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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to _______________
Commission file number: 33-92810
PROGRAMMER'S PARADISE, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3136104
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 389-8950
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: Common Stock, par
value $0.01 per share (Title Of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- -----------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the closing sales price for the
Registrant's Common Stock on March 13, 2000, as reported on the Nasdaq National
Market, was approximately $31,811,801.
The number of shares outstanding of the Registrant's Common Stock as of
March 13, 2000: 5,202,750 shares.
In determining the market value of the voting stock held by any
non-affiliates, shares of Common Stock of the Registrant beneficially owned by
directors, officers and holders of more than 10% of the outstanding shares of
Common Stock of the Registrant have been excluded. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
Documents Incorporated by Reference: Portions of the Registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to
be held on June 13, 2000 are incorporated by reference into Part III of this
Report.
PART I
ITEM 1 BUSINESS.
GENERAL
Programmer's Paradise, Inc. (the "Company") is a recognized
international marketer of software targeting the software development and
Information Technology professionals within enterprise organizations. The
Company operates principally through five distribution channels in North America
and Europe - Internet, catalog, direct sales, telemarketing, and wholesale
distribution. Internet sales encompass the Company's domestic and international
web sites. Catalog operations include worldwide catalog sales, advertising and
publishing. Direct sales operations include Programmer's Paradise Corporate
Sales in the United States, ISP*D International Software Partners GmbH
("ISP*D"), a wholly owned subsidiary in Munich, Germany, ISP*F International
Software Partners France SA ("ISP*F"), a majority owned subsidiary in Paris,
France, and Logicsoft Holding BV ("Logicsoft"), a wholly owned subsidiary in
Amsterdam, The Netherlands. Telemarketing operations are presently conducted in
the United States, Germany and the United Kingdom. Wholesale operations include
distribution to dealers and large resellers through Lifeboat Distribution Inc.
in the United States and Lifeboat Associates Italia Srl ("Lifeboat Italy") in
Milan, Italy, also subsidiaries of the Company.
The Company's strategic focus is to expand its catalog and Internet
activities while solidifying its position as the predominant direct sales
company for corporate desktop application software. A key element of that
strategy is to build upon its distinctive catalogs - the established
Programmer's Paradise catalog, directed at independent professional programmers,
and its Programmer's Supershop catalog, directed at Information Technology
professionals working in large corporations, and to utilize the catalogs to
direct traffic to it's web sites as well as being the initial conduit to
developing its telemarketing channel. The Company's focus for direct sales is to
expand revenues and income by assisting companies manage their IT expenditures,
a value-added selling approach.
Through its multiple distribution channels, the Company now offers more
than 58,000 SKUs, consisting of technical and general business application
software and PC hardware and components from more than 2,000 publishers and
manufacturers, at prices generally discounted below manufacturers' suggested
retail prices. The Company's catalogs are full color "magalogs", and offer one
of the most complete collections of microcomputer technical software, including
programming languages, tools, utilities, libraries, development systems,
interfaces and communication products. The Company has created a niche for hard
to source technical software programs and has demonstrated an ongoing capability
to search and obtain titles requested by its customer base. The Company believes
that its catalogs are important marketing vehicles for software publishers and
manufacturers and that they provide a cost-effective and service-oriented means
to market, sell and fulfill software products. The Company utilizes its
proprietary and brand-distinctive logo, the "Island Man" cartoon character, on
its flagship Programmer's Paradise catalog and many of it's international
catalogs. In 1999, the Company distributed over 9.7 million catalogs and plans
to distribute 8.5 million catalogs or 710 million pages in 2000. Catalog
operations, which have historically had the highest gross margins of all the
Company's distribution channels, contributed 28% of its revenue and 40% of gross
margin in 1999.
