)
the potential for product line synergies; (3) the possibility of operational
synergies; (4) the potential for cost control through control in the growth of
headcount and expenses; and (5) the stability and potential stockholder return
of a combined entity. In particular, the Peerless Board discussed the
possibilities of potential combinations with other companies in the industry and
concluded that no other financial institution management information systems
company provided technology and market position as complementary to Peerless'
business as Jack Henry and that any potential combinations with other third
parties would likely involve substantially more risk than a combination with
Jack Henry, including both financial riskand operational risks. The Peerless
Board also concluded that the business cultures of the two companies were highly
compatible and this compatibility would increase the likelihood that the
benefits of the Merger could be achieved;
(ix) The terms and conditions of the Merger Agreement and the Stock
Option Agreement, including the break-up fees, non-solicitation provisions,
conditions to closing and termination provisions. In particular, the Peerless
Board concluded that these provisions provided reasonable flexibility for the
Peerless Board to exercise its fiduciary duties in the event of receipt by
Peerless of a superior unsolicited competing bid prior to consummation of the
Merger;
(x) The requirement of stockholder approval of the Merger and the
process involved in obtaining such approval and the degree of governmental
review that the Merger may require with respect to antitrust compliance and
other matters. In particular, the Peerless Board discussed the possibility of
substantial delays in completing the Merger and the concern that such a delay
could have a significant adverse effect on Peerless' employee base and customer
relationships if not managed properly;
(xi) The potential effect of the Merger on Peerless' customers and
suppliers both in the near term and over an extended period of time;
(xii) The possible effect on sales and marketing efforts of Peerless
during the period following announcement of the Merger and prior to consummation
of the Merger;
(xiii) The potential effect of the Merger on Peerless' employees
including the compensation, benefits and responsibilities which may be offered
such employees and the potential effect on employee morale associated with these
matters and the risk that the Surviving Company would be unable to retain all of
its key employees;
(xiv) The risks of combining the distinct cultures of the two
organizations; and
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(xv) The limitations on trading by affiliates imposed by pooling of
interest accounting requirements.
As part of the foregoing analysis, the Peerless Board considered the
following specific negative factors concerning the Merger and the risks inherent
in the transaction: (i) the risks in mergers of technology companies generally
and, in particular, the fact that technology merger transactions have frequently
resulted in high employee attrition rates, loss of management focus and
temporary or long-term employee morale problems; (ii) the possibility that
following announcement of the Merger, some customers may defer orders or
purchasing decisions pending the completion of the Merger; and (iii) the risk
that some customers could seek to terminate their relationship with the combined
company or reduce their long-term dependence on the combined company following
the Merger.
In view of the wide variety of factors, both positive and negative,
considered by the Peerless Board, the Peerless Board did not find it practicable
to quantify or otherwise assign relative weight to the specific factors
considered. However, after taking into account all of the factors set forth
above, the Peerless Board unanimously agreed that the Merger Agreement and the
consummation of the Merger were advisable and fair to and in the best interests
of Peerless and Peerless' stockholders and that Peerless should proceed with the
Merger Agreement and the consummation of the Merger.
REASONS FOR THE MERGER - JACK HENRY
Jack Henry believes that the Merger is in the best interests of its
stockholders. Jack Henry maintains a strategy of seeking to acquire businesses
and products to better serve its existing customers. In addition, the Merger
will permit Jack Henry to expand its customer base, item processing capabilities
and service bureau operations and enhance Jack Henry's ability to serve the
financial service industry. Although Jack Henry presently competes on a limited
basis with Peerless in certain broadly defined markets, the Merger would enable
Jack Henry to offer its services in certain market niches in which it does not
compete regularly, including the credit union market.
RECOMMENDATION OF THE PEERLESS BOARD
THE PEERLESS BOARD UNANIMOUSLY (I) DEEMS THE MERGER TO BE ADVANTAGEOUS
TO AND IN THE BEST INTERESTS OF PEERLESS, (II) DEEMS THE MERGER TO BE FAIR TO
AND IN THE BEST INTERESTS OF THE PEERLESS STOCKHOLDERS, (III) APPROVES,
ADOPTS AND DECLARES THE ADVISABILITY OF THE MERGER AGREEMENT AND (IV)
RECOMMENDS THAT THE PEERLESS STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT AND THE CONSUMMATION OF THE MERGER. IN CONSIDERING SUCH
RECOMMENDATION, PEERLESS STOCKHOLDERS SHOULD BE AWARE THAT JACK HENRY HAS
AGREED TO PROVIDE CERTAIN INDEMNIFICATION ARRANGEMENTS TO DIRECTORS AND
OFFICERS AND PAYMENTS UNDER A NON-COMPETITION AGREEMENT TO AN OFFICER OF
PEERLESS. SEE " -- INTERESTS OF CERTAIN PERSONS IN THE MERGER," BELOW.
OPINION OF PEERLESS' FINANCIAL ADVISOR
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, was
retained, pursuant to an engagement letter dated September 25, 1997
and amended July 30, 1998 (collectively, the "DRW Engagement Letter"), to
furnish an opinion as to the fairness, from a financial point of view, to
Peerless stockholders of the consideration to be paid in the Merger.
On August 18, 1998 DRW rendered its opinion (the "DRW Opinion") to the
Peerless Board of Directors that, as of such date and based on the procedures
followed, factors considered and assumptions made by DRW and certain other
limitations, all as set forth therein, the consideration proposed to be paid to
the holders of Peerless Common Stock upon completion of the Merger was fair from
a financial point of view. A copy of the DRW Opinion is attached as Annex C to
this Proxy Statement/Prospectus. Peerless stockholders are urged to read the DRW
Opinion in its entirety. The summary of the opinion set forth herein is
qualified in its entirety by reference to the full text of the DRW Opinion.
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The DRW Opinion applies only to the fairness, from a financial point of
view, of the consideration to be paid to the Peerless stockholders as provided
by the terms of the Merger Agreement and should not be understood to be a
recommendation by DRW to vote in favor of any matter presented in this Proxy
Statement/Prospectus. Peerless stockholders should note that the opinion
expressed by DRW was provided solely for the information of the Peerless Board
in its evaluation of the Merger and was not prepared on behalf of, and was not
intended to confer rights or remedies upon, Jack Henry, Peerless or any
stockholder of Peerless or Jack Henry, or any persons other than the Peerless
Board. The Peerless Board did not impose any limitations on the scope of the
investigation of DRW with respect to rendering its opinion.
DRW assumed and relied upon the accuracy and completeness of the
financial, legal, tax, operating and other information provided by Peerless and
Jack Henry (including without limitation the financial statements and related
notes of Peerless and Jack Henry) and certain other publicly available
information and did not independently verify such information. Additionally, DRW
was not asked and did not consider the possible effects of any litigation, other
legal claims or any other contingent matters. DRW did not perform any
independent evaluation or appraisal of any of the respective assets or
liabilities of Peerless or Jack Henry, nor was DRW furnished with any such
evaluations or appraisals. The DRW Opinion is based on the conditions as they
existed and the information available to DRW on the date of the DRW Opinion.
Events occurring after the date of the DRW Opinion may materially affect the
assumptions used in preparing the DRW Opinion.
In connection with its review of the Merger, and in arriving at its
opinion, DRW: (i) reviewed and analyzed the financial terms of the Merger
Agreement; (ii) reviewed and analyzed certain publicly available financial and
other data with respect to Peerless and Jack Henry and certain other historical
relevant operating data relating to Peerless and Jack Henry made available to
DRW from published sources and from the internal records of Peerless and Jack
Henry; (iii) conducted discussions with members of the senior management of
Peerless with respect to the business and prospects of Peerless relative to
published industry analyst estimates; (iv) conducted discussions with members of
the senior management of Jack Henry with respect to the business and prospects
of Jack Henry relative to published industry analyst estimates; (v) reviewed the
reported prices and trading activity for Jack Henry Common Stock and Peerless
Common Stock; (vi) compared the financial performance of Jack Henry and Peerless
and the prices of Jack Henry Common Stock and Peerless Common Stock with that of
certain other comparable publicly traded companies and their securities; and
(vii) reviewed the financial terms, to the extent publicly available, of certain
comparable merger transactions. In addition, DRW conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as it deemed necessary in arriving at its opinion.
The following is a summary of the financial analyses performed by DRW
in connection with the delivery of the DRW Opinion and made available to the
Peerless Board:
Comparable Company Analysis. DRW used a comparable company
analysis to analyze Peerless' operating performance relative to a group of
publicly traded companies that DRW deemed for purposes of its analysis
to be comparable to Peerless. In such analysis, DRW compared the value
to be achieved by Peerless stockholders in the Merger, expressed as a multiple
of certain operating data, to the market trading values of the comparable
companies expressed as a multiple of the same operating results. DRW
compared multiples of selected financial data for Peerless with those of the
following publicly traded companies: The BISYS Group, Inc.; Broadway & Seymour,
Inc.; CFI ProServices, Inc.; CPS Systems, Inc.; Fair Isaac & Company; Fiserv,
Inc.; Jack Henry; Phoenix International, Inc.; and ULTRADATA Corporation
(collectively referred to as the "Comparable Companies"). Although such
companies were considered comparable to Peerless for the purpose of this
analysis based on certain characteristics of their respective businesses, none
of such companies possesses characteristics identical to those of Peerless. DRW
calculated the following valuation multiples based on an implied value
of $7.25 per share of Peerless Common Stock based on Jack Henry's three-day
average closing price on August 17,1998, and, as to the Comparable Companies, on
market prices and other information available as of the same date. Multiples of
future earnings were based on projected earnings as estimated publicly by First
Call Consensus. The mean and median price per share as a multiple of the
indicated statistic for Peerless as compared to those of the Comparable
Companies were as follows: (a) projected calendar year 1998 earnings per share,
19.1x for Peerless, compared to a mean of 23.3x and a median of 22.1x for the
Comparable Companies; and (b) projected calendar year 1999 earnings per share,
18.1x for Peerless, compared to a mean of 18.5x and a median of 16.5x for the
Comparable Companies. The mean and
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median multiples of stock price to projected calendar earnings as a multiple of
growth rate were as follows: projected calendar year 1999 earnings, 1.8x for
Peerless, compared to a mean of 0.9x and a median of 0.9x for the Comparable
Companies.
Comparable Transactions. DRW compared multiples of selected financial
data and other financial data relating to the Merger with multiples paid in, and
other financial data from, selected mergers (the "Comparable Transactions")
since 1995 of publicly traded companies in the financial services software
industry. DRW noted that none of the target companies involved in these
transactions had a business that was directly comparable to Peerless. This
analysis produced multiples of enterprise value (defined as equity value plus
debt less cash) to latest 12-month revenues for the Comparable Transactions
ranging from 0.6x to 2.9x, with a median of 1.7x, compared with 1.4x for
Peerless. The multiple of enterprise value to latest 12-month operating income
for the Comparable Companies ranged from 8.0x to 13.9x, with a median of 11.9x,
compared to 18.9x for Peerless. The multiple of enterprise value to latest
12-month net income for the Comparable Transactions ranged from 13.1x to 21.0x,
for companies with net income, with a median of 15.3x, compared with 20.1x for
Peerless. DRW also compared the premium of the enterprise value per share over
the target stock price four weeks and one day prior to the announcement of the
transaction for 45 transactions since January 1, 1997 involving the sale of a
public technology company for less than $100 million. The premiums of the
enterprise value per share over the stock price of the target one day and one
month prior to the announcement of the transaction ranged from -11.1% to 74.2%
and -7.1% to 122.0%, with medians of 18.2% and 29.0% respectively. This was
compared with one day and one month premiums of 48.7% and 45.0%, respectively
for Peerless.
Discounted Cash Flow Analysis. DRW estimated present values of Peerless
using a discounted cash flow analysis using projections of future operations
based on information provided by Peerless' management. DRW calculated present
values of projected operating cash flows after net changes to working capital
over the period between August 1, 1998 and December 31, 2002 using a discount
rate of 25.0%. DRW calculated an approximate terminal value of Peerless as of
March 31, 1998 of 8.0x Peerless' projected fiscal year 2002 operating income,
which was determined by analyzing the enterprise value paid in comparable
mergers and acquisitions as a multiple of each target company's operating
income. The terminal value was discounted to present value using the same
discount rate as the cash flows. DRW calculated an implied valuation of Peerless
by adding the present value of the cash flows and the terminal value. The
implied value of Peerless based on this analysis was $36.4 million, or $6.54 per
share. DRW determined that, at the time of the DRW Opinion, the value of the
consideration to be received by the Peerless stockholders in the Merger of
approximately $7.25 per share was greater than the present value of Peerless
cash flows under the discounted cash flow valuation discussed above.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. DRW believes
that its analyses must be considered as a whole and that selecting portions of
the analyses and of the factors considered by it, without considering all
factors and analyses, could create an incomplete or misleading view of the
processes underlying its opinion. In arriving at its fairness determination, DRW
considered the results of all such analyses. In view of the wide variety of
factors considered in connection with its evaluation of the fairness of the
Merger consideration, DRW did not find it practicable to assign relative weights
to the factors considered in reaching its opinion. No company or transaction
used in the above analyses as a comparison is identical to Peerless or Jack
Henry or the proposed Merger. The analyses were prepared solely for purposes of
DRW providing its opinion as to the fairness of the Merger consideration
pursuant to the Merger Agreement to Peerless stockholders and do not purport to
be appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold. Analyses based upon forecasts of future results
are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. As
described above, the DRW Opinion and presentation to the Peerless Board were
among many factors taken into consideration by the Peerless Board in making its
determination to approve the Merger Agreement.
DRW is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations of corporations. DRW is familiar with Peerless, having
acted as a managing underwriter of the initial public offering of Peerless
Common Stock in October 1996. Peerless selected DRW to render the
fairness opinion based
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on DRW's familiarity with Peerless, its knowledge of the technology
industry, and its experience in mergers and acquisitions and in securities
valuation generally.
In the ordinary course of business, DRW acts as a market
maker and broker in the publicly traded securities of Peerless and Jack Henry
and receives customary compensation in connection therewith, and also provides
research coverage of Peerless and Jack Henry. In the ordinary course of
business, DRW actively trades in the publicly traded securities of
Peerless and Jack Henry for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities which positions, on occasion, may be material in size or
relative to the volume of trading activity.
Pursuant to the DRW Engagement Letter, Peerless paid DRW a
nonrefundable opinion fee (the "Opinion Fee") of $100,000 upon the rendering of
the DRW Opinion; payment of the Opinion Fee to DRW is not contingent upon the
closing of the Merger. In addition, pursuant to the DRW Engagement Letter,
Peerless has agreed to pay DRW, upon the closing of the Merger pursuant to the
Merger Agreement, a transaction fee (the "Transaction Fee") of approximately
$650,000. The Opinion Fee will not be credited against the Transaction Fee.
Payment of the Transaction Fee is contingent upon the closing of the Merger.
Peerless has also agreed to reimburse DRW for its reasonable out-of-pocket
expenses and to indemnify DRW against certain liabilities relating to or arising
out of services performed by DRW in connection with the Merger. The terms of the
DRW Engagement Letter, which are customary for transactions of this nature, were
negotiated at arm's length between Peerless and DRW, and the Peerless Board was
aware of such fee arrangement at the time of its approval of the Merger
Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material federal
income tax consequences of the Merger and is based on the Internal Revenue Code
of 1986, as amended (the "Code"), the final, proposed and temporary Treasury
Regulations promulgated thereunder, administrative rulings and interpretations,
and judicial decisions, in each case as in effect as of the date hereof. All of
the foregoing are subject to change at any time, possibly with retroactive
effect. The discussion set forth below does not address all aspects of federal
income taxation that may be relevant to a Peerless stockholder in light of such
stockholder's particular circumstances or to stockholders subject to special
rules under the federal income tax laws, such as non-United States persons,
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities or stockholders who acquired their shares of Peerless Common Stock
pursuant to the exercise of employee stock options, or otherwise as
compensation, nor any consequences arising under the laws of any state, locality
or foreign jurisdiction. This discussion assumes that holders of Peerless Common
Stock hold their respective shares as capital assets within the meaning of
Section 1221 of the Code.
Neither Jack Henry nor Peerless intends to secure a ruling from the
Internal Revenue Service with respect to the tax consequences of the Merger.
Peerless has received an opinion from Haynes and Boone, LLP, a copy of which is
filed as Exhibit 8.1 to the Registration Statement, to the effect (based upon
and subject to the assumptions and other matters referred to therein) that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, that Peerless will be a party
to that reorganization within the meaning of Section 368(b) of the Code, that no
gain or loss will be recognized by Peerless upon consummation of the Merger, and
that no gain or loss will be recognized by the stockholders of Peerless upon
their exchange of shares of Peerless Common Stock for Jack Henry Common Stock
under Section 354 of the Code (except with respect to receipt of cash in lieu of
fractional shares).
Cash payments received by holders of Peerless Common Stock in lieu of
fractional share interests of Jack Henry Common Stock will be treated as if such
fractional share of Jack Henry Common Stock had been issued in the Merger and
then redeemed by Jack Henry, and a stockholder of Peerless receiving such cash
will generally recognize capital gain or loss upon such payment, measured by the
difference (if any) between the amount of cash received and the basis in such
fractional share.
The aggregate tax basis of Jack Henry Common Stock received as a result
of the Merger will be the same as the stockholder's aggregate tax basis in the
Peerless Common Stock surrendered in the exchange, decreased by the basis
allocable to fractional shares for which cash is received in the Merger. The
holding period of the Jack
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Henry Common Stock received by former holders of Peerless Common Stock as a
result of the exchange will for tax purposes include the period during which
such stockholders held the Peerless Common Stock exchanged.
HOLDERS OF PEERLESS COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER INCLUDING THE APPLICABILITY
AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS AND THE EFFECT OF ANY
PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
It is expected that the Merger will be accounted for under the pooling
of interests method of accounting. It is a condition to the obligations of
Peerless and Jack Henry under the Merger Agreement that Peerless shall have
received an opinion, on or before the date the Proxy Statement/Prospectus is
mailed to Peerless stockholders, from Deloitte & Touche LLP setting forth the
concurrence of Deloitte & Touche LLP with the conclusion of Jack Henry's
management that the Merger will qualify as a pooling of interests transaction
under Opinion 16 of the Accounting Principles Board if consummated in accordance
with the Merger Agreement, and that Jack Henry receive an opinion from Ernst &
Young, LLP setting forth the concurrence of Ernst & Young, LLP with Peerless'
management that Peerless' participation in the Merger will not disqualify the
Merger from pooling of interests accounting under Opinion 16 of the Accounting
Principles Board if consummated in accordance with the Merger Agreement.
REGULATORY APPROVALS
Jack Henry and Peerless must observe the notification and waiting
period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), before the Merger may be consummated. The HSR Act
provides for an initial 30-calendar day waiting period following the filing with
the Antitrust Division of the Department of Justice ("Antitrust Division") and
the Federal Trade Commission ("FTC") of certain Notification and Report Forms by
Jack Henry and Peerless. The HSR Act further provides that if, within the
initial 30-calendar day waiting period, the FTC or the Antitrust Division issues
a request for additional information or documents, the waiting period will be
extended until 11:59 p.m. on the twentieth day after the date of substantial
compliance by the filing parties with such request. Only one such extension of
the initial waiting period is permitted under the HSR Act; however, the filing
parties may voluntarily extend the waiting period.
Jack Henry and Peerless have made the requisite initial filings under
the HSR Act in connection with the Merger. The initial waiting period with
respect to such filings will expire at 11:59 p.m. on November 27, 1998.
The FTC and the Antitrust Division frequently scrutinize the legality
under the antitrust laws of transactions such as the Merger. At any time before
or after completion of the Merger, the FTC or the Antitrust Division could,
among other things, seek under the antitrust laws to enjoin the Merger or to
cause Jack Henry to divest itself, in whole or in part, of Peerless or of other
businesses conducted by Jack Henry. Under certain circumstances, private parties
and state governmental authorities may also bring legal action under the
antitrust laws challenging the Merger. See "Certain Provisions of the Merger
Agreement--Conditions to the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Members of Peerless' management and the Peerless Board may be deemed to
have certain interests in the Merger that are in addition to their interests as
stockholders of Peerless generally. The Peerless Board was aware of these
interests and considered them, among other matters, in adopting the Merger
Agreement and in recommending that Peerless stockholders vote in favor of the
Merger. These interests are described below.
Pursuant to the Merger Agreement, outstanding stock options to purchase
Peerless Common Stock ("Peerless Options") will be converted into options to
purchase Jack Henry Common Stock ("Substitute Options"). The following table
sets forth, with respect to each of the executive officers and directors of
Peerless, the number of shares of Jack Henry Common Stock subject to Substitute
Options to be received by such officers and directors based on the number of
Peerless Options held by them on September 30, 1998, and based upon the
Conversion Ratio of 0.16145 and the estimated aggregate immediately realizable
value of Substitute Options
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<PAGE> 31
which will be received in respect thereof, upon the consummation of the Merger
(before deduction for applicable withholding taxes, if any), based on the price
of Jack Henry Common Stock at the close of business on November 6, 1998 of
$48.38 and determined by subtracting the aggregate exercise price of such
Substitute Options from the total value of the shares of Jack Henry Common Stock
subject to such Substitute Options.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES AGGREGATE VALUE
---- ---------------- ---------------
<S> <C> <C>
Rodney L. Armstrong, Jr. 7,103 $118,605
Steven W. Tomson 7,103 $ 57,405
Kevin W. Marsh 4,359 $117,742
Ann L. Puddister 2,583 $ 68,078
Douglas K. Hansen 6,684 $152,564
Allen D. Fleener 2,744 $ 70,746
William F. Dunbar 807 $ 8,245
David A. O'Connor 807 $ 8,245
Jane C. Walsh 807 $ 8,245
</TABLE>
Rodney L. Armstrong, Jr., the Chairman and Chief Executive Officer of
Peerless, will receive payments under a Non-Competition Agreement if the Merger
is consummated. See " -- Other Agreements" below. In addition, the Merger
Agreement provides that indemnification and insurance arrangements in favor of
officers and directors of Peerless who served prior to the Merger, subject to
certain limitations, will be continued following the completion of the Merger.
STOCK OPTION AGREEMENT
In connection with the Merger, Jack Henry and Peerless entered into the
Stock Option Agreement on August 18, 1998. The following description of the
Stock Option Agreement does not purport to be complete and is qualified in its
entirety by reference to the Stock Option Agreement, a copy of which is attached
as Annex B to this Proxy Statement/Prospectus. Pursuant to the Stock Option
Agreement, Peerless granted Jack Henry an irrevocable option (the "Option") to
purchase up to 979,815 shares of Peerless Common Stock (the "Option Shares") at
a cash purchase price equal to $7.25 per share (the "Option Purchase Price").
The Option Shares represent approximately 19.9% of the total number of shares of
Peerless Common Stock issued and outstanding on the date of the Stock Option
Agreement. The Option may be exercised by Jack Henry, in whole or in part, at
any time after (but not prior to) the occurrence of one of the Triggering Events
(as defined below) and prior to the termination of the Option in accordance with
the terms of the Stock Option Agreement.
The Stock Option Agreement provides that in the event any additional
shares of Peerless Common Stock, or any rights, options (other than compensatory
options), warrants, subscriptions, calls, convertible securities or other
agreements or commitments obligating Peerless to issue any shares of Peerless
Common Stock, are issued after August 18, 1998, the number of Option Shares
shall be appropriately adjusted to represent 19.9% of the total number of shares
of Peerless Common Stock issued and outstanding immediately prior to the
exercise of the Option.
The Stock Option Agreement also provides that in the event of any
change in the number of issued and outstanding shares of Peerless Common Stock
by reason of any stock dividend, stock split, merger, recapitalization,
combination, subdivision, conversion, exchange of shares or similar
transactions, the number of Option Shares and the Option Purchase Price will be
appropriately adjusted so that Jack Henry will receive upon exercise of the
Option, the number of shares of Peerless Common Stock that Jack Henry would have
received if the Option had been exercised in full immediately prior to such
event, or the record date therefor, as applicable.
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<PAGE> 32
A "Triggering Event" occurs when (a) the Merger Agreement is terminated
due to the failure of Peerless stockholders to approve the Merger and Merger
Agreement at the Special Meeting, if prior to the Special Meeting, Peerless had
received a proposal or offer (other than the Merger) with respect to any
acquisition, business combination or purchase of 20% or more of the assets or
equity interest in Peerless or any of its subsidiaries, and such acquisition
proposal or offer had not been rejected by Peerless; or (b) the Merger Agreement
is terminated by Peerless prior to the Special Meeting upon Peerless' execution
of a definitive and binding written agreement with any party, other than Jack
Henry, who has made an unsolicited acquisition proposal which the Peerless Board
has determined in good faith (i) is more favorable to Peerless stockholders than
the Merger and (ii) would result in a breach by the Peerless Board of its
fiduciary duties if such acquisition proposal were not accepted.
Pursuant to the Stock Option Agreement, Peerless' obligation to deliver
shares of Peerless Common Stock upon exercise of the Option is subject only to
the conditions that (a) all waiting periods under the HSR Act applicable to the
issuance of shares of Peerless Common Stock to Jack Henry have expired or been
terminated, (b) all consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, any federal, state or local
administrative agency or commission shall have been obtained and (c) no
preliminary or permanent injunction or other order by any court of competent
jurisdiction prohibiting or otherwise restraining such issuance shall be in
effect.
The Stock Option Agreement provides that the right to exercise the
Option will terminate at the earliest of (a) the effective time of the Merger,
(b) termination of the Merger Agreement pursuant to Sections 9.1.1 (mutual
consent of Jack Henry and Peerless), 9.1.2(b) (Jack Henry terminates Merger
Agreement because closing has not occurred on or before February 19, 1999) or
9.1.3 (Peerless terminates Merger Agreement because of Jack Henry's breach of
the Merger Agreement or closing has not occurred on or before February 19,
1999), (c) 270 days after the first occurrence of a Triggering Event, (d)
termination of the Stock Option Agreement by mutual written consent, or (e)
August 15, 1999.
The Stock Option Agreement also provides that following the occurrence
of a Triggering Event, if any, and until the earlier of (a) 270 days after the
occurrence of the Special Meeting or (b) 180 days after the termination of the
Merger Agreement, if prior to the Special Meeting ("Standstill Expiration
Date"), Jack Henry cannot, without the prior written consent of Peerless,
directly or indirectly, alone or in concert, (i) acquire, agree to acquire or
make any proposal to acquire, any securities or material property of Peerless
(other than pursuant to the Stock Option Agreement or the Merger Agreement),
(ii) propose to enter into any merger or business combination involving Peerless
or to purchase a material portion of the assets of Peerless, (iii) make or in
any way participate in any "solicitation" of "proxies" (as such terms are used
in Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) to vote, or seek to advise or influence any person
with respect to the voting of, any voting securities of Peerless, (iv) form,
join or in any way participate in a group with respect to any voting securities
of Peerless, (v) seek to control or influence the management, Board of Directors
or policies of Peerless.
The Stock Option Agreement further provides that until the Standstill
Expiration Date, Jack Henry must vote any shares of Peerless Common Stock
acquired pursuant to the Option for and against each matter submitted to a vote
of stockholders in the same proportion as all other outstanding shares of
Peerless Common Stock are voted for and against such matter.
OTHER AGREEMENTS
Voting Agreements. In connection with the Merger, all of the members of
the Peerless Board and Steven W. Tomson and Kevin W. Marsh, both of whom are
executive officers of Peerless, have entered into voting agreements with Jack
Henry (the "Voting Agreements"). The terms of the Voting Agreements provide (i)
that such Peerless stockholders will not either directly or indirectly dispose
of or pledge (except for pledges in place on August 18, 1998), any Peerless
Common Stock and either directly or indirectly grant any proxy to any person
regarding their ownership of any Peerless Common Stock, deposit any Peerless
Common Stock into a voting trust or enter into a voting agreement regarding such
Peerless Common Stock, and (ii) that such Peerless stockholders will vote all
shares of Peerless Common Stock beneficially owned by them in favor of the
approval of the Merger and against any action or agreement that would result
in a breach in any material respect of any obligation of Peerless under the
Merger Agreement or of the Peerless stockholder under the Voting Agreement.
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<PAGE> 33
In addition, Rodney L. Armstrong, Jr., Steven W. Tomson, Kevin W. Marsh and
Allen D. Fleener have "no solicitation" clauses in their Voting Agreements which
prohibit negotiations with third parties regarding an Acquisition Proposal (as
defined below), except that such "no solicitation" clauses will not prohibit any
of the four above-mentioned Peerless stockholders from fulfilling his fiduciary
duties as an officer or director of Peerless regarding acting upon a superior
unsolicited competing bid.
Such Voting Agreements also obligate the seven Peerless stockholders
who entered the Voting Agreements to grant to Jack Henry, upon request of Jack
Henry, irrevocable proxies whereby such Peerless stockholders provide to Jack
Henry the right to vote their shares at any meeting of the Peerless stockholders
called to consider the Merger or in connection with any action by written
consent by the Peerless stockholders with respect to the Merger. Holders of
approximately 24.3% (as of the Record Date, exclusive of any shares issuable
upon the exercise of Peerless Options held by such holders) of the shares of
Peerless Common Stock entitled to vote at the Special Meeting have entered into
Voting Agreements. The Voting Agreements will terminate on the earlier of (i)
the date of closing of the Merger (the "Closing Date"); (ii) notice of
termination being given by Jack Henry to the stockholders executing the Voting
Agreements; (iii) the termination of the Merger Agreement (see "Certain
Provisions of the Merger Agreement -- Termination"); or (iv) February 1, 1999.
Affiliate Agreements. Peerless will cause to be delivered to Jack
Henry, from each person who is an "affiliate" of Peerless within the meaning of
Rule 145 promulgated under the Securities Act, an executed Affiliate Letter
intended to ensure compliance with the Securities Act by such persons. Pursuant
to such Affiliate Letters, affiliates of Peerless will acknowledge the resale
restrictions imposed by Rule 145 under the Securities Act on shares of Jack
Henry Common Stock to be received by them in the Merger. Accordingly, Jack Henry
will be entitled to place appropriate legends on the certificates evidencing any
Jack Henry Common Stock to be received by a Peerless affiliate pursuant to the
terms of the Merger Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for the Jack Henry Common Stock, consistent
with the terms of the Affiliate Letter. See " -- Resale of Jack Henry Common
Stock by Affiliates" below.
Non-Competition Agreement. Upon completion of the Merger, Rodney L.
Armstrong, Jr. ("Armstrong") intends to resign from employment with Peerless.
Armstrong has entered into a Non- Competition Agreement, providing that for a
period of two (2) years from the Closing Date, he will not (i) solicit any
business of any kind from, divert any business from, or attempt to convert to
other products or services, any client, customer, account or location of Jack
Henry or Peerless; or (ii) solicit, entice or persuade any employees of Jack
Henry or Peerless to leave the services of Jack Henry or Peerless for any
reason, or employ any such former employees of Jack Henry or Peerless for a
period of 180 days following the date of termination of their employment with
Jack Henry or Peerless. In consideration of these covenants, Jack Henry will
make cash payments totaling $340,000 to Armstrong.
In addition, Armstrong has agreed not to, at any time, directly or
indirectly, use, divulge, furnish or make accessible to anyone other than Jack
Henry, its directors or officers (otherwise than in the regular course of
business of Jack Henry or with the knowledge and written permission of Jack
Henry) any confidential information (as defined in the Non-Competition
Agreement) of Jack Henry, Peerless or the suppliers of either company. The
Non-Competition Agreement will terminate if the Merger Agreement is terminated
according to its terms.
NO APPRAISAL RIGHTS
Section 262 of the Delaware General Corporation Law ("DGCL") provides
appraisal rights (sometimes referred to as "dissenters' rights") to stockholders
of Delaware corporations in certain situations. However, Section 262 appraisal
rights are not available to stockholders of a corporation, such as Peerless, (a)
whose securities are listed on a national securities exchange or are designated
as a national market system security on
25
<PAGE> 34
an interdealer quotation system by the National Association of Securities
Dealers, Inc. ("NASD") and (b) whose stockholders are not required to accept in
exchange for their stock anything other than stock of another corporation listed
on a national securities exchange or on an interdealer quotation system by the
NASD and cash in lieu of fractional shares. Because Peerless Common Stock is
traded on the NASDAQ National Market System ("NASDAQ"), and because Peerless
stockholders are being offered Jack Henry Common Stock, which is also traded on
the NASDAQ, and cash in lieu of fractional shares, stockholders of Peerless will
not have appraisal rights with respect to the Merger.
RESALE OF JACK HENRY COMMON STOCK BY AFFILIATES
The shares of Jack Henry Common Stock to be issued to the holders of
Peerless Common Stock in the Merger are being registered under the Securities
Act pursuant to the Registration Statement. However, because some holders of
Peerless Common Stock are or may be "affiliates" of Peerless at the time of the
Special Meeting, such persons will not be able to resell the Jack Henry Common
Stock received by them in the Merger unless such Jack Henry Common Stock is
registered for resale under the Securities Act, is sold in compliance with an
applicable exemption from the registration requirements of the Securities Act or
is sold in compliance with Rule 145 under the Securities Act.
Rule 145 permits affiliate holders of securities received in a merger
or other exchange to sell such securities without registration under the
Securities Act provided such sale is made in compliance with certain provisions
of Rule 144 under the Securities Act or certain holding period requirements have
been satisfied. The applicable provisions of Rule 144 allow a holder of such
securities to sell, without registration, within any three month period a number
of shares of such securities that does not exceed the greater of 1% of the
number of outstanding securities in question or the average weekly trading
volume in the securities in question during the four calendar weeks preceding a
specified date subject to the satisfaction of certain other requirements
regarding the manner of sale and the availability of current public information
regarding the issuer. Rule 145 also permits a holder of such securities to sell
such securities without registration if: (i) such holder is not an affiliate of
the issuer (here, Jack Henry) and a period of at least one year has elapsed
since the date such securities were acquired from the issuer in the transaction,
and the issuer meets the requirements of Rule 144 regarding the availability of
current public information, or (ii) such holder is not, and has not been for at
least three months, an affiliate of the issuer and a period of at least two
years has elapsed since the date such securities were acquired from the issuer
in the transaction.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Peerless and Jack Henry have made forward-looking statements in this
document (including documents that are incorporated by reference herein) that
are subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of
Peerless, Jack Henry or the combined company set forth under the "Summary," "The
Merger--Reasons for the Merger-Peerless," and "--Opinion of Peerless' Financial
Advisor," "Description of Peerless' Business," "Peerless Management's Discussion
and Analysis of Financial Condition and Results of Operation" and "Description
of Jack Henry's Business," and those preceded by, followed by or that include
the words "believes," "expects," "anticipates," "intends," "plans," "estimates,"
or similar expressions. Such forward-looking statements are based on the beliefs
of Peerless, Jack Henry and their respective Boards in which they attempt to
analyze the companies' competitive position in their respective industries and
the factors affecting their respective businesses. Stockholders should
understand that each of the foregoing risk factors identified under "Certain
Risk Factors and Investment Considerations," in addition to those discussed
elsewhere in this document and in the documents which are incorporated by
reference herein, could affect the future results of Peerless, Jack Henry and
the combined company, and could cause those results to differ materially from
those expressed in the forward-looking statements contained or incorporated by
reference herein. In addition, there can be no assurance that (i) Peerless, Jack
Henry and their respective Boards have correctly identified and assessed all of
the factors affecting the companies' businesses; (ii) the publicly available and
other information with respect to these factors on which Peerless, Jack Henry
and their Boards have based their analyses is complete or correct; (iii)
Peerless', Jack Henry's and their respective Boards' analyses are correct; or
(iv) the combined company's strategy, which is based in part on these analyses,
will be successful.
26
<PAGE> 35
THE SPECIAL MEETING
PURPOSE, TIME AND PLACE
This Proxy Statement/Prospectus is being furnished to stockholders of
Peerless in connection with the solicitation of proxies by the Peerless Board
for use at the Special Meeting. The Special Meeting is to be held on December
16, 1998, at 10:00 a.m., local time. At the Special Meeting, holders of Peerless
Common Stock will be asked to consider and vote upon a proposal to approve the
Merger Agreement and the transactions contemplated thereby and such other
matters as may properly come before the Special Meeting.
RECORD DATE; VOTING POWER
The Peerless Board has fixed the close of business on October 30,
1998 (the "Record Date") as the record date for determining the holders of
Peerless Common Stock entitled to notice of, and to vote at, the Special
Meeting. Only holders of record of Peerless Common Stock at the close of
business on the Record Date will be entitled to notice of, and to vote at, the
Special Meeting. At the close of business on the Record Date, there were
4,922,660 shares of Peerless Common Stock outstanding and entitled to vote
at the Special Meeting. Holders of record of Peerless Common Stock are entitled
to one vote at the Special Meeting for each share of Peerless Common Stock held
of record on the Record Date on any matter which may properly come before the
Special Meeting.
VOTING OF PROXIES
The proxy accompanying this Proxy Statement/Prospectus is solicited on
behalf of the Peerless Board for use at the Special Meeting. Stockholders are
requested to complete, date and sign the accompanying proxy and promptly return
it in the accompanying envelope or otherwise mail it to Peerless. All properly
executed proxies received by Peerless prior to the vote at the Special Meeting,
and that are not revoked, will be voted at the Special Meeting in accordance
with the instructions indicated on the proxies or, if no direction is indicated,
FOR the Merger Agreement and consummation of the Merger, as unanimously
recommended by the Peerless Board as indicated herein. The Peerless Board does
not presently intend to bring any other business before the Special Meeting and,
so far as is known to the Peerless Board, no other matters are to be brought
before the Special Meeting. As to any business that may properly come before the
Special Meeting, however, it is intended that proxies, in the form enclosed,
will be voted in respect thereof in accordance with the judgment of the persons
voting such proxies.
REQUIRED VOTE; CERTAIN VOTING INFORMATION
Approval of the Merger Agreement and the consummation of the Merger by
Peerless' stockholders is required by the DGCL. Such approval requires the
affirmative vote of the holders of a majority of the shares of Peerless Common
Stock outstanding and entitled to vote. All of the members of the Peerless Board
and Steven W. Tomson and Kevin W. Marsh have entered into Voting Agreements
obligating them to vote in favor of the Merger Agreement and the consummation of
the Merger. As of the Record Date, such Peerless stockholders as a group
beneficially owned 1,173,739 shares (exclusive of any shares issuable upon the
exercise of options) of Peerless Common Stock (constituting approximately 23.8%
of the shares of Peerless Common Stock then outstanding). As of the Record Date
and the date of this Proxy Statement/Prospectus, Jack Henry owns no outstanding
shares of Peerless Common Stock. See "The Merger -- Other Agreements -- Voting
Agreements."
SOLICITATION OF PROXIES AND EXPENSES
Peerless will bear the cost of solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of Peerless may solicit proxies from Peerless stockholders by
telephone, facsimile or in person. Following the original mailing of the proxies
and other soliciting materials, Peerless will request brokers, custodians,
nominees, and other record holders to forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of Peerless Common
Stock and to request authority for the exercise of proxies. In such cases,
Peerless, upon the request of the record holders, will reimburse such holders
for their reasonable expenses.
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<PAGE> 36
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The required quorum for the transaction of business at the Special
Meeting is a majority of the shares of Peerless Common Stock issued and
outstanding on the Record Date. Abstentions and broker non- votes each will be
included in determining the number of shares present and voting at the meeting
for the purpose of determining the presence of a quorum. Because approval of the
Merger Agreement and the consummation of the Merger requires the affirmative
vote of a majority of the outstanding shares of Peerless Common Stock entitled
to vote thereon, abstentions and broker non-votes will have the same effect as
votes against the Merger Agreement and the consummation of the Merger. THE
ACTIONS PROPOSED IN THIS PROXY STATEMENT/PROSPECTUS ARE NOT MATTERS THAT CAN BE
VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS'
SPECIFIC INSTRUCTIONS. ACCORDINGLY, ALL BENEFICIAL OWNERS OF PEERLESS COMMON
STOCK ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE THEIR
VOTES.
REVOCATION OF PROXIES
The grant of a proxy on the enclosed proxy card does not preclude a
stockholder from voting in person. A stockholder of Peerless may revoke a proxy
at any time prior to its exercise by (i) delivering prior to the Special
Meeting, to Ann L. Puddister, Corporate Secretary of Peerless, at 1021 Central
Expressway South, Allen, Texas 75013, a written notice of revocation bearing a
later date or time than the proxy; (ii) delivering to the Corporate Secretary of
Peerless a duly executed proxy bearing a later date or time than the revoked
proxy; or (iii) attending the Special Meeting and voting in person. Attendance
at the Special Meeting will not by itself constitute revocation of a proxy.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO
THE PEERLESS STOCKHOLDERS. ACCORDINGLY, PEERLESS STOCKHOLDERS ARE URGED TO READ
AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
PEERLESS STOCKHOLDERS SHOULD NOT SEND STOCK
CERTIFICATES WITH THEIR PROXY CARDS
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<PAGE> 37
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions of the
Merger Agreement and is qualified in its entirety by reference to the full text
of the Merger Agreement, a copy of which is attached as Annex A to this Proxy
Statement/Prospectus.
STRUCTURE OF THE MERGER; EFFECTIVE TIME
As soon as practicable, but in no event later than the second business
day following the date on which the last of the conditions set forth in the
Merger Agreement (other than those that by their nature are to be satisfied at
the closing of the Merger) is satisfied or waived (the "Effective Time"), Newco
and Peerless will cause a certificate of merger (the "Certificate of Merger") to
be filed with the Secretary of State of the State of Delaware as provided in the
DGCL. On the terms and subject to the conditions set forth in the Merger
Agreement, at the Effective Time (i) Newco will be merged with and into
Peerless and (ii) the separate corporate existence of Newco will cease and
Peerless will continue as the Surviving Company and as a wholly owned
subsidiary of Jack Henry. The Merger will become effective upon the filing of
the Certificate of Merger with the Secretary of State of the State of Delaware,
or later if agreed upon by the parties. The Merger will have the effects set
forth in the applicable provisions of the DGCL and the Merger Agreement.
CONSIDERATION TO BE PAID IN THE MERGER
The Merger Agreement provides that at the Effective Time, by virtue of the
Merger and without any action on the part of any holder thereof: (i) each share
of Peerless Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Peerless Common Stock owned by Peerless or
any subsidiary of Peerless or by Jack Henry, Newco or any other subsidiary of
Jack Henry) will be converted into the right to receive 0.16145 fully paid and
nonassessable shares of Jack Henry Common Stock and (ii) each share of common
stock, par value $.01 per share, of Newco issued and outstanding immediately
prior to the Effective Time will be converted into and become one validly
issued, fully paid and nonassessable share of common stock, par value $.01 per
share, of the Surviving Company. Each share of Peerless Common Stock issued and
outstanding immediately prior to the Effective Time that is owned by Peerless or
any subsidiary of Peerless or by Jack Henry, Newco or any other subsidiary of
Jack Henry (other than shares of Peerless Common Stock held in trust accounts,
managed accounts, custodial accounts and the like that are beneficially owned by
third parties) will be canceled and retired and no cash or other consideration
will be delivered in exchange therefor.
Under the Merger Agreement, the Conversion Ratio may change prior to the
Special Meeting. If the Pre-Closing Average Price is less than or equal to
$38.17, which represents 85% of the Pre-Announcement Average Price, the
Conversion Ratio will be adjusted by multiplying the Conversion Ratio by 85% of
the Pre-Announcement Average Price and dividing the result by the Pre-Closing
Average Price. If the Pre-Closing Average Price is greater than or equal to
$51.64, which represents 115% of the Pre-Announcement Average Price, the
Conversion Ratio will be adjusted by multiplying the Conversion Ratio by 115% of
the Pre-Announcement Average Price and dividing the result by the Pre-Closing
Average Price. Based on the foregoing Conversion Ratio formula, if the
Pre-Closing Average Price is between $38.17 and $51.64 per share, the Conversion
Ratio will be 0.16145, if the Pre-Closing Average Price is $38.17 or below, the
Conversion Ratio will be increased as described above, and if the Pre-Closing
Average Price is $51.64 or above, the Conversion Ratio will be decreased as
described above.
On August 18, 1998, the last full trading day before the public
announcement of the Merger, Peerless Common Stock closed at $4.88 and Jack Henry
Common Stock closed at $45.59. On November 6, 1998, Peerless Common Stock
closed at $7.25 and Jack Henry Common Stock closed at $48.38. At the
Conversion Ratio of 0.16145 of a share of Jack Henry Common Stock per share of
Peerless Common Stock, the equivalent price of a share of Peerless Common Stock
on August 18, 1998 was $7.36 and on November 6, 1998 was $7.81. As
previously discussed, however, the Conversion Ratio of 0.16145 may change prior
to the Special Meeting.
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<PAGE> 38
TREATMENT OF PEERLESS STOCK OPTIONS AND WARRANTS
The Merger Agreement provides that, at the Effective Time, each Peerless
Option and warrant to purchase Peerless Common Stock ("Peerless Warrant"),
whether or not then vested or fully exercisable, will be assumed by Jack Henry
and will constitute a Substitute Option or warrant ("Substitute Warrant") to
acquire, on substantially the same terms and subject to substantially the same
conditions as were applicable under such Peerless Option or Peerless Warrant,
including without limitation term, vesting, exercisability and termination
provisions, the number of shares of Jack Henry Common Stock determined by
multiplying (a) the number of shares of Peerless Common Stock subject to such
Peerless Option or Peerless Warrant immediately prior to the Effective Time by
(b) the Conversion Ratio, at an exercise price per share of Jack Henry Common
Stock (rounded to the nearest whole cent) equal to (i) the exercise price per
share of Peerless Common Stock subject to such Peerless Option or Peerless
Warrant divided by (ii) the Conversion Ratio.
Jack Henry has agreed to reserve a sufficient number of shares of Jack
Henry Common Stock for delivery upon exercise of Substitute Options. Jack Henry
has also agreed to register such shares with the SEC on an appropriate
registration statement, to use all reasonable efforts to maintain the
effectiveness of such registration statement as long as such Substitute Options
remain outstanding and to use all reasonable efforts to cause such shares of
Jack Henry Common Stock to be listed on the NASDAQ.
FRACTIONAL SHARES
No certificates for fractional shares of Jack Henry Common Stock will be
issued pursuant to the Merger. In lieu of any such fractional shares, each
holder of shares of Peerless Common Stock who otherwise would be entitled to
receive a fractional share of Jack Henry Common Stock in the Merger will be paid
an amount in cash (without interest), rounded to the nearest cent, determined by
multiplying (i) the Pre-Closing Average Price of Jack Henry Common Stock by (ii)
the fractional interest to which such holder would otherwise be entitled.
EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Time, a letter of transmittal
with instructions will be mailed to each Peerless stockholder for use in
exchanging Peerless Common Stock certificates for Jack Henry Common Stock
certificates. Upon surrender of a Peerless Common Stock certificate for
cancellation to UMB Bank, N.A., the exchange agent in connection with the
Merger, or to such other agent or agents as may be appointed by Jack Henry (the
"Exchange Agent"), together with such letter of transmittal, duly completed and
validly executed in accordance with the instructions thereto, the holder of such
certificate will be entitled to receive in exchange therefor a certificate
representing the number of whole shares of Jack Henry Common Stock equal to the
Conversion Ratio multiplied by the number of shares subject to the Peerless
Common Stock certificate being exchanged. No fraction of a share of Jack Henry
Common Stock will be issued. Peerless stockholders will receive cash in lieu of
fractional shares equal to the fraction of a share that would otherwise be
issued multiplied by the Pre-Closing Average Price.
Immediately after the Effective Time, each outstanding Peerless Common
Stock certificate will be deemed for all corporate purposes to evidence the
ownership of the number of full shares of Jack Henry Common Stock into which
such shares of Peerless Common Stock shall have been converted as a result of
the Merger and the right to receive an amount in cash in lieu of the issuance of
any fractional shares. No dividends or other distributions with respect to Jack
Henry Common Stock with a record date at or after the Effective Time will be
paid to the holder of any unsurrendered Peerless Common Stock certificate with
respect to the shares of Jack Henry Common Stock represented thereby until the
holder of record of such certificate surrenders such certificate. Instead, Jack
Henry will pay the dividend or make the distribution to the Exchange Agent in
trust for the benefit of the holder pending surrender and exchange of such
Peerless Common Stock certificate. Jack Henry may cause the Exchange Agent to
invest any cash the Exchange Agent receives from Jack Henry as a dividend or
distribution; provided, however, that the terms and conditions of the
investments shall be such as to permit the Exchange Agent to make prompt
payments of cash to the holders of Peerless Common Stock as necessary. Jack
Henry may cause the Exchange Agent to pay over to Jack Henry any net earnings
with respect to the investments, and Jack Henry will replace promptly any cash
which the Exchange Agent loses through investments. In no event, however, will
any holder of unsurrendered Peerless Common Stock be entitled to any interest or
earnings on the dividend or distribution pending receipt.
30
<PAGE> 39
Jack Henry may cause the Exchange Agent to return any Jack Henry Common
Stock and dividends and distributions thereon remaining unclaimed 180 days after
the Effective Time, and thereafter each remaining holder of an unsurrendered
Peerless Common Stock certificate shall be entitled to look to Jack Henry
(subject to abandoned property, escheat, and other similar laws) as a general
creditor thereof with respect to Jack Henry Common Stock and dividends and
distributions thereon to which the holder is entitled upon surrender of the
Peerless Common Stock certificate.
If any cash in lieu of a fractional share of Jack Henry Common Stock is to
be paid to a person or any certificate for shares of Jack Henry Common Stock is
to be issued in a name other than that in which the Peerless Common Stock
certificate surrendered in exchange therefor is registered, it will be a
condition of the payment or issuance thereof that the Peerless Common Stock
certificate so surrendered be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange has paid any required
transfer or other taxes, or established to the satisfaction of the Exchange
Agent that such tax or is not payable.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties. These include representations by Peerless with respect to: (i)
organization, good standing and corporate power; (ii) authority and
noncontravention; (iii) consents and approvals; (iv) capital structure; (v)
financial statements; (vi) absence of undisclosed liabilities; (vii) real
property and other assets; (viii) software; (ix) intellectual property; (x)
material contracts; (xi) litigation; (xii) compliance with laws; (xiii) taxes;
(xiv) benefit plans; (xv) labor matters; (xvi) tax and accounting matters;
(xvii) brokers' fees; (xviii) voting requirements; (xix) documents filed with
the SEC; and (xx) disclosure of material information in this Proxy
Statement/Prospectus.
Jack Henry and Newco have also made representations and warranties with
respect to: (i) organization, good standing and corporate power; (ii) authority
and noncontravention; (iii) capital structure; (iv) documents filed with the
SEC; (v) absence of undisclosed liabilities; (vi) tax and accounting matters;
(vii) disclosure of material information in this Proxy Statement/Prospectus;
(viii) broker's fees; (ix) litigation; and (x) tax and accounting matters.
No representations and warranties made by Peerless, Jack Henry or Newco
will survive beyond the Effective Time.
NO SOLICITATION
The Merger Agreement provides that, (i) neither Peerless nor its
subsidiaries shall, and that it and they will cause their respective directors,
officers, employees not to, and will use their best efforts to cause their
financial advisors, legal counsel, accountants and other agents and
representatives not to, initiate or solicit, directly or indirectly, any
inquiries or the making of any proposal with respect to, engage in negotiations
concerning, provide any confidential information or data to or have any
discussions with any person relating to, any acquisition, business combination
or purchase of all or the major portion of the assets of, or any equity interest
in such party or any subsidiary of such party (an "Acquisition Proposal"), other
than the Merger, (ii) that Peerless will immediately cease and terminate any
existing activities, discussions or negotiations with any person, and (iii) that
Peerless will notify Jack Henry immediately in writing if any such inquiries or
proposals are received by it, any such information is requested, or any such
negotiations or discussions are sought to be initiated or continued.
Notwithstanding the foregoing, however, nothing shall prohibit the Peerless
Board from furnishing information to or entering into discussions or
negotiations with, any person that makes an unsolicited bona fide written
Acquisition Proposal, if and only to the extent that, the Peerless Board, after
consultation with legal counsel, determines in good faith that (i) the
Acquisition Proposal would be more favorable to Peerless stockholders than the
Merger, (ii) failure to take such action would result in a breach by the
Peerless Board of its fiduciary duties to Peerless stockholders under applicable
law, and (iii) prior to furnishing any confidential information to such person
or entering into discussions or negotiations with such person, Peerless receives
from such person an executed confidentiality agreement with provisions no less
favorable to Peerless than the confidentiality agreement between Peerless and
Jack Henry, and Peerless provides written notice to Jack Henry that it is
furnishing information to, or entering into discussions or negotiations with,
such person. Peerless must
31
<PAGE> 40
keep Jack Henry informed in reasonable detail of the terms, status and other
pertinent details of any Acquisition Proposal, including the identity of any
person making an Acquisition Proposal.
Nothing contained in this covenant not to solicit (i) permits Peerless to
terminate the Merger Agreement, (ii) permits Peerless to enter into any
agreement with respect to an Acquisition Proposal, except as set forth in the
Merger Agreement, during the term of the Merger Agreement (it being agreed that
during the term of the Merger Agreement, Peerless shall not enter into any
agreement with any person that provides for, or in any way facilitates, an
Acquisition Proposal, other than a confidentiality agreement), or (iii) affects
any other obligation of any party under the Merger Agreement.
CONDITIONS TO THE MERGER
Pursuant to the Merger Agreement, the respective obligation of each party
to effect the Merger is subject to the satisfaction or written waiver on or
prior to the Closing Date of the following conditions:
(i) the Merger Agreement shall have been approved by the affirmative vote
of the holders of a majority of outstanding shares of Peerless Common Stock;
(ii) the Registration Statement shall have been declared effective under
the Securities Act and not be the subject of any stop order or proceedings
seeking a stop order;
(iii) all necessary waiting periods under the HSR Act applicable to the
Merger shall have expired or been earlier terminated; and
(iv) no governmental entity shall have issued, enacted, promulgated,
enforced or entered any order, stay, decree, judgment, injunction, rule,
regulation or statute which is in effect and has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger.
The obligation of each of Jack Henry and Newco to effect the Merger is
further subject to satisfaction or written waiver on or prior to the Closing
Date of the following conditions:
(i) the representations and warranties of Peerless contained in the
Merger Agreement shall be true and correct as of the Closing Date, with the same
effect as though such representations and warranties were made as of the Closing
Date, except where the matters in respect of which such representations and
warranties are not true and correct, in the aggregate, have not had and could
not reasonably be expected to have a Material Adverse Effect (as hereinafter
defined) on Peerless;
(ii) Peerless shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement at or
prior to the Closing Date;
(iii) no action, suit, or proceeding shall be pending or threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (a) prevent
consummation of any of the transactions contemplated by the Merger Agreement,
(b) cause any of the transactions contemplated by the Merger Agreement to be
rescinded following consummation, (c) affect adversely the right of the
Surviving Company to own the assets, to operate the businesses, and to control
the subsidiaries of Peerless, or (d) affect adversely the right of any of the
subsidiaries of Peerless to own its assets and to operate its businesses;
(iv) Peerless shall have procured all third party consents reasonably
requested by Jack Henry, unless the failure to obtain such consents would not
have a Material Adverse Effect on Jack Henry or Peerless;
(v) Jack Henry shall have received an opinion from Ernst & Young, LLP
setting forth the concurrence of Ernst & Young, LLP with the conclusion of
Peerless' management that Peerless' participation in the Merger will not
disqualify the Merger from pooling of interests accounting under Opinion 16 of
the Accounting Principles Board and applicable rules and regulations of the SEC
if consummated in accordance with the Merger Agreement; and
32
<PAGE> 41
(vi) the Peerless Group, Inc. Employee Stock Purchase Plan shall have been
terminated and shall be of no further force or effect.
For purposes of the Merger Agreement, a "Material Adverse Effect" with
respect to any person means a material adverse effect on (i) the ability of such
person to perform its obligations under the Merger Agreement or to consummate
the transactions contemplated thereby or (ii) the condition (financial or
otherwise), assets, liabilities (actual or contingent), results of operations or
business of such person and its subsidiaries taken as a whole.
The obligation of Peerless to effect the Merger is further subject to
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(i) the representations and warranties of each of Jack Henry and Newco
contained in the Merger Agreement shall be true and correct as of the Closing
Date, with the same effect as though such representations and warranties were
made as of the Closing Date; except where the matters in respect of which such
representations and warranties are not true and correct, in the aggregate, has
not had and could not reasonably be expected to have a Material Adverse Effect
on Jack Henry;
(ii) Jack Henry and Newco shall have procured all third party consents
reasonably requested by Peerless, unless the failure to obtain such consents
would not have a Material Adverse Effect on Jack Henry or Peerless;
(iii) each of Jack Henry and Newco shall have performed in all material
respects all obligations required to be performed by it under the Merger
Agreement at or prior to the Closing Date;
(iii) no action, suit, or proceeding shall be pending or threatened before
any court or quasi-judicial or administrative agency of any federal, state,
local, or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (a) prevent
consummation of any of the transactions contemplated by the Merger Agreement,
(b) cause any of the transactions contemplated by the Merger Agreement to be
rescinded following consummation, (c) affect adversely the right of the
Surviving Company to own the assets, to operate the businesses and to control
the subsidiaries of Peerless, or (d) affect adversely the right of any of the
subsidiaries of Jack Henry and Newco to own its assets and to operate its
businesses;
(iv) Peerless shall have received from counsel reasonably acceptable to
the parties, an opinion dated as of the Closing Date, to the effect that for
federal income tax purposes the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code; and
(v) Peerless shall have received an opinion on or before the date the
Proxy Statement/Prospectus is mailed to Peerless stockholders from Deloitte &
Touche LLP setting forth the concurrence of Deloitte & Touche LLP with the
conclusion of Jack Henry's management that the Merger will qualify as a pooling
of interests transaction under Opinion 16 of the Accounting Principles Board if
consummated in accordance with the Merger Agreement.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, notwithstanding approval thereof by the Peerless stockholders, in any one
of the following circumstances:
(i) by mutual written consent of Jack Henry and Peerless;
(ii) by Jack Henry or Peerless, if the Closing shall not have occurred on
or before February 19, 1999 by reason of the failure of any condition precedent
to be complied with by the other party (unless such failure results primarily
from the other party's breach of a representation, warranty or covenant
contained in the Merger Agreement);
33
<PAGE> 42
(iii) by Jack Henry or Peerless, if there is a final nonappealable order in
effect preventing consummation of the Merger, or there shall be any action
taken, or any governmental entity shall have issued, enacted, promulgated,
enforced or entered any order, stay, decree, judgment, injunction, statute, law,
rule or regulation deemed applicable to the Merger that would make consummation
of the Merger illegal;
(iv) by Jack Henry or Peerless, if either party is in receipt of opinion
of counsel or of their respective accountants to the effect that the Merger is
not reasonably likely to qualify for pooling of interests accounting treatment;
(v) by Jack Henry or Peerless, if the Special Meeting shall have been
held and the Merger Agreement shall not have been approved by the affirmative
vote of the requisite number of shares of Peerless Common Stock;
(vi) by Jack Henry or Peerless, if the other party has breached any
material representation, warranty or covenant contained in the Merger Agreement
to be complied with or performed by such party at or prior to such date of
termination, and such failure continues for 30 business days after the actual
receipt by such party of a written notice from the other party setting forth in
detail the nature of such failure; or
(vii) by Peerless, if prior to the Special Meeting, Peerless executes a
definitive and binding written agreement with any party, other than Jack Henry,
who has made an unsolicited Acquisition Proposal which the Peerless Board has
determined in good faith is more favorable to Peerless stockholders than the
Merger and would result in a breach by the Peerless Board of its fiduciary
duties to Peerless stockholders if such Acquisition Proposal were not accepted.
TERMINATION FEE
If the Merger Agreement is terminated based upon Peerless' failure to
obtain the approval of the requisite number of shares of Peerless Common Stock
at the Special Meeting, Peerless will be required to pay to Jack Henry a
$500,000 fee on or prior to termination.
If the Merger Agreement is terminated based upon the foregoing paragraph,
and (i) at the time of such termination, an Acquisition Proposal was made by
another party, and (ii) within 12 months of such termination, Peerless or any of
its subsidiaries accepts a written offer or enters into a definitive written
agreement to consummate such Acquisition Proposal with such party, then Peerless
shall pay Jack Henry an additional fee of $500,000, and upon the effective date
of the merger or acquisition contemplated in the Acquisition Proposal, pay to
Jack Henry a further additional fee of $500,000.
If the Merger Agreement is terminated prior to the Special Meeting based
upon Peerless entering into a definitive and binding written agreement with any
party that has made an unsolicited Acquisition Proposal which the Peerless Board
has determined is superior to the Merger, then Peerless shall pay Jack Henry a
$750,000 fee, and upon the effective date of the merger or acquisition
contemplated in the Acquisition Proposal, pay to Jack Henry an additional fee of
$750,000.
THE SPECIAL MEETING
The Merger Agreement provides that Peerless will convene and hold a special
meeting of Peerless stockholders as soon as reasonably practicable for the
purpose of considering and voting upon the Merger Agreement and to solicit
proxies in connection therewith. The Merger Agreement also provides that the
Peerless Board will recommend that the holders of shares of Peerless Common
Stock vote in favor of the approval of the Merger Agreement at the Special
Meeting and cause such recommendation to be included in this Proxy
Statement/Prospectus; provided, however, that no officer or director of Peerless
shall be required to violate any fiduciary duty or other requirements imposed by
law.
CONSENTS, APPROVALS AND FILINGS
The Merger Agreement provides that each of the parties to the Merger
Agreement will (i) make promptly its respective filings, and thereafter make any
other required submissions, under the HSR Act and the Exchange
34
<PAGE> 43
Act, with respect to the Merger and the other transactions contemplated by the
Merger Agreement and (ii) use all reasonable efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger and the other transactions contemplated
by the Merger Agreement, including without limitation using all reasonable
efforts to obtain all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental entities and parties to contracts with
Peerless and its subsidiaries as are necessary for the consummation of the
Merger and the other transactions contemplated by the Merger Agreement and to
fulfill the conditions to the Merger. See "The Merger--Regulatory Approvals."
INSURANCE AND INDEMNIFICATION
The Merger Agreement requires Jack Henry to maintain an insurance policy in
effect covering errors and omissions of Peerless' directors and officers that
occurred prior to the Merger, subject to certain limitations. Additionally, the
Surviving Company is required to observe all indemnification and limitation of
liability provisions in the Certificate of Incorporation and Bylaws of Peerless
for the benefit of Peerless' directors and officers.
NASDAQ LISTING
The Merger Agreement provides that Jack Henry will promptly prepare and
submit to the NASDAQ a Notification Form for listing of additional shares of
Jack Henry Common Stock. The shares of Jack Henry Common Stock are traded on
the NASDAQ National Market System under the symbol "JKHY".
FEES AND EXPENSES
The Merger Agreement provides that each party will pay its own expenses in
preparing for, entering into and carrying out the Merger Agreement and the
consummation of the transactions contemplated thereby. If the Merger is
consummated, Jack Henry (directly or through its ownership of the Surviving
Company) will ultimately bear all costs of such transactions.
AMENDMENT
The parties may mutually amend any provision of the Merger Agreement at any
time prior to the Effective Time with the prior authorization of their
respective Boards of Directors; provided that any amendment effected after
approval of the Merger Agreement at the Special Meeting will be subject to the
restrictions contained in the DGCL.
35
<PAGE> 44
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
COMPARATIVE MARKET PRICE DATA
The following table sets forth the closing price for Jack Henry and
Peerless Common Stock on the NASDAQ on August 18, 1998 and November 6, 1998.
August 18, 1998 was the last full trading day prior to announcement of the
signing of the Merger Agreement. November 6, 1998 was the last trading day
for which information was available prior to the printing of this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Jack Henry Peerless Peerless
Common Stock Common Stock Equivalent(a)
(per share) (per share) (per share)
------------------- ------------------- -------------------
<S> <C> <C> <C>
August 18, 1998........ $ 45.59 $ 4.88 $ 7.36
November 6, 1998....... $ 48.38 $ 7.25 $ 7.81
</TABLE>
- ------------------------
(a) Represents the equivalent value of one share of Peerless Common Stock
calculated by multiplying the closing price per share of Jack Henry Common
Stock by the Conversion Ratio of 0.16145 provided in the Merger Agreement.
Please note that the Conversion Ratio could change prior to the Special
Meeting.
On the Record Date, there were approximately 744 holders of record
of Jack Henry Common Stock, and 263 holders of record of Peerless Common Stock.
HISTORICAL MARKET PRICES AND DIVIDENDS
The principal trading market for Jack Henry and Peerless Common Stock is on
the NASDAQ. The following tables set forth, for periods indicated, the high and
low closing sales price per share on the NASDAQ, based on published financial
sources, of Jack Henry Common Stock (as adjusted to reflect a 50% stock dividend
paid on March 13, 1997) and Peerless Common Stock and dividends declared on Jack
Henry Common Stock.
<TABLE>
<CAPTION>
JACK HENRY COMMON STOCK
-----------------------------------------------
Calendar Period High Low Dividend
----------------- -------- -------- -----------
<S> <C> <C> <C>
Fiscal 1999 (ending June 30, 1999)
Second Quarter (through November 6, 1998).......... $ 50.34 $ 30.38 $ .065
First Quarter...................................... 50.25 34.00 .065
Fiscal 1998 (ended June 30, 1998)
Fourth Quarter..................................... $ 38.88 $ 29.00 $ .065
Third Quarter...................................... 36.75 24.75 .065
Second Quarter..................................... 28.13 22.75 .055
First Quarter...................................... 30.25 22.00 .055
Fiscal 1997 (ended June 30, 1997)
Fourth Quarter..................................... $ 24.75 $ 17.50 $ .055
Third Quarter...................................... 27.17 20.63 .053
Second Quarter..................................... 27.83 20.25 .0467
First Quarter...................................... 24.08 16.67 .0467
Fiscal 1996 (ended June 30, 1996)
Fourth Quarter..................................... $ 23.17 $ 16.25 $.0467
Third Quarter...................................... 17.17 13.58 .0467
Second Quarter..................................... 17.00 12.67 .0385
First Quarter...................................... 13.83 9.50 .0383
</TABLE>
36
<PAGE> 45
<TABLE>
<CAPTION>
PEERLESS COMMON STOCK
--------------------------------
Calendar Period High Low
----------------- -------------- ------------
<S> <C> <C>
Fiscal 1998 (ending December 31, 1998)
Fourth Quarter (through November 6, 1998)........... $ 7.25 $ 4.25
Third Quarter........................................ 6.38 4.38
Second Quarter....................................... 5.25 3.63
First Quarter........................................ 5.13 3.66
Fiscal 1997 (ended December 31, 1997)
Fourth Quarter....................................... $ 5.25 $ 4.25
Third Quarter........................................ 7.38 5.00
Second Quarter....................................... 7.50 5.13
First Quarter........................................ 7.13 5.50
Fiscal 1996 (ended December 31, 1996)
Fourth Quarter....................................... $ 8.38 $ 6.00
Third Quarter........................................ * *
Second Quarter....................................... * *
First Quarter........................................ * *
</TABLE>
____________________
* Peerless Common Stock began trading on the NASDAQ National Market on
October 3, 1996. Prior to such date, there was no established trading
market for Peerless Common Stock. Peerless has not declared or paid
dividends on its common stock since that date.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements are based on the
historical consolidated financial statements of Jack Henry and Peerless,
combined and adjusted to give effect to the Merger as accounted for as a pooling
of interests.
The unaudited pro forma combined balance sheet reflects the combined
historical consolidated balance sheets of Jack Henry and Peerless at June 30,
1998. The unaudited pro forma combined statements of income are based on the
consolidated financial statements of Jack Henry for the fiscal years ended June
30, 1998, 1997 and 1996, and the unaudited consolidated financial statements of
Peerless for the twelve month periods ended on these same dates.
For all applicable periods presented in the pro forma combined statements
of income, shares used in the computation of earnings per common and common
equivalent shares give effect to the Conversion Ratio of 0.16145.
The unaudited pro forma combined financial statements are not necessarily
indicative of the results that would have been achieved had the Merger occurred
on the dates indicated and should not be construed as representative of future
operations. These unaudited pro forma combined financial statements should be
read in conjunction with the related historical financial statements and notes
thereto of Jack Henry and Peerless, which are incorporated by reference or
included elsewhere in this Proxy Statement/Prospectus.