International expansion has been an integral part of the Company's
strategy, with its European-based operations accounting for approximately 67% of
sales for the year ended December 31,1999 and approximately 57% of gross margin
for the same period. The Company began European-based
operations in the first quarter of 1993 when it acquired a controlling interest
in Lifeboat Associates Italia Srl, a long-standing software wholesale
distributor in Italy with an orientation towards technical software. In June
1994, the Company acquired a controlling interest, and in January 1995, the
Company acquired the remaining interest in ISP*D International Software Partners
GmbH, a large software-only dealer and a leading independent supplier of
Microsoft Select licenses and other software to many large German and Austrian
companies. In late 1994, the Company organized a subsidiary in the United
Kingdom to engage in catalog operations and in December 1995, the Company
acquired Systematika Ltd., a leading reseller of technical software in the
United Kingdom and the publisher of the popular System Science catalog. In
January 1996, the Company formed ISP*F International Software Partners France
SA, as a full service corporate reseller of PC software, based in Paris and
majority-owned by Programmer's Paradise France SARL. In August 1997, the Company
formed Programmer's Paradise, Canada Inc. located in Mississauga, Ontario, to
serve the growing developer market in Canada. In September 1997, the Company
acquired Logicsoft Holding BV, the parent company of Logicsoft Europe BV, the
largest software-only corporate reseller of PC software in The Netherlands. The
Company estimates that it now holds the lead position in over 40% of the
European software market.
Programmer's Paradise, Inc. was incorporated under the laws of the
State of Delaware in 1982. The Company's principal executive offices are located
at 1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702 and its telephone number
is (732) 389-8950. Website addresses are www.pparadise.com and
www.supershops.com. Information contained on our web sites is not, and should
not be deemed to be, a part of this report.
INDUSTRY BACKGROUND
According to industry data published in January 2000, the worldwide
package software market grew 14.5% in 1999 reaching revenues of $154 billion.
This is more than the 12.8% growth that occurred from 1997 to 1998. It is
projected that by 2003, there will be an estimated 17.4 million professional
developers. The worldwide application development and deployment ("AD&D")
revenue in 1999 is estimated to be $36.4 billion, reflecting a 14.7% growth over
1998. Oracle and Microsoft account for $5.6 billion and $5.0 billion of this
amount, respectively. The AD&D market is expected to grow from $36.4 billion in
1999, to $64.7 billion in 2003. The compounded annual growth rate between 1998
and 2003 is expected to be 15.3% as a result of strong growth driven by Internet
development tools. The Internet also made a determined push into software
channels as vendors continue to streamline both delivery and pricing by
encouraging end users to acquire software and licenses via the Web.
The Company believes that through it's catalog and Internet sales
channels, it is positioned to participate heavily in the worldwide package
software market.
INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one principal industry segment across
geographically diverse marketplaces. Information regarding financial data by
geographic area and amounts of total revenue for each class of similar products
or services that represents 10 percent or more of total revenue is set forth in
Part II, Item 8 of this Form 10-K at Note 10, "Industry Segment and Geographic
Information."
PRODUCTS
The Company offers over 58,000 stock keeping units, or SKUs, from more
than 2,000 publishers and manufacturers, including Microsoft, Sybase, Borland,
IBM, Symantec, Blue Sky Software and NuMega Technologies, at prices generally
discounted below manufacturer's suggested retail prices. The Company screens new
products and selects products for inclusion in its catalogs and on its web sites
based on features, quality, sales trends, price, margins and warranties.
Software upgrades are a significant category of product offered by the
Company. The Company is authorized by major microcomputer technical software
publishers to stock upgrades. Upgrades are revisions to previously published
software that improve or enhance certain features of the software or correct
errors found in previous versions. The Company believes it offers several
advantages to its customers in the upgrade process, including timely and
reliable service and the ability to combine upgrades with other products on the
same order. The Company has demonstrated its expertise in new product rollouts
and product upgrades, and plans to leverage these past experiences with vendors
contemplating new or upgrade product introductions.
MARKETING AND SALES
The Company operates principally through five distribution channels -
Internet, catalog, direct sales, telemarketing and wholesale distribution.
Management believes that this diversification of distribution channels is
complementary and operationally cost effective. Further, due to the volume of
purchasing by the Company, and also due to the unique magazine/catalog format of
the Company's catalogs, the Company believes it is able to obtain favorable
pricing, prompt supply of upgrades and significant marketing funds.
Telemarketing and Technical Support. The Company employs sales
representatives who assist customers in purchasing decisions, process product
orders and respond to customer inquiries on order status, product pricing and
availability. The sales representatives are trained to answer all basic
questions about products. On technical issues, there is an in-house technical
support staff, which is able to respond to most inquiries over the phone, with
the balance researched off-line. The Company has recently introduced a real-time
customer service and technical support module on its web site. This new
technology enables customers greater access to order status, frequently asked
questions and on-line technical support issues.