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<PAGE> 46
<TABLE>
<CAPTION>
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
Pro Forma
Jack Henry Peerless Adjustment Combined
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,306 $ 1,377 $ 24,683
Investments 3,217 - 3,217
Trade receivables 36,826 5,789 42,615
Prepaid expenses and other 5,789 2,385 8,174
---------- -------- --------
Total $ 69,138 $9,551 $ 78,689
PROPERTY AND EQUIPMENT, NET $ 26,855 $4,063 $ 30,918
OTHER ASSETS:
Intangible assets, net of amortization $ 15,272 $ - $ 15,272
Computer software 2,838 778 3,616
Other non-current assets 1,183 2,500 3,683
---------- -------- --------
Total $ 19,293 $ 3,278 $ 22,571
---------- -------- --------
Total assets $ 115,286 $ 16,892 $132,178
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,854 $ 1,265 $ 8,119
Accrued expenses 3,968 1,666 5,634
Accrued income taxes 136 - 136
Deferred revenues 28,302 4,849 33,151
---------- -------- --------
Total $ 39,260 $ 7,780 $ 47,040
DEFERRED INCOME TAXES 2,526 - 2,526
---------- -------- --------
Total liabilities $ 41,786 $ 7,780 $ 49,566
STOCKHOLDERS' EQUITY:
JKHY preferred stock; $1 par value; 500,000 shares
authorized; none issued - - -
PLSS preferred stock; $.01 par value; 5,000,000 shares
authorized; none issued - - -
JKHY common stock; $.01 par value; 50,000,000
shares authorized; shares issued and outstanding -
18,950,527 $ 189 - $ 8 $ 197
PLSS common stock $.01 par value; 10,000,000 shares
authorized; shares issued - 4,976,650 - $ 50 (50) -
Less treasury shares; PLSS - 74,000 - (382) 382 -
Additional paid-in-capital 18,599 8,018 (340) 26,277
Retained earnings 54,712 1,496 56,208
Unearned compensation - ( 70) (70)
---------- -------- --------
Total stockholders' equity $ 73,500 $ 9,112 $ 82,612
---------- -------- --------
Total liabilities and stockholders' equity $ 115,286 $ 16,892 $132,178
========== ======== ========
</TABLE>
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<PAGE> 47
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JACK HENRY PEERLESS COMBINED JACK HENRY PEERLESS COMBINED
FYE FYE FYE FYE FYE FYE
6/30/98 6/30/98 6/30/98 6/30/97 6/30/97 6/30/97
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Software licensing & installation $ 32,988 $ 9,772 $ 42,760 $ 22,955 $ 11,388 $ 34,343
Maintenance/support & service 35,444 9,764 45,208 27,433 7,211 34,644
Hardware 44,991 8,837 53,828 32,212 11,745 43,957
----------- ----------- ----------- ----------- ----------- -----------
Total 113,423 28,373 141,796 82,600 30,344 112,944
COST OF SALES:
Cost of hardware 30,832 6,786 37,618 22,397 8,872 31,269
Cost of service 24,798 12,486 37,284 18,679 10,505 29,184
----------- ----------- ----------- ----------- ----------- -----------
Total 55,630 19,272 74,902 41,076 19,377 60,453
----------- ----------- ----------- ----------- ----------- -----------
GROSS PROFIT 57,793 9,101 66,894 41,524 10,967 52,491
OPERATING EXPENSES:
Selling and marketing 11,804 2,977 14,781 9,162 3,841 13,003
Research and development 3,132 1,987 5,119 2,045 1,863 3,908
General and administrative 9,081 2,075 11,156 6,076 2,110 8,186
----------- ----------- ----------- ----------- ----------- -----------
Total 24,017 7,039 31,056 17,283 7,814 25,097
----------- ----------- ----------- ----------- ----------- -----------
OPERATING INCOME FROM CONTINUING
OPERATIONS 33,776 2,062 35,838 24,241 3,153 27,394
OTHER INCOME (EXPENSE):
Interest income 1,221 115 1,336 660 307 967
Interest expense (18) (18) (229) (229)
Other, net 367 367 186 186
----------- ----------- ----------- ----------- ----------- -----------
Total 1,588 97 1,685 846 78 924
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 35,364 2,159 37,523 25,087 3,231 28,318
PROVISION FOR INCOME TAXES 13,127 446 13,573 9,332 702 10,034
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 22,237 1,713 23,950 15,755 2,529 18,284
LOSS FROM DISCONTINUED OPERATIONS 668 668 450 450
----------- ----------- ----------- ----------- ----------- -----------
NET INCOME $ 21,569 $ 1,713 $23,282 $ 15,305 $ 2,529 $ 17,834
=========== =========== =========== =========== =========== ===========
As reported:
Diluted earnings per share $ 1.09 $ 0.34 $ 0.80 $ 0.53
=========== =========== =========== ===========
Basic earnings per share $ 1.14 $ 0.36 $ 0.85 $ 0.61
=========== =========== =========== ===========
Shares used in computing diluted
earnings per share 19,761 5,097 19,072 4,787
=========== =========== =========== ===========
Shares used in computing basic
earnings per share 18,850 4,811 17,977 4,101
=========== =========== =========== ===========
Pro Forma:
Diluted earnings per share $ 1.13 $ 0.90
=========== ===========
Basic earnings per share $ 1.19 $ 0.96
=========== ===========
Shares used in computing diluted
earnings per share 20,584 19,845
=========== ===========
Shares used in computing basic
earnings per share 19,627 18,639
=========== ===========
<CAPTION>
JACK HENRY PEERLESS COMBINED
FYE FYE FYE
6/30/96 6/30/96 6/30/96
----------- ------------ -----------
<S> <C> <C> <C>
REVENUES:
Software licensing & installation $ 18,111 $ 7,774 $ 25,885
Maintenance/support & service 22,595 6,015 28,610
Hardware 26,852 8,222 35,074
----------- ------------ -----------
Total 67,558 22,011 89,569
COST OF SALES:
Cost of hardware 17,764 6,149 23,913
Cost of service 15,829 7,610 23,439
----------- ------------ -----------
Total 33,593 13,759 47,352
----------- ------------ -----------
GROSS PROFIT 33,965 8,252 42,217
OPERATING EXPENSES:
Selling and marketing 7,573 2,784 10,357
Research and development 1,775 1,576 3,351
General and administrative 5,411 1,679 7,090
----------- ------------ -----------
Total 14,759 6,039 20,798
----------- ------------ -----------
OPERATING INCOME FROM CONTINUING
OPERATIONS 19,206 2,213 21,419
OTHER INCOME (EXPENSE):
Interest income 541 91 632
Interest expense (670) (670)
Other, net 126 126
----------- ------------ -----------
Total 667 (579) 88
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 19,873 1,634 21,507
PROVISION FOR INCOME TAXES 7,605 111 7,716
----------- ------------ -----------
INCOME FROM CONTINUING OPERATIONS 12,268 1,523 13,791
LOSS FROM DISCONTINUED OPERATIONS 2,620 - 2,620
----------- ------------ -----------
NET INCOME $ 9,648 $ 1,523 $11,171
=========== ============ ===========
As reported:
Diluted earnings per share $ 0.51 $ 0.40
=========== ===========
Basic earnings per share $ 0.55 $ 0.73
=========== ===========
Shares used in computing diluted
earnings per share 18,726 3,691
=========== ===========
Shares used in computing basic
earnings per share 17,656 1,998
=========== ============
Pro Forma:
Diluted earnings per share $ 0.58
===========
Basic earnings per share $ 0.62
===========
Shares used in computing diluted
earnings per share 19,322
===========
Shares used in computing basic
earnings per share 17,979
===========
</TABLE>
39
<PAGE> 48
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited pro forma combined financial statements have
been prepared in accordance with generally accepted accounting principles. In
the opinion of management, all adjustments considered necessary for a fair
presentation of the unaudited pro forma combined financial statements have been
included therein. These financial statements are not necessarily indicative of
the results that would have occurred had the Merger occurred on the indicated
dates and not necessarily indicative of the results to be expected for future
operations. These unaudited pro forma combined financial statements should be
read in conjunction with the related historical financial statements and notes
thereto of Jack Henry and Peerless, which are incorporated by reference or
included elsewhere in this Proxy Statement/Prospectus.
EARNINGS PER SHARE INFORMATION
Earnings per common share are computed by dividing income by the diluted
and basic (as required by FASB No. 128) weighted average number of shares of
common stock and dilutive common stock equivalents outstanding for each of the
years and twelve-month periods then ended. For all applicable periods presented
in the unaudited pro forma combined statements of income, dilutive and basic
common stock and common stock equivalents used in the computation of earnings
give effect to the Conversion Ratio of 0.16145.
40
<PAGE> 49
DESCRIPTION OF PEERLESS' BUSINESS
GENERAL
Peerless designs, develops, installs and supports integrated information
systems, including proprietary computer software and third party software and
hardware, for community banks and credit unions located in the United States and
Canada. Peerless was incorporated in 1989 when a group of management executives
from EDS purchased EDS' turnkey community bank data processing systems division,
which EDS had acquired in 1980. In 1992, Peerless acquired and began offering a
credit union information software system. In 1994, Peerless began marketing a
check and statement imaging system that is fully integrated with Peerless21,
Peerless' flagship banking product. In September 1996, Peerless began operating
an outsourcing service bureau. On October 3, 1996, Peerless completed its
initial public offering (the "Offering"), resulting in the issuance of 2,440,000
shares and net proceeds to Peerless of approximately $10.1 million.
Peerless was incorporated under the laws of the State of Texas in 1989 and
was reincorporated under the laws of the State of Delaware in 1996.
MARKET
Peerless' target bank market is comprised of community banks with assets
ranging from $50 million to $1 billion. However, most of Peerless' community
bank customers have total assets ranging from $100 million to $500 million, and
the number of community banks in this size range increased slightly between 1995
and 1996 to approximately 2,580 banks. Most of Peerless' credit union customers
have total assets ranging from $5 million to $200 million. As of December 31,
1997, Peerless had more than 350 bank and credit union customers in 38 U.S.
states and in Canada. In 1997, approximately 91% of Peerless' total revenue was
from community bank customers, and no customer accounted for 10% or more of
Peerless' total revenue.
PRODUCTS AND SERVICES
Peerless' revenues are derived primarily from software license and
installation, hardware and equipment sales, and maintenance and services.
Software license and installation revenues include fees from the sale of
Peerless' own software products and third party software products and the
installation of such software products. Hardware and equipment sales relate to
the hardware and equipment on which Peerless', as well as other vendors',
software products operate. Maintenance and service revenues relate primarily to
the processing fees of the outsourcing service bureau operations and revenues
derived from maintenance contracts with its customers, under which Peerless
provides customers with telephone support 24 hours a day, 7 days a week, and
modifications and enhancements to its software products. The following table
presents the revenue composition of Peerless for the three years ending December
31, 1997:
Fiscal Year Ended December 31,
----------------------------------
1997 1996 1995
------ ------ ---------
Software licensing and installation 34.3% 37.7% 36.5%
Maintenance/support and services 28.6% 23.5% 29.3%
Hardware sales 37.1% 38.8% 34.2%
------- ------- -------
Total Revenues 100.0% 100.0% 100.0%
======= ======= =======
Peerless' two core software products are Peerless21, its proprietary
information system for community banks, and PeerlessCU, its proprietary
information system for credit unions. Peerless21 and PeerlessCU provide software
solutions for substantially all areas of financial institution data processing,
customer relationship management, management decision making and product
creation and sales. Peerless also offers its customers an ATM transaction
processing system and telephone banking using an interactive voice response
system that are fully integrated with Peerless21 and PeerlessCU. As a part of
its service offerings, Peerless provides its customers with Year 2000 consulting
services, comprehensive training and education programs for its systems and
continuing customer maintenance and support, as well as business recovery
services.
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<PAGE> 50
Peerless' software products run on IBM computing platforms, which are the
leading hardware platforms in Peerless' target market. Peerless is an
authorized IBM reseller.
Peerless customers that purchase Peerless21 or PeerlessCU information
systems typically enter into three to five year maintenance and service
agreements with Peerless at the time of installation. As part of the
maintenance and service agreements, customers automatically receive two to three
product updates each year.
Peerless markets a check and statement imaging system that is fully
integrated with Peerless21. Peerless' check and statement imaging system
enables banks to reduce costs by scanning digital images of checks into a bank's
computer system, which can then be printed on checking account statements,
thereby eliminating the need to return checks to customers and improving check
processing speeds. During 1997, revenues from the shipment and installation of
check and statement imaging systems accounted for approximately 25% of Peerless'
total revenues, compared to 22% in 1996.
In 1996, Peerless 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 not served by Peerless. During 1997, revenues from outsourcing
operations accounted for approximately 4% of Peerless' total revenues, compared
to less than 1% in 1996. Peerless currently has 23 outsourcing customer
contracts, 13 of which are both check and statement imaging and data processing,
three of which are data processing only and seven of which are check imaging or
item processing only. Currently, all data processing services are performed at
Peerless' facility in Allen, Texas, and at Peerless' processing center in Port
Arthur, Texas, and no additional data processing centers are currently expected
to be established. Due to the nature of item processing services, Peerless has
established five item capture centers in close proximity to the customers
serviced and expects to open additional item processing centers as contracts
necessary to support such centers are executed. Peerless' outsourcing business
is still in the early stages of growth and investment. While management
believes this business will reach profitably in 1998, there can be no assurance
that Peerless will be successful in this business.
Peerless offers business recovery services. These services are intended to
allow its customers to be back online after a disaster in as little as 24 hours
and to satisfy U.S. financial institution regulatory obligations to maintain and
annually test a business recovery plan.
SEASONALITY AND CYCLICALITY
Peerless recognizes a significant portion of its revenues upon the
installation of its software. Since its customers generally do not want to have
systems installed at or near the end of the calendar year, revenues have
generally been lower during the months of December and January than in the
remainder of the year. An economic downturn in Peerless' target market could
have a materially adverse effect on Peerless' operating results.
PRINCIPAL SUPPLIERS
Since 1989, Peerless has been a value-added remarketer of IBM products
pursuant to standard IBM remarketer agreements. These products include non-IBM
software that IBM authorizes Peerless to sell. Peerless does not maintain an
inventory of IBM products but purchases such products only upon receipt of a
customer order. IBM has sole discretion with respect to the products offered by
Peerless pursuant to this agreement.
Peerless' current remarketing agreement with IBM expires February 28, 1999.
Both IBM and Peerless may terminate the agreement, with or without cause, upon
three months written notice. Peerless has no indication that IBM will
discontinue these remarketing arrangements.
Since 1993, Peerless has been a value-added remarketer of NCR products
pursuant to an NCR value-added remarketer agreement. These products include the
hardware on which Peerless' check and statement imaging and processing systems
operate. Under its agreement with NCR, Peerless markets and resells or licenses
such NCR products, which it purchases from NCR at a volume based discount.
Peerless may from time to time purchase NCR products in advance of an order,
based on forecasted demand. NCR may add new products or
42
<PAGE> 51
discontinue or change the design of any products subject to the agreement at any
time. The agreement has no term, but either party may terminate it upon 90
days' written notice.
Peerless licenses software for its check and statement imaging and
processing systems from Document Solutions, Inc. ("DSI") pursuant to a system
integrator agreement. Peerless provides all normal customer support for
Peerless' customers, and DSI provides software releases as necessary. Peerless
may from time to time purchase DSI products in advance of an order based on
forecasted demand.
Peerless' agreement with DSI extends through December 31, 2001, and
automatically renews for two year terms thereafter, unless terminated by either
party upon written notice 120 days prior to the expiration of the then current
term. During the term of the agreement and for one year following its
termination, Peerless may not develop, sell or otherwise distribute products
competitive with those of DSI, so long as DSI's products offer competitive
features and prices. If DSI cannot suitably enhance its products or reduce its
prices within 180 days after notice from Peerless, Peerless may then develop,
sell or distribute the competing products.
INTELLECTUAL PROPERTY
Peerless relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. Peerless seeks to protect its software, documentation
and other written materials under trade secret and copyright laws. Peerless
presently has no patents or patent applications pending.
BACKLOG
Peerless' backlog of license and installation fees and hardware and
equipment sales was approximately $2.0 million at September 30, 1998, compared
to approximately $4.5 million at December 31, 1997 and approximately $4.7
million at December 31, 1996. This backlog amount excludes revenues to be
derived from long term customer contracts for maintenance and outsourcing
activities, which are typically three to five year contract commitments.
Peerless' backlog can fluctuate significantly due to many reasons, including,
but not limited to, the sales cycle length of varying products, product
availability, the duration of the installation period, and customer requested
installation date.
COMPETITION
The financial institution management information systems market is
intensely competitive and subject to rapid change. Competitors vary in size and
in the scope and breadth of the products and services offered. Peerless
believes that the primary competitive factors in system selection are features
and functions, flexibility and ease of use, software enhancements and
maintenance, technological advantages and customer support and training. The
price of the software and related services is also a significant competitive
factor which may be determinative, particularly for smaller institutions.
Peerless competes with several firms that offer software products that compete
with Peerless' products, as well as competing with firms that provide data
processing services to financial institutions that desire to outsource that
function. These competitors vary in size from large to small and in geographical
coverage from national to regional and local operations.
Peerless' principal competitors in its target market for community banking
information management systems are Jack Henry and Fiserv, Inc. Peerless also
competes in this market against EDS, ALLTEL Information Systems, Inc. and
others.
The credit union market is highly fragmented, and no one firm has a
dominant market share. Peerless' competitors in its target market for credit
union information management systems are EDS, Fiserv, Inc., ULTRADATA
Corporation and others.
Additionally, Peerless believes that no one firm may be considered dominant
in providing outsourcing processing services to customers in Peerless'
marketplace. Peerless believes that EDS, Fiserv, Inc. and The BISYS Group, Inc.
are its main outsourcing services competitors.
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<PAGE> 52
Peerless' principal competitors in the check imaging industry are BancTec
Financial Systems and Advanced Financial Solutions, Inc.
SALES AND MARKETING
Peerless markets its products and services throughout the United States
through a direct sales force. Peerless maintains separate sales forces for its
community bank, credit union, and outsourcing products and services, which
allows Peerless' sales representatives to concentrate on each separate customer
market.
Peerless markets its products and services through specific product
advertising in trade journals directed at community banks and credit unions, its
Internet home page and sales support literature. Peerless also relies on
customer referrals, networking, direct mail, trade shows and contacts with
independent consultants. The sales cycle associated with the purchase of
Peerless' products is typically lengthy and subject to a number of significant
risks, including customers' budgetary constraints and internal acceptance
reviews.
YEAR 2000
Peerless has modified its software products to make them Year 2000
compliant. Peerless' plan to modify its software products was certified by the
Information Technology Association of America. Based on currently available
information, management estimates that the total costs in implementing the plan
are between $1.0 and $2.0 million.
Peerless also purchases software and hardware from certain vendors, which
Peerless resells to its customers. See "-- Principal Suppliers." Peerless is
currently evaluating the hardware and software provided by its vendors to
identify any systems that need to be made Year 2000 compliant. Peerless'
primary vendors have assured Peerless that the systems they provide will be made
Year 2000 compliant in a timely fashion, although there can be no assurances
made as to these representations.
EMPLOYEES
As of September 30, 1998, Peerless had a total of 186 employees, compared
to 184 at December 31, 1997. None of Peerless' employees are represented by a
labor union. Peerless has not experienced any work stoppages and considers its
relations with its employees to be satisfactory.
EXECUTIVE OFFICERS
Set forth below is the name, age, position, term of office and a brief
account of the business experience of each person who is an executive officer of
Peerless.
Name Age Position
------------------------ --- --------------------------------
Rodney L. Armstrong, Jr. 54 Chairman of the Board and
Chief Executive Officer
Steven W. Tomson 36 President
Kevin W. Marsh 46 Executive Vice President - Sales
Ann L. Puddister 38 Director of Administration and
Corporate Secretary
Douglas K. Hansen 31 Treasurer and Controller
44
<PAGE> 53
Rodney L. Armstrong, Jr. is one of Peerless' founders and has been Chairman
of the Board and Chief Executive Officer since 1989. Mr. Armstrong was Peerless'
President from 1994 to June 1996. Mr. Armstrong has 24 years of experience in
the information technology and financial institution marketplace. In 1974, he
joined United Virginia Bankshares (now known as Crestar Corporation) as
Corporate Planning Officer responsible for the bank holding company's long range
strategic planning. Between 1977 and 1989, Mr. Armstrong held various management
positions with EDS, where he started and managed its electronic ATM and point of
sale networking division and was responsible for corporate development for its
Financial and Insurance Group, before initiating the buyout of EDS' turnkey
community bank data processing systems division by Peerless in 1989.
Steven W. Tomson joined Peerless in 1991 as Regional Marketing Manager,
Banking. In June 1994, Mr. Tomson left Peerless to work for Bermac
Communications, Inc., a software development company, as an Account Manager. Mr.
Tomson returned to Peerless in February 1995 and has served as President of
Peerless' credit union systems subsidiary and President of Peerless since April
1997. Prior to joining Peerless, Mr. Tomson was employed as an Account Sales
Representative by IBM.
Kevin W. Marsh joined Peerless in 1989 and has served in various capacities
since that time, including Vice President of Sales of Peerless' banking systems
subsidiary and Vice President of Sales of Peerless' outsourcing subsidiary. Mr.
Marsh has served as Executive Vice President - Sales of Peerless since July
1997.
Ann L. Puddister joined Peerless in 1989. Ms. Puddister has served as
Director of Administration since 1992 and Corporate Secretary since 1994. Prior
to joining Peerless, Ms. Puddister worked at EDS for 10 years.
Douglas K. Hansen joined Peerless in 1994 as Controller and has served as
Treasurer of Peerless since May 1996. From 1989 to 1994, Mr. Hansen was
employed by Ernst & Young, LLP, most recently as an Audit Manager. Mr. Hansen
is a certified public accountant.
GOVERNMENT REGULATION
As a provider of in-house software application systems and hardware,
Peerless is not directly subject to Federal or state regulations specifically
applicable to financial institutions. As a provider of products to these
entities, however, Peerless must take into account such regulations in order to
provide products that help its customers comply with such regulations. The
implementation of Peerless' products by its customers is reviewed from time to
time by government regulators in connection with compliance audits of the
customers' operations. Peerless must continually update its products to reflect
changes in applicable regulations or the adoption of new regulations. To the
extent Peerless provides information services to financial institutions that
desire to outsource that function, Peerless is subject to examinations by
various Federal and state regulatory agencies.
DESCRIPTION OF PROPERTY
Peerless' community banking, credit union, outsourcing and check and
statement imaging are located in one facility in Allen, Texas with a total size
of approximately 82,600 square feet. This facility is leased pursuant to an
agreement which expires in August 2013 and provides for monthly rental payments
of approximately $84,000 for the first five years. See Note 6 of Notes to
Consolidated Financial Statements of Peerless Group, Inc. Peerless leases seven
additional facilities totaling approximately 38,000 square feet and that require
total monthly rental payments of approximately $38,500.
LEGAL PROCEEDINGS
From time to time, Peerless has been involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this Proxy Statement/Prospectus, Peerless is not a party to any
legal proceeding, the adverse outcome of which would, in management's opinion,
have a materially adverse effect on Peerless' results of operations or financial
position.
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<PAGE> 54
PEERLESS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Peerless' total revenues are derived primarily from software license and
installation, hardware and equipment and maintenance and services. Approximately
91% of Peerless' total revenues for 1997 is from its banking customers and,
historically, a large part of Peerless' total revenues and growth have been
derived from its installed customer base.
Software license and installation consists of revenue recorded by Peerless
on the installation of its software products, which in the case of most of
Peerless' contracts, involves the use of the percentage-of-completion method of
accounting for revenues, as installation services are performed over several
months. Revenues from sales of software licenses not involving installation are
recognized upon delivery of the software to the customer. Revenues from
hardware and equipment sales are recognized upon shipment by the manufacturer to
the customer. Revenues from maintenance contracts are recognized ratably over
the periods of the respective contracts, which typically have terms of three to
five years. Revenues from services, including processing fees, are recognized
in the period in which the services are performed.
In the case of revenues from software license and installation and hardware
and equipment, Peerless generally requires significant deposits and prepayments.
Maintenance and service agreements are administered on a calendar year basis
with fees generally received in December or January. Deposits received and
amounts billed for software licenses, installation and hardware in advance of
installation or delivery, and for annual software maintenance prior to
performance of related services, are reflected as unearned until such amounts
are recognized in accordance with Peerless' revenue recognition policy. See Note
2 of Notes to Consolidated Financial Statements of Peerless Group, Inc.
Peerless expenses all software development costs as incurred until
technological feasibility has been established for the product, at which time
the costs are capitalized until the product is available for general release to
customers. Peerless has expensed substantially all software development costs
since 1994, as primarily all software development efforts have been related to
enhancing Peerless' existing products.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Revenues for the three months ended June 30, 1998 decreased $1.8
million, or 20.8%, from those in the same period during 1997. Decreases of
$213,000 in software license and installation revenues and $2,204,000 in
hardware and equipment revenues were offset by an increase of $604,000 in
maintenance and services revenues.
The decreases in software license and installation and hardware and
equipment revenues were due primarily to a lower amount of revenues from
implementations of check and statement imaging systems during the quarter.
Management believes the implementations of check and statement imaging systems
were negatively impacted by the delays of customers in the purchasing of new
technologies because of the customers' focus on their own Year 2000 compliance
issues. In total, revenues from check and statement imaging system
implementations accounted for 7.6% of revenues during the period, compared to
37.5% of revenues in the same period of the prior year. The decrease in check
and statement imaging revenues was partially offset by revenues associated with
the introduction of Year 2000 consulting services.
The primary reason for the increase of maintenance and services revenues
was the additional revenues from Peerless' outsourcing service bureau, which
contributed 9.6% of total revenues during the three months ended June 30, 1998,
compared to 3.2% of total revenues during the same period of the prior year.
This revenue increase is due to an increase in customers in the outsourcing
service bureau to 14 at June 30, 1998, compared to six at June 30, 1997.
Revenues for the six months ended June 30, 1998 decreased $1.8 million, or
10.8%, from those in the same period of the prior year. Decreases of $567,000
in software license and installation revenues and
46
<PAGE> 55
$2,334,000 in hardware and equipment revenues were offset by an increase of
$1,143,000 in maintenance and services revenues. These changes were due to the
factors influencing the three month period ended June 30, 1998 discussed above
as well as an overall decrease in revenues from installations of Peerless21.
Revenues from installations of Peerless21 were $2.1 million for the first six
months of 1998 compared to $2.7 million for the same period of the prior year.
This decrease was due to a decrease in the average size of Peerless21
implementations during the first three months of 1998. Peerless typically
recognizes lower revenues from a Peerless21 implementation for a smaller
financial institution than for a larger financial institution.
Gross Margin. Gross margin for the three months ended June 30, 1998
increased to 36.7% of total revenues from 32.1% for the same period of the prior
year. The increase in gross margin was directly related to lower revenues from
check and statement imaging systems, which generally have lower margins than
Peerless' other products, as well as increased margins realized from Year 2000
consulting services. Gross margin for the six months ended June 30, 1998
decreased to 34.1% of total revenues from 34.8% for the same period of the prior
year. This decrease was a result of lower revenues from Peerless21
installations, as discussed above, as well as the impact of the service bureau
operations.
Selling and Marketing. Selling and marketing expenses for the three and
six months ended June 30, 1998 decreased $240,000, or 26.9%, and $435,000, or
22.9%, respectively, from the same periods of the prior year. These decreases
primarily resulted from a reduction in headcount as compared to the same periods
of the prior year and the implementation of certain cost saving initiatives by
management.
Interest Income. Interest income for the three and six months ended June
30, 1998 decreased $70,000, or 73.7%, and $165,000, or 71.4%, from the same
periods of the prior year. These decreases were a result of the lower amount of
cash and cash equivalents held by Peerless during these periods as compared to
the prior year.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Revenues for the year ended December 31, 1997 increased $3.6
million, or 13.6%, over the prior year. Revenues from software license and
installation increased $0.4 million, or 3.5%, over the prior year, and revenues
from hardware and equipment increased $0.9 million, or 8.4%, over the prior
year. Increases in revenues from installations of check and statement imaging
systems as well as additional software license and hardware revenues associated
with the sales of ancillary products were offset by decreases in revenues from
implementations of Peerless21. Shipments and installations of check and
statement imaging systems contributed $7.6 million in software license and
installation and in hardware and equipment revenues, as compared to $5.9 million
in 1996. Revenues from installations of Peerless21 decreased $0.7 million, or
14.5%, from the prior year. This decrease occurred primarily because Peerless
made a greater number of Peerless21 installations in 1997 to smaller financial
institutions than in 1996. Peerless typically recognizes lower revenues from a
Peerless21 implementation for a smaller financial institution than for a larger
financial institution. In response to the decrease in Peerless21 revenues,
Peerless made certain management changes to better focus its Peerless21 sales
strategy. Revenues from maintenance and services increased $2.4 million, or
38.3%, over the prior year, due primarily to data and item processing fees
earned during 1997, which was the first full year of operations for Peerless'
outsourcing service bureau. Data and item processing revenues from Peerless'
outsourcing service bureau were $1.1 million in 1997, compared to $0.1 million
in 1996.
Gross Margin. Gross margin for the year ended December 31, 1997 declined
to 32.6% of total revenues from 37.3% for the prior year. Increased shipments
of check and statement imaging systems and continuing investment in Peerless'
service bureau contributed to the lower margins for the year. Check and
statement imaging systems generally have lower margins than other software and
hardware products, and investments in service bureau operations may continue to
contribute to lower margins in the future. Excluding the service bureau
component, gross margin for the year ended December 31, 1997 was 35.3% of total
revenues.
Research and Development. Research and development expenses for the year
ended December 31, 1997 increased $308,000, or 18.2%, from the prior year. This
increase primarily resulted from Peerless' focus on product upgrades to complete
the Year 2000 solution and provide its customers with the most current
technology. As a percentage of total revenues, research and development
expenses increased slightly to 6.7% for the year from 6.4% for the prior year.
47
<PAGE> 56
Selling and Marketing. Selling and marketing expenses for the year ended
December 31, 1997 decreased $65,000, or 1.9%, from the prior year. As a
percentage of total revenues, selling and marketing expenses decreased to 11.3%
for the year from 13.1% for the prior year. This decrease was due to cost
control initiatives undertaken by management during the year.
General and Administrative. General and administrative expenses for the
year ended December 31, 1997 increased $704,000, or 46.6%, from the prior year.
This increase primarily resulted from additional insurance, professional fees
and administrative costs associated with being a public company. As a
percentage of total revenues, general and administrative expenses increased to
7.4% for the year from 5.7% for the prior year.
Interest Expense. Interest expense for the year ended December 31, 1997
decreased $528,000, or 96.4%, from the prior year. This decrease primarily
resulted from the repayment of all outstanding debt subsequent to the Offering.
Interest Income. Interest income for the year ended December 31, 1997
increased $147,000 from the prior year. This increase was a result of the
investment of cash obtained from the Offering.
Basic and Diluted Earnings Per Share. Basic and diluted earnings per share
for the year ended December 31, 1997 were negatively impacted by an increase in
Peerless' tax rate and an increase in the shares used in computing earnings per
share, which resulted from the additional shares issued in the Offering and the
exercise of outstanding warrants to purchase Peerless' Common Stock.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Revenues for the year ended December 31, 1996 increased $6.8
million, or 34.7%, over the prior year. Revenues from software license and
installation fees increased $2.8 million, or 39.1%, over the prior year, and
revenues from hardware and equipment sales increased $3.6 million, or 53.2%,
over the prior year. These increases were due primarily to increases in revenue
from installations of Peerless21 and shipments and installations of check and
statement imaging systems. Installations of Peerless21 contributed $4.7 million
in software license and installation fees, as well as additional software
license fees and hardware revenues associated with the sales of ancillary
products, representing an increase of $1.6 million, or 52.2%, over the prior
year. Shipments and installations of check and statement imaging systems
contributed $5.9 million in revenues, representing an increase of $2.5 million,
or 74.5%, over the prior year.
Gross Margin. Gross margin for the year ended December 31, 1996 declined
slightly to 37.3% of total revenues from 38.4% for the prior year. This
decrease was attributable primarily to Peerless hiring and training additional
employees to support revenue growth. These margin declines were partially
offset by an improvement in the gross margin percentage from hardware and
equipment sales, which increased to 24.7% for the year from 21.8% for the prior
year, which was primarily attributable to an increase in the margins on check
and statement imaging hardware.
Research and Development. Research and development expenses for the year
ended December 31, 1996 increased $298,000, or 21.3%, from the prior year. This
increase primarily resulted from hiring additional research and development
employees to modify and enhance existing products. As a percentage of total
revenues, research and development expenses decreased slightly to 6.4% for the
year from 7.1% for the prior year.
Selling and Marketing. Selling and marketing expenses for the year ended
December 31, 1996 increased by $975,000, or 39.0%, from the prior year. This
increase primarily resulted from an increase in the number of employees in sales
and marketing to support increased revenues and increased compensation levels
for existing employees due to increased production. As a percentage of total
revenues, selling and marketing expenses increased slightly to 13.1% for the
year from 12.7% for the prior year.
General and Administrative. General and administrative expenses for the
year ended December 31, 1996 increased $290,000, or 23.7%, from the prior year.
This increase primarily resulted from placement agency fees and other costs
associated with the hiring of additional employees, as well as additional
insurance and legal costs associated with being a public company. As a
percentage of total revenues, general and administrative
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<PAGE> 57
expenses decreased slightly to 5.7% for the year from 6.2% for the prior year.
During 1996, Peerless incurred a severance charge of $341,000 related to the
resignation of a former officer ($289,000 of which were noncash 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 year ended December 31, 1996
decreased $64,000, or 10.5%, from the prior year. This decrease primarily
resulted from the repayment of all outstanding debt subsequent to the Offering,
and was slightly offset by amortization of deferred debt costs associated with
Peerless' line of credit, which Peerless obtained in October 1995.
Basic and Diluted Earnings Per Share. Basic and diluted earnings per share
for the year ended December 31, 1996, were negatively impacted by an increase in
the shares used in computing earnings per share, resulting from the additional
shares issued in the Offering.
PROVISION FOR INCOME TAXES
Peerless' provision for income taxes for the year ended December 31, 1996
included the Alternative Minimum Tax under the Code and state income taxes. In
the fourth quarter of 1996, Peerless eliminated the valuation allowance against
its deferred tax assets, resulting in the recording of a Federal deferred tax
benefit of approximately $250,000. The majority of Peerless' net operating loss
carry forwards for Federal income tax purposes were utilized in late 1996.
Peerless' 1997 effective tax rate was favorably impacted by the utilization of
research and development tax credits totaling $459,000. The effective tax rate
for the year ended December 31, 1997 was 21.9%, up from 6.3% in the prior year.
INVESTMENT IN ONLINE
In May 1997, Peerless 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. Peerless
also received warrants to purchase approximately 333,000 shares of Online's
common stock at $3.00 per share. Peerless understands that Online is seeking
additional financing. If Online is not able to obtain additional financing,
Peerless may be required to write off some or all of this investment.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 1998 were $1.4 million, down from
$2.8 million at December 31, 1997. During the six months ended June 30, 1998,
cash used in operating activities was $91,000, compared to $1.2 million for the
same period of the prior year, primarily due to decreases in trade accounts
payable, purchases of inventory and a decrease in unearned revenues, offset by a
decrease in trade accounts receivable resulting from the collection of amounts
due from customers for annual maintenance fees, which are typically billed at
the end of each year and collected during the first quarter of the following
year.
Peerless expects that capital expenditures associated with service bureau
operations in 1998 could reach $1.5 million, depending upon the growth of this
business. Peerless anticipates that new item processing centers will only be
opened as contracts necessary to support such centers are executed.
Peerless moved into its new facility in Allen, Texas in August, 1998.
Peerless anticipates that capital expenditures associated with this new facility
will be approximately $1.0 to $1.5 million.
Peerless 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
(8.5% at June 30, 1998) plus 1/2% and are secured by the assets and stock of
Peerless' 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 Peerless. As of June 30, 1998, 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 Peerless. The Credit Agreement
imposes certain requirements on Peerless, including minimum annual net income
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<PAGE> 58
and quarterly cash flow and liquidity levels. The Credit Agreement prohibits
Peerless from incurring or otherwise becoming liable for any indebtedness for
liens on any property owned by Peerless, except for certain trade and other
indebtedness. The Credit Agreement also contains other restrictive covenants,
including limitations on dispositions of material amounts of assets, capital
expenditures, mergers, consolidations, related party transactions, alterations
in the nature of Peerless' business, employee compensation, the making of any
loans, investments in other entities, entering into any guarantees and the
payment of cash dividends. At September 30, 1998, Peerless was not in
compliance with a covenant in the Credit Agreement regarding limitations on
capital spending. State Street has waived non-compliance with the covenant.
There can be no assurance that Peerless will not require additional waivers in
the future or, if required, that State Street will grant them.
Peerless believes that its cash and cash equivalents at June 30, 1998,
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 12 months.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Position 97-2. In October 1997, the Accounting Standards
Executive Committee of the American Institute of Public Accountants issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which supersedes
SOP 91-1. Peerless was required to adopt SOP 97-2 for software transactions
entered into beginning January 1, 1998, and retroactive application to years
prior to adoption was prohibited. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements (i.e., software products,
upgrades/enhancements, post-contract customer support, installation, training,
etc.) to be allocated to each element based on the relative fair values of the
elements. The fair value of an element must be based on evidence which is
specific to the vendor. The revenue allocated to software products (including
specified upgrades/enhancements) generally is recognized upon delivery of the
products. The revenue allocated to post-contract customer support generally is
recognized ratably over the term of the support and revenue allocated to service
elements (such as training and installation) generally is recognized as the
services are performed. If a vendor does not have evidence of the fair value
for all elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. The adoption of SOP 97-2 has not had, and Peerless' management
anticipates that it will not have, a material impact on Peerless' results of
operations.