Customers and Backlog. No customer accounted for more than 10% of
consolidated net sales in 1999 and 1998 and no material part of the business is
dependent upon a single customer or a few customers, the loss of any one or more
of which would have a materially adverse effect on the Company. Because the
Company generally ships products within 48 hours of receipt of an order from a
customer, backlog is not material to an understanding of its business.
INTERNET
The Company conducts business via the Internet through its two domestic
E-commerce enabled web sites: www.pparadise.com and www.supershops.com, and
several E-commerce enabled foreign web sites. All Websites link to each other
thus is creating a strong multinational Internet presence. The Company recently
launched newly remodeled domestic E-commerce Websites, deploying with enhanced
functionality, a new look and increased product offerings to more than 58,000
SKUs. The Company's strategy with respect to expanding its business-to-consumer
and business-to-business E-commerce revenues is to capitalize on its established
brand and imaging with its proprietary "Island Man" cartoon character. By
leveraging the depth of its catalog distribution, furthering online strategic
relationships and ongoing Internet brand awareness, the Company believes it will
increase its market penetration.
In 2000, the Company plans to print and distribute more than 710
million pages of product listings and ads as banner advertising for its
E-commerce sites. In addition, the Company will establish strategic partnership
arrangements with the leading content-only Websites to provide additional
information to its readers.
Electronic Services and Capabilities. The Company's electronic services
and capabilities initiative provides the ability to deliver fully licensed and
functioning products via the Internet. Currently the Company offers over 280
individual titles available for download. The Company recognizes the strategic
importance of electronic software distribution ("ESD") and will provide support
to customers electing this service.
ESD provides customers with three benefits. First, distributing
software within an organization via the company's internal network. Within a
large organization, this will reduce the total cost of ownership of desktop
computing assets. Second, ESD facilitates hardware and software asset
management, remote desktop support and automatic installation of packaged and
custom software to the desktop. The third benefit of ESD is the direct
connection of business-to-consumer and business-to-business via electronic links
such as the Internet. This provides the customer with fast delivery of software
products and positions the Company to be highly responsive to the rapidly
changing developer market.
The Company's Websites contain an online catalog of over 58,000 of
products available to purchase over the Internet. In responding to the
requirements of the customers, the E-commerce catalog offers product information
through a comprehensive search engine, extensive product descriptions and
third-party reviews. Website functionality includes one-to-one personalization
and recommendations, ad-serving and live online-help capabilities.
To further our focus on content and community building, the Company has
developed a Vendor Support area on its web sites. This empowers the Company's
vendors to create and maintain product data and adjunct information.
CATALOG OPERATIONS
The Company has two primary established catalogs - Programmer's
Paradise, directed at independent programming professionals, and The
Programmer's Supershop, directed at Information Technology professionals working
in large corporations. These catalogs are full color "magalogs" which combine
traditional catalog sales offerings with detailed product descriptions, product
announcements and contain substantial amounts of paid and cooperative
advertising. The Programmer's Paradise catalog features the Company's
distinctive "Island Man" cartoon character and is recognized as a leading source
for technical software in the United States. In 1999, the Company distributed
over 9.7 million catalogs, typically featuring more than 1,100 SKUs in its
larger catalogs.
In addition to its two flagship catalogs, the Company offers an
additional catalog - Enterprise Supershop (formally called NT Supershop), which
is directed to the IT professional working with the NT operating platform. In
September 1997, the Company launched Programmer's Paradise - Canada to support
the growing Canadian developer market.
The Company creates its domestic catalogs in-house with its own design
team and production artists using a computer-based desktop publishing system.
The in-house preparation of the catalogs streamlines the production process,
provides greater flexibility and creativity in catalog production and results in
significant cost savings.
The Company continuously attracts new customers by selectively mailing
catalogs and other direct mail materials to prospective customers, as well as
through advertising in magazines and trade journals. The Company's domestic
mailing list currently consists of core Programmer's Paradise and The
Programmer's Supershop buyer list of approximately 150,000 customers who have
purchased products from the Company within the 36 months ended December 31,
1999, plus selected names from the Company's prospect list, lists of names
provided by publishers and list of names rented from others.
In conjunction with The Programmer's Supershop and Enterprise Supershop
catalogs, the Company has energized and supported an outbound telemarketing
program as part of its domestic catalog operations. This telemarketing program
targets mid-size to large commercial, governmental and educational accounts in
the United States.