Statement of Financial Accounting Standards No. 131. In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, which is effective for years beginning after December 15, 1997.
Statement 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Peerless will adopt the new requirements retroactively in 1998.
Management of Peerless anticipates that the adoption of Statement 131 will not
affect results of operations or financial position, but will affect the
disclosure of segment information.
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<PAGE> 59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF PEERLESS
The following table sets forth information, as of September 30, 1998,
regarding the beneficial ownership of Peerless Common Stock (which includes
shares held of record and shares which may be acquired within 60 days pursuant
to the exercise of options) by each director of Peerless, Peerless' Chief
Executive Officer, each of the Peerless' four most highly compensated executive
officers other than the Chief Executive Officer who earned more than $100,000 in
salaries and bonuses and who were serving as executive officers at the end of
1997, and any person who served as an executive officer during 1997 and would
have been considered one of the four most highly compensated executive officers
had that person been serving as such at the end of 1997, based on salary and
bonus earned during 1997 (collectively, the "Peerless Executive Officers"), the
directors and Peerless Executive Officers as a group and each person known by
Peerless to own 5% or more of the outstanding shares of Peerless Common Stock.
The persons named in the table have sole voting and investment power with
respect to all shares of Peerless Common Stock owned by them, except as
otherwise noted.
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Name of Beneficial Owner Beneficially Owned Beneficially Owned(1)
- --------------------------------- ------------------ ---------------------
<S> <C> <C>
Rodney L. Armstrong, Jr.(2)......... 798,640(3) 16.13
Gary J. Austin...................... 0(4) *
Steven W Tomson(2).................. 54,799(5) 1.11
Kevin W. Marsh(2)................... 235,800(6) 4.78
Allen D. Fleener(7)................. 150,800(8) 3.06
William F. Dunbar(9)................ 7,000(10) *
David A. O'Connor(11)............... 6,500(10) *
Jane C. Walsh(12)................... 4,000(10) *
All directors and executive officers
as a group (total of 9 persons)..... 1,295,414(13) 25.80
Allied Investment Corporation(14)... 307,889(15) 6.03
Allied Capital Corporation(14)...... 253,240 5.14
Fleet Financial Group, Inc.(16)..... 305,000(17) 6.20
Hathaway Partners Investment
Limited Partnership(18)............. 300,000 6.09
</TABLE>
- ----------------------------
* Less than 1%.
(1) Percentage of outstanding shares that the named person, entity or group
would beneficially own if such person, entity or group, and only such
person, entity or group, exercised all warrants and options held that are
exercisable within 60 days.
(2) 1021 Central Expressway South, Allen, Texas 75013.
(3) Includes options to purchase 29,200 shares of Common Stock. Mr. Armstrong
has shared voting and investment power with respect to 55,900 of the shares
beneficially owned by him.
(4) Mr. Austin retired from his positions as the Vice-Chairman and Chief
Operating Officer of Peerless on February 28, 1998.
(5) Includes options to purchase 24,400 shares of Common Stock.
(6) Includes options to purchase 12,600 shares of Common Stock.
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<PAGE> 60
(7) 15301 Dallas Parkway, Suite 840, Dallas, Texas 75248.
(8) Includes options to purchase 11,600 shares of Common Stock.
(9) 4350 North Fairfax Drive, Suite 480, Arlington, Virginia 22203.
(10) Includes options to purchase 2,000 shares of Common Stock.
(11) 800 Linkhorn Drive, Virginia Beach, Virginia 23451.
(12) 89 Turnpike Street, North Andover, Massachusetts 01845-5045.
(13) Includes options to purchase 98,880 shares of Common Stock.
(14) 1919 Pennsylvania Avenue, Third Floor, Washington, D.C. 20006.
Information with respect to beneficial ownership of shares of Common Stock
by Allied Investment Corporation and Allied Capital Corporation is based
solely upon information provided to Peerless by both Allied entities.
(15) Includes warrants to purchase 181,654 shares of Common Stock.
(16) One Federal Street, Boston, Massachusetts 02110. Information with
respect to beneficial ownership of shares of Common Stock by Fleet
Financial Group, Inc. is based solely upon the latest report of Fleet
Financial Group, Inc. on Schedule 13G dated February 13, 1998, as filed
with the SEC.
(17) Fleet Financial Group, Inc. has sole voting power with respect to 250,000
of such shares.
(18) 119 Rowayton Avenue, Rowayton, Connecticut 06853. Information with
respect to beneficial ownership of shares of Peerless Common Stock by
Hathaway Partners Investment Limited Partnership is based solely upon the
latest report of Hathaway Partners Investment Limited Partnership on
Schedule 13D dated April 18, 1997, as filed with the SEC.
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<PAGE> 61
DESCRIPTION OF JACK HENRY'S BUSINESS
OVERVIEW
Jack Henry was incorporated in Missouri in 1977 and was privately held
until November 1985 when it sold 725,000 shares of its common stock to the
public (along with 375,000 shares sold by stockholders). Jack Henry also
reincorporated in Delaware at that time. Jack Henry became subject to periodic
reporting and certain other requirements of the Exchange Act as a result of that
initial public stock offering. The common stock was then qualified for
quotation on the National Market System of the NASDAQ interdealer quotation
system under the stock symbol "JKHY."
Jack Henry provides integrated computer systems for in-house and service
bureau data processing to banks and other financial institutions. Jack Henry
has developed several banking applications software systems which it markets,
along with the computer hardware, to financial institutions throughout the
United States. Jack Henry also performs data conversion, software installation
and software customization for the implementation of its systems, and provides
continuing customer maintenance/support services after the systems are
installed.
Over the last five years, Jack Henry's revenues have grown from $32.6
million to $113.4 million; and earnings have grown from $6.3 million to $21.6
million. Jack Henry's growth has resulted from both acquisitions and internal
expansion. This growth has allowed Jack Henry to develop new products and
expand its core systems customer base from 837 to 1,150, while increasing the
number of employees from 154 to 605 during this same period.
MARKETS AND COMPETITION
Jack Henry's primary market consists of the approximately 9,200 commercial
banks in the United States with less than $10 billion in total assets. Community
banks account for approximately 9,100 of that number. The population of
community banks decreased by 3% in 1997. In 1997, statistics reported in
"Automation in Banking 1998" showed that financial institutions spent
approximately $31 billion on hardware, software, services and
telecommunications. In-house vendors have 58% of the commercial banks as
customers. Centralized off-site service bureaus provide data processing for 37%
of the banks, down from two-thirds in the mid 1980's. Many organizations
provide data processing to banks through a service bureau approach. Some
service bureaus are affiliated with large financial institutions which may have
other relationships with potential bank customers, but this is less prevalent
than in the past. Typically, a bank which is making a data processing decision
will consider both service bureau and in-house alternatives.
Of the small-to-mid-size banks with in-house installations, 43% utilize IBM
hardware, 26% NCR and 20% Unisys Corporation, respectively. All other vendors
had under 5% shares of the in-house community bank market. In 1997, eight of
the top ten software providers in this market, ranked by number of installed
customers, offered their products on IBM hardware. According to that survey,
Jack Henry had the most installed customers (approximately 1150 at 12-31-97) of
the IBM providers. Only one other software provider had a larger customer base
than Jack Henry. Although the top ten software providers accounted for about
89% of in-house systems installed, the study identified 20 other software
vendors in this arena. That number has been declining in recent years.
Jack Henry believes that the primary competitive factors in software
selection are comprehensiveness of applications, features and functions,
flexibility and ease of use, customer support, references of existing customers,
and hardware preferences and pricing. The price of the software and the related
services is also a significant competitive factor which may be determinative,
particularly for smaller banks. Jack Henry's management believes that Jack
Henry's results and the size of its customer base indicate that Jack Henry
generally compares favorably in the competitive factors. However, the in-house
banking software industry includes several
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<PAGE> 62
competitors, based upon the size of their respective customer bases. Over half
of the most successful competitors utilize IBM hardware.
PRODUCTS AND SERVICES
Jack Henry's business and operations include three major categories which
are software and installation, maintenance/support and services and hardware
sales. Software includes the development and licensing of applications software
systems and the conversion, installation and customization services required for
the customer's installation of the systems. Maintenance/support consists of the
ongoing services to assist the customer in operating the systems and to modify
and update the software to meet changes in banking. Hardware sales (often
referred to as remarketing) include both the computer equipment and the
equipment maintenance on which the Jack Henry software systems operate. Also,
included in hardware is the resale of forms and supplies. The following table
illustrates the significance of each of these three areas, expressed as a
percentage of total revenues:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------
1998 1997 1996
<S> <C> <C> <C>
Software licensing and installation 29% 28% 27%
Maintenance/support and services 31% 33% 33%
Hardware sales 40% 39% 40%
--- --- ---
Total Revenues 100% 100% 100%
=== === ===
</TABLE>
Jack Henry's primary banking software systems are CIF 20/20(TM) and the
Silverlake System(R). CIF 20/20 is the latest version of a series of systems
that has evolved from Jack Henry's original system which was first installed in
1977. It is written using the RPG/400 language to take advantage of the
relational data base features and functions of the IBM AS/400(TM ) computer.
CIF/36, CIF/34 and CIF/32 are all predecessors of this software system, which
ran on IBM System 36, 34 and 32 hardware. CIF 20/20 operates on IBM AS/400 and
IBM System 36 hardware and is designed primarily for financial institutions with
total assets ranging up to $300 million. The Silverlake System was developed
(rather than having been migrated from equipment with other architecture) by
Jack Henry in 1986 and 1987 to take advantage of the relational data base
characteristics of IBM System 38 and AS/400 hardware. It is designed generally
for somewhat larger banks than CIF 20/20 and multi-bank groups ranging up to $10
billion in total assets. The computer equipment now being offered extends this
system into the low end of the large bank arena, previously limited to
"mainframe" computer systems. Jack Henry is one of the few vendors that offers
its customers truly native software products for use on the AS/400.
Each of the systems consists of several fully integrated applications
software modules, such as Deposits, Loans, General Ledger, and the Customer
Information File (which is a centralized file containing customer data for all
applications). The systems make extensive use of parameters established by the
customer. The systems can be interfaced with (connected to) a variety of
peripheral devices used in bank operations including teller machines, on-line
teller terminals and magnetic character readers. Jack Henry software is
designed to provide maximum flexibility in meeting a bank's data processing
requirements within a single system, thereby minimizing data entry.
Jack Henry devotes significant effort and expense to develop and
continually upgrade and enhance its software. Upgrades and enhancement efforts
are directed primarily through prioritized lists prepared by its national users
organization and in response to changes in the banking environment. Bank
regulation, by federal and state banking agencies, has a significant impact on
Jack Henry's software since Jack Henry must maintain
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its systems in compliance with those regulations. Jack Henry's research and
development expenditures were $3,107,000, $2,019,000 and $2,047,000 in FY '98,
'97 and '96, respectively. Portions of the expenditures are required to be
capitalized when incurred and then amortized in subsequent periods. Including
the effect of this amortization, the amount of research and development costs
charged to expense in those years is $3,132,000, $2,045,000 and $1,775,000,
respectively.
Jack Henry licenses CIF 20/20 and the Silverlake System under standard
license agreements which provide the customer with a fully-paid, nonexclusive,
nontransferable right to use the software for a term of 25 years on a single
computer and for a single financial institution location upon payment of the
license fee. Generally, license fees are payable 25% upon execution of a
license agreement, 65% upon delivery of the software, and the balance at the
installation of the last application module. Jack Henry provides a limited
warranty for its unmodified software for a period of 60 days from delivery.
Under the warranty, Jack Henry will correct any program errors at no additional
charge to the customer.
Jack Henry claims a proprietary interest in its software programs,
documentation, methodology and know-how. It also utilizes copyright protection,
trademark registration, trade secret laws and contract restrictions to protect
its interest in these products.
Jack Henry provides data conversion and software installation services to
assist its customers in implementing their Jack Henry software system. Jack
Henry provides these services on an hourly or a fixed-fee basis, depending on
the customers' preference. After a customer installation is complete, the
customer is encouraged (but not required) to contract with Jack Henry for
software maintenance/support. These services, which are provided for an annual
fee, include updates of the software to meet regulatory requirements and
telephone support to assist the customer in operating the system. Jack Henry
also offers maintenance services for hardware, providing customers who have
contracted for this service with "one-call" system support covering hardware,
system software and applications software. The hardware maintenance contract is
between Jack Henry and its customer. The actual hardware maintenance is
performed by the hardware manufacturer under a contract between the manufacturer
and Jack Henry.
Hardware manufacturers enter into marketing and other arrangements with
software companies, such as Jack Henry, because each depends upon the products
of the other. These arrangements generally include financial incentives paid by
the manufacturer to the software company. They may be structured as hardware
commissions based upon hardware sold by the manufacturer in conjunction with
Jack Henry's software or as a remarketer arrangement. A remarketer arrangement
allows the software company to purchase hardware from the manufacturer at a
discount and sell (remarket) it to customers along with Jack Henry's software.
Remarketer arrangements usually require the software company to assume more of
the marketing and customer contact responsibilities. The margin earned by a
remarketer on hardware it sells is generally greater than the amounts received
on commission arrangements. Only a minor portion of Jack Henry's revenues are
realized from commission arrangements. Remarketer arrangements are generally
not exclusive. All of the major hardware manufacturers, except one, have more
than one software company as remarketers of their hardware in the banking
industry. Effective January 1, 1997, Jack Henry renewed its industry remarketer
(IR) agreement with IBM for a two year term. Jack Henry continues to operate
under the IBM Business Partner marketing program.
The IR agreement allows Jack Henry to sell IBM's newest mid-range computer
system, the AS/400, along with its banking software system. It also allows Jack
Henry to provide upgraded and additional equipment to its existing IBM
customers. IBM hardware maintenance will also continue to be offered by Jack
Henry to customers, providing "one-call" customer support service for hardware,
system software and applications software support.
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<PAGE> 64
Jack Henry offers outsourcing solutions to customers through service
bureaus, which give the customers the same data and item processing capabilities
as the in-house offering. Customers pay monthly usage fees on the multi-year
service contracts for these services.
Jack Henry offers automatic teller machine (ATM) software and provides
regional and national switching services for various electronic fund
transactions. Customers pay license and maintenance fees for the software and
monthly usage and item processing fees for the switching services.
Jack Henry also offers emergency facilities backup to its CIF 20/20 and
Silverlake System customers using its Bank Business Recovery Services. Jack
Henry has established six locations, strategically located geographically, to
provide backup to its customers. Each location contains the computer equipment
needed to provide bank data processing in the event a subscriber's equipment is
destroyed in a fire or natural disaster.
The service bureau, electronic funds switching services and bank business
recovery services provided by Jack Henry are subject to specific review by
various banking regulatory agencies.
Silverlake System(R) is a registered trademark of Jack Henry & Associates,
Inc. CIF 20/20(TM) is a trademark of Jack Henry & Associates, Inc. AS/400(TM)
is a trademark of International Business Machines Corporation.
MARKETING AND SALES
Jack Henry markets its products (including Silverlake System, CIF 20/20 and
its other ancillary products) throughout the United States using sales
representatives who are employed by and work directly for Jack Henry. Jack
Henry's primary market is commercial banks. Jack Henry has not devoted
significant marketing and sales efforts to other financial institutions such as
savings and loans or credit unions. While Jack Henry does serve a limited
number of savings and loan and savings bank customers, most of these customers
operate more like a commercial bank than a traditional thrift institution. With
its current range of products, Jack Henry systems are appropriate for all but
the largest regional money center banks. Most of the sales effort and success
has been in banks with $2 million to $2 billion in total assets.
Jack Henry also has installations in the Caribbean and one in West Africa
through the marketing efforts of its small foreign sales corporation, Jack Henry
International Limited ("JHI"). JHI's sales have historically accounted for
substantially less than 5% of Jack Henry's revenues.
BACKLOG
Jack Henry's backlog of business was $56,742,000 and $29,671,000 at June
30, 1998 and 1997. Backlog at September 30, 1998 was $64,132,000.
FACTORS AFFECTING JACK HENRY'S BUSINESS AND PROSPECTS
There are numerous factors that may affect Jack Henry's business and the
results of its operations. These factors include general economic and business
conditions; the level of demand for banking software; the level and intensity of
competition in the banking software and financial services industry and the
pricing pressures that may result; the ability of Jack Henry to timely and
effectively manage periodic product transitions and hardware availability; the
ability of Jack Henry to keep pace with new or evolving technology; its ability
to continue to improve its infrastructure (including personnel and systems) to
keep pace with the growth in its overall business activities; and Jack Henry's
ability to ensure its products and information systems and those of its third
party
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providers will be Year 2000 compliant. For a discussion of these and other
factors affecting Jack Henry's business, see "Certain Risk Factors and
Investment Considerations".
SUBSIDIARIES
Jack Henry currently has the following subsidiaries:
<TABLE>
<CAPTION>
Percent
Company Ownership Comments
------- --------- --------
<S> <C> <C>
Jack Henry International, Ltd. 100% Markets Jack Henry products outside the U.S.
BankVision Software, Ltd. 100% Marketed banking products outside the U.S.
CommLink Corp. 100% Markets ATM switching products and services
GG Pulley & Associates, Inc. 100% Markets image and item processing products and services
Financial Software Systems, Inc. 100% Markets payroll software and services
Vertex, Inc. 100% Markets teller software and services
Hewlett Computer Services, Inc. 100% Provides data processing services to banks
</TABLE>
EMPLOYEES
As of August 14, 1998, Jack Henry had 605 full-time employees. Jack
Henry's employees are not covered by a collective bargaining agreement and there
have been no labor-related work stoppages. Jack Henry considers its employee
relations to be good.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is the name, age, position, term of office and a brief
account of the business experience of each person who is a director or executive
officer of Jack Henry.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael E. Henry 37 Chairman of the Board and
Chief Executive Officer
Michael R. Wallace 37 President, Chief Operating Officer
and Director
John W. Henry 63 Vice Chairman, Senior Vice President
and Director
Jerry D. Hall 55 Executive Vice President and Director
James J. Ellis 64 Director
Burton O. George 71 Director
George R. Curry 73 Director
Terry W. Thompson 48 Vice President, Chief Financial Officer
and Treasurer
Marguerite P. Butterworth 50 Vice President
</TABLE>
Michael E. Henry, the son of John W. Henry and a director of Jack Henry
since 1986, has served as Jack Henry's Chairman of the Board and Chief Executive
Officer since October, 1994. He previously served as Vice Chairman and Senior
Vice President since 1993. Previous to that he served as Manager of Research and
Development since 1983. He joined Jack Henry in 1979.
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Michael R. Wallace, a director of Jack Henry since 1991, has served as
President since 1993 and as the Chief Operating Officer since October, 1994. He
previously served as Manager of Installation Services since 1986. He joined Jack
Henry in 1981.
John W. Henry, a founder and principal stockholder of Jack Henry, has
served as Vice Chairman since October, 1994. He previously served as Chairman of
the Board from 1977 through 1994. He also has been a director since Jack Henry's
inception in 1977. He previously served as Chief Executive Officer from 1977
through 1988 and as President until 1989.
Jerry D. Hall, a principal stockholder of Jack Henry, has served as
Executive Vice President since October, 1994. He previously served as Chief
Executive Officer from 1990 through 1994. He also has been a director since Jack
Henry's inception in 1977. He previously served as President from 1989 through
1993 and as Vice President-Operations from 1977 through 1988.
James J. Ellis, a director of Jack Henry since 1985, has been Managing
Partner of Ellis/Rosier Financial Services since 1992. Mr. Ellis served as
general manager of MONY Financial Services, Dallas, Texas, from 1979 until his
retirement in 1992. Mr. Ellis also serves as a director of Merit Medical
Systems, Inc.
Burton O. George, a director of Jack Henry since 1987, is retired. He
previously had been in the banking business since 1958, and most recently served
as Chairman of the Board and Chief Executive Officer of First National Bank of
Berryville, Berryville, Arkansas from 1985 through 1989.
George R. Curry, a director of Jack Henry since 1989, is Chairman of
Central Bank, Lebanon, Missouri, with which he has been affiliated since 1949,
as well as President of Central Shares, Inc., a bank holding company.
Terry W. Thompson has served as Vice President, Chief Financial Officer and
Treasurer of Jack Henry since 1990.
Marguerite P. Butterworth has served as Vice President since February of
1993. Ms. Butterworth joined Jack Henry in 1983 and has been Hardware Manager
since 1984.
YEAR 2000
The Year 2000 will have a broad impact on the business environment in which
Jack Henry operates due to the possibility that many computerized systems across
the banking and financial services industries will be unable to process
information containing dates beginning in the Year 2000. Jack Henry has
established a Year 2000 Committee to review and analyze Jack Henry's exposure to
Year 2000 issues. This Committee has prepared a documented, systematic approach
(the "Y2K Plan") to review all products and internal systems for Year 2000
compliance. The Jack Henry Board has reviewed and approved the Y2K Plan as
required by the banking regulators of all service bureau providers. Jack Henry
believes the products it currently sells to be Year 2000 ready and that the
majority, if not all, of its internal systems will be Year 2000 ready by March
31, 1999. The estimated cost of the above efforts is not reasonably
determinable at the current time and is not expected to be material to Jack
Henry's business or financial condition.
In addition, Jack Henry is communicating with key suppliers, vendors
and customers in order to assess their ability to maintain normal business
operations in the Year 2000. To the extent that Jack Henry is not satisfied
with the status of a vendor's Year 2000 compliance, Jack Henry expects to
develop and implement appropriate contingency plans.
For a further discussion of the risks and uncertainties associated with the
Year 2000 issue, see "Certain Risk Factors and Investment Consideration -- Year
2000 Compliance," above.
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<PAGE> 67
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF PEERLESS AND JACK HENRY
At the Effective Time, the stockholders of Peerless will become
stockholders of Jack Henry. As stockholders of Jack Henry, their rights will be
governed by the DGCL and Jack Henry's Certificate of Incorporation (the "Jack
Henry Certificate") and Bylaws (the "Jack Henry Bylaws"). Following are
summaries of certain differences between the rights of Peerless stockholders and
Jack Henry stockholders. The summaries do not purport to be complete and are
qualified in their entirety by reference to the Jack Henry Certificate and Jack
Henry Bylaws and Peerless' Certificate of Incorporation (the "Peerless
Certificate") and Bylaws (the "Peerless Bylaws"), as applicable.
Jack Henry and Peerless are each organized under the laws of the State of
Delaware. Any differences, therefore, in the rights of holders of Jack Henry
Common Stock, on one hand, and Peerless Common Stock, on the other hand, arise
solely from differences in their respective certificates of incorporation and
bylaws.
AUTHORIZED AND ISSUED CAPITAL STOCK
The Peerless Certificate authorizes the issuance of 15,000,000 shares of
capital stock, consisting of 10,000,000 shares of Peerless Common Stock, par
value $.01 per share, and 5,000,000 shares of preferred stock, par value $.01
per share ("Peerless Preferred Stock"). The Jack Henry Certificate, as amended,
authorizes the issuance of 50,500,000 shares of capital stock, consisting of
50,000,000 shares of Jack Henry Common Stock, par value $.01 per share, and
500,000 shares of preferred stock, par value $1.00 per share ("Jack Henry
Preferred Stock"). At October 30, 1998, 4,922,660 shares of Peerless Common
Stock were issued and outstanding and no shares of Peerless Preferred Stock were
issued and outstanding. At October 30, 1998, 19,072,498 shares of Jack
Henry Common Stock were issued and outstanding, and no shares of Jack Henry
Preferred Stock were issued and outstanding.
NUMBER OF DIRECTORS
Under the DGCL, the certificate of incorporation and bylaws of a
corporation may specify the number of directors. The Jack Henry Bylaws provide
that the number of Jack Henry directors shall consist of eight members, or such
other number as determined by the Jack Henry Board; provided that such number is
at least one. The Jack Henry Board currently consists of seven directors. The
Peerless Certificate provides that the number of directors shall be not less
than three nor more than nine, as determined exclusively by the Peerless Board.
The Peerless Board currently consists of five directors.
ELECTION OF DIRECTORS
The Jack Henry Bylaws provide that each director shall be elected to serve
until the next annual meeting of stockholders or until his successor shall be
elected and qualified. The Peerless Certificate, in contemplation of a
classified Board of Directors, provides that each director shall be elected to
serve until the third succeeding annual meeting of stockholders or until his
successor shall be elected and qualified.
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<PAGE> 68
SPECIAL STOCKHOLDER MEETINGS
The Jack Henry Bylaws provide that a special meeting of stockholders may be
called at any time by the chairman of the board, president, secretary, board of
directors, or if requested in writing by stockholders owning at least two-thirds
(2/3) of the stock entitled to vote. The Peerless Certificate provides that a
special meeting of stockholders may be called at any time by the chairman of the
board, president, board of directors or holders of not less than a majority of
stock entitled to vote.
ADVANCE NOTICE REQUIREMENTS FOR NOMINATIONS OF DIRECTORS AND STOCKHOLDER
PROPOSALS
The Peerless Certificate provides that nominations of directors and
proposals for business at a meeting of Peerless stockholders may be made by any
Peerless stockholder who submits written notice thereof to the Secretary of
Peerless at least 60 days prior to the meeting of the Peerless stockholders. In
the event that less than 70 days notice of the date of the meeting is given to
the Peerless stockholders, the Peerless stockholder's nominations or proposals
must be received no later than the 10th day following the date on which notice
of the meeting was mailed or public disclosure of the meeting was made.
The Jack Henry Bylaws provide that a Jack Henry stockholder may make
nominations for the election of directors or submit a proposal for business at
an annual meeting of stockholders by providing written notice thereof to the
Secretary of Jack Henry between 70 and 90 days prior to the anniversary date of
the preceding year's annual meeting, except that if the date of the upcoming
annual meeting is advanced by more than 20 days, or is delayed by more than 70
days from the anniversary date, the notice must be delivered not earlier than
the 90th day prior to the upcoming annual meeting and not later than the close
of business following the day on which the meeting was publicly announced. If
the number of directors to be elected to the board of directors is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased board at least 80 days prior to the
anniversary of the preceding year's annual meeting, the Jack Henry Bylaws
provide that a stockholder may make a nomination for any new positions created
by the increase in the board size by delivering the nomination to the Secretary
no later than the close of business on the 10th day following the day on which
the public announcement was first made. The Jack Henry Bylaws provide that a
Jack Henry stockholder may make nominations for the election of directors at a
special meeting of stockholders by providing written notice thereof to the
Secretary of Jack Henry not earlier than the 90th day prior to the special
meeting and not later than the later of the 70th day prior to the special
meeting or the 10th day following the date on which public announcement is first
made of the date of the special meeting.
PROVISIONS AFFECTING BUSINESS COMBINATIONS WITH INTERESTED PERSONS
The Peerless Certificate requires that any "business combination" (as
defined in the Peerless Certificate) with an "interested stockholder" requires
the affirmative vote of the holders of not less than 80% in interest of the
outstanding voting shares of Peerless Common Stock unless the following
conditions are satisfied: (i) the "business combination" has been approved prior
to consummation by a majority of directors not associated with the "interested
stockholder" or (ii) the consideration received in the "business combination"
satisfies certain specified minimum price requirements. The Jack Henry
Certificate has no corresponding provision to the foregoing requirement, but
Jack Henry is subject to Section 203 of the DGCL pertaining to business
combinations with interested stockholders.
ACTION BY WRITTEN CONSENT
Under Delaware law, unless the certificate of incorporation provides
otherwise, any action that can be taken by stockholders at a meeting can be
taken without a meeting, without prior notice, and without a vote, if
60
<PAGE> 69
the stockholders having the number of votes that would be necessary to take such
action at a meeting at which all stockholders were present and voted consent to
the action in writing. Both the Jack Henry Certificate and the Peerless
Certificate eliminate the stockholders' right to take action by written consent.
AMENDMENT TO CERTIFICATE OF INCORPORATION
The Jack Henry Certificate provides that any proposed amendment must be
approved by stockholders owning at least two-thirds of the stock entitled to
vote. However, in the event any amendments are recommended to the stockholders
by at least two-thirds of the Jack Henry Board, then only the vote of a simple
majority of the stock entitled to vote is required to approve the amendment. The
Peerless Certificate provides that amendments to certain provisions of the
Peerless Certificate concerning preferred stock terms, stockholder meetings,
amendments to the Bylaws and the Peerless Board must be approved by a two-thirds
vote of the stock entitled to vote. The remaining provisions of the Peerless
Certificate can be amended by the affirmative vote of the holders of a majority
of the stock entitled to vote.
REMOVAL OF DIRECTORS
The Jack Henry Bylaws provide that any director may be removed from office
at any time, but only for cause or upon the affirmative vote of the holders of
at least two-thirds of the corporation's stock entitled to vote thereon. The
Peerless Certificate states that directors can be removed by an affirmative vote
of the holders of at least two-thirds of the voting power of the voting stock
only if the director is convicted of a felony, adjudged to be liable for gross
negligence or misconduct in the performance of the director's duties, or has
missed four consecutive meetings of the Peerless Board.
DIRECTOR INDEMNIFICATION
Under Section 145 of the DGCL, a Delaware corporation may indemnify fully
its directors, officers, employees, and agents if such persons have acted in
good faith and in a manner that such persons reasonably believed was in, or not
opposed to, the best interests of the corporation. A Delaware corporation also
may indemnify fully such individuals with respect to criminal actions or
proceedings, provided that such individual had no reasonable cause to believe
such conduct was unlawful. The Peerless Certificate provides that Peerless
shall indemnify, to the fullest extent authorized by the DGCL, its directors,
officers, employees, and agents. If a claim for indemnification or advancement
of expenses is not paid by Peerless within 60 days after Peerless receives a
written claim, the claimant is authorized by the Peerless Certificate to bring
suit to recover the unpaid amount of the claim. The Jack Henry Certificate
contains a similar provision indemnifying Jack Henry's directors and officers to
the fullest extent authorized by the DGCL. However, the Jack Henry Certificate
does not contain a provision similar to the provision in the Peerless
Certificate authorizing the claimant to sue to recover a claim not paid within a
certain period of time. The Jack Henry Certificate further permits Jack Henry
to maintain insurance on behalf of any director, officer, employee, or agent of
Jack Henry against any liability incurred by such person in any such capacity or
arising out of such person's position, whether or not Jack Henry would have the
power to indemnify such person against such liability under the DGCL.
AMENDMENT, REPEAL OF BYLAWS
The Jack Henry Bylaws may be amended, altered or repealed by the Jack Henry
Board and at any special meeting of the stockholders if duly called for that
purpose or at any annual meeting, by the affirmative vote of the holders of at
least two-thirds of the corporation's stock entitled to vote thereon. The
Peerless Certificate provides that the Peerless Bylaws may generally be altered
or amended or new bylaws adopted by the Peerless Board. However, the Peerless
Certificate provides that if a proposed amendment to the Peerless Bylaws would
61
<PAGE> 70
be inconsistent with certain provisions of the Peerless Certificate (the same
provisions which can only be amended in the Peerless Certificate if the
amendment is approved by two-thirds of the stock entitled to vote thereon), the
amendment must be approved by at least two-thirds of the stock entitled to vote
thereon.
DESCRIPTION OF JACK HENRY CAPITAL STOCK
The summary of the terms of the capital stock of Jack Henry set forth below
does not purport to be complete and is qualified by reference to the Jack Henry
Certificate and Jack Henry Bylaws. Copies of the Jack Henry Certificate and Jack
Henry Bylaws are incorporated by reference herein and will be sent to holders of
shares of Peerless Common Stock upon request. See "Where You Can Find More
Information".
AUTHORIZED CAPITAL STOCK
Under the Jack Henry Certificate, Jack Henry's authorized capital stock
consists of 50,000,000 shares of Jack Henry Common Stock and 500,000 shares of
Jack Henry Preferred Stock.
JACK HENRY COMMON STOCK
The holders of Jack Henry Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. Subject
to preferences that may be applicable to any outstanding Jack Henry Preferred
Stock, holders of Jack Henry Common Stock are entitled to receive ratably such
dividends as may be declared by the Jack Henry Board out of funds legally
available therefor. In the event of a liquidation or dissolution of Jack Henry,
holders of Jack Henry Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Jack Henry Preferred Stock.
Holders of Jack Henry Common Stock have no preemptive rights and have no
rights to convert their Jack Henry Common Stock into any other securities. All
of the outstanding shares of Jack Henry Common Stock are, and the shares of Jack
Henry Common Stock issued pursuant to the Merger will be, duly authorized,
validly issued, fully paid and nonassessable.
JACK HENRY PREFERRED STOCK
The Jack Henry Board is authorized to designate any series of Jack Henry
Preferred Stock and the powers, preferences and rights of the shares of such
series and the qualifications, limitations or restrictions thereof without
further action by the holders of Jack Henry Common Stock. As of the Record
Date, no shares of Jack Henry Preferred Stock were issued or outstanding.
The Jack Henry Board may create and issue a series of Jack Henry Preferred
Stock with rights, privileges or restrictions, and adopt a stockholder rights
plan, having the effect of discriminating against an existing or prospective
holder of such securities as a result of such security holder beneficially
owning or commencing a tender offer for a substantial amount of Jack Henry
Common Stock. One of the effects of authorized but unissued and unreserved
shares of capital stock may be to render more difficult or discourage an attempt
by a potential acquiror to obtain control of Jack Henry by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of
Jack Henry's management. The issuance of such shares of capital stock may have
the effect of delaying, deferring or preventing a change in control of Jack
Henry without any further action by the stockholders of Jack Henry. Jack Henry
has no present intention to adopt a stockholder rights plan, but could do so
without stockholder approval at any future time.
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<PAGE> 71
TRANSFER AGENT AND REGISTRAR
UMB Bank, N.A. is the transfer agent and registrar for the Jack Henry
Common Stock.
NASDAQ LISTING; DELISTING AND DEREGISTRATION OF PEERLESS COMMON STOCK
It is a condition to the Merger that Jack Henry provide notification to the
NASDAQ for listing of the shares of Jack Henry Common Stock to be issued in the
Merger on or prior to the Effective Time. If the Merger is consummated,
Peerless Common Stock will cease to be listed on the NASDAQ.
STOCKHOLDER PROPOSALS
As described in Peerless' proxy statement relating to its 1998 Annual
Meeting of Stockholders, SEC Regulations provide that Peerless is entitled to
omit any proposal that a stockholder intends to present at Peerless' 1999 Annual
Meeting (if the Merger is not consummated) from Peerless' proxy statement unless
the proposal is received by Peerless at its principal executive offices by
November 23, 1998. Such proposals should be directed to Peerless Group, Inc.,
1021 Central Expressway South, Allen, Texas 75013, Attention: Chief Executive
Officer.
The Peerless Certificate requires any Peerless stockholders desiring to
bring business before a stockholder meeting to give notice to the Peerless
Secretary at least 60 days prior to the stockholder meeting. In the event that
less than 70 days notice of the date of the meeting is given to the Peerless
stockholders, the notice from a Peerless stockholder desiring to bring business
before the meeting must be received no later than the 10th day following the
date on which notice of the meeting was mailed or public disclosure of the
meeting was made.