The Company seeks to have its catalogs reach a similar status in
Europe. The Company's European catalogs (Programmer's Paradise Italia,
Programmer's Paradise Deutschland, Software Paradise Deutschland, Programmer's
Paradise France, Programmer's Paradise U.K. and Programmer's Paradise - The
Netherlands) are offshoots of the U.S. versions. They are published in local
languages and present offerings in local currencies, while using similar but
localized cover graphics, including the Company's proprietary logo, the "Island
Man" cartoon character. The Company also distributes the popular System Science
catalog in the United Kingdom. This catalog has long been established as one of
the pre-eminent publications for programmers in the United Kingdom, and is
produced four times per year.
Upstream Marketing to Suppliers. The Company engages in upstream
marketing to its suppliers who are software publishers by providing important
services designed to enhance such supplier's ability to market its products in
the programmer and developer marketplace. The Company believes that its
advertising and other supplier-directed marketing activities maximize the
Company's marketing reach and build relationships with leading publishers. The
Company offers a menu of fee services to help its suppliers sell products,
including cooperative space advertising, banner advertising on its web sites,
trade show support, special publisher catalogs, demonstration disks, shipment
stuffers, telephone sold-on-hold advertising and a variety of custom direct mail
services. As part of these services, the Company works closely with supplier's
personnel on the timing and nature of new product introductions and policies,
helps build product awareness, conducts marketing programs to selected users on
behalf of publishers and provides a broad range of product support.
Cooperative and Fee-Based Advertising. The Company engages in
cooperative and fee-based advertising with software publishers in accordance
with written advertising insertion order agreements. Under these agreements, the
Company places advertisements or prints catalogs that feature publisher products
at discounted prices from retail, advertising allowances and rebates.
Frequently, the
Programmer's Paradise logo and telephone number are included in the promotion of
selected publishers and incoming calls are handled by Company representatives.
In addition, the Company often coordinates its catalog distribution and other
marketing initiatives to coincide with new product releases. Many suppliers also
provide funds to the Company based upon an agreed amount of coverage given in
the catalogs for their respective products, thereby financing the cost of
catalog publication and distribution. In 1999, the Company's cooperative and
fee-based advertising reimbursements totaled less than 9% of total product
revenues in the Company's domestic operations, and significantly smaller
percentages in the European operations.
DIRECT SALES
Direct sales are primarily conducted in Europe through the Company's
subsidiaries. The direct sales channel offers flexible software acquisition,
volume software licensing and maintenance options specially customized to meet
the needs of mid-size to large commercial, governmental and educational
accounts.
The Company serves as a designated services provider for volume
licensing and maintenance ("VLM") agreements between many of its European
customers and major publishers of personal computer software. VLM agreements are
typically used by customers seeking to standardize desktop software applications
and, consequently, typically involve significant quantities of unit sales for
each customer. Under VLM agreements, the Company acts as a designated service
provider to sell software licensing rights that permit customers to make copies
of a publisher's software program from a master disk and distribute this
software within a customer's organization for a fee for each copy made.
Maintenance agreements entitle customers to all upgrades of certain products
during a specified period of time, typically two years following the software
purchase. Although unit volume sales are increased by the use of VLM agreements,
generally lower gross margins are realized on such sales as compared to sales of
full-packaged software products. The Company has been designated by Microsoft as
an Authorized Reseller for its Select Licensing Program. Appointment of "Select"
status in the United States and Europe enhances the Company's ability to develop
the business-to-business market while servicing customers that have
international licensing needs.
The Company's experienced sales force, each member of which is assigned
a specific territory, has built relationships with corporate customers through
regular phone contact and personalized service. Account executives work directly
with procurement managers, management information system managers and computer
support managers of existing and potential customers to identify the specific
needs of each customer and to facilitate the acquisition of software within the
customer's organizational framework. The Company's licensing consultants can
assist customers in selecting the most advantageous form of licensing available
based on specific needs or constraints. They also maintain close contact with
customers in order to provide them with timely communications and assistance
with any special or strategic requests.
WHOLESALE OPERATIONS
Wholesale operations include distribution to dealers and large
resellers through its subsidiaries, Lifeboat Distribution Inc. ("Lifeboat") in
the United States and Lifeboat Italy. Through Lifeboat and Lifeboat Italy, the
Company concentrates on marketing and the reselling of programming tools and
other quality technical computing product lines. Lifeboat customers consist of
corporate resellers, value added resellers (VARs), consultants, system
integrators and retailers who have an interest in servicing the software
development and other high tech communities.