LEGAL MATTERS
The validity of the shares of Jack Henry Common Stock to be issued in
connection with the Merger have been be passed upon for Jack Henry by Shughart
Thomson & Kilroy, P.C., Kansas City, Missouri. The federal income tax
consequences of the Merger have been passed upon for Peerless by
Haynes and Boone, LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements incorporated in this Proxy
Statement/Prospectus by reference from Jack Henry's Annual Report on Form 10-K
as of and for the years ended June 30, 1998 and 1997 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference. The consolidated financial statements of Jack
Henry for the year ended June 30, 1996 appearing in Jack Henry's Annual Report
on form 10-K for the year ended June 30, 1998 have been audited by Baird, Kurtz
& Dobson, independent accountants, as set forth in their report included therein
and incorporated herein by reference. Such consolidated financial statements
are incorporated herein by reference in reliance upon such reports given upon
the authority of such firms as experts in accounting and auditing.
The consolidated financial statements of Peerless at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
included in the Proxy Statement of Peerless and the Registration Statement and
Prospectus of Jack Henry, have been audited by Ernst & Young, LLP, independent
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<PAGE> 72
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Peerless and Jack Henry file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by either company at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The companies' SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
Jack Henry filed a Registration Statement on Form S-4 to register with the
SEC the Jack Henry Common Stock to be issued to Peerless stockholders in the
Merger. This Proxy Statement/Prospectus is a part of that Registration Statement
and constitutes a prospectus of Jack Henry in addition to being a proxy
statement of Peerless for the Special Meeting. As allowed by SEC rules, this
Proxy Statement/Prospectus does not contain all the information you can find in
the Registration Statement or the exhibits to the Registration Statement.
The SEC allows Jack Henry to "incorporate by reference" information into
this Proxy Statement/Prospectus, which means important information may be
disclosed to you by referring you to another document filed separately with the
SEC. The information incorporated by reference is deemed to be part of this
Proxy Statement/Prospectus, except for any information superseded by information
in (or incorporated by reference in) this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that have been previously filed with the SEC. These documents contain important
information about Jack Henry and its finances.
JACK HENRY SEC FILINGS (FILE NO. 0-14112) PERIOD
Annual Report on Form 10-K Year ended June 30, 1998.
Current Reports on Form 8-K As Filed.
Proxy Statement on Schedule 14A for 1998 Dated September 23, 1998.
Annual Meeting
Jack Henry is also incorporating by reference additional documents that it
may file with the SEC between the date of this Proxy Statement/Prospectus and
the date of the Special Meeting.
Jack Henry has supplied all information contained or incorporated by
reference in this Proxy Statement/Prospectus relating to Jack Henry, and
Peerless has supplied all such information relating to Peerless. Documents
incorporated by reference are available from Jack Henry without charge,
excluding all exhibits unless we have specifically incorporated by reference an
exhibit in this Proxy Statement/Prospectus. Peerless stockholders may obtain
documents incorporated by reference in this Proxy Statement/Prospectus by
requesting them in writing or by telephone from Terry W. Thompson at the
following address:
Jack Henry & Associates, Inc.
663 Highway 60
P.O Box 807
Monett, Missouri 65708
(417) 235-6652
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<PAGE> 73
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY DECEMBER 7,
1998 TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement/Prospectus to vote on the approval of the
Merger Agreement and the Merger. Neither Peerless nor Jack Henry has authorized
anyone to provide you with information that is different from what is contained
in this Proxy Statement/Prospectus. This Proxy Statement/Prospectus is dated
November 10, 1998. You should not assume that the information contained in
the Proxy Statement/Prospectus is accurate as of any date other than such date,
and neither the mailing of this Proxy Statement/Prospectus to stockholders nor
the issuance of Jack Henry Common Stock in the Merger shall create any
implication to the contrary.
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<PAGE> 74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF PEERLESS GROUP, INC.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . . . . . . . . . . F-2
Audited Financial Statements:
- -----------------------------
Consolidated Balance Sheets as of December 31, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .F-7
Unaudited Financial Statements:
- -------------------------------
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
Consolidated Statements of Income for three months
and six months ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . .F-18
Consolidated Statements of Cash Flows for six
months ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . .F-19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .F-20
</TABLE>
F-1
<PAGE> 75
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Peerless Group, Inc.
We have audited the accompanying consolidated balance sheets of Peerless
Group, Inc. (the Company), as of December 31, 1997 and 1996, and the related
consolidated statements of income, cash flows, and stockholders' equity
(deficit) for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Peerless
Group, Inc., at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
Dallas, Texas
January 20, 1998
F-2
<PAGE> 76
PEERLESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS (NOTE 4)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,845 $8,378
Trade accounts receivable 9,346 5,712
Prepaid expenses and other current assets 1,152 541
--------- ---------
Total current assets 13,343 14,631
Computer and other equipment, at cost 4,337 2,335
Less accumulated depreciation 1,135 589
--------- ---------
3,202 1,746
Computer software, maintenance contracts,
and other assets, net of accumulated
amortization of $396 and $1,482 at
December 31, 1997 and 1996, respectively 897 982
Investment in preferred stock, at cost 2,500 -
--------- ---------
Total assets $19,942 $17,359
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,014 $1,865
Accrued liabilities 1,002 1,041
Sales tax payable 646 568
Unearned revenues 7,121 7,573
--------- ---------
Total current liabilities 11,783 11,047
Commitments (Note 6)
Stockholders' equity (Notes 4 and 8):
Preferred stock, $.01 par value:
Authorized shares-5,000
Issued shares-none
Common stock, $.01 par value:
Authorized shares-10,000
Issued shares-4,948 and 4,598 at December
31, 1997 and 1996,
respectively 49 46
Additional paid-in capital 7,958 7,720
Retained earnings (deficit) 649 (1,254)
Treasury stock, at cost (73 and 1 at
December 31, 1997 and 1996, respectively) (379) (1)
Unearned compensation (118) (199)
--------- ---------
Total stockholders' equity 8,159 6,312
--------- ---------
Total liabilities and stockholders' equity $19,942 $17,359
========= =========
</TABLE>
See accompanying notes
F-3
<PAGE> 77
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Software license and installation............................... $ 10,339 $ 9,987 $ 7,181
Hardware and equipment.......................................... 11,171 10,303 6,727
Maintenance and services........................................ 8,621 6,235 5,782
-------- -------- --------
Total revenues................................................ 30,131 26,525 19,690
Cost of revenues:
Hardware and equipment.......................................... 8,528 7,754 5,258
Software license and installation, maintenance and
services........................................................ 11,794 8,882 6,872
-------- -------- --------
Total cost of revenues........................................ 20,322 16,636 12,130
-------- -------- --------
Gross margin..................................................... 9,809 9,889 7,560
Operating costs and expenses:
Research and development........................................ 2,004 1,696 1,398
Selling and marketing........................................... 3,412 3,477 2,502
General and administrative...................................... 2,216 1,512 1,222
Severance charge (Note 11)...................................... -- 341 --
-------- -------- --------
Total operating costs and expenses............................ 7,632 7,026 5,122
-------- -------- --------
Income from operations........................................... 2,177 2,863 2,438
Other income (expense):
Interest expense................................................ (20) (548) (612)
Interest income................................................. 280 133 68
-------- -------- --------
Total other income (expense)................................... 260 (415) (544)
-------- -------- --------
Income before income taxes....................................... 2,437 2,448 1,894
Provision for income taxes....................................... 534 155 64
-------- -------- --------
Net income....................................................... $ 1,903 $ 2,293 $ 1,830
======== ======== ========
Basic earnings per share......................................... $ 0.40 $ 0.82 $ 0.90
======== ======== ========
Diluted earnings per share....................................... $ 0.37 $ 0.55 $ 0.49
======== ======== ========
Shares used in computing basic earnings per share................ 4,712 2,745 1,976
Shares used in computing diluted earnings per share.............. 5,130 4,055 3,648
</TABLE>
See accompanying notes.
F-4
<PAGE> 78
PEERLESS GROUP, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------ --------------
ADDITIONAL RETAINED NUMBER
NUMBER OF PAID-IN EARNINGS OF UNEARNED
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT COMPENSATION
--------- ------ ---------- --------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ...... 2,080 $ 20 $ (3,948) $ (5,377) 237 $(281) $ --
Net income ...................... -- -- -- 1,830 -- -- --
Common stock issued, net of
unearned compensation ......... 162 2 291 -- -- -- (195)
Common stock repurchased ........ -- -- 141 -- 67 (154) --
Accretion of redeemable
common stock................... -- -- (58) -- -- -- --
-------- ----- -------- -------- -------- ----- --------
Balance at December 31, 1995 ...... 2,242 22 (3,574) (3,547) 304 (435) (195)
Net income...................... -- -- -- 2,293 -- -- --
Common stock issued upon
exercise of warrants ........ 506 5 8 -- -- -- --
Common stock issued upon
exercise of options ......... 79 1 79 -- -- -- --
Common stock issued, net of
unearned compensation ....... 45 1 295 -- -- -- (4)
Common stock repurchased ....... -- -- -- -- 8 (9) --
Cancellation of treasury
stock upon
change-of-domicile merger ... (311) (3) (440) -- (311) 443 --
Common stock issued upon
initial public offering ..... 2,037 20 10,117 -- -- -- --
Accretion of redeemable
common stock ............... -- -- (44) -- -- -- --
Compensation expense on
options ..................... -- -- 268 -- -- -- --
Reclassification of
redeemable common stock
upon exercise of underlying
options ..................... -- -- 1,011 -- -- -- --
-------- ----- -------- -------- -------- ----- --------
Balance at December 31, 1996 ...... 4,598 46 7,720 (1,254) 1 (1) (199)
Net income ..................... -- -- -- 1,903 -- -- --
Common stock issued upon
exercise of warrants ........ 182 2 3 -- -- -- --
Common stock issued upon
exercise of options ......... 168 1 247 -- -- -- --
Common stock issued, net of
unearned compensation ....... -- -- 1 -- (2) 10 72
Common stock issued,
employee stock purchase
plan ........................ -- -- (13) -- (30) 202 --
Common stock repurchased ....... -- -- -- -- 104 (590) 9
-------- ----- -------- -------- -------- ----- --------
Balance at December 31, 1997 ...... 4,948 $ 49 $ 7,958 $ 649 73 $(379) $ (118)
======== ===== ======== ======== ======== ===== ========
</TABLE>
See accompanying notes
F-5
<PAGE> 79
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------- ------- -------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income................................................... $ 1,903 $ 2,293 $ 1,830
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 1,052 757 523
Compensation expense...................................... 83 366 54
Changes in operating assets and liabilities:
Trade accounts receivable.............................. (3,634) (1,506) (584)
Prepaid expenses and other current assets.............. (660) (451) 34
Accounts payable and accrued liabilities............... 1,188 812 939
Unearned revenues...................................... (452) (594) (87)
------- ------- -------
Net cash provided by (used in) operating activities.......... (520) 1,677 2,709
INVESTING ACTIVITIES
Additions to computer and other equipment.................... (2,246) (1,419) (381)
Investment in preferred stock................................ (2,500) - -
Other........................................................ (120) (160) -
------- ------- -------
Net cash used in investing activities........................ (4,866) (1,579) (381)
FINANCING ACTIVITIES
Note receivable from officer................................. - 271 -
Proceeds from borrowings..................................... - - 4,111
Payments on borrowings....................................... - (3,627) (5,953)
Issuance of common stock..................................... 297 94 30
Purchase of treasury stock................................... (436) (9) (140)
Net proceeds from initial public offering.................... - 10,137 -
Other........................................................ (8) 20 (63)
------- ------- -------
Net cash provided by (used in) financing activities.......... (147) 6,886 (2,015)
------- ------- -------
Net increase (decrease) in cash and cash equivalents......... (5,533) 6,984 313
Cash and cash equivalents at beginning of period............. 8,378 1,394 1,081
------- ------- -------
Cash and cash equivalents at end of period................... $ 2,845 $ 8,378 $ 1,394
======= ======= =======
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid for interest....................................... $ 19 $ 542 $ 737
======= ======= =======
Cash paid for income taxes................................... $ 545 $ 265 $ 38
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 80
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE COMPANY
Peerless Group, Inc., formerly known as TPG Holdings, Inc. (the
"Company"), is a computer software company which develops and provides banking
and credit union software systems and services. The Company markets these
systems along with the computer equipment (hardware) to financial institutions
primarily located in the United States and Canada and provides conversion,
support, and maintenance and outsourcing services to customers using the
systems. In conjunction with the initial public offering of its common stock on
October 3, 1996 (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. The financial statements included herein reflect the
merger and resulting change in capitalization as all share and per share
amounts have been retroactively restated to reflect the merger. In conjunction
with this change in capitalization, all treasury shares outstanding were
canceled.
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of money market funds, certificates of
deposit and Treasury Bills with original purchased maturities of three months
or less.
DEPRECIATION
Depreciation is provided on computer and other equipment using the
straight-line method over a five- to ten-year estimated useful life.
COMPUTER SOFTWARE AND MAINTENANCE CONTRACTS
Computer software and maintenance contracts consist of fair values
assigned to acquired software and maintenance contracts. The amounts are being
amortized on a straight-line basis over the estimated economic benefit period
of five years. The amounts amortized and charged to cost of sales were
approximately $358,000, $403,000, and $308,000 in 1997, 1996 and 1995,
respectively.
CAPITALIZED SOFTWARE
The Company expenses all software development costs as incurred until
technological feasibility has been established for the product, at which time
the costs are capitalized until the product is available for general release to
customers.
F-7
<PAGE> 81
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's sources of revenue and the methods of revenue recognition
are as follows:
Software license and installation-Revenues from software contracts
involving installation are recognized when the installation is performed
according to contractual terms, which, in the case of long-term contracts,
involves the use of the percentage-of-completion method of accounting.
Progress towards completion is measured based upon the percentage
relationship that costs incurred to date bear to total estimated costs to
complete the installation. Revenues from license fees not involving
installation are recognized upon delivery of the software to the customer
when no significant vendor obligations remain.
Hardware and equipment-Commissions and revenues from hardware and
equipment sales are recognized upon shipment by the manufacturer.
Maintenance and services-Revenues from maintenance and service contracts
are recognized ratably over the periods of the respective contracts.
Revenues from data and check and statement imaging processing services are
recognized in the period in which the services are performed.
UNEARNED REVENUES
Deposits received and amounts billed for software licenses, installation
and hardware in advance of installation or delivery, and for annual software
maintenance prior to performance of related services, are reflected as unearned
until such amounts are recognized in accordance with the Company's revenue
recognition policy.
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION
Cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and unearned revenues are stated at expected settlement values
which approximate fair value.
Accounts receivable potentially subject the Company to concentrations of
credit risk as the Company markets its products and services primarily to
financial institutions throughout the United States and Canada. The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral; however, deposits for future services or
products are frequently required.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 9, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (Statement 123), requires use of option valuation
models that were not developed for use in valuing employee stock options.
F-8
<PAGE> 82
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statement, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(Statement 128). Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The Company will adopt the
new requirements retroactively in 1998. Management has not completed its review
of Statement 131, but does not anticipate that the adoption of this statement
will affect results of operations or financial position, but will affect the
disclosure of segment information.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Public Accountants issued Statement of Position (SOP)
97-2, Software Revenue Recognition, which supersedes SOP 91-1. The Company will
be required to adopt SOP 97-2 for software transactions entered into beginning
January 1, 1998. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements (i.e., software products,
upgrades/enhancements, postcontract customer support, installation, training,
etc.) to be allocated to each element based on the relative fair values of the
elements. The fair value of an element must be based on evidence which is
specific to the vendor. The revenue allocated to software products (including
specified upgrades/enhancements) generally is recognized upon delivery of the
products. The revenue allocated to postcontract customer support generally is
recognized ratably over the term of the support and revenue allocated to
service elements (such as training and installation) generally is recognized as
the services are performed. If a vendor does not have evidence of the fair
value for all elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. The Company's management anticipates that the adoption of SOP 97-2
will not have a material impact on the Company's results of operations.
F-9
<PAGE> 83
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANGES IN PRESENTATION
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. INVESTMENT IN PREFERRED STOCK
In May 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. The Company understands that Online
is seeking additional financing. If Online is not able to obtain additional
financing, the Company may be required to write off some or all of this
investment.
4. DEBT AND CREDIT AGREEMENTS
LINE OF CREDIT
In January 1997, the Company amended its line of credit agreement with a
bank that provides for borrowings up to $2,500,000, reduced by the value of
outstanding letters of credit issued by the bank on behalf of the Company.
Borrowings using this line of credit bear interest at the bank's prime rate
(8.50% at December 31, 1997) plus 1 2% and are collateralized by the assets of
the Company's wholly owned subsidiaries. The facility will expire on February
1, 1999. No amounts were outstanding on the line of credit at December 31,
1997, and a letter of credit in the amount of $600,000 was issued by the bank
on behalf of the Company at that date.
The line of credit agreement contains restrictive covenants, the most
significant of which relate to minimum defined annual net income, quarterly
cash flow and the restriction on the payment of cash dividends. At December 31,
1997, the Company was in compliance with such covenants.
Under the terms of the line of credit agreement, the bank was issued a
warrant to purchase at any time on or before October 1, 2002, 115,680 shares of
the Company's common stock at a purchase price of $5.42 per share. Included in
the warrant agreement was a provision allowing the bank to put the warrant back
to the Company at any time after October 1, 1999, at a price equal to the
then-current market price of the Company's common stock. No value was assigned
to the warrant at the date of issuance and no accretion was recorded, as the
Company determined that there was no significant value separately assignable to
the warrant and put option. In June 1996, the line of credit agreement was
amended such that the provision allowing the bank to put the warrant back to
the Company was terminated.
F-10
<PAGE> 84
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT AND CREDIT AGREEMENTS (CONTINUED)
LONG-TERM DEBT DUE TO RELATED PARTIES
The Company repaid all of its debt upon completion of the Offering. In
prior years, the terms of certain Subordinated Debentures and Acquisition notes
included warrants to purchase up to 65% of the Company's common stock by the
holders of the Subordinated Debentures (the "Holders"). After giving effect to
several transactions, including the repurchase of warrants for $3,776,000 in
cash and notes, which were recorded as reductions to additional
paid-in-capital, the Holders had warrants to purchase 37.5% of the outstanding
common stock of the Company at December 31, 1995. In June 1996, the Holders
exercised warrants to purchase 505,710 shares of the Company's common stock,
and in October 1996, in conjunction with the Offering, they sold warrants to
the underwriters to purchase 597,360 shares of the Company's common stock. In
December 1997, the Holders exercised warrants to purchase an additional 181,654
shares of the Company's common stock. Therefore, at December 31, 1997, the
Holders own warrants to purchase 181,654 shares of the Company's common stock.
The warrants are exercisable at a price of $0.025 per share and expire in
October, 2000.
5. INCOME TAXES
The Company uses the liability method in accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109 Accounting for
Income Taxes. The components of the provision for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . . . $312 $ 51 $ 38
State. . . . . . . . . . . . . . 124 362 26
---- ---- ----
Total current. . . . . . . . . . . 436 413 64
Deferred:
Federal. . . . . . . . . . . . . 70 (245) -
State. . . . . . . . . . . . . . 28 (13) -
---- ---- ----
Total deferred . . . . . . . . . . 98 (258) -
---- ---- ----
Total provision for income taxes . $534 $155 $ 64
==== ===== ====
</TABLE>
F-11
<PAGE> 85
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The effective income tax rate on income before income taxes differed from
the Federal income tax statutory rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Income tax charge:
<S> <C> <C> <C>
At Federal statutory rate . . . . . $824 $832 $644
Unbenefitted (utilized) net
operating losses . . . . . . . . . - (832) (644)
Benefit of research and
development tax credits. . . . . . (459) - -
Federal alternative minimum tax . . - 48 38
Deferred federal benefit
relating to the elimination of
the valuation allowance. . . . . . - (245) -
State income tax. . . . . . . . . . 96 271 26
Other . . . . . . . . . . . . . . . 73 81 -
------- ------- -------
$534 $155 $64
======= ======= =======
</TABLE>
Given the historical trends in generating taxable income and the expected
future earnings, in the fourth quarter of 1996 the Company determined that it
was more likely than not that its net deferred tax assets would be realized. As
a result of the Company's judgement, the valuation allowance was eliminated and
a deferred tax benefit of approximately $250,000 was recorded.
During the three months ended September 30, 1997, the Company identified
research and development tax credits totaling $459,000. As a result, the
estimated effective tax rate for the fiscal year was lowered to 21.9%. As of
December 31, 1997, the Company had $302,000 of research and development tax
credits available for carryforward to future periods. These credits begin to
expire in 2008.
The significant components of the Company's deferred tax assets and
liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit carryforward . $- $85
Net operating loss carryforwards. . . . . . . - 65
Compensation expense on options . . . . . . . - 103
Research and development tax credits. . . . . 302 -
Allowance for bad debts . . . . . . . . . . . 52 -
Other . . . . . . . . . . . . . . . . . . . . 43 24
------- -------
Total deferred tax assets. . . . . . . . . . . 397 277
Deferred tax liabilities:
Prepaid expenses. . . . . . . . . . . . . . . 185 -
Amortization. . . . . . . . . . . . . . . . . 51 19
------- -------
Total deferred tax liabilities . . . . . . . . 236 19
------- -------
Deferred income tax assets, net of
deferred income tax liabilities . . . . . . . $161 $258
======= =======
</TABLE>
F-12
<PAGE> 86
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASE COMMITMENTS
In May 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 third quarter of 1998. The
Company intends to sublease certain of its existing facilities upon moving to
the new facility.
Minimum noncancelable lease payments required under operating leases for
the years subsequent to December 31, 1997, are as follows (in thousands):
<TABLE>
YEAR NEW LEASE EXISTING LEASES TOTAL
- ---- --------- --------------- ------
<S> <C> <C> <C>
1998 . . . . . . . . . . . $ 505 $ 396 $ 901
1999 . . . . . . . . . . . 1,009 356 1,365
2000 . . . . . . . . . . . 1,009 320 1,329
2001 . . . . . . . . . . . 1,009 160 1,169
2002 . . . . . . . . . . . 1,009 65 1,074
Thereafter . . . . . . . . 12,994 6 13,000
</TABLE>
Rental expense totaled approximately $323,000, $269,000, and $247,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
7. EMPLOYEE 401(K) PLAN
The Company has a plan which provides retirement benefits under the
provisions of Section 401(k) of the Internal Revenue Code (the "Plan") for
substantially all employees who have completed a specified term of service. The
Company's contributions equal 50% of employee contributions, up to a maximum of
6% of eligible employee compensation, as defined. Benefits under the Plan are
limited to the assets of the Plan. Contributions by the Company charged to
expense during the years ended December 31, 1997, 1996 and 1995, were
approximately $128,000, $122,000, and $90,000, respectively.
8. COMMON STOCK
In July 1996, the Company adopted an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended. Under the
employee stock purchase plan, employees may make annual purchases of the
Company's common stock at a price equal to 85% of the market value of the
common stock on certain specified dates. The Company has reserved 250,000
shares of its common stock for issuance under the employee stock purchase plan.
During 1997 and 1996, the Company issued 1,675 and 19,620 shares,
respectively, of restricted stock to employees at weighted-average fair values
of $6.38 and $5.38 per share, respectively. The Company recorded approximately
$10,000 and $102,000, respectively, of unearned compensation for the excess of
the deemed value for accounting purposes of the common stock issued over the
proceeds received upon issuance. The unearned compensation is charged to
expense ratably over the vesting period of the common stock. During 1997 and
1996, approximately $83,000 and $98,000 was charged to operations.
F-13
<PAGE> 87
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS
The Board of Directors and the stockholders of the Company approved the
Peerless Group, Inc. 1997 Stock Option Plan (the "Plan") effective as of April
22, 1997. The Plan reserves 450,000 shares of the Company's common stock for
future issuance. Each option to be granted under the Plan will be exercisable
as provided by the terms of each option, but in no case longer than ten years
from the date of the option's grant. Historically, the Company's options have
generally vested 20% on the date of grant and 20% each year for the following
four years, with an exercise period of five years from the date of grant.
A summary of the Company's stock option activity and related information
for the years ended December 31 follows (in thousands except for per share
data):
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year . . . 433 $4.14 348 $1.76 299 $1.09
Granted-Exercise
price exceeds
market price on
date of grant . . . . . 170 8.05 10 8.80 24 2.87
Granted-Exercise
price equals market
price on date of
grant . . . . . . . . . 10 4.50 154 7.60 95 2.74
Exercised. . . . . . . . . (168) 1.48 (79) 1.01 (60) 0.44
Forfeited. . . . . . . . . (39) 8.00 - - (10) 1.93
---- -------- --------
Outstanding at end
of year . . . . . . . . 406 6.51 433 4.14 348 1.76
==== ========= ========
Exercisable at end
of year . . . . . . . . 148 $5.67 241 $2.53 148 $1.48
Weighted average
fair value of
options
granted-Exercise
price exceeds
market price on
date of grant . . . . . $1.83 $1.98 $0.86
Weighted average
fair value of
options
granted-Exercise
price equals market
price on date of
grant . . . . . . . . . $1.97 $2.22 $0.99
</TABLE>
F-14
<PAGE> 88
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
The total options outstanding at December 31, 1997, included 96,000
options with exercise prices ranging from $2.60 to $2.87 and a weighted-average
remaining contractual life of 2.0 years; and 310,000 options with exercise
prices ranging from $4.50 to $8.80 and a weighted-average remaining contractual
life of 4.2 years. Exercisable options at December 31, 1997, included 58,800
options with exercise prices ranging from $2.60 to $2.87 and a weighted-average
exercise price of $2.67; and 89,540 options with exercise prices ranging from
$4.50 to $8.80 and a weighted-average exercise price of $7.64. Under APB 25,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995 respectively: risk-free interest rates of
5.82%, 5.79% and 7.37%; volatility factors of the expected market price of the
Company's common stock of .502, .347 and .447; and no dividend yields. In
addition, the fair value of these options was estimated based on an expected
life of one year from the vesting date using the multiple option method.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Pro forma net income. . . . . . . . . . . .$1,698 $2,170 $1,789
Pro forma basic earnings per share. . . . . $0.36 $0.77 $0.88
Pro forma diluted earnings per share. . . . $0.34 $0.53 $0.48
</TABLE>
The pro forma disclosures only include the effect of options granted
subsequent to December 31, 1994. Accordingly, the pro forma information does
not reflect the pro forma effect of all previous stock option grants of the
Company, and thus is not indicative of future amounts until Statement No. 123
is applied to all outstanding stock options.
10. OPERATIONS
The Company is dependent upon International Business Machines Corporation
(IBM) as its principal computer hardware vendor for its financial institution
applications systems. Additionally, operating systems on which the Company's
products function have been developed by IBM. Since its inception in 1989, the
Company has been a value-added remarketer of IBM products pursuant to standard
IBM Remarketer Agreements. The Company's current remarketing agreement with IBM
expires on February 28, 1999. Both IBM and the Company may, with or without
cause, upon three months written notice, terminate the agreement. The Company
has no indication that IBM will discontinue the remarketing agreement. The
Company believes that its relationships with IBM are good.
F-15
<PAGE> 89
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEVERANCE CHARGE
During the year ended December 31, 1996, the Company incurred a 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).
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands except for earnings per share
amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income. . . . . . . . . . . . . . . . . . . . . . . $1,903 $2,293 $1,830
Accretion on redeemable common stock. . . . . . . . . . - (44) (58)
------ ------ ------
Numerator for basic and diluted earnings per share . . . $1,903 $2,249 $1,772
====== ====== ======
Denominator:
Denominator for basic earnings per share-weighted
average shares . . . . . . . . . . . . . . . . . . . . 4,712 2,745 1,976
Effect of dilutive securities:
Stock options . . . . . . . . . . . . . . . . . . . . . 76 266 169
Warrants. . . . . . . . . . . . . . . . . . . . . . . . 365 1,072 1,503
Employee stock purchase plan. . . . . . . . . . . . . . 4 - -
Non-vested stock. . . . . . . . . . . . . . . . . . . . (27) (28) -
------ ------ ------
Dilutive potential common shares . . . . . . . . . . . . 418 1,310 1,672
====== ====== ======
Denominator for diluted earnings per
share-adjusted weighted average shares and
assumed conversions . . . . . . . . . . . . . . . . . . 5,130 4,055 3,648
====== ====== ======
Basic earnings per share . . . . . . . . . . . . . . . . $0.40 $0.82 $0.90
Diluted earnings per share . . . . . . . . . . . . . . . $0.37 $0.55 $0.49
</TABLE>
Options to purchase 251,200 shares of common stock at $8.00 per share and
20,000 shares of common stock at $8.80 per share were outstanding during 1997
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
F-16
<PAGE> 90
PEERLESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,377 $ 2,845
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 5,789 9,346
Finished goods inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,441 409
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . 944 743
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,551 13,343
Computer and other equipment, at cost. . . . . . . . . . . . . . . . . . . . . 5,608 4,337
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 1,545 1,135
------- -------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,063 3,202
Computer software, maintenance contracts, and other assets, net of accumulated
amortization of $511 and $396 at June 30, 1998 and December 31, 1997,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778 897
Investment in preferred stock, at cost . . . . . . . . . . . . . . . . . . . . 2,500 2,500
------- -------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,892 $19,942
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,265 $ 3,014
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,248 1,002
Sales tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 646
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,849 7,121
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7,780 11,783
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--4,977 and 4,948 at June 30, 1998 and December 31, 1997,
respectively .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 49
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 8,018 7,958
Retained earnings .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,496 649
Treasury stock, at cost--74 and 73 at June 30, 1998 and December 31, 1997,
respectively .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (382) (379)
Unearned compensation .. . . . . . . . . . . . . . . . . . . . . . . . . . . . (70) (118)
------- -------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 9,112 8,159
------- -------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $16,892 $19,942
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-17
<PAGE> 91
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -----------------------
JUNE 30, JUNE 30,
------------------- -----------------------
1998 1997 1998 1997
----- ----- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Software license and installation . . . . . . . . . . . $3,041 $3,254 $5,475 $6,042
Hardware and equipment. . . . . . . . . . . . . . . . . 1,204 3,408 3,960 6,294
Maintenance and services. . . . . . . . . . . . . . . . 2,650 2,046 5,066 3,923
------- ------- ------- -------
Total revenues . . . . . . . . . . . . . . . . . . . 6,895 8,708 14,501 16,259
Cost of revenues:
Hardware and equipment . . . . . . . . . . . . . . . . 939 2,683 3,037 4,779
Software license and installation, maintenance and
services . . . . . . . . . . . . . . . . . . . . . . . 3,428 3,231 6,513 5,821
------- ------- ------- -------
Total cost of revenues . . . . . . . . .. . . . . . . 4,367 5,914 9,550 10,600
------- ------- ------- -------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . 2,528 2,794 4,951 5,659
Operating costs and expenses:
Research and development .. . . . . . . . . . . . . . . 546 524 990 1,007
Selling and marketing . . . . . . . . . . . . . . . . . 652 892 1,464 1,899
General and administrative .. . . . . . . . . . . . . . 586 599 1,170 1,311
------- ------- ------- -------
Total operating costs and expenses . . . . . . . . . 1,784 2,015 3,624 4,217
------- ------- ------- -------
Income from operations .. . . . . . . . . . . . . . . . . 744 779 1,327 1,442
Other income:
Interest expense. . . . . . . . . . . . . . . . . . . . (4) (5) (8) (10)
Interest income . . . . . . . . . . . . . . . . . . . . 25 95 66 231
------- ------- ------- -------
Total other income .. . . . . . . . . . . . . . . . . 21 90 58 221
------- ------- ------- -------
Income before income taxes .. . . . . . . . . . . . . . . 765 869 1,385 1,663
Provision for income taxes. . . . . . . . . . . . . . . . 300 326 538 626
------- ------- ------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 465 $ 543 $ 847 $1,037
======= ======= ======= =======
Basic earnings per share $ 0.09 $ 0.11 $ 0.17 $ 0.22
======= ======= ======= =======
Diluted earnings per share $ 0.09 $ 0.11 $ 0.17 $ 0.20
======= ======= ======= =======
Shares used in computing basic earnings per share. . . . 4,903 4,745 4,895 4,695
Shares used in computing diluted earnings per share. . . 5,102 5,161 5,088 5,150
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-18
<PAGE> 92
PEERLESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
------- -------
OPERATING ACTIVITIES
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 847 $ 1,037
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 604 525
Compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 42
Changes in operating assets and liabilities:
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,557 430
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . (197) (144)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,032) (115)
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . . . (1,646) 666
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,272) (3,650)
------- -------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . (91) (1,209)
INVESTING ACTIVITIES
Additions to computer and other equipment. . . . . . . . . . . . . . . . . . . . . (1,353) (1,439)
Investment in preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . - (2,500)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (120)
------- -------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . (1,353) (4,059)
FINANCING ACTIVITIES
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 108
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) (50)
Other .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (8)
------- -------
Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . (24) 50
------- -------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . (1,468) (5,218)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . 2,845 8,378
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $ 1,377 $ 3,160
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-19
<PAGE> 93
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 1996, the Company began an outsourcing
service bureau. On October 3, 1996, the Company completed an initial public
offering of its Common Stock.
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, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes for
the year ended December 31, 1997 included herein.
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 current year presentation.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands except for earnings per share
amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ---------------------
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share $ 465 $ 543 $ 847 $1,037
Denominator:
Denominator for basic earnings per share- . . . . . . 4,903 4,745 4,895 4,695
weighted average shares
Effect of dilutive securities:
Stock options . . . . . . . . . . . . . . . . . . . . 35 61 31 101
Warrants. . . . . . . . . . . . . . . . . . . . . . . 181 381 181 379
Employee stock purchase plan. . . . . . . . . . . . . 1 1 2 4
Non-vested stock. . . . . . . . . . . . . . . . . . . (18) (27) (21) (29)
------- ------- ------- -------
Dilutive potential common shares . . . . . . . . . . . 199 416 193 455
Denominator for diluted earnings per
share-adjusted weighted average shares
and assumed conversions . . . . . . . . . . . . . . . 5,102 $ 5,161 5,088 5,150
======= ======= ====== ======
Basic earnings per share . . . . . . . . . . . . . . . $ 0.09 $ 0.11 $ 0.17 $ 0.22
Diluted earnings per share . . . . . . . . . . . . . . $ 0.09 $ 0.11 $ 0.17 $ 0.20
</TABLE>
F-20
<PAGE> 94
PEERLESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Position 97-2. As of January 1, 1998, the Company adopted
AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition, which was
effective for transactions that the Company entered into beginning on that date
and retroactive application to years prior to adoption was prohibited. The
effect of adopting SOP 97-2 has not had a material impact on the Company's
results of operations.
Statement of Financial Accounting Standards No. 131. In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, which is effective for years beginning after December 15, 1997.
Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company will adopt the new requirements
retroactively in 1998. Management anticipates that the adoption of Statement
131 will not affect results of operations or financial position, but will
affect the disclosure of segment information.
F-21
<PAGE> 95
ANNEX A
-------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
JACK HENRY & ASSOCIATES, INC.
PEERLESS ACQUISITION CORP.
AND
PEERLESS GROUP, INC.