The U.S. customers include corporate resellers such as Software
Spectrum, Corporate Software, ASAP Software and Software House International.
Major product lines include CompuWare-Numega, Computer Associates, Premia, Blue
Sky Software, Apex, Sheridan, NetManage and Wolfram.
TELEMARKETING
Telemarketing operations are presently conducted in the United States,
Germany, The Netherlands and the United Kingdom. The Company employs sales
representatives who assist customers in purchasing decisions, process product
orders and respond to customer inquiries on order status, product pricing and
availability. The sales representatives are trained to answer all basic
questions about products. On technical issues, there is an in-house technical
support staff, which is able to respond to most inquiries over the phone, with
the balance researched off-line. For product literature and technical fact
sheets, the Company employs its fax on demand literature service supported by a
CD-ROM-based reference library. Through the Company's domestic information
systems, a sales representative can quickly access a customer's record, which
details past purchases as well as billing information. Similar capabilities
exist in the Company's international operations.
Domestically, the Company has directed resources and expanded
infrastructure designed to expand its corporate telemarketing operations. The
Company believes that this channel is a natural outgrowth from the corporate
influence of its catalogs.
PURCHASING AND FULFILLMENT
The Company's success is, in part, dependent upon the ability of its
suppliers to develop and market products that meet the changing requirements of
the marketplace. The Company believes it enjoys good relations with its vendors.
The Company and its principal vendors have cooperated frequently in product
introductions and other marketing programs. In addition, the Company typically
receives price protection should a vendor subsequently lower its price. As is
customary in the industry, the Company has no long-term supply contracts with
any of its suppliers. Substantially all the Company's contracts with its vendors
are terminable upon 30 days' notice or less.
The Company believes that effective purchasing is a key element of its
business strategy to provide technical software at competitive prices. The
Company believes that volume purchases enable it to obtain favorable and
competitive product pricing. The Company purchases products from more than 2,000
publishers. Domestically, in 1999 the Company purchased approximately 56% of
their products directly from manufacturers and publishers and the balance from
multiple distributors. Internationally, in 1999 the Company's foreign
subsidiaries purchased approximately 59% of its products directly from
manufacturers and publishers. The largest volume of purchases by the Company
from distributors was from Ingram, representing approximately 16% of worldwide
purchases in 1999. The Company believes it can purchase substantially all
products purchased from Ingram from other competing wholesalers under similar
terms. Management estimates that during 1999 approximately 50% of worldwide
revenues of the Company were derived from products published by Microsoft.
The Company attempts to manage its inventory position to generate a
high number of inventory turns consistent with achieving high product
availability and order fill rates. Inventory levels may vary from period to
period, due in part to increases or decreases in sales levels, the Company's
practice of making large-volume purchases when it deems the terms of such
purchases to be attractive, and the addition of new suppliers and products.
Moreover, the Company's order fulfillment and inventory control allow the
Company to order certain products just in time for next day shipping. The
Company promotes the use of electronic data interchange ("EDI") with its
suppliers, which helps reduce overhead and the use of paper in the ordering
process. All inventory items in the U.S. are bar coded and located in
computer-designated areas which are easily identified on the packing slip. All
such orders are checked with bar code scanners prior to packing to ensure that
each order is filled correctly. The Company also conducts a semi-annual physical
inventory to verify its inventory levels on a timely basis.
Additionally, some suppliers or distributors will "drop ship" products
directly to the customers, which reduces physical handling by the Company. These
inventory management techniques allow the Company to offer a greater range of
products without increased inventory requirements. Generally, the Company has
been able to return unsold or obsolete inventory within specified intervals of
the purchase date to its vendors through written agreements with, or unwritten
policies of, such vendors. Domestic orders are shipped via United Parcel Service
or DHL. Upon request, at an additional charge, overnight delivery services are
available. The Company operates distribution facilities in Shrewsbury, New
Jersey; Mississauga, Canada; Munich, Germany; Milan, Italy; London, England;
Paris, France and Amsterdam, The Netherlands.
MANAGEMENT INFORMATION SYSTEMS
In the United States, the Company operates a management information
system that allows for centralized management of key functions, including
inventory and accounts receivable, purchasing, sales and distribution. The
system allows the Company, among other things, to track direct marketing
campaign performance, to monitor sales trends, make marketing event driven
purchasing decisions, and provide product availability and order status
information. In addition to the main system, the Company has systems of
networked personal computers, which facilitates data sharing and provides an
automated office environment, as well as microcomputer-based desktop publishing
systems.