AUGUST 18, 1998
<PAGE> 96
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
ARTICLE I DEFINITIONS...............................................................................................A-1
Section 1.1 Affiliate..................................................................................A-1
Section 1.2 Company Disclosure Schedule................................................................A-1
Section 1.3 Company Shares.............................................................................A-1
Section 1.4 Company Stock..............................................................................A-1
Section 1.5 Confidential Information...................................................................A-1
Section 1.6 Delaware General Corporation Law...........................................................A-1
Section 1.7 Documentation..............................................................................A-1
Section 1.8 Exchange Act...............................................................................A-1
Section 1.9 Exchange Agent.............................................................................A-1
Section 1.10 Form S-4...................................................................................A-2
Section 1.11 GAAP.......................................................................................A-2
Section 1.12 Hart-Scott-Rodino Act......................................................................A-2
Section 1.13 JHA Shares.................................................................................A-2
Section 1.14 Joint Disclosure Document..................................................................A-2
Section 1.15 Knowledge..................................................................................A-2
Section 1.16 Material Adverse Effect....................................................................A-2
Section 1.17 Ordinary Course of Business................................................................A-2
Section 1.18 Person.....................................................................................A-2
Section 1.19 Pre-Closing Average Price..................................................................A-2
Section 1.20 Requisite Company Stockholder Approval.....................................................A-2
Section 1.21 SEC........................................................................................A-2
Section 1.22 Securities Act.............................................................................A-2
Section 1.23 Software...................................................................................A-2
Section 1.24 Security Interest..........................................................................A-2
Section 1.25 Subsidiary.................................................................................A-3
ARTICLE II MERGER...................................................................................................A-3
Section 2.1 The Merger.................................................................................A-3
Section 2.2 Effective Time.............................................................................A-3
Section 2.3 The Closing................................................................................A-3
Section 2.4 Effects of the Merger......................................................................A-3
ARTICLE III THE SURVIVING CORPORATION...............................................................................A-3
Section 3.1 Certificate of Incorporation...............................................................A-3
Section 3.2 Bylaws.....................................................................................A-3
Section 3.3 Directors..................................................................................A-3
Section 3.4 Officers...................................................................................A-3
ARTICLE IV CONVERSION OF SHARES AND OPTIONS.........................................................................A-4
Section 4.1 Conversion of Company Common Stock.........................................................A-4
Section 4.2 Conversion of Company Options and Warrants.................................................A-4
Section 4.3 Procedure for Payment......................................................................A-5
Section 4.4 No Fractional Shares.......................................................................A-6
Section 4.5 Conversion of Newco Stock..................................................................A-6
Section 4.6 Closing of Transfer Records................................................................A-6
ARTICLE V REPRESENTATIONS AND WARRANTIES OF COMPANY.................................................................A-6
Section 5.1 Organization, Qualification, and Corporate Power...........................................A-6
Section 5.2 Capitalization.............................................................................A-6
Section 5.3 Subsidiaries...............................................................................A-6
Section 5.4 Authorization of Transaction...............................................................A-7
Section 5.5 Noncontravention...........................................................................A-7
Section 5.6 SEC Reports................................................................................A-7
Section 5.7 Financial Statements.......................................................................A-7
Section 5.8 Events Subsequent to Most Recent Fiscal Quarter End........................................A-7
Section 5.9 Properties.................................................................................A-8
Section 5.10 Agreements, Contracts and Commitments......................................................A-8
</TABLE>
A-ii
<PAGE> 97
<TABLE>
<S> <C>
Section 5.11 Employee Benefit Plans; ERISA..............................................................A-8
Section 5.12 Proprietary Rights.........................................................................A-8
Section 5.13 Labor Matters..............................................................................A-9
Section 5.14 Undisclosed Liabilities....................................................................A-9
Section 5.15 Litigation.................................................................................A-9
Section 5.16 Taxes.....................................................................................A-10
Section 5.17 Brokers' Fees.............................................................................A-10
Section 5.18 Year 2000.................................................................................A-10
Section 5.19 Compliance with Laws......................................................................A-10
Section 5.20 Tax and Accounting Matters................................................................A-10
Section 5.21 Disclosure................................................................................A-10
Section 5.22 Fairness Opinion..........................................................................A-11
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO......................................................A-11
Section 6.1 Organization..............................................................................A-11
Section 6.2 Capitalization............................................................................A-11
Section 6.3 Authorization of Transaction..............................................................A-11
Section 6.4 Noncontravention..........................................................................A-11
Section 6.5 Brokers' Fees.............................................................................A-11
Section 6.6 Disclosure................................................................................A-11
Section 6.7 SEC Reports...............................................................................A-12
Section 6.8 Events Subsequent to Most Recent Fiscal Quarter End.......................................A-12
Section 6.9 Litigation................................................................................A-12
Section 6.10 Tax and Accounting Matters................................................................A-12
Section 6.11 Ownership of Newco; No Prior Activities...................................................A-12
Section 6.12 Issuance of JHA Shares....................................................................A-12
Section 6.13 Undisclosed Liabilities...................................................................A-12
ARTICLE VII ADDITIONAL COVENANTS...................................................................................A-12
Section 7.1 General...................................................................................A-12
Section 7.2 Notices and Consents......................................................................A-13
Section 7.3 Preparation of the Joint Disclosure Document and the Form S-4.............................A-13
Section 7.4 Compliance with the Securities Act........................................................A-13
Section 7.5 NASDAQ Quotation..........................................................................A-13
Section 7.6 Stockholder Approval......................................................................A-13
Section 7.7 Hart-Scott-Rodino Act.....................................................................A-14
Section 7.8 Pooling of Interests......................................................................A-14
Section 7.9 Comfort Letters...........................................................................A-14
Section 7.10 Pooling of Interests Opinions.............................................................A-14
Section 7.11 Tax-Free Reorganization...................................................................A-14
Section 7.12 Operation of Business.....................................................................A-14
Section 7.13 Full Access and Confidentiality...........................................................A-15
Section 7.14 Notice of Developments....................................................................A-15
Section 7.15 Exclusivity...............................................................................A-15
Section 7.16 Insurance and Indemnification.............................................................A-16
Section 7.17 Expenses..................................................................................A-16
Section 7.18 Cooperation...............................................................................A-16
Section 7.19 Governmental Approvals....................................................................A-16
Section 7.20 Obligations of Newco......................................................................A-16
Section 7.21 Public Announcements......................................................................A-16
Section 7.22 Nasdaq National Market System.............................................................A-17
</TABLE>
A-iii
<PAGE> 98
<TABLE>
<S> <C>
ARTICLE VIII CONDITIONS TO OBLIGATIONS TO CLOSE ....................................................................A-17
Section 8.1 Conditions to Obligation of Parent and Newco..............................................A-17
Section 8.2 Conditions to Obligation of Company.......................................................A-18
ARTICLE IX TERMINATION.............................................................................................A-19
Section 9.1 Termination of Agreement..................................................................A-19
Section 9.2 Termination Fee...........................................................................A-20
Section 9.3 Effect of Termination.....................................................................A-20
ARTICLE X MISCELLANEOUS............................................................................................A-20
Section 10.1 Survival..................................................................................A-20
Section 10.2 Press Releases and Public Announcements...................................................A-20
Section 10.3 No Third Party Beneficiaries..............................................................A-20
Section 10.4 Entire Agreement..........................................................................A-20
Section 10.5 Succession and Assignment.................................................................A-21
Section 10.6 Counterparts..............................................................................A-21
Section 10.7 Headings..................................................................................A-21
Section 10.8 Notices...................................................................................A-21
Section 10.9 Governing Law.............................................................................A-21
Section 10.10 Amendments and Waivers....................................................................A-21
Section 10.11 Severability..............................................................................A-22
Section 10.12 Construction..............................................................................A-22
Section 10.13 Incorporation of Exhibits and Schedules...................................................A-22
Section 10.14 Cooperation...............................................................................A-22
Section 10.15 Submission to Jurisdiction................................................................A-22
INDEX TO EXHIBITS & SCHEDULES
Exhibit A Form of Certificate of Incorporation of Surviving Corporation
Exhibit B Form of Bylaws of Surviving Corporation
Exhibit C Form of Affiliate Letter
Schedule 1 Company Disclosure Schedule
Schedule 2 List of Proprietary and Third-Party Software
</TABLE>
A-iv
<PAGE> 99
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") entered into as of
this 18th day of August, 1998 by and among JACK HENRY & ASSOCIATES, INC., a
Delaware corporation ("Parent"), PEERLESS ACQUISITION CORP., a Delaware
corporation and wholly-owned subsidiary of Parent ("Newco") and PEERLESS GROUP,
INC., a Delaware corporation ("Company").
WHEREAS, the Boards of Directors of Parent and Newco and Company deem
it advisable and in the best interests of their respective stockholders that
Parent acquire Company, and such Boards of Directors have approved the merger
(the "Merger") of Newco with and into Company upon the terms and subject to the
conditions set forth herein; and
WHEREAS, for federal income tax purposes, this Agreement contemplates a
tax-free merger of Newco with and into Company in a reorganization pursuant to
Section 368(a)(1)(A) and (B) of the Internal Revenue Code of 1986, as amended
(the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall
be accounted for as a pooling of interests.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, and in order to set forth the terms of the
Merger, the parties hereto agree as follows.
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings, and additional capitalized terms defined elsewhere in this
Agreement shall have such meaning:
Section 1.1 An "Affiliate" of any Person means another Person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with, such first Person.
Section 1.2 "Company Disclosure Schedule" means the disclosure schedule
prepared by Company.
Section 1.3 "Company Shares" means issued and outstanding shares of
Company Stock.
Section 1.4 "Company Stock" means the Company's common stock par value
$.01.
Section 1.5 "Confidential Information" means any information concerning
the businesses and affairs of Company and its Subsidiaries or Parent and its
subsidiaries, as applicable, that is not already generally available to the
public.
Section 1.6 "Delaware General Corporation Law" means the General
Corporation Law of the State of Delaware, as amended.
Section 1.7 "Documentation" means Proprietary Documentation and Third
Party Documentation, defined as follows:
1.7.1 "Proprietary Documentation" means those written
materials created by the Company that explain Proprietary Software,
were used by Company or its Subsidiaries in the development of
Proprietary Software, or represent an interim step in Company's
development of Proprietary Software, including, without limitation,
logic diagrams, flowcharts, procedural diagrams and algorithms, as well
as manuals, training materials, sales materials, error reports and
related correspondence and memoranda.
1.7.2 "Third Party Documentation" means those written
materials owned by Company or its Subsidiaries that explain any Third
Party Software or the use thereof.
Section 1.8 "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
Section 1.9 "Exchange Agent" means UMB Bank, N.A.
<PAGE> 100
Section 1.10 "Form S-4" shall mean that certain Form S-4 filed by
Parent with the SEC, which incorporates the Joint Disclosure Document.
Section 1.11 "GAAP" means generally accepted accounting principles in
the United States as in effect from time to time.
Section 1.12 "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (sometimes referred to as the
"HSR Act").
Section 1.13 "JHA Shares" shall mean the shares of common stock, par
value $.01, of Parent ("Parent Stock") which holders of Company Shares will
receive in exchange for their Company Shares, pursuant to this Agreement.
Section 1.14 "Joint Disclosure Document" means the document filed by
the Company with the SEC and sent to the holders of record of the Company Shares
which includes the Company's definitive proxy statement relating to the Special
Company Meeting and Parent's prospectus relating to the issuance of JHA Shares.
Section 1.15 "Knowledge" means the actual knowledge of such person
after reasonable investigation. When used with respect to Company, on the one
hand, or Parent or Newco, on the other hand, Knowledge shall mean the actual
knowledge, after reasonable investigation, of those persons identified in the
"Management" section of the most recent Form 10-K of Company or Parent,
respectively.
Section 1.16 "Material Adverse Effect" with respect to any Person
means a material adverse effect on (a) the ability of such Person to perform its
obligations under this Agreement or to consummate the transactions contemplated
hereby, or (b) the condition (financial or otherwise), assets, liabilities
(actual or contingent), results of operations or business of such Person and its
subsidiaries taken as a whole.
Section 1.17 "Ordinary Course of Business" means the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency).
Section 1.18 "Person" means an individual, a partnership, a
corporation, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization, a governmental entity (or any department, agency,
or political subdivision thereof), or any other form of business organization or
any other entity.
Section 1.19 "Pre-Closing Average Price" means the average closing
price of JHA Shares, as reported on the NASDAQ National Market System by the
Wall Street Journal, for the ten (10) consecutive trading days ending on the
fifth day prior to the Special Company Meeting held to vote on the Merger.
Section 1.20 "Requisite Company Stockholder Approval" means the
affirmative vote of the holders of a majority of the Company Shares in favor of
this Agreement and the Merger.
Section 1.21 "SEC" means the Securities and Exchange Commission.
Section 1.22 "Securities Act" means the Securities Act of 1933, as
amended.
Section 1.23 "Software" means "Proprietary Software" and "Third Party
Software," defined as follows:
1.23.1 "Proprietary Software" means those computer
software programs that are owned by Company or its Subsidiaries (in
both object code and source code versions) listed on Schedule 2 hereto,
including every modification and enhancement thereto that has been
created and owned by Company or its Subsidiaries, together with any
additional modifications and enhancements thereto created by Company or
its Subsidiaries between the date hereof and the Closing Date.
1.23.2 "Third Party Software" means those computer
software programs separately listed on Schedule 2 (in object code only
or both source code and object code) that are owned by third parties
and used or sublicensed by Company or its Subsidiaries.
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Section 1.24 "Security Interest" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and payable or
for taxes that the taxpayer is contesting in good faith through appropriate
proceedings, (c) purchase money liens and liens securing rental payments under
capital lease arrangements, and (d) other liens arising in the Ordinary Course
of Business and not incurred in connection with the borrowing of money.
Section 1.25 "Subsidiary" means any corporation or other entity with
respect to which Company (or a Subsidiary thereof) owns a majority of the common
stock or has the power to vote or direct the voting of sufficient securities to
elect a majority of the directors.
ARTICLE II
MERGER
Section 2.1 The Merger. At the Effective Time (as hereinafter defined
in Section 2.2 hereof), Newco shall be merged with and into Company on the terms
and conditions hereinafter set forth as permitted by and in accordance with the
Delaware General Corporation Law. Thereupon, the separate existence of Newco
shall cease, and Company, as the surviving corporation ("Surviving
Corporation"), shall continue to exist under and be governed by Delaware General
Corporation Law.
Section 2.2 Effective Time. The Merger shall become effective
immediately upon the later of the filing of the Certificate of Merger
("Certificate of Merger") with the Secretary of State of the State of Delaware
or such other time or date as the parties hereto may agree (the "Effective
Time"). The Surviving Corporation may, at any time after the Effective Time,
take any action (including executing and delivering any document) in the name
and on behalf of either Company or Newco in order to carry out and effectuate
the transactions contemplated by this Agreement.
Section 2.3 The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the executive offices of
the Company, commencing at 9:00 a.m. local time no later than the second
business day following the satisfaction or waiver of all conditions to the
obligations of the parties to consummate the transactions contemplated hereby
(other than conditions with respect to actions the respective parties will take
at the Closing itself) or such other place or time and date as the parties may
mutually determine (the "Closing Date").
Section 2.4 Effects of the Merger. The Merger shall have the effects
set forth in this Agreement and in the applicable provisions of the Delaware
General Corporation Law. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all property of Company and Newco shall
vest in the Surviving Corporation, and all liabilities of Company and Newco
shall become the liabilities of the Surviving Corporation.
ARTICLE III
THE SURVIVING CORPORATION
Section 3.1 Certificate of Incorporation. At the Effective Time, the
Certificate of Incorporation of the Surviving Corporation shall be amended to be
in the form set forth in Exhibit A, until thereafter changed or amended in
accordance with the provisions thereof and applicable law.
Section 3.2 Bylaws. At the Effective Time, the Bylaws of the
Surviving Corporation shall be amended to be in the form set forth in Exhibit B,
until thereafter changed or amended in accordance with the provisions thereof
and applicable law.
Section 3.3 Directors. From and after the Effective Time, the members
of the Board of Directors of the Surviving Corporation shall consist of the
members of the Board of Directors of Newco (as constituted immediately prior to
the Effective Time).
Section 3.4 Officers. From and after the Effective Time, the officers
of the Surviving Corporation shall consist of the officers of Newco, as
constituted immediately prior to the Effective Time, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
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ARTICLE IV
CONVERSION OF SHARES AND OPTIONS
Section 4.1 Conversion of Company Common Stock. At and as of the
Effective Time, by virtue of the Merger and without any action on the part of
Parent, Newco, Company or any holder of any securities thereof:
4.1.1 All shares of capital stock of Company that are
owned directly or indirectly by Parent, Newco, Company or any
subsidiary of any of the foregoing immediately prior to the Effective
Time (as treasury shares or otherwise) shall be canceled and no Parent
Stock or other consideration shall be delivered in exchange therefor.
4.1.2 Subject to Sections 4.1.3, 4.1.4, 4.1.5 and 4.4,
each share of Company Stock, (other than any shares to be canceled
pursuant to Section 4.1.1, above) shall be converted into the right to
receive 0.16145 fully paid and nonassessable shares (the "Conversion
Ratio") of Parent Stock. The Conversion Ratio has been calculated by
dividing (i) $7.25 by (ii) the average closing price of JHA Shares, as
reported on the NASDAQ National Market System by The Wall Street
Journal, for the three (3) consecutive trading days prior to the date
of announcement made pursuant to Section 7.21 of the proposed Merger by
Company and Parent (the "Pre-Announcement Average Price").
4.1.3 In the event the Pre-Closing Average Price (as
defined in Section 1.18) is less than or equal to 85% of the
Pre-Announcement Average Price, the Conversion Ratio shall be adjusted
to equal the product of (A)(i) 85% of the Pre-Announcement Average
Price divided by (ii) the Pre-Closing Average Price, and (B) the
Conversion Ratio.
4.1.4 In the event the Pre-Closing Average Price is
greater than or equal to 115% of the Pre-Announcement Average Price,
the Conversion Ratio shall be adjusted to equal the product of (A) (i)
115% of the Pre-Announcement Average Price divided by (ii) the
Pre-Closing Average Price, and (B) the Conversion Ratio.
4.1.5 The Conversion Ratio shall be subject to equitable
adjustment in the event of any stock split, stock dividend, reverse
stock split, or other change in the number of Company Shares
outstanding.
Any references to "Conversion Ratio" hereafter in this Agreement shall be deemed
to include any subsequent adjustments required by the terms of 4.1.3, 4.1.4 and
4.1.5, above. No Company Share shall be deemed to be outstanding or to have any
rights other than those set forth above in this Section 4.1 after the Effective
Time, and each holder of a certificate representing any such shares will cease
to have any rights with respect thereto, except to receive the shares of Parent
Stock and any cash in lieu of fractional shares of Company Stock to be issued or
paid in consideration therefor upon surrender of such certificate in accordance
with Sections 4.3 and 4.4.
Section 4.2 Conversion of Company Options and Warrants. At the
Effective Time:
4.2.1 Each then-outstanding option to purchase Company
Stock (collectively, the "Options") whether or not then exercisable or
fully vested (after giving effect to any provisions that would result
in acceleration of vesting of such Options upon the occurrence of the
Merger), shall be assumed by Parent and shall constitute an option (a
"Substitute Option") to acquire, on terms and subject to conditions no
less favorable to the optionee than those that were applicable under
such Option, including without limitation term, vesting,
exercisability, method of payment, status as an "incentive stock
option" under Section 422 of the Code (if applicable) or as an employee
stock purchase plan option under Section 423 of the Code (if
applicable), and termination provisions, the number of JHA Shares
determined by multiplying the number of shares of Company Stock subject
to such Option immediately prior to the Effective Time by the
Conversion Ratio, at an exercise price per share equal to the exercise
price per share of Company Stock immediately prior to the Effective
Time divided by the Conversion Ratio and rounded to the nearest cent;
provided, however, that in the case of any Option to which Section 421
of the Code applies by reason of its qualification as an incentive
stock option under Section 422 of the Code or as an employee stock
purchase plan option under Section 423 of the Code, the conversion
formula shall be adjusted if necessary to comply with Section 424(a) of
the Code.
4.2.2 Each then-outstanding warrant to purchase Company
Stock (collectively, the "Warrants") shall be assumed by Parent and
shall constitute a warrant (a "Substitute Warrant") to acquire,
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on the same terms and subject to the same conditions as were applicable
to such Warrant, including without limitation term, exercisability, and
any anti-dilution or other adjustment provisions, the number of JHA
Shares determined by multiplying the number of shares of Company Stock
subject to such Warrant immediately prior to the Effective Time by the
Conversion Ratio, at an exercise price per share equal to the exercise
price per share of Company Stock immediately prior to the Effective
Time divided by the Conversion Ratio.
4.2.3 Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of JHA Shares for delivery
upon exercise of Substitute Options and Substitute Warrants pursuant to
the terms set forth in Section 4.2.1 and Section 4.2.2, respectively.
Within 5 business days after the Effective Time, the JHA Shares subject
to Substitute Options issued to holders of Options which were
originally issued under "employee benefit plans" of the Company, as
defined in Rule 405 under the Securities Act, will be covered by an
effective registration statement on Form S-8 (or any successor form) or
another appropriate form and Parent shall use all reasonable efforts to
maintain the effectiveness of such registration statement for so long
as any Substitute Options are outstanding.
Section 4.3 Procedure for Payment.
4.3.1 Immediately after the Effective Time, Parent will
deposit, or cause to be deposited with, the Exchange Agent for the
benefit of holders of Company Shares, for exchange in accordance with
this Article IV, (a) that number of JHA Shares equal to the product of
(i) the Conversion Ratio (as adjusted) times (ii) the number of issued
and outstanding Company Shares (excluding shares held in treasury) and
(b) an estimated amount of cash required to be delivered in exchange
for fractional shares of Parent Stock.
4.3.2 As soon as practicable after the Effective Time,
Parent will cause the Exchange Agent to mail a letter of transmittal
(with instructions for its use) to each record holder of outstanding
Company Shares for the holder to use in surrendering the certificates
which represented his or its Company Shares in exchange for a
certificate representing the number of JHA Shares to which he or it is
entitled.
4.3.3 As soon as practicable after the Effective Time and
after the surrender to the Exchange Agent of any certificate which,
prior to the Effective Time, shall have represented any shares of
Company Stock (a "Certificate") together with such letter of
transmittal, duly executed, and such other customary documents as may
be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive certificates registered in the
name of such person representing the JHA Shares to which such person
shall be entitled as described in Section 4.1.2 and cash payable to
such person representing payment in lieu of a fraction of any JHA
Share, if any, as determined in accordance with Section 4.4 (such cash
to be provided in the form of a check).
4.3.4 If any cash is to be paid to, or certificates
representing JHA Shares are to be issued to, a person other than the
person in whose name the Certificate surrendered in exchange therefor
is registered, it shall be a condition of the payment or issuance
thereof that the Certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent any transfer
or other taxes required by reason of the payment of cash to a person
other than, or the issuance of certificates representing the JHA Shares
in any name other than, that of, if any, the registered holder of the
Certificate surrendered, or otherwise required, or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or
is not payable.
4.3.5 Parent will not pay any dividend or make any
distribution on JHA Shares (with a record date at or after the
Effective Time) to any holder of an unsurrendered Certificate until the
holder surrenders for exchange of such Certificate. Parent instead will
pay the dividend or make the distribution to the Exchange Agent in
trust for the benefit of the holder pending surrender and exchange of
such Certificate. Parent may cause the Exchange Agent to invest any
cash the Exchange Agent receives from the Parent as a dividend or
distribution; provided, however, that the terms and conditions of the
investments shall be such as to permit the Exchange Agent to make
prompt payments of cash to the holders of outstanding Company Shares as
necessary. Parent may cause the Exchange Agent to pay over to Parent
any net earnings with respect to the investments, and the Parent will
replace promptly any cash which the Exchange Agent loses through
investments. In no event, however, will any holder of an unsurrendered
Certificate be entitled to any interest or earnings on the dividend or
distribution pending receipt.
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4.3.6 Parent may cause the Exchange Agent to return any
JHA Shares and dividends and distributions thereon remaining unclaimed
180 days after the Effective Time, and thereafter each remaining holder
of an unsurrendered Certificate shall be entitled to look to Parent
(subject to abandoned property, escheat, and other similar laws) as a
general creditor thereof with respect to the JHA Shares and dividends
and distributions thereon to which he or it is entitled upon surrender
of his or its Certificates.
4.3.7 In the event any Certificate shall have been lost,
stolen or destroyed, Exchange Agent shall cause to be distributed JHA
Shares in exchange for such lost, stolen or destroyed Certificate upon
the making of an affidavit of that fact by the holder thereof;
provided, however, that Parent may, in its reasonable discretion and as
a condition precedent thereto, require the owner of such lost, stolen
or destroyed Certificate to deliver a bond in such sum as Parent may
reasonably direct as indemnity against any claim that may be made
against Parent with respect to the Certificate alleged to have been
lost, stolen or destroyed.
4.3.8 Parent shall pay all charges and expenses of the
Exchange Agent.
Section 4.4 No Fractional Shares. No certificate or scrip representing
fractional JHA Shares shall be issued upon the surrender for exchange of
certificates, and no dividend, stock split or interest shall relate to any such
fractional shares. In lieu of any fractional JHA Share being issued, cash shall
be paid to a holder of Company Stock who would otherwise be entitled to receive
a fraction of a JHA Share in an amount equal to (a) the fraction of a JHA Share
to which such holder would otherwise be entitled multiplied by (b) the
Pre-Closing Average Price.
Section 4.5 Conversion of Newco Stock. Each issued and outstanding
share of capital stock of Newco shall be converted into and become one validly
issued, fully paid and non-assessable share of common stock, par value $.01, of
the Surviving Corporation.
Section 4.6 Closing of Transfer Records. At and after the Effective
Time, transfers of Company Shares outstanding immediately prior to the Effective
Time shall not be made on the stock transfer books of the Surviving Corporation.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Parent and Newco that the statements
contained in this Article V are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date.
Section 5.1 Organization, Qualification, and Corporate Power. Each of
Company and its Subsidiaries is a corporation duly organized, validly existing,
and in good standing under the laws of its jurisdiction of incorporation. Each
of Company and its Subsidiaries is duly authorized to conduct business and is in
good standing under the laws of each jurisdiction where such qualification is
required, except where the lack of such qualification would not have a Material
Adverse Effect. Each of Company and its Subsidiaries has full corporate power
and authority to carry on the businesses in which it is engaged and to own and
use the properties owned and used by it.
Section 5.2 Capitalization. The entire authorized capital stock of
Company consists of 10,000,000 Company Shares and 5,000,000 shares of Preferred
Stock. At the close of business on the date hereof, no shares of Preferred Stock
are issued or outstanding, 4,923,695 Company Shares are issued and outstanding,
645,734 Company Shares are reserved for issuance pursuant to outstanding Options
and Warrants and 51,892 Company Shares are held by Company in its treasury. All
of the issued and outstanding Company Shares are duly authorized and are validly
issued, fully paid, and nonassessable. Except as set forth above, or on Section
5.2 of the Company Disclosure Schedule, there are no outstanding or authorized
Company Shares, options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments that could
require Company to issue, sell, or otherwise cause to become outstanding any of
its capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to Company.
Section 5.3 Subsidiaries. Except as set forth in Section 5.3 of the
Company Disclosure Schedule, all of the outstanding shares of capital stock of
the Subsidiaries are validly issued, fully paid and nonassessable and are owned
by Company or by a Subsidiary free and clear of any liens, claims, charges and
encumbrances. There are not now, and at the Effective Time there will not be,
any outstanding options, warrants, subscriptions, calls, rights, convertible
securities or other agreements or other commitments obligating Company or any
Subsidiary to issue, transfer or sell any securities of any Subsidiary. There
are not now, and at the Effective Time there will not be, any
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voting trusts or other agreements or understandings to which Company or any
Subsidiary is a party or is bound with respect to the voting of the capital
stock of any Subsidiary.
Section 5.4 Authorization of Transaction. Company has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder; provided, however, that
Company cannot consummate the Merger unless and until it receives the Requisite
Company Stockholder Approval. This Agreement constitutes the valid and legally
binding obligation of Company, enforceable against Company in accordance with
its terms and conditions. The Board of Directors of Company has approved this
Merger Agreement and has declared the advisability of the Merger Agreement and
the Merger. The Board of Directors has taken all appropriate action so that (a)
neither Parent nor Newco will be an "interested stockholder" within the meaning
of Section 203 of the Delaware General Corporation Law by virtue of the parties
entering into this Agreement and consummating the transactions contemplated
hereby, and (b) no special vote of the Company's stockholders shall be required
with regard to the Merger under Article 12 of the Company's Certificate of
Incorporation pertaining to fair price in certain business combinations.
Section 5.5 Noncontravention. Except as set forth in Section 5.5 of the
Company Disclosure Schedule, neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(a) subject to the provisions of the next sentence, violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
Company or any of its Subsidiaries is subject or any provision of the charter or
bylaws of Company or any of its Subsidiaries or (b) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument or other
arrangement to which Company or any of its Subsidiaries is a party or by which
it is bound or to which any of its assets is subject (or result in the
imposition of any Security Interest upon any of its assets), except where any
such violations, conflicts, breaches, defaults, accelerations, or creation of
the right to accelerate, terminate, modify, or cancel would not have a Material
Adverse Effect. Other than in connection with the provisions of the
Hart-Scott-Rodino Act, the Delaware General Corporation Law, the Securities Act,
the Exchange Act, state securities laws, neither Company nor its Subsidiaries
needs to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order for the
parties to consummate the transactions contemplated by this Agreement.
Section 5.6 SEC Reports. Company has made all filings with the SEC that
it has been required to make under the Securities Act and the Exchange Act
(collectively the "Public Reports"). Each of the Public Reports has complied
with the Securities Act and the Exchange Act in all material respects. None of
the Public Reports, as of their respective dates (or if amended or superseded by
a subsequent filing, then on the date of such filing), contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. Company has delivered to Parent a correct
and complete copy of each Public Report (together with all exhibits and
schedules thereto and as amended to date).
Section 5.7 Financial Statements. Company has filed a Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1998 (the "Most Recent Fiscal
Quarter End"), and an Annual Report on Form 10-K for the fiscal years ended
December 31, 1997 and 1996. The financial statements included in or incorporated
by reference into these Public Reports (including the related notes and
schedules) have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby (except as may be indicated in the
notes to such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q promulgated by the SEC) and fairly present in all
material respects the financial condition of Company and its Subsidiaries as of
the indicated dates and the results of operations of Company and its
Subsidiaries for the indicated periods, are correct and complete in all material
respects, and are consistent with prior accounting policies (other than as
disclosed in the Public Reports) and with the books and records of Company and
its Subsidiaries; provided, however, that the interim statements are subject to
normal year-end adjustments.
Section 5.8 Events Subsequent to Most Recent Fiscal Quarter End. Since
the Most Recent Fiscal Quarter End, there has not been any material adverse
change in the business, financial condition, operations, results of operations,
or future prospects of Company or its Subsidiaries. Material adverse changes in
the business, financial condition, operations, results of operations, or future
prospects of Company or its Subsidiaries which occur after the date of this
Agreement and are caused by consequences directly relating to the announcement
of the Merger shall not be considered a violation of the representation made in
this Section 5.8.
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Section 5.9 Properties. (a) Company does not own of record any real
property; and (b) except as would not have a Material Adverse Effect, all
material real property leases of Company and its Subsidiaries are in good
standing, valid and effective in accordance with their respective terms, and
neither Company nor any of its Subsidiaries is in default under any of such
leases.
Section 5.10 Agreements, Contracts and Commitments. Except as set forth
in Section 5.10 of the Company Disclosure Schedule, Company has not breached, or
received in writing any claim or notice that it has breached, any of the terms
or conditions of any agreement, contract or commitment in such a manner as,
individually or in the aggregate, would have a Material Adverse Effect. Each
Company contract that has not expired by its terms is, to Company's Knowledge,
in full force and effect and enforceable against the parties thereto in
accordance with its terms.
Section 5.11 Employee Benefit Plans; ERISA. Section 5.11 of the Company
Disclosure Schedule identifies each employee pension, retirement, profit
sharing, bonus, incentive, deferred compensation, hospitalization, medical,
dental, vacation, insurance, sick pay, disability, severance or other plan,
fund, program, policy, contract or arrangement providing employee benefits
maintained, promised or contributed to by Company, whether created in writing,
through an employee manual or similar document or orally (the "Plans"). Company
has no formal plan or commitment, whether legally binding or not, to create any
additional Plan or modify or change any existing Plan. Section 5.11 of the
Company Disclosure Schedule sets forth all liabilities, obligations and
commitments of Company, whether legally binding or not, to make any
contributions to any Plan or payments to any employee or any other Person (other
than payments being made on claims under Company's health plans) with respect to
any of the Plans as of the date hereof. Except as set forth in Section 5.11 of
the Company Disclosure Schedule: (a) all such Plans that are subject to the
Employee Retirement Income Security Act of 1974, as amended, and any successor
statute of similar import, together with the regulations thereunder ("ERISA")
comply in all material respects with ERISA and the Internal Revenue Code, (b)
all contributions to or payments under such Plans that were due and payable by
Company on or before the date hereof have been made, and (c) Company does not
sponsor, maintain or contribute to any Plan which is subject to Title IV of
ERISA, nor has Company terminated or withdrawn from any such Plan. Company will
take all appropriate and necessary action on or before Closing to begin the
process for terminating Company's defined contribution retirement plan,
including the filing of Internal Revenue Service Form 5310, and upon approval of
the Internal Revenue Service as to its qualified status upon termination, all
account balances shall be distributed as directed by the participants,
including, without limitation, as rollovers to Parent's 401(k) plan to the
extent permissible.
Section 5.12 Proprietary Rights.
5.12.1 Except as set forth in Section 5.12 of the
Company Disclosure Schedule, Company or one of its Subsidiaries owns or
is licensed to use all copyrights, know-how, patents, trademarks and
trade secrets (collectively, the "Proprietary Rights") necessary for
the operation of its business as now conducted.
5.12.2 Except as set forth in Section 5.12 of the
Company Disclosure Schedule, Company and its Subsidiaries have not
entered into any agreement that limits or restricts its right to use,
copy, modify, prepare derivatives of, sublicense, distribute and
otherwise market, severally or together, the Proprietary Software
and/or the Proprietary Documentation. Except as set forth in Section
5.12 of the Company Disclosure Schedule, there are no agreements or
arrangements in effect with respect to the marketing, distribution,
licensing or promotion of the Proprietary Software with any current or
past employee of Company or its Subsidiaries, or with any independent
sales person, distributor, sublicensee or other remarketer or sales
organization. Company's and its Subsidiaries' present use, copying,
modification, preparation of derivatives of, sublicensing, distribution
or other marketing of the Proprietary Software does not infringe any
intellectual property right of any Person.
5.12.3 Except as set forth in Section 5.12 of the
Company Disclosure Schedule, Company and its Subsidiaries own all
right, title and interest in and to the copyrights in all Proprietary
Software and Proprietary Documentation. Company and its Subsidiaries
have not obtained registrations of any copyrights. Except as set forth
in the Company Disclosure Schedule, each Person who has participated in
or contributed to the development of the Proprietary Software and the
Proprietary Documentation since the inception of Company, has either:
(a) so contributed or participated as an employee of Company or a
Subsidiary within the scope of his or her employment obligations, (b)
so
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contributed or participated as an independent contractor pursuant to a
valid and binding agreement which specifically assigns all copyrights
to Company or Subsidiary, or (c) otherwise assigned to Company or
Subsidiary the copyright in any Proprietary Software and Proprietary
Documentation.
5.12.4 Except as set forth in Section 5.12 of the
Company Disclosure Schedule, Company and its Subsidiaries have taken
efforts that are reasonable under the circumstances to prevent the
unauthorized disclosure to other Persons of such portions of Company's
and Subsidiaries' trade secrets as would enable any such other Person
to compete with Company or its Subsidiaries within the scope of its
business as now conducted.
5.12.5 Company or its Subsidiaries do not use any
trademark in connection with its business in any material way, except
for those trademarks listed in Section 5.12 of the Company Disclosure
Schedule, and no such trademark is registered except as otherwise
indicated therein.
5.12.6 Any Third Party Software used by Company or
its Subsidiaries within the scope of its business is identified in
Schedule 2. Company and its Subsidiaries have the legal right to use,
sublicense, distribute and otherwise market all Third Party Software in
the manner that each presently uses, sublicenses, distributes and
otherwise markets such Third Party Software in the normal course of its
business. Except as set forth in Section 5.12 of the Company Disclosure
Schedule, Company and its Subsidiaries have no obligation to make any
payments by way of royalty, fee, settlement or otherwise to any Person
in connection with Company's or Subsidiaries' present use,
sublicensing, distribution or other marketing of such Third Party
Software.
5.12.7 Except as set forth in Section 5.12 of the
Company Disclosure Schedule, no claim has been asserted against Company
or its Subsidiaries within the scope of its business by any other
Person: (a) that such Person has any right, title or interest in or to
any of Company's or Subsidiaries' copyrights, patents or trade secrets,
(b) that such Person has the right to use any of Company's or
Subsidiaries' trademarks, (c) to the effect that any past, present or
projected act or omission by Company or Subsidiary infringes any rights
of such Person to any copyright, patent, trade secret, know-how or
trademark, or (d) that challenges Company's or Subsidiaries' right to
use any copyrights, patents, trade secrets, know-how or trademarks.
Section 5.13 Labor Matters. Neither Company nor any of the Subsidiaries
is a party to, or bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization. There
is no unfair labor practice or labor arbitration proceeding pending or, to the
Knowledge of Company, threatened against Company or the Subsidiaries relating to
their business, except for any such proceeding which would not have a Material
Adverse Effect. To the Knowledge of Company, there are no organizational efforts
with respect to the formation of a collective bargaining unit presently being
made or threatened involving employees of Company or any of the Subsidiaries.
Section 5.14 Undisclosed Liabilities. Except as disclosed in Section
5.14 of the Company Disclosure Schedule, neither Company nor its Subsidiaries
has any liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become due), including any liability for
taxes, except for (a) liabilities set forth on the face of the balance sheet
dated as of the Most Recent Fiscal Quarter End (or in the notes thereto), (b)
liabilities which have arisen after the Most Recent Fiscal Quarter End in the
Ordinary Course of Business (none of which results from, arises out of, relates
to, is in the nature of, or was caused by any breach of contract, breach of
warranty, tort, infringement, or violation of law), (c) liabilities specifically
described in this Agreement or in the Company Disclosure Schedule and (d)
liabilities permitted to be incurred under Section 7.12 hereof.
Section 5.15 Litigation. As of the date hereof, except as specified in
Section 5.15 of the Company Disclosure Schedule, (a) there is no suit, claim,
action, proceeding, at law or in equity, or investigation pending or, to the
Knowledge of Company, threatened against Company or any of its Subsidiaries
before any court or other governmental entity, and (b) neither Company nor any
of its Subsidiaries is subject to any outstanding order, writ, judgment,
injunction, decree or arbitration order or award. As of the date hereof, there
are no suits, claims, actions, proceedings or investigations pending or, to the
Knowledge of Company, threatened, seeking to prevent, hinder, modify or
challenge the transactions contemplated by this Agreement.
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Section 5.16 Taxes.
5.16.1 Except as disclosed in Section 5.16 of the
Company Disclosure Schedule, all federal, state and local tax returns
required to be filed by Company and its Subsidiaries on or prior to the
date hereof have been filed; (ii) all Taxes and assessments including,
without limitation, estimated tax payments, excise, unemployment,
social security, occupation, franchise, property, sales and use taxes,
and all penalties or interest in respect thereof now or heretofore due
and payable by or with respect to Company and its Subsidiaries have
been paid; (iii) all federal, state and local withholdings of Company
and its Subsidiaries including, without limitation, withholding taxes,
social security, and any similar taxes, have been withheld and paid
over as required by law; and (iv) no extension with any taxing
authority concerning any tax liability of or with respect to Company or
its Subsidiaries is currently outstanding.
5.16.2 There are no tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against
any of the assets, properties or business of Company or its
Subsidiaries (except for liens for property (ad valorem) taxes not yet
due and payable).
For purposes of this Agreement, "Taxes" shall mean all federal, state, local,
foreign income, property, sales, excise, employment, payroll, franchise,
withholding and other taxes, tariffs, charges, fees, levies, imposts, duties,
licenses or other assessments of every kind and description, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
Section 5.17 Brokers' Fees. Except as set forth in Section 5.17 of the
Company Disclosure Schedule, neither of Company nor its Subsidiaries has any
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement.
Section 5.18 Year 2000. Company believes that, assuming the continued
implementation without alteration or disruption of its plan for Year 2000
compliance, Company's and its Subsidiaries' Proprietary Software will not be
materially and adversely affected by the occurrence or use of dates before, on,
or after January 1, 2000 A.D., including dates and leap years between the
twentieth and twenty-first centuries ("Millennial Dates"), the Proprietary
Software will without error or omission, create, receive, store, process and
output (collectively "Compute") information related to the Millennial Dates.
This warranty includes, without limitation, that the Proprietary Software will
accurately, and without performance degradation, Compute Millennial Dates,
date-dependent data, date-related interfaces, or other date-related functions
(including, without limitation, calculating, comparing and sequencing such
functions).
Section 5.19 Compliance with Laws. Company and each of its Subsidiaries
has complied with, is not in violation of, and has not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for failure to comply or violations which,
individually or in the aggregate, have not had and are not reasonably likely to
have a Material Adverse Effect.
Section 5.20 Tax and Accounting Matters. Neither Company, nor its
Subsidiaries, nor any of its Affiliates has taken or agreed to take any action,
and Company does not have Knowledge of any circumstances relating to Company or
its Subsidiaries or any of its Affiliates, that (a) would prevent the Merger
from constituting a reorganization within the meaning of Section 368(a) of the
Code or (b) would prevent the Merger from being accounted for as a pooling of
interests under the requirements of Opinion No. 16 of the American Institute of
Certified Public Accounts ("AICPA"), as amended by the Statements of Financial
Accounting Standards Board (the "SFAS Board") and the related interpretations of
the AICPA, the SFAS Board, and the rules and regulations of the SEC.
Section 5.21 Disclosure. The information supplied by Company for
inclusion in the Joint Disclosure Document insofar as it relates to Company will
not (a) at the time the Joint Disclosure Document is first mailed to the
Company's stockholders, or (b) on the date of the Special Company Meeting,
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they are made, not misleading. None of the information
supplied by Company specifically for use in the Form S-4 will, at the time the
Form S-4 is declared effective by the SEC, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they are
made, not misleading.
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Section 5.22 Fairness Opinion. Dain Rauscher Wessels has delivered to
Company as of, or immediately prior to, the date of this Agreement, an opinion
to the effect that the Conversion Ratio is fair to Company's stockholders from a
financial point of view (the "Fairness Opinion").
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO
Parent and Newco represent and warrant to Company that the statements
contained in this Article VI are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date.
Section 6.1 Organization. Each of Parent and Newco is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware. Parent has full corporate power and authority to carry on the
businesses in which it is engaged and to own and use the properties owned and
used by it.
Section 6.2 Capitalization. The entire authorized capital stock of
Parent consists of (a) 50,000,000 JHA Shares and 500,000 shares of Preferred
Stock, of which no shares of Preferred Stock are issued and outstanding,
18,955,217 JHA Shares are issued and outstanding, 2,096,234 JHA Shares are
reserved for issuance pursuant to outstanding stock options, and no JHA Shares
are held in treasury. All of the JHA Shares to be issued in the Merger have been
duly authorized and, upon consummation of the Merger, will be validly issued,
fully paid, and nonassessable. Other than the aforementioned outstanding stock
options, there are no options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments that could
cause Parent to issue, sell or otherwise cause to become outstanding any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to Parent.
Section 6.3 Authorization of Transaction. Each of Parent and Newco has
full power and authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of Parent
and Newco, enforceable in accordance with its terms and conditions. No approval
of this Agreement or the Merger by Parent=s security holders is required under
the provisions of Parent's Certificate of Incorporation or Bylaws or the
Delaware General Corporation Law or the rules and regulations of the National
Association of Securities Dealers.
Section 6.4 Noncontravention. Neither the execution and the delivery
of this Agreement, nor the consummation of the transactions contemplated hereby,
will (a) subject to the provisions of the next sentence, violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which Parent or Newco is subject or any provision of the charter or
bylaws of Parent or Newco or (b) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument or other arrangement
to which Parent or Newco is a party or by which it is bound or to which any of
its assets is subject, except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation, or failure to give notice
would not have a Material Adverse Effect. Other than in connection with the
provisions of the Hart-Scott-Rodino Act, the Delaware General Corporation Law,
the Exchange Act, the Securities Act, and the state securities laws, neither
Parent nor Newco needs to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental agency
in order for the parties to consummate the transactions contemplated by this
Agreement.
Section 6.5 Brokers= Fees. Neither Parent nor Newco has any liability
or obligation to pay any fees or commissions to any broker, finder, or agent
with respect to the transactions contemplated by this Agreement for which
Company or its Subsidiaries could become liable or obligated.
Section 6.6 Disclosure. The Form S-4 will comply with the Securities
Act and the Exchange Act in all material respects. The Form S-4 will not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they will be made, not misleading; provided, however,
that Parent makes no representation or warranty with respect to any information
that Company will supply specifically for use in the Form S-4. None of the
information that Parent or Newco will supply specifically for use in the Form
S-4 will contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they will be made, not misleading.
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Section 6.7 SEC Reports. Parent has made all filings with the SEC that
it has been required to make under the Securities and Exchange Act. Each of such
of the filings has complied with the Securities Act and the Exchange Act in all
material respects. None of the reports contained in such filings, as of their
respective dates (or if amended or superseded by subsequent filing, on the date
of such filing), contained any untrue statement of a material fact or omitted to
state a material fact in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Parent contained in such filings and reports were prepared in
accordance with GAAP applied on a consistent basis through the periods covered
thereby (except as may be indicated in the notes to such financial statements
or, in the case of unaudited statements, as permitted by Form 10-Q promulgated
by the SEC) and present fairly the financial condition of Parent as of the
indicated dates and the results of operations of Parent for the indicated
periods and are correct and complete in all material respects.
Section 6.8 Events Subsequent to Most Recent Fiscal Quarter End. Since
March 31, 1998, there has not been any material adverse change in the business,
financial condition, operations, results of operations, or future prospects of
Parent provided, however, that material adverse changes in the business,
financial condition, operations, results of operations or future prospects of
Parent which occur after the date of this Agreement and are caused by
consequences directly relating to the announcement of the Merger shall not be
considered a violation of the representation made in this Section 6.8.
Section 6.9 Litigation. As of the date hereof, there are no suits,
claims, actions, proceedings or investigations pending or, to the Knowledge of
Parent, threatened, seeking to prevent, hinder, modify or challenge the
transactions contemplated by this Agreement.
Section 6.10 Tax and Accounting Matters. Neither Parent, nor its
subsidiaries nor any of its affiliates has taken or agreed to take any action,
and Parent does not have Knowledge of any circumstances relating to Parent or
its subsidiaries or any of its Affiliates that (a) would prevent the Merger from
constituting a reorganization within the meaning of Section 368(a) of the Code
or (b) would prevent the Merger from being accounted for as a pooling of
interests under the requirements of Opinion No. 16 of the AICPA, as amended by
the SFAS Board and the related interpretations of the AICPA, the SFAS Board, and
the rules and regulations of the SEC.
Section 6.11 Ownership of Newco; No Prior Activities. Newco was formed
solely for the purpose of engaging in the Merger, and is wholly owned by Parent.
As of the date hereof and the Effective Time, except for obligations or
liabilities incurred in connection with its incorporation or organization and
the Merger and except for this Agreement and any other agreements or
arrangements contemplated by this Agreement, Newco has not and will not have
incurred, directly or indirectly, through any subsidiary or Affiliate, any
obligations or liabilities or engaged in any business activities of any type or
kind whatsoever or entered into any agreements or arrangements with any Person.
Section 6.12 Issuance of JHA Shares. The JHA Shares to be issued
pursuant to the Merger will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, Parent=s
Certificate of Incorporation or Bylaws or any agreement to which Parent is a
party or by which Parent is bound.
Section 6.13 Undisclosed Liabilities. Neither Parent nor its
subsidiaries has any material liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for taxes, except for (a) liabilities set forth on
the face of its balance sheet as of March 31, 1998 (or in the notes thereto),
(b) liabilities which have arisen after March 31, 1998 in the Ordinary Course of
Business (none of which results from, arises out of, relates to, is in the
nature of, or was caused by any breach of contract, breach of warranty, tort,
infringement, or violation of law), and (c) liabilities specifically described
in this Agreement.
ARTICLE VII
ADDITIONAL COVENANTS
The parties agree as follows with respect to the period from and after
the execution of this Agreement.
Section 7.1 General. Each of the parties will use its best efforts to
take all action and to do all things necessary, proper or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article VIII below).
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Section 7.2 Notices and Consents. Each of the parties hereto will
give any notices (and will cause each of its subsidiaries to give any notices)
to third parties, and will use its best efforts to obtain (and will cause each
of its subsidiaries to use its best efforts to obtain) any third party consents,
that the other party reasonably may request.
Section 7.3 Preparation of the Joint Disclosure Document and the Form
S-4. As soon as practicable following the date hereof:
7.3.1 Company shall prepare for inclusion in the
Joint Disclosure Document and Form S-4 a proxy statement relating to
the Merger in accordance with the Exchange Act and the rules and
regulations under the Exchange Act, to the extent applicable. Parent
shall prepare for inclusion in the Joint Disclosure Document and Form
S-4 a prospectus relating to the issuance of JHA Shares. Company,
Parent and Newco shall cooperate with each other in the preparation of
the Joint Disclosure Document and the Form S-4. Company and Parent
shall use all reasonable efforts to respond promptly to any comments
made by the SEC with respect to the Joint Disclosure Document and Form
S-4 and to cause the Joint Disclosure Document to be mailed to the
stockholders of Company at the earliest practicable date after the Form
S-4 is declared effective by the SEC.
7.3.2 Parent shall prepare and file with the SEC
the Form S-4. Parent shall also, prior to the Effective Time, take any
action required to be taken under any applicable state securities laws
in connection with the issuance of JHA Shares in the Merger, and
Company shall furnish all information concerning Company and the
holders of the Company Shares as may be reasonably requested in
connection with any such action.
7.3.3 Without limiting the generality of the
foregoing, Company and Parent shall notify each other promptly of the
issuance of any stop order relating to the Form S-4 or the Joint
Disclosure Document, the receipt of the comments of the SEC and of any
request by the SEC for amendments or supplements to the Joint
Disclosure Document and Form S-4, or for additional information, and
shall supply each other with copies of all correspondence between them
or their respective representatives, on the one hand, and any state
securities commission or the SEC or members of its staff, on the other
hand, with respect to the Joint Disclosure Document and Form S-4. If at
any time prior to the Special Company Meeting (as hereinafter defined)
any event should occur relating to Company or Parent or their
respective officers or directors which is required to be described in
any amendment or supplement to the Joint Disclosure Document and Form
S-4, the parties shall promptly inform each other. Whenever any event
occurs which is required to be described in an amendment or a
supplement to the Form S-4, Company and Parent shall, upon learning of
such event, cooperate in promptly preparing, filing and (to the extent
applicable) clearing with the SEC and mailing to the stockholders of
Company such amendment or supplement; provided, however, that, prior to
such mailing, (a) Company and Parent shall consult with each other with
respect to such amendment or supplement, (b) Company and Parent shall
afford each other reasonable opportunity to comment thereon, and (c)
each such amendment or supplement shall be reasonably satisfactory to
the other.
7.3.4 Parent shall send the Form S-4 to Company for
Company's review and comment prior to the filing of the Form S-4 with
the SEC. Parent and Company each shall use all reasonable efforts to
cause the Form S-4 to become effective as promptly as practicable.
Section 7.4 Compliance with the Securities Act. Prior to the
Effective Time, Company shall cause to be delivered to Parent a list identifying
all persons who where at the record date for the Special Company Meeting
convened in accordance with Section 7.6 hereof, "affiliates" of Company as that
term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act (the
"Affiliates"). Company shall use its efforts to cause each person who is
identified as an Affiliate in the list referred to above to deliver to Parent at
or prior to the Effective Time a written agreement in the form attached hereto
as Exhibit C (the "Affiliate Letters").
Section 7.5 NASDAQ Quotation. Each of Company and Parent agrees to
continue the quotation of Company Shares and JHA Shares on the NASDAQ National
Market during the term of this Agreement so that appraisal rights will not be
available to stockholders of Company under Section 262 of the Delaware General
Corporation Law.
Section 7.6 Stockholder Approval. Company will call a special meeting
of its stockholders (the "Special Company Meeting") as soon as reasonably
practicable in order that Company's stockholders may consider and vote upon the
adoption of this Agreement and the approval of the Merger in accordance with the
Delaware General
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Corporation Law. Company will mail the Joint Disclosure Document to its
stockholders as soon as reasonably practicable. The Joint Disclosure Document
will contain the affirmative recommendation of the Company's Board of Directors
in favor of the adoption of this Agreement and the approval of the Merger;
provided, however, that no director or officer shall be required to violate any
fiduciary duty or other requirement imposed by law in connection therewith.
Section 7.7 Hart-Scott-Rodino Act. Each of the parties will file (and
Company will cause each of its Subsidiaries to file) any Notification and Report
Forms and related material that it may be required to file with the Federal
Trade Commission and the Antitrust Division of the United States Department of
Justice under the Hart-Scott-Rodino Act, will use its reasonable best efforts to
obtain (and Company will cause each of its Subsidiaries to use its reasonable
best efforts to obtain) an early termination of the applicable waiting period,
and will make (and Company will cause each of its Subsidiaries to make) any
further filings pursuant thereto that may be necessary.
Section 7.8 Pooling of Interests. Company and Parent shall each use
their best efforts to cause the business combination to be effected by the
Merger to be accounted for as a pooling of interests. Each of Company and Parent
shall use their best efforts to not take any action and to cause its respective
Affiliates not to take any action (including, without limitation any
transactions involving the securities of Parent or Company) that would adversely
affect the ability of Parent to account for the business combination to be
effected by the Merger as a pooling of interests.
Section 7.9 Comfort Letters. Company will deliver to Parent on or
before the date the Joint Disclosure Document is mailed to Company stockholders
a letter of Ernst & Young, stating their conclusions as to the accuracy of
certain information derived from the financial records of Company and its
Subsidiaries and contained in the Joint Disclosure Document (the "Company
Comfort Letter"). The Company Comfort Letter shall be reasonably satisfactory to
Parent in form and substance. Parent will deliver to Company on or before the
date the Joint Disclosure Document is mailed to Company stockholders a letter of
Deloitte & Touche stating their conclusions as to the accuracy of certain
information derived from the financial records of Parent and its subsidiaries
and contained in the Joint Disclosure Document (the "Parent Comfort Letter").
The Parent Comfort Letter shall be reasonably satisfactory to Company in form
and substance.
Section 7.10 Pooling of Interests Opinions. Company shall cause to be
delivered to Parent an opinion of Ernst & Young in form reasonably satisfactory
to Parent at the Closing, addressed to Company, setting forth the concurrence of
Ernst & Young with Company as to the eligibility of Company to participate in
the Merger, and that such participation will not, in and of itself, disqualify
the Merger from pooling of interests accounting under Opinion No. 16 of the
AICPA, as amended by the SFAS Board and the related interpretations of the
AICPA, the SFAS Board, and the rules and regulations of the SEC. Parent shall
cause to be delivered to Company an opinion of Deloitte & Touche in form
reasonably satisfactory to Company at the Closing, addressed to Parent, setting
forth the concurrence of Deloitte & Touche with Parent's management as to the
appropriateness of pooling of interest accounting for the Merger under Opinion
No. 16 of the AICPA, as amended by the SFAS Board and the related
interpretations of the AICPA, the SFAS Board, and the rules and regulations of
the SEC.
Section 7.11 Tax-Free Reorganization. Company and Parent shall each
use its best efforts to cause the Merger to be treated as a reorganization
within the meaning of Section 368(a) of the Code. Parent shall file, and shall
cause its Affiliates (including the Surviving Corporation) to, file all tax
returns in a manner that is consistent with the intended treatment of the Merger
as a reorganization within the meaning of Section 368(a) of the Code. Parent
shall not, and shall not permit its Affiliates (including the Surviving
Corporation) to, take any action that adversely affects the foregoing intended
treatments.
Section 7.12 Operation of Business. Company will not (and will not
cause or permit any of its Subsidiaries to), without the consent of Parent,
engage in any practice, take any action, or enter into any transaction outside
the Ordinary Course of Business. Without limiting the generality of the
foregoing, neither Company nor its Subsidiaries:
7.12.1 will authorize or effect any change in its
charter or bylaws;
7.12.2 will grant any options, warrants, or other
rights to purchase or obtain any of its capital stock or issue, sell,
or otherwise dispose of any of its capital stock (except upon the
conversion or exercise of options, warrants, and other rights currently
outstanding);
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7.12.3 will declare, set aside, or pay any dividend
or distribution with respect to its capital stock (whether in cash or
in kind), or redeem, repurchase, or otherwise acquire any of its
capital stock, in either case outside the Ordinary Course of Business;
7.12.4 will issue any note, bond, or other debt
security or create, incur, assume, or guarantee any indebtedness for
borrowed money or capitalized lease obligation outside the Ordinary
Course of Business;
7.12.5 will impose any Security Interest upon any
of its assets outside the Ordinary Course of Business;
7.12.6 will make any capital investment in, make
any loan to, or acquire the securities or assets of any other Person
outside the Ordinary Course of Business; and
7.12.7 will make any change in employment terms for
any of its directors, officers, and employees outside the Ordinary
Course of Business.
Section 7.13 Full Access and Confidentiality. Except for information
relating to any claims either party may have against the other, Company and
Parent shall each afford to the other and to the other=s financial advisors,
legal counsel, accountants, consultants and other representatives full access
during normal business hours throughout the period prior to the Effective Time
to all of its books, records, properties, plans and personnel and, during such
period, each shall furnish promptly to the other (a) a copy of each report,
schedule and other document filed or received by it pursuant to the requirements
of federal or state securities laws, and (b) all other information as such other
party may reasonably request, provided that no investigation pursuant to this
Section 7.13 shall affect any representations or warranties made herein or the
conditions to the obligations of the respective parties to consummate the
Merger. Each party shall hold in confidence all Confidential Information until
such time as such information is otherwise publicly available and, if this
Agreement is terminated, each party will deliver to the other all documents,
work papers and other material (including copies) obtained by such party or on
its behalf from the other party as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof. The
confidentiality obligations of the parties hereto shall be terminated regarding
any Confidential Information obtained or acquired if (a) such Confidential
Information becomes known to the public generally through no fault of the
receiving party, (b) disclosure is required by law or the order of any
governmental authority, or (c) the disclosing party reasonably believes that
such disclosure is required in connection with the defense of a lawsuit against
the disclosing party; provided, that prior to disclosing any information
pursuant to clause (a), (b) or (c), such party shall, if possible, give prior
written notice thereof to the other party to provide the other party with the
opportunity to contest such disclosure.
Section 7.14 Notice of Developments. Each party will give prompt
written notice to the other of any material adverse development causing a breach
of any of its own representations and warranties in Article V and VI above. No
disclosure by any party pursuant to this Section 7.14, however, shall be deemed
to amend or supplement either parties respective Disclosure Schedule or to
prevent or cure any misrepresentation, breach of warranty, or breach of
covenant.
Section 7.15 Exclusivity. Company agrees (a) that, neither Company
nor its Subsidiaries shall, and that it and they will cause their respective
directors, officers, employees not to, and will use their best efforts to cause
their financial advisors, legal counsel, accountants and other agents and
representatives not to, initiate or solicit, directly or indirectly, any
inquiries or the making of any proposal with respect to, engage in negotiations
concerning, provide any Confidential Information or data to or have any
discussions with any Person relating to, any acquisition, business combination
or purchase of all or the major portion of the assets of, or any equity interest
in such party or any subsidiary of such party (an "Acquisition Proposal"), other
than the Merger, (b) that Company will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any Person
conducted heretofore with respect to any of the foregoing, and (c) that Company
will notify Parent immediately in writing if any such inquiries or proposals are
received by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, the Company; provided,
however, that nothing contained in this Section 7.15 shall prohibit the Board of
Directors of Company from furnishing information to or entering into discussions
or negotiations with, any Person that makes an unsolicited bona fide written
Acquisition Proposal, if and only to the extent that, the Board of Directors of
Company, after consultation with legal counsel, determines in good faith that
(i) the Acquisition Proposal would be more favorable to Company's stockholders
than the Merger, (ii) failure to take such action would result in a breach by
the Board of Directors of Company of its fiduciary duties to Company's
stockholders under applicable law, and (iii) prior to furnishing any
Confidential Information to such Person or entering into
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discussions or negotiations with such Person, Company receives from such Person
an executed confidentiality agreement with provisions no less favorable to
Company than the Confidentiality Agreement referred to in Section 10.4 and
Company provides written notice to Parent that it is furnishing information to,
or entering into discussions or negotiations with, such Person. Company shall
keep Parent informed in reasonable detail of the terms, status and other
pertinent details of any Acquisition Proposal including the identity of any
Person making an Acquisition Proposal. Nothing in this Section 7.15 shall (A)
permit Company to terminate this Agreement (except as specifically provided in
Article IX hereof), (B) permit Company to enter into any agreement with respect
to an Acquisition Proposal, except as set forth in Section 9.1.5, during the
term of this Agreement (it being agreed that during the term of this Agreement,
Company shall not enter into any agreement with any Person that provides for, or
in any way facilitates, an Acquisition Proposal (other than a confidentiality
agreement or as set forth in Section 9.1.5)) or (C) affect any other obligation
of any party under this Agreement.
Section 7.16 Insurance and Indemnification.
7.16.1 Parent will provide each individual who
served as a director or officer of Company at any time prior to the
Effective Time with liability insurance in respect of acts or omissions
occurring at or prior to the Effective Time for a period of six (6)
years after the Effective Time, such coverage to be on terms no less
favorable in coverage and amount than any applicable insurance in
effect immediately prior to the Effective Time; provided, however, that
Parent may reduce the coverage and amount of liability insurance to the
extent the cost of liability insurance having the full coverage and
amount would exceed $130,000 per annum.
7.16.2 The Surviving Corporation will observe any
indemnification and limitation on liability provisions now existing in
the certificate of incorporation or bylaws of Company for the benefit
of any individual who served as a director or officer of Company at any
time prior to the Effective Time.
7.16.3 If the Surviving Corporation or any of its
successors or assigns (a) consolidates with or mergers into any other
Person and shall not be the continuing or surviving corporation or
entity of such consolidation or merger or (b) transfers all or
substantially all of its properties and assets to any Person other than
in the Ordinary Course of Business, then, and in each such case, proper
provision shall be made so that the successors and assigns of the
Surviving Corporation, or at Parent's option, Parent shall assume the
obligations of the Surviving Corporation set forth in this Section
7.16.
Section 7.17 Expenses. Whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, except that the filing fees in connection with the HSR Act filing and
those expenses incurred in connection with printing the Form S-4 and the related
Joint Disclosure Document, as well as the filing fee relating to the Form S-4
shall be paid by the Parent.
Section 7.18 Cooperation. For all consents and approvals which
Company is required to obtain pursuant to this Agreement, Parent shall cooperate
and provide to Company such documentation or other information as Company shall
reasonably request. For all consents and approval which Parent is required to
obtain pursuant to this Agreement, Company shall cooperate and provide to Parent
such documentation or other information as Parent shall reasonably request.
Section 7.19 Governmental Approvals. Company and Parent shall use
their reasonable best efforts to (a) take, or cause to be taken, all appropriate
action necessary, proper or advisable under applicable law or required to be
taken by any governmental entity or otherwise to consummate and make effective
the Merger as promptly as practicable, (b) obtain from any governmental entity
any consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by Parent, Newco, or Company or of their
respective subsidiaries in connection with the authorization, execution and
delivery of this Agreement and the consummation of the Merger, and (c) furnish
to each other all information required for any application or other filing to be
made pursuant to any applicable law in connection with this Agreement and the
Merger.
Section 7.20 Obligations of Newco. Parent shall take all action
necessary to cause Newco to perform its agreements, covenants, and obligations
under this Agreement and to consummate the Merger.
Section 7.21 Public Announcements. Parent and Company shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the Merger and shall
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not issue any such press release or make any such public statement prior to such
consultation. The parties have agreed on the text of a joint release by which
Parent and Company will announce the execution of this Agreement.
Section 7.22 Nasdaq National Market System. Parent shall promptly
prepare and submit to the National Association of Securities Dealers a
Notification Form for listing of the additional shares of Parent Stock issuable
in the Merger on the Nasdaq National Market System.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS TO CLOSE
Section 8.1 Conditions to Obligation of Parent and Newco. The
obligation of Parent and Newco to consummate the transactions to be performed by
it in connection with the Closing is subject to satisfaction of the following
conditions:
8.1.1 this Agreement and the Merger shall have received the
Requisite Company Stockholder Approval;
8.1.2 Company and its Subsidiaries shall have
procured all third party consents reasonably requested by Parent
pursuant to Section 7.2 the failure of which to receive would have a
Material Adverse Effect on Company or Parent;
8.1.3 the representations and warranties of
Company set forth in Article V above (a) that are qualified as to
materiality by a Material Adverse Effect shall be true and correct at
and as of the Closing Date (except that representations and warranties
that are confined to a specific date and qualified as to materiality by
a Material Adverse Effect shall be true and correct as of such date)
and (b) that are not so qualified as to materiality shall be true and
correct in all material respects at and as of the Closing (except that
representations and warranties that are confined to a specific date and
are not so qualified as to materiality shall be true and correct in all
material respects as of such date);
8.1.4 Company shall have performed and complied in
all material respects with all of its covenants hereunder through the
Closing;
8.1.5 no action, suit, or proceeding shall be
pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation, (C) adversely affect
the right of the Surviving Corporation to own the assets, to operate
the businesses, and to control the Subsidiaries of Company, or (D)
adversely affect the right of any Subsidiary of Company to own its
assets and to operate its businesses;
8.1.6 Company shall have delivered to Parent a
certificate to the effect that each of the conditions specified above
in Sections 8.1.1 through 8.1.5 are satisfied in all respects;
8.1.7 the Form S-4 shall have become effective
under the Securities Act, no stop order suspending the effectiveness
the Form S-4 shall be in effect and no proceeding for that purpose
shall have been initiated or threatened by the SEC;
8.1.8 the waiting period applicable to the Merger
(and any extensions thereof) under the Hart-Scott-Rodino Act shall have
expired or otherwise been terminated and the parties shall have
received all other required authorizations, consents, and approvals of
governments and governmental agencies;
8.1.9 Parent shall have received from Ernst &
Young the opinions described in Sections 7.9 and 7.10;
8.1.10 no governmental entity shall have issued,
enacted, promulgated, enforced or entered any order, stay, decree,
judgment, injunction, rule, regulation or statute which is in effect
and has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger;
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8.1.11 Parent shall have received executed Affiliate
Letters in accordance with Section 7.4 of this Agreement;
8.1.12 Parent shall have received the resignations,
effective as of the Closing, of each director and officer of Company
and its Subsidiaries other than those whom Parent shall have specified
in writing at least five (5) business days prior to the Closing; and
8.1.13 Company shall have terminated the Peerless Group,
Inc. Employee Stock Purchase Plan.
Parent may waive any condition specified in this Section 8.1 if it executes a
writing so stating at or prior to the Closing.
Section 8.2 Conditions to Obligation of Company. The obligation of
Company to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
8.2.1 the Form S-4 shall have become effective
under the Securities Act, no stop order suspending the effectiveness
the Form S-4 shall be in effect and no proceeding for that purpose
shall have been initiated or threatened by the SEC;
8.2.2 Parent and its subsidiaries shall have
procured all third party consents reasonably requested by Company
pursuant to Section 7.2 the failure of which to receive would have a
Material Adverse Effect on Company or Parent;
8.2.3 the representations and warranties of Parent
set forth in Article VI above (a) that are qualified as to materiality
by a Material Adverse Effect shall be true and correct at and as of the
Closing Date (except that representations and warranties that are
confined to a specific date and qualified as to materiality by a
Material Adverse Effect shall be true and correct as of such date) and
(b) that are not so qualified as to materiality shall be true and
correct in all material respects at and as of the Closing (except that
representations and warranties that are confined to a specific date and
are not so qualified as to materiality shall be true and correct in all
material respects as of such date);
8.2.4 Parent shall have performed and complied in
all material respects with all of its covenants hereunder through the
Closing;
8.2.5 no action, suit, or proceeding shall be
pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (a)
prevent consummation of any of the transactions contemplated by this
Agreement, (b) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation, (c) affect adversely
the right of the Surviving Corporation to own the assets, to operate
the businesses, and to control the Subsidiaries of Company, or (d)
affect adversely the right of any of the Subsidiaries of Company to own
its assets and to operate its businesses.
8.2.6 Parent shall have delivered to Company a
certificate to the effect that each of the conditions specified above
in Sections 8.2.1 through 8.2.5 are satisfied in all respects;
8.2.7 this Agreement and the Merger shall have
received the Requisite Company Stockholder Approval;
8.2.8 the waiting period applicable to the Merger
(and any extensions thereof) under the Hart-Scott-Rodino Act shall have
expired or otherwise been terminated and the parties shall have
received all other required authorizations, consents, and approvals of
governments and governmental agencies;
8.2.9 no governmental entity shall have issued,
enacted, promulgated, enforced or entered any order, stay, decree,
judgment, injunction, rule, regulation or statute which is in effect
and has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger;
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8.2.10 Company shall have received from Deloitte &
Touche the opinions described in Sections 7.9 and 7.10; and
8.2.11 Company shall have received an opinion of
counsel, in form reasonably acceptable to it, to the effect that the
Merger will be treated for federal income tax purposes as a tax-free
reorganization within the meaning of Section 368(a) of the Code.
Company may waive any condition specified in this Section 8.2 if it executes a
writing so stating at or prior to the Closing.