The Company's European operations use local systems, which are being
modified to allow exchange of data with the Company's U.S. operations. The
Company believes that its management information systems and planned
enhancements are sufficient to sustain its present operations and its
anticipated growth for the foreseeable future.
All Website development and maintenance is performed in-house by
qualified technicians and maintained on independent servers in-house. The
Company feels this is a cost-effective approach and enables it to make timely
adjustments to marketing initiatives.
TRADEMARKS, INTELLECTUAL PROPERTY AND LICENSES
The Company conducts its business under the trademarks and service
marks of Programmer's Paradise, The Programmer's Supershop, The "Island Man"
cartoon character logo, Lifeboat, DEMO, demo-it!, System Science, ISP*A, ISP*D,
ISP*F, ISP*UK, ISP*Italy and Logicsoft. The Company believes that its trademarks
and service marks have significant value and are an important factor in the
marketing of its products. The Company intends to use and protect these and
related marks, as necessary. The Company does not maintain a traditional
research and development group, but works closely with software authors and
publishers and other technology developers to stay abreast of the latest
developments in microcomputer technology.
ISP*D, ISP*F, Programmer's Paradise, Inc. and Logicsoft are Microsoft
Select Large Account Resellers (LAR). The Company has multiple other alliances
with publishers such as Lotus, Borland, Sybase, Attachmate, NuMega, Intersolv
and Computer Associates.
EMPLOYEES
At December 31, 1999, the Company and its subsidiaries employed 275
full-time and 13 part-time persons. The Company is not a party to any collective
bargaining agreements with its employees, has experienced no work stoppages and
considers its relations with its employees to be satisfactory.
COMPETITION
The software distribution market is highly competitive. Pricing is very
aggressive, and the Company expects pricing pressure to continue. The Company
faces competition from a wide variety of sources including direct sales by
vendors, software resellers, superstores, catalogers and other direct marketers
of software products, some of which are significantly larger and have
substantially greater resources than the Company. Many of these competitors
compete principally on the basis of price, product availability, customer
service and technical support, and may have lower costs than the Company. The
market for software is characterized by rapid changes in technology and user
needs. The Company competes both in the acquisition of lists of prospects and of
new products from software authors, developers and publishers, as well as in the
marketing and sale of its existing products to its customers.
Although many of the Company's competitors have greater financial
resources than the Company, the Company believes that an ability to offer the
professional programmer a wide selection of products, at low prices, with prompt
delivery, and high customer service levels and its good relationships with its
vendors and suppliers, allow it to compete effectively. The Company competes to
gain distribution rights for new products primarily on the basis of its
reputation, the relationships which management of the Company has established
with product authors and the Company's ability to promote and market new
products successfully.
The manner in which software products are distributed and sold is also
changing, and new methods of distribution and sale may emerge or expand.
Software developers and publishers have sold, and may intensify their efforts to
sell, their products directly to end-users. The emergence of the Internet as a
viable platform in which to conduct business transactions has both lowered the
barriers for
competition and broadened customers access to products and information. This
transition has heightened the Company's awareness to maintain a competitive edge
in this market. From time to time certain developers and publishers have
instituted programs for the direct sale of large order quantities of software to
certain major corporate accounts. These types of programs may continue to be
developed and used by various developers and publishers. While Microsoft and
other vendors currently sell their update products directly to end users, they
have not attempted to completely bypass the reseller channel. Future efforts by
such entities to bypass third-party sales channels could materially and
adversely affect the Company's operations.
In addition, resellers and publishers may attempt to increase the
volume of software products distributed electronically through electronic
software distribution to end users' microcomputers, through CD-ROM unlocking
technology, through CD-ROM based subscription services and through on-line
shopping services. Any of these competitive programs, if successful, could have
a material adverse effect on the Company's operations and financial condition.
SALES TAX AND REGULATORY MATTERS
The Company presently collects state sales tax, or other similar tax,
only on sales of products to residents of the State of New Jersey. Various
states have tried to impose on direct marketers the burden of collecting state
sales taxes on the sale of products shipped to state residents. The United
States Supreme Court has affirmed its position that it is unlawful for a state
to impose state sales tax collection obligations on an out-of-state mail order
company whose only contacts with the state are the distribution of catalogs and
other advertising materials through the mail and subsequent delivery of
purchased goods by parcel post and interstate common carriers. However, it is
possible that legislation may be passed to overturn such decision or the Supreme
Court may change its position. Additionally, it is currently uncertain as to
whether electronic commerce, which includes the Company's Internet sales
activities, will be subject to state sales tax. The imposition of new state
sales tax collection obligations on the Company in states to which it ships
products would result in additional administrative expenses to the Company and
could result in price increases to the customer, which could adversely affect
the Company's business, financial condition and results of operations.
The Company seeks to expand its in-house list of customers and
prospects. In the event that federal or state governments or European
governments enact privacy legislation resulting in the increased regulation of
mailing lists, the Company's ability to enhance or expand its lists could be
adversely affected. In such event, the Company could also experience increased
costs in complying with potentially burdensome regulations concerning the
solicitation of consents to keep or add customer names to its mailing lists.
The direct response business is subject to the Mail or Telephone Order
Merchandise Rule and related regulations promulgated by the Federal Trade
Commission. While the Company believes it is in compliance with such regulations
and has implemented programs and systems to assure its ongoing compliance with
such regulations, no assurance can be given that new laws or regulations will
not be enacted or adopted which might adversely affect the Company's operations.
SEASONALITY
The Company has traditionally experienced a decrease in domestic net
sales in its third quarter compared to the other quarters. This traditional
downturn in domestic net sales is exacerbated by the decline of European
commercial activity in general and software sales in particular during the
summer months.
ITEM 2 PROPERTIES.
At December 31, 1999, the Company leased 18,000 square feet of space at
1157 Shrewsbury Avenue, Shrewsbury, New Jersey for its corporate headquarters
under a ten-year lease and an additional 7,250 square feet of space at 1163
Shrewsbury Avenue under a five-year lease. Total annual rent expense for these
premises is approximately $264,000. Additionally, the Company leases
approximately 3,600 square feet of office space under a three-year lease in
Mississauga, Canada. The Company's European facilities, all of which are leased
under long-term arrangements, are as follows: 21,700 square feet in Munich,
Germany; 8,600 square feet in Milan, Italy; 3,100 square feet in London,
England; 21,500 square feet in Amsterdam, The Netherlands; and 3,450 square feet
in Paris, France. Total annual rent expense for the European facilities is
approximately $618,000.
ITEM 3 LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company or
any of its subsidiaries.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company are as follows:
Name Age Position
William H. Willett 63 President, Chief Executive Officer
and Chairman of the Board
William H. Sheehy 43 Chief Financial Officer,
Vice President - Finance and Treasurer
Secretary
Simon Nijnens 28 Vice President European Operations
Greg Caravello 52 Vice President - Sales
Jeffrey Largiader 41 Vice President - Marketing
Vito Legrottaglie 36 Vice President - Operations
and Information Services
Alexander Alarid 39 Vice President - Internet Operations
and Marketing
WILLIAM WILLETT has served as a director of the Company since 1996. In July
1998, Mr. Willett was appointed to the position of Chairman, President and Chief
Executive Officer. Prior to joining the Company and since 1994, Mr.Willett was
the President and Chief Operating Officer of Colorado Prime Foods located in New
York.
WILLIAM SHEEHY joined the Company in February 2000 as Vice-President and Chief
Financial Officer. Mr. Sheehy previously served as President and Chief Operating
Officer of TechniLogix located in New Jersey. Prior to serving as President and
COO he was CFO of TechniLogix for worldwide operations since 1996. From 1994 to
1996, Mr. Sheehy served as Chief Financial Officer for DLB Systems for its US
and UK operations.
SIMON NIJNENS has served as the Vice-President and Chief Operating Officer of
the Company's operations in Europe since November 1999. Prior to that
appointment he was European Controller and Corporate Controller of the Company.
Mr. Nijnens began his career as a registered accountant with Ernst & Young in
Amsterdam, The Netherlands.
GREG CARAVELLO joined the Company in October 1999 as Vice-President Sales. Mr.
Caravello previously held the position of Vice President U.S. Channel Sales for
Platinum Technologies and also held the same position for Logic Works, Inc.
Previously, Mr. Caravello served as Vice President of Sales and Marketing for
Thoroughbred Software, an early 3GL entry into the UNIX marketplace, where he
was a founder.