ARTICLE IX
TERMINATION
Section 9.1 Termination of Agreement. Either Parent or Company may
terminate this Agreement with the prior authorization of its Board of Directors
(whether before or after obtaining the Requisite Company Stockholder Approval)
as provided below:
9.1.1 this Agreement may be terminated by mutual
written consent of Parent and Company at any time prior to the
Effective Time;
9.1.2 Parent may terminate this Agreement by giving
written notice to the Company at any time prior to the Effective Time
(a) in the event Company has breached any material representation,
warranty, or covenant contained in this Agreement in any material
respect, Parent has notified Company of the breach, and the breach has
continued without cure for a period of 30 days after the notice of
breach, or (b) if the Closing shall not have occurred on or before
February 19, 1999 by reason of the failure of any condition precedent
under Section 8.1 hereof (unless the failure results primarily from
Parent or Newco breaching any representation, warranty, or covenant
contained in this Agreement);
9.1.3 Company may terminate this Agreement by giving
written notice to Parent at any time prior to the Effective Time (a) in
the event Parent has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, Company
has notified Parent of the breach, and the breach has continued without
cure for a period of 30 days after the notice of breach, or (b) if the
Closing shall not have occurred on or before February 19, 1999 by
reason of the failure of any condition precedent under Section 8.2
hereof (unless the failure results primarily from Company or any
Subsidiary breaching any representation, warranty, or covenant
contained in this Agreement);
9.1.4 Parent or Company may terminate this Agreement
by giving written notice to the other party at any time after the
Special Company Meeting in the event this Agreement and the Merger fail
to receive the Requisite Company Stockholder Approval, provided that
Company may not terminate this Agreement pursuant to this Section 9.1.4
unless it shall have paid to Parent the fee provided in Section 9.2;
9.1.5 Company may terminate this Agreement at any
time prior to the Special Company Meeting by giving written notice to
Parent upon Company's execution of a definitive and binding written
agreement with any Person, other than Parent, who has made an
unsolicited Acquisition Proposal which the Board of Directors of
Company has determined in good faith (a) is more favorable to Company
stockholders than the Merger and (b) would result in a breach by the
Board of Directors of Company of its fiduciary duties to Company
stockholders if such Acquisition Proposal were not accepted; provided
that Company may not terminate this Agreement pursuant to this Section
9.1.5 unless it pays to Parent the fee provided in Section 9.2.2 and
complies with all obligations to Parent under Section 7.15;
9.1.6 either Company or Parent may terminate this
Agreement by giving written notice to the other if there shall be a
final nonappealable order in effect preventing consummation of the
Merger, or there shall be any action taken, or any governmental entity
shall have issued, enacted, promulgated, enforced or entered any order,
stay, decree, judgment, injunction, statute, law, rule or regulation
deemed applicable to the Merger that would make consummation of the
Merger illegal (provided, that the right to terminate the Agreement
pursuant to this Section 9.1.6 shall not be available to any party that
has not complied with the obligations under Sections 6.6, 7.3, 7.7 or
7.19); or
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9.1.7 subject to Company's and Parent's obligations
under Section 7.8, either Company or Parent may terminate this
Agreement by giving written notice to the other that (a) such party is
in receipt of opinions of counsel or of their accountants to the effect
that the Merger is not reasonably likely to qualify for pooling of
interests accounting or (b) that any of the opinions required by
Section 7.10 hereof have been withdrawn.
Section 9.2 Termination Fee. If the Agreement is terminated by Company
pursuant to Section 9.1.4, Section 9.1.5 or Section 9.1.6, all rights and
obligations of Company hereunder shall terminate without any further liability
of Company to Parent (except as provided in this Section 9.2); provided,
however, that the confidentiality provisions contained in Section 7.13 and the
expense provisions contained in Section 7.17 shall survive any such termination.
9.2.1 If this Agreement is terminated pursuant to
Section 9.1.4, then, in such event, Company shall pay to Parent prior
to or simultaneously with such termination, in immediately available
funds, a fee in an amount equal to $500,000.
9.2.2 If this Agreement is terminated pursuant to
Section 9.1.5, then, in such event, Company shall pay to Parent prior
to such termination, in immediately available funds, a fee in an amount
equal to $750,000, and shall, upon the effective date of the merger or
acquisition contemplated in the Acquisition Proposal, pay to Parent, in
immediately available funds, an additional fee in an amount equal to
$750,000.
9.2.3 If (a) this Agreement is terminated pursuant
to Section 9.1.4; (b) at the time of such termination, an Acquisition
Proposal shall have been made by any other Person and (c) within 12
months of such termination, Company or any of its Subsidiaries accepts
a written offer or enters into a definitive written agreement to
consummate an Acquisition Proposal with such other Person, or any
successor or assign thereof, then Company shall pay Parent in
immediately available funds, an additional fee of $500,000, and shall,
upon the effective date of the merger or acquisition contemplated in
the Acquisition Proposal, pay to Parent, in immediately available
funds, an additional fee in an amount equal to $500,000.
Section 9.3 Effect of Termination. If any party terminates this
Agreement pursuant to Sections 9.1.1 to 9.1.3 or 9.1.5, all rights and
obligations of the parties hereunder shall terminate without any liability of
any party to any other party (except for any liability of any party then in
breach); provided, however, that the confidentiality provisions contained in
Sections 7.13 and 7.17, shall survive any such termination.
ARTICLE X
MISCELLANEOUS
Section 10.1 Survival. None of the representations and warranties of
the parties shall survive the Effective Time. This Section 10.1 shall not limit
any covenant or agreement of the parties that by its terms contemplates
performance after the Effective Time.
Section 10.2 Press Releases and Public Announcements. No party shall
issue any press release or make any public announcement relating to the subject
matter of this Agreement without the prior written approval of the other
parties; provided, however, that any party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case the
disclosing party will use its reasonable best efforts to advise the other
parties prior to making the disclosure).
Section 10.3 No Third Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the parties and their
respective successors and permitted assigns; provided, however, that (a) the
provisions in Section 4.1 above concerning issuance of the JHA Shares are
intended for the benefit of Company stockholders and (b) the provisions in
Section 7.16 above concerning insurance and indemnification are intended for the
benefit of the individuals specified therein and their respective legal
representatives.
Section 10.4 Entire Agreement. Other than the Confidentiality Agreement
between Company and Parent dated June 8, 1998, and the Stock Option Agreement of
even date, this Agreement, including the Exhibits and Schedules attached hereto,
constitutes the entire agreement between the parties and supersedes any prior
understandings, agreements, or representations by or between the parties,
written or oral, to the extent they relate in any way to the subject matter
hereof. No representation, warranty, promise, inducement or statement of
intention has
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been made by any party hereto which is not embodied in this Agreement or such
other documents, and no party hereto shall be bound by, or be liable for, any
alleged representation, warranty, promise, inducement or statement of intention
not embodied herein or therein.
Section 10.5 Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties named herein and their respective
successors and permitted assigns. No party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other parties.
Section 10.6 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 10.7 Headings. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 10.8 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing and shall be deemed duly given if
(and then two business days after) it is sent by registered or certified mail,
return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to Company: with a copy to:
Peerless Group, Inc. Haynes and Boone, LLP
1212 East Arapaho Road 901 Main Street,
Richardson, Texas 75081 3100 NationsBank Plaza
FAX: 972-497-9246 Dallas, Texas 75202
Attn: Rodney L. Armstrong, C.E.O. FAX: 214-651-5940
Attn: Robert Kibby
If to Parent or Newco: with a copy to:
Jack Henry & Associates, Inc. Shughart Thomson & Kilroy, P.C.
663 Highway 60 12 Wyandotte Plaza
P.O. Box 807 120 W. 12th Street
Monett, Missouri 65708 Kansas City, Missouri 64105
FAX: 417-235-1765 FAX: 816-374-0509
Attn: Michael E. Henry, President Attn: Robert T. Schendel
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
Section 10.9 Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of Delaware without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Delaware.
Section 10.10 Amendments and Waivers. The parties may mutually amend
any provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective Boards of Directors; provided, however,
that any amendment effected subsequent to obtaining the Requisite Company
Stockholder Approval will be subject to the restrictions contained in the
Delaware General Corporation Law. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by all
of the parties. No waiver by any party of any default, misrepresentation, or
breach of warranty or covenant hereunder, whether intentional or not, shall be
valid unless signed by the party to be charged with such waiver. No waiver by
any party of any default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend
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to any prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
Section 10.11 Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
Section 10.12 Construction. The parties have participated jointly in
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word Aincluding@ shall mean including without limitation.
Section 10.13 Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof. Inclusion of information in any Schedule to this Agreement
does not constitute an admission or acknowledgment of the materiality of such
information. To the extent that any information included in any Section of any
Schedule provided by a party hereto applies or pertains to any other Section of
such Schedule, such information shall be deemed to be incorporated by reference
in all Sections of such Schedule to which such information is applicable.
Section 10.14 Cooperation. Parent, Newco and Company shall each deliver
or cause to be delivered to the other at the Closing, and at such times and
places as shall be reasonably agreed to, such additional instruments as the
other may reasonably request for the purpose of effectuating this Agreement.
Section 10.15 Submission to Jurisdiction. Each of the parties hereto
irrevocably (a) consent to submit itself to the personal jurisdiction of any
federal court located in the State of Delaware or any Delaware state court in
the event that nay dispute arises out of this Agreement or of the transactions
contemplated by this Agreement, (b) agrees that it will not attempt to deny or
defeat such personal jurisdiction by motion or other request for leave from any
such court and (c) agrees that it will not initiate any action related to this
Agreement or any of the transactions contemplated by this Agreement in any court
other than a Federal court in the State of Delaware or a Delaware state court.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
JACK HENRY & ASSOCIATES, INC.
By: /s/ Michael E. Henry
-------------------------------------
Title: Chief Executive Officer
---------------------------------
PEERLESS ACQUISITION CORP.
By: /s/ Michael R. Wallace
-------------------------------------
Title: President
---------------------------------
PEERLESS GROUP, INC.
By: /s/ Steven W. Tomson
-------------------------------------
Title: President
---------------------------------
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ANNEX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (this "Agreement"), dated as of August 18, 1998,
between Jack Henry & Associates, Inc. a Delaware corporation ("Grantee"), and
Peerless Group, Inc., a Delaware corporation (the "Company").
WHEREAS, the Company, Grantee and Peerless Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Grantee ("Newco"), have
contemporaneously with the execution of this Agreement, entered into an
Agreement and Plan of Merger dated August 18, 1998 (the "Merger Agreement")
which provides, among other things, that Newco shall be merged with and into
the Company pursuant to the terms and conditions thereof; and
WHEREAS, as an essential condition and inducement to Grantee's entering
into the Merger Agreement and in consideration therefor, the Company has agreed
to grant Grantee the Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein and in the Merger Agreement, and intending to
be legally bound hereby, the parties hereby agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof,
979,815 shares (such shares being referred to herein as the "Option Shares") of
fully paid and nonassessable common stock, par value $.01 per share, of the
Company ("Company Common Stock"), equal to 19.9% of the number of shares of
Company Common Stock issued and outstanding as of the date hereof at the
exercise price of $7.25 per share (such price, as adjusted if applicable, the
"Option Price").
2. (a) EXERCISE OF OPTION. Grantee may exercise the Option, in whole or
part, and from time to time, after the occurrence, if any, of a Triggering
Event (as hereinafter defined) and prior to the first occurrence of an Option
Termination Event (as hereinafter defined).
(b) OPTION TERMINATION EVENTS. The term "Option Termination Event"
shall mean any of the following events:
(i) the Effective Time (as defined in the Merger Agreement);
(ii) termination of the Merger Agreement pursuant to Section 9.1.1,
9.1.2(b) or 9.1.3 thereof;
(iii) 270 days after the first occurrence of a Triggering Event (as
hereinafter defined);
(iv) termination of this Stock Option Agreement by mutual written
consent; or
(v) August 15, 1999.
(c) TRIGGERING EVENTS. The term "Triggering Event" shall mean the
occurrence (after the date hereof) of either of the two following events:
(i) termination of the Merger Agreement pursuant to Section 9.1.4
thereof, if prior to the Special Company Meeting, there shall have been
a proposal or offer (other than the Merger Agreement) with respect to any
acquisition, business combination or purchase of 20% or more of the assets
of, or any 20% or greater equity interest in, Company or any of its
Subsidiaries and such proposal or offer shall not have been rejected by
Company; or
(ii) termination of the Merger Agreement by Company pursuant to
Section 9.1.5 of the Merger Agreement.
(d) NOTICE OF TRIGGERING EVENT. The Company shall notify Grantee in
writing as promptly as practicable, and in any event within 24 hours, of the
occurrence of any Triggering Event, it being understood that the giving of such
notice by the Company shall not be a condition to the right of Grantee to
exercise the Option or for a Triggering Event to have occurred.
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(e) NOTICE OF EXERCISE; CLOSING. In the event that Grantee is entitled
to and wishes to exercise the Option, it shall send to the Company a written
notice (such notice being herein referred to as an "Exercise Notice" and the
date of issuance of an Exercise Notice being herein referred to as the "Notice
Date") specifying (i) the total number of shares it will purchase pursuant to
such exercise and (ii) a place and date not earlier than three (3) Business
Days nor later than forty (40) Business Days from the Notice Date for the
closing of such purchase (the "Option Closing Date"); provided, that if the
closing of the purchase and sale pursuant to the Option (the "Option Closing")
cannot be consummated, by reason of any applicable judgment, decree, order, law
or regulation, the Option Closing Date shall be ten business days after such
impediment to consummation shall have been removed; provided further that if
such impediment to consummate is not removed within one (1) year after the
related Notice Date, Grantee shall, to the extent permitted by applicable law,
nevertheless be entitled to exercise its rights as set forth herein, including
without limitation the rights set forth in Subsection 5(a) and Grantee shall be
entitled to exercise the Option in connection with the resale of the Company
Common Stock pursuant to a registration statement as provided in Section 6.
(f) CONDITIONS TO CLOSING. The obligation of Company to issue shares
of Company Common Stock to Grantee hereunder is subject to the conditions that
(i) all waiting periods, if any, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder, applicable to the issuance of the shares of Company Common Stock
hereunder shall have expired or have been terminated; (ii) all consents,
approvals, orders or authorizations of, or registrations, declarations or
filings with, any Federal, state or local administrative agency or commission
or other Federal state or local governmental authority or instrumentality, if
any, required in connection with the issuance of the shares of Company Common
Stock hereunder shall have been obtained or made, as the case may be; and (iii)
no preliminary or permanent injunction or other order by any court of competent
jurisdiction prohibiting or otherwise restraining such issuance shall be in
effect.
(g) PURCHASE PRICE. At the Option Closing, Grantee shall pay to the
Company the aggregate Option Price in immediately available funds by wire
transfer to a bank account designated by the Company, provided that failure or
refusal of the Company to designate such a bank account shall not preclude
Grantee from exercising the Option.
(h) ISSUANCE OF COMPANY COMMON STOCK. At the Option Closing,
simultaneously with the delivery of immediately available funds as provided in
Subsection 2(g), the Company shall deliver to Grantee a certificate or
certificates representing the number of shares of Company Common Stock
purchased by Grantee and, if the Option should be exercised in part only, a new
Option evidencing the rights of Grantee thereof to purchase the balance of the
shares purchasable hereunder. If at the time of issuance of any Option Shares
pursuant to an exercise of all or part of the Option hereunder, the Company
shall have issued any rights or other securities which are attached to or
otherwise associated with the Company Common Stock, then each Option Share
issued pursuant to such exercise shall also represent such rights or other
securities with terms substantially the same as and at least as favorable to
Grantee as are provided under any shareholder rights agreement or similar
agreement of the Company then in effect.
(i) LEGEND. Certificates for Company Common Stock delivered at an
Option Closing hereunder may be endorsed with a restrictive legend that shall
read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE
REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE."
It is understood and agreed that the reference to the resale restrictions of
the Securities Act of 1933, as amended (the "Securities Act"), in the above
legend shall be removed by delivery of substitute certificate(s) without such
reference if Grantee shall have delivered to the Company a copy of a letter
from the staff of the SEC, or an opinion of counsel, reasonably satisfactory to
the Company, to the effect that such legend is not required for purposes of the
Securities Act. In addition, such certificates shall bear any other legend as
may be required by Law.
(j) RECORD GRANTEE. Upon the delivery by Grantee to the Company of the
Exercise Notice and the tender of the applicable Option Price in immediately
available funds, Grantee shall be deemed to be the holder of record of the
shares of Company Common Stock issuable upon such exercise, notwithstanding
that the stock transfer books of the Company shall then be closed or that
certificates representing such shares of Company Common Stock shall not then be
actually delivered to Grantee or the Company shall have failed or refused to
designate the bank account described in Subsection 2(g).
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3. RESERVATION OF SHARES. The Company agrees (i) that it shall at all
times maintain, free from preemptive rights, sufficient authorized but unissued
or treasury shares of Company Common Stock issuable pursuant to this Agreement
so that the Option may be exercised without additional authorization of Company
Common Stock after giving effect to all other options, warrants, convertible
securities and other rights to purchase Company Common Stock; (ii) that it will
not, by charter amendment or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act, avoid or seek to
avoid the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Company; and (iii)
promptly to take all action as may from time to time be required in order to
permit Grantee to exercise the Option and the Company to duly and effectively
issue shares of Company Common Stock pursuant hereto.
4. DIVISION OF OPTION; LOST OPTIONS. This Agreement (and the Option
granted hereby) are exchangeable, without expense, at the option of Grantee,
upon presentation and surrender of this Agreement at the principal office of
the Company, for other Agreements providing for Options of different
denominations entitling the holder thereof to purchase, on the same terms and
subject to the same conditions as are set forth herein, in the aggregate the
same number of shares of Company Common Stock purchasable hereunder. The terms
"Agreement" and "Option" as used herein include any Stock Option Agreements and
related Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Agreement, and (in the
case of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Agreement, if mutilated, the
Company will execute and deliver a new Agreement of like tenor and date.
5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. Company Common Stock
purchasable upon the exercise of the Option shall be subject to adjustment from
time to time as provided in this Section 5.
(a) ADDITIONAL SHARES ADJUSTMENT. Excluding issuances contemplated
by Subsection 5(b), in the event that any additional shares of Company Common
Stock, or any rights, options (other than compensatory options), warrants,
subscriptions, calls, convertible securities or other agreements or commitments
obligating the Company to issue any shares of Company Common Stock, are issued
or otherwise become outstanding after the date hereof (an "Increase"), the
number of shares of Company Common Stock subject to the Option shall be
increased by a number of shares equal to the product of (i) 19.9% and (ii) the
number of shares of Company Common Stock issued and outstanding immediately
after the Increase minus the number of shares of Company Common Stock issued
and outstanding immediately prior to the Increase; provided that the number of
shares of Company Common Stock subject to the Option shall in no event exceed
19.9% of the issued and outstanding shares of Company Common Stock immediately
prior to exercise.
(b) TRANSACTION ADJUSTMENT. In the event of any change in Company
Common Stock by reason of stock dividends, splits, mergers, recapitalization,
combinations, subdivisions, conversions, exchanges of shares or other similar
transactions then, the type and number of shares of Company Common Stock
purchasable upon exercise hereof shall be appropriately adjusted so that
Grantee shall receive upon exercise of the Option and payment of the aggregate
Option Price hereunder the number and class of shares or other securities or
property that Grantee would have received in respect of Company Common Stock if
the Option had been exercised in full immediately prior to such event, or the
record date therefor, as applicable.
6. REGISTRATION RIGHTS. If during the three years following the first
exercise hereof the Company shall propose to register under the Securities Act
the offering, sale and delivery of Company Common Stock for cash for its own
account or for any other stockholder of the Company pursuant to a firm
underwriting, it will allow Grantee the right to participate in such
registration; provided, however, that, if the managing underwriter of such
offering advises the Company in writing that in its opinion the number of
shares of Company Common Stock requested to be included in such registration
exceeds the number which can be sold in such offering, the Company will, after
fully including therein all shares of Company Common Stock to be sold by the
Company, include the shares of Company Common Stock requested to be included
therein by Grantee pro rata (based on the number of shares of Company Common
Stock intended to be included therein) with the shares of Company Common Stock
intended to be included therein by Persons other than the Company. The Company
will use all reasonable efforts to cause each such registration statement to
become effective, to obtain all consents or waivers of other parties which are
required therefor and to keep such registration statement effective for such
period not in excess of 180 days from the day such registration statement first
becomes effective as may be reasonably necessary to effect such sale or other
disposition. The expenses associated with the preparation and filing of any
such registration statement pursuant to this Section 6 and any sale covered
thereby (including any fees related to blue sky qualifications and filing fees
in respect of the Securities and Exchange Commission or the National
Association of Securities Dealers, Inc.) will be for the account of the Company
except for
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underwriting discounts or commissions or brokers' fees in respect to shares of
Company Common Stock to be sold by the Grantee and the fees and disbursements
of the Grantee's counsel. Grantee will provide all information reasonably
requested by the Company for inclusion in any registration statement to be
filed hereunder. In connection with any offering, sale and delivery of Company
Common Stock pursuant to a registration statement effected pursuant to this
Section 6, the Company and Grantee will provide each other and each underwriter
of the offering with customary representations, warranties and covenants,
including covenants of indemnification and contribution.
7. CORPORATE CHANGE. In the event that the Company shall enter into
an agreement (i) to consolidate with or merge into any Person, other than
Grantee or one of its subsidiaries, and shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its subsidiaries, to merge into the
Company and the Company shall be the continuing or surviving corporation, but,
in connection with such merger, the then outstanding shares of Company Common
Stock shall be changed into or exchanged for stock or other securities of any
other person or cash or any other property or the then outstanding shares of
Company Common Stock shall after such merger represent less than 50% of the
outstanding shares and share equivalents of the continuing or surviving
corporation, or (iii) to sell or otherwise transfer all or substantially all of
its assets to any Person, other than Grantee or one of its subsidiaries, then,
and in each such case, the agreement governing such transaction shall make
proper provision so that, upon the consummation of any such transaction and
upon the terms and conditions set forth herein, Grantee shall receive for each
share of Company Common Stock with respect to which the Option has not been
exercised an amount of consideration in the form of and equal to the per share
amount of consideration that would be received by the holder of one share of
Company Common Stock less the Option Price (and, in the event of an election or
similar arrangement with respect to the type of consideration to be received by
the holders of Company Common Stock, subject to the foregoing, proper provision
shall be made so that Grantee, as the holder of the Option, would have the same
election or similar rights as would the holder of the number of shares of
Company Common Stock for which the Option is then exercisable).
8. EXTENSION OF TIME FOR REGULATORY APPROVALS. The periods related to
exercise of the Option and the other rights of Grantee hereunder shall be
extended (i) to the extent necessary to obtain all regulatory approvals for the
exercise of such rights, and for the expiration of all statutory waiting
periods and (ii) to the extent necessary to avoid liability under Section 10(b)
of the Exchange Act by reason of such exercise.
9. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Grantee as follows:
(a) AUTHORITY. The Company has full corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of the Company and no other corporate
proceedings on the part of the Company are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly and validly executed and delivered by the Company. This Agreement is
the valid and legally binding obligation of the Company, enforceable against
the Company in accordance with its terms subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditors' rights generally or to general principles of equity.
(b) CORPORATE ACTION. The Company has taken all necessary corporate
action to authorize and reserve and to permit it to issue, and at all times
from the date hereof through the termination of this Agreement in accordance
with its terms will have reserved for issuance upon the exercise of the Option,
that number of shares of Company Common Stock equal to the maximum number of
shares of Company Common Stock at any time and from time to time issuable
hereunder, and all such shares of Company Common Stock, upon issuance pursuant
hereto, will be duly authorized, validly issued, fully paid, nonassessable, and
will be delivered free and clear of all Liens and not subject to any preemptive
rights.
(c) NO CONFLICT. Except as set forth in Section 5.5 of the Company
Disclosure Schedule attached to the Merger Agreement, the execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any violation
pursuant to any provisions of the Certificate of Incorporation or by-laws of
the Company or any Subsidiary of the Company, subject to obtaining any
approvals or consents contemplated hereby, result in any violation of any loan
or credit agreement, note, mortgage, indenture, lease, plan or other agreement,
obligation, instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company or any Subsidiary of the Company or their respective properties or
assets.
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<PAGE> 125
(d) ANTI-TAKEOVER STATUTES. The provisions of Section 203 of the
General Corporation Law of the State of Delaware will not, prior to the
termination of this Agreement, apply to this Agreement or the transactions
contemplated hereby and thereby. The Company has taken, and will in the future
take, all steps necessary to irrevocably exempt the transactions contemplated
by this Agreement from any other applicable state takeover law and from any
applicable charter or contractual provision containing change of control or
anti-takeover provisions.
10. REPRESENTATIONS OF GRANTEE. The Grantee hereby represents and
warrants to the Company that it is an "accredited investor" as defined in the
Securities and Exchange Commission's Rule 501(a) and that in acquiring the
Option pursuant to this Stock Option Agreement, it is acting for its own
account, for the purpose of investment, and not with a view to the distribution
or resale of any securities of the Company.
11. STANDSTILL PROVISIONS. (a) Other than pursuant to the Merger
Agreement, following the occurrence of a Triggering Event, if any, hereof and
prior to the Standstill Expiration Date (as defined below), without the prior
written consent of the Company, Grantee shall not, nor shall Grantee permit its
affiliates to, directly or indirectly, alone or in concert or conjunction with
any other Person or Group (as defined below), (i) acquire, agree to acquire or
make any proposal to acquire, any securities or material property of the
Company (other than pursuant to this Agreement or the Merger Agreement), (ii)
propose to enter into any merger or business combination involving the Company
or to purchase a material portion of the assets of Company, (iii) make or in
any way participate in any "solicitation" of "proxies" (as such terms are used
in Regulation 14A promulgated under the Securities exchange Act of 1934, as
amended (the "Exchange Act")) to vote, or seek to advise or influence any
Person with respect to the voting of, any voting securities of the Company,
(iv) form, join or in any way participate in a Group with respect to any voting
securities of the Company, (v) seek to control or influence the management,
Board of Directors or policies of the Company, (vi) disclose any intention,
plan or arrangement inconsistent with the foregoing, (vii) advise, assist or
encourage any other Person in connection with the foregoing or (viii) request
the Company (or its directors, officers, employees or agents) to amend or waive
any provisions of this Section 11, or take any action that may require the
Company to make a public announcement regarding the possibility of a business
combination or merger with such party.
(b) For purposes of this Agreement, (i) the term "Group" shall mean any
two or more persons acting as set forth in Section 13(d)(3) of the Exchange
Act, (ii) the term "Person" shall mean any corporation, partnership,
individual, trust, unincorporated association or other entity or Group, and
(iii) the term "Standstill Expiration Date" shall mean the earlier to occur of
(A) 270 days after the occurrence of the Special Company Meeting referred to in
Section 7.6 of the Merger Agreement, or (B) 180 days after the termination of
the Merger Agreement pursuant to Section 9.1.5 thereof.
12. VOTING OF SHARES. Following the occurrence of a Triggering Event,
if any, and until the Standstill Expiration Date (as defined above in Section
11(b)), Grantee shall vote any shares of Company Common Stock acquired pursuant
to the Option on each matter submitted to a vote of stockholders of the Company
for and against such matter in the same proportion as all other outstanding
shares of Company Common Stock are voted (whether by proxy or otherwise) for
and against such matter.
13. ASSIGNMENT. The Company may not assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
Person, without the express written consent of Grantee. Grantee may not assign
any of its rights or obligations under this Agreement or the Option created
hereunder to any other Person without the consent of the Company (which consent
will not be unreasonably withheld).
14. APPLICATION FOR REGULATORY APPROVAL. Each of Grantee and the
Company will use its best efforts to make all filings with, and to obtain
consents of, all third parties and governmental authorities necessary to the
consummation of the transactions contemplated by this Agreement.
15. SPECIFIC PERFORMANCE. The parties hereto acknowledge that damages
would be an inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be enforceable by
either party hereto through injunctive or other equitable relief.
16. SEPARABILITY OF PROVISIONS. If any term, provision, covenant or
restriction contained in this Agreement is held by a court or a federal or
state regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and effect,
and shall in no way be affected, impaired or invalidated.
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<PAGE> 126
17. NOTICES. All notices, claims, demands and other communications
hereunder shall be deemed to have been duly given or made when delivered in
person, by registered or certified mail (postage prepaid, return receipt
requested), by overnight courier or by facsimile at the respective addresses of
the parties set forth in the Merger Agreement.
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof.
19. DEFINITIONS. Capitalized terms used and not defined herein shall
have the meanings set forth in the Merger Agreement.
20. ENTIRE AGREEMENT. Except as otherwise expressly provided herein or
in the Merger Agreement, this Agreement contains the entire agreement between
the parties with respect to the transactions contemplated hereunder and
supersedes all prior arrangements or understandings with respect thereof,
written or oral. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties hereto,
and their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided herein. Any provision of this Agreement may be waived only
in writing at any time by the party that is entitled to the benefits of such
provision. This Agreement may not be modified, amended, altered or supplemented
except upon the execution and delivery of a written agreement executed by the
parties hereto.
21. FURTHER ASSURANCES. In the event of any exercise of the Option by
Grantee, the Company and Grantee shall execute and deliver all other documents
and instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise. Nothing
contained in this Agreement shall be deemed to authorize the Company or Grantee
to breach any provision of the Merger Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
PEERLESS GROUP, INC.
/s/ Steven W. Tomson
------------------------------
Title: President
------------------------
JACK HENRY & ASSOCIATES, INC.
/s/ Michael E. Henry
------------------------------
Title: Chief Executive Officer
------------------------
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ANNEX C
OPINION OF DAIN RAUSCHER WESSELS
August 18, 1998
The Board of Directors
Peerless Group, Inc.
1201 South Central Expressway
Allen, TX 75013
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of Peerless Group, Inc., a Delaware corporation
(the "Company"), of the consideration to be received by the stockholders
pursuant to the terms of the proposed Agreement and Plan of Merger (the
"Agreement") dated as of August 18, 1998, by and among Jack Henry & Associates,
Inc., a Delaware corporation (the "Acquiror"), Peerless Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of the Acquiror ("Newco"), and
the Company. Capitalized terms used herein shall have the meanings used in the
Agreement unless otherwise defined herein.
Pursuant to the Agreement, each outstanding share of common stock, $.01
par value per share, of the Company is proposed to be converted into and
represent the right to receive 0.16145 shares, $.01 par value, of the
Acquiror's common stock (the "Acquiror Shares"), subject to adjustments
described in the Agreement (the "Exchange Ratio"). Outstanding options and
warrants to acquire shares of the Company will be converted into options and
warrants, respectively, to acquire shares of the Acquiror, adjusted for the
Exchange Ratio. The transaction is intended to qualify as a tax-free
reorganization for U.S. Federal Income tax purposes and to be accounted for as
a pooling-of-interests transaction under applicable accounting principles. The
terms and conditions of the Merger and the Exchange Ratio are set forth more
fully in the Agreement.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. In addition, the Company
has agreed to indemnify us for certain liabilities arising out of our
engagement. In the ordinary course of business, Dain Rauscher Wessels acts as
a market maker and broker in the publicly traded securities of the Company and
the Acquiror and receives customary compensation in connection therewith, and
also provides research coverage for the Company and the Acquiror for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities.
In connection with our review of the Merger, and in arriving at our
opinion, we have: (i) reviewed and analyzed the consideration to be received
per the Agreement; (ii) reviewed and analyzed certain publicly available
financial and other data (including financial forecasts of the Company and
Acquiror) with respect to the Company and Acquiror and certain other historical
relevant financial and operating data relating to the Company and Acquiror made
available to us from published sources and from the internal records of the
Company and Acquiror; (iii) conducted discussions with members of the senior
management of the Company with respect to the business and prospects of the
Company; (iv) conducted discussions with members of the senior management of
the Acquiror with respect to the business and prospects of the Acquiror; (v)
reviewed the reported prices and trading activity for the Company's Common
Stock and the Acquiror's Common Stock; (vi) compared the financial performance
of the Company and the Acquiror and the prices of the Company's Common Stock
and the Acquiror's Common Stock with that of certain other comparable
publicly-traded companies and their securities; and (vii) reviewed the
financial terms, to the extent publicly available, of certain comparable merger
transactions. In addition, we have
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The Board of Directors
August 18, 1998
Page C-2
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as we have deemed necessary in arriving
at our opinion.
With respect to the Company's financial forecasts, upon advice of the
Company we have assumed that such forecasts have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company
and that the Company will perform substantially in accordance with such
projections. We express no opinion as to such financial forecast information
or the assumptions on which they were based.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial, legal, tax, operating and other information
provided to us by the Company and the Acquiror (including without limitation
the financial statements and related notes thereto of the Company and
Acquiror), and have not assumed responsibility for independently verifying and
have not independently verified such information. We have not assumed any
responsibility to perform, and have not performed, an independent evaluation or
appraisal of any of the respective assets or liabilities of the Company or the
Acquiror, and we have not been furnished with any such valuations or
appraisals. In addition, we have not assumed any obligation to conduct, and
have not conducted, any physical inspection of the property or facilities of
the Company or the Acquiror. Additionally, we have not been asked and did not
consider the possible effects of any litigation, other legal claims or any
other contingent matters. Further, we have assumed that the Merger will be
accounted for by the Acquiror as a pooling-of-interests transaction under
generally accepted accounting principles and will qualify as a tax-free
reorganization for U.S. federal income tax purposes.
Our opinion speaks only as of the date hereof, is based on the conditions
as they exist and information which we have been supplied as of the date
hereof, and is without regard to any market, economic, financial, legal or
other circumstances or event of any kind or nature which may exist or occur
after such date. Our advisory services and the opinion expressed herein are
provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated by
the Agreement and such opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to such
transaction. Further, our opinion does not address the merits of the
underlying decision by the Company to engage in such transaction.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
Based on our experience as investment bankers and subject to the
foregoing, including the various assumptions and limitations set forth herein,
it is our opinion that, as of the date hereof, the consideration to be received
by the holders of the Company's Common Stock pursuant to the Agreement is fair,
from a financial point of view, to the holders of the Company's Common Stock.
Very truly yours,
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
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<PAGE> 129
FORM OF PEERLESS GROUP, INC. PROXY
PEERLESS GROUP, INC.
1021 CENTRAL EXPRESSWAY SOUTH
ALLEN, TEXAS 75013
SPECIAL MEETING OF STOCKHOLDERS - Wednesday, December 16 1998.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Rodney L. Armstrong, Jr., and Douglas
K. Hansen or either of them as proxies, each with full powers of substitution,
and hereby authorizes them to represent and to vote, as designated on the
reverse side, all shares of Common Stock, $0.01 par value, of Peerless Group,
Inc. ("Peerless") held of record by the undersigned on October 30, 1998, at
the Special Meeting of Stockholders of Peerless to be held on December 16,
1998, or any adjournment or postponement thereof.
This proxy when properly executed and returned in a timely manner will
be voted at the Special Meeting and any adjournment or postponement thereof in
the manner described herein. If no contrary indication is made, the proxy will
be voted FOR Proposal 1 and in accordance with the judgment of the persons named
as proxies herein on any other matters that may properly come before the Special
Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE
[Reverse Side]
Please mark [x] votes as in this example.
The Board of Directors unanimously recommends that you vote FOR Proposal 1:
1. Proposal to approve and adopt the Agreement and Plan of Merger and the
transactions contemplated thereby, as described in the accompanying Proxy
Statement/Prospectus.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. In accordance with their judgment, the proxies are authorized to vote upon
such other matters as may properly come before the Special Meeting or any
adjournment hereof.
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
This proxy must be signed exactly as your name appears hereon. When shares are
held by joint tenants, both should sign. Attorneys, executors, administrators,
trustees and guardians should indicate their capacities. If the signer is a
corporation, please print full corporate name and indicate capacity of duly
authorized officer executing on behalf of the corporation. If the signer is a
partnership, please print full partnership name and indicate capacity of duly
authorized person executing on behalf of the partnership.
Signature: Date:
----------------------------------- -------------------
Signature: Date:
----------------------------------- -------------------