JEFFREY LARGIADER has served as the Vice-President - Marketing since 1989 and is
responsible for catalog production, advertising sales, media planning and
marketing communications. Prior to that and since 1983, he held various sales
and product management positions with the Company and the predecessor of
Lifeboat.
VITO LEGROTTAGLIE has served as the Company's Vice-President - Operations and
Information Services since 1999. Prior to that and since 1997, he was Director
of Information Services of the Company. Prior to joining the Company and since
1994, Mr. Legrottaglie served as Vice President - Operations for Wine Enthusiast
Companies in New York, a direct mail company.
ALEXANDER ALARID joined the Company in January 2000 as Vice-President - Internet
Operations and Marketing. During 1999, Mr. Alarid directed an in-house
e-commerce team at Blackberry Technologies, Inc. Prior to that and since 1994,
he was the architect and deployment coordinator of Website projects for such
companies as Jupiter Communications, Snickelways Interactive and US Web/CKS
Cornerstone, including the well-know site, VitaminShoppe.com. He was also a
pioneer in implementing emerging technologies at Young & Rubicam.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the Nasdaq National Market under
the symbol "PROG." The following table sets forth, for the calendar quarters
indicated, the quarterly high and low sales prices of the Company's Common Stock
as reported on Nasdaq. The quotations listed below reflect inter-dealer prices
only, without retail markups, markdowns or commissions. Prior to July 18, 1995,
there was no established public trading market for the Company's Common Stock.
High Low
1998
First Quarter 10 1/2 8
Second Quarter 11 1/8 8
Third Quarter 8 5/8 4 3/4
Fourth Quarter 12 5/8 5 1/8
1999
First Quarter 17 9 3/4
Second Quarter 15 1/2 10 1/2
Third Quarter 15 1/4 6 5/8
Fourth Quarter 7 5/8 5
During 1999, 326,418 shares of the Common Stock were issued to employees, former
employees and directors of the Company, pursuant to the exercise of incentive
stock options granted to them prior to such year under the Company's stock
option plans. Such shares were issued pursuant to Rule 701 promulgated under the
Securities Act of 1933, at a weighted average exercise price of $2.57.
On February 12, 1999, the Company filed a registration statement on Form S-8
with respect to the resale of 1,344,951 shares issued or issuable upon the
exercise of options.
HOLDERS OF COMMON STOCK
On March 13, 2000, 5,202,750 shares of the Company's Common Stock were
outstanding. On such date, there were approximately 72 holders of record.
DIVIDENDS
No dividends have been paid on the Company's Common Stock. The Company
is limited in its ability to pay dividends by its domestic facility agreement,
which presently prohibits the payments of dividends. The Company does not
currently anticipate declaring or paying dividends.
ITEM 6 SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31
-------------------------------------------
(In thousands, except per share data)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA (1):
Net sales $93,286 $127,680 $176,157 $234,429 $244,139
Income (loss) from operations 2,275 2,936 6,217 5,527 (92)
Net income (loss) 4,203 2,298 3,964 3,442 (729)
Basic net income (loss) per common share $1.14 $0.48 $0.84 $0.72 $(0.14)
Diluted net income (loss) per common share $1.03 $0.44 $0.75 $0.66 $(0.14)
Weighted average
common shares outstanding-basic 3,703 4,764 4,740 4,797 5,100
Weighted average
common shares outstanding-diluted 4,102 5,198 5,280 5,249 5,100
BALANCE SHEET DATA:
Working capital $ 21,689 $12,415 $16,077 $17,686 $14,806
Total assets 58,329 68,490 86,368 104,877 95,757
Notes payable - current 2,469 1,135 958 674 2,628
Notes payable - long term -- 1,050 2,220 1,761 --
Total stockholders' equity 26,989 28,845 32,213 36,241 34,849
(1) Comparability of the Statement of Operations is affected by
acquisitions occurring throughout the periods presented.
(2) Income (loss) per share amounts for all periods presented have been
restated to conform to the requirements of Statement of Financial Accounting
Standards No. 128.
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company is a distributor of software, operating principally through
five distribution channels - Internet, catalogs, direct sales, telemarketing and
wholesale operations. Internet sales encompass the Company's domestic and
international web sites. Catalog operations include worldwide catalog sales,
advertising and publishing. Direct sales operations include Programmer's
Paradise Corporate Sales in the United States; ISP*D in Munich, Germany;
Logicsoft, in Amsterdam, The Netherlands; both wholly owned subsidiaries of the
Company, and ISP*F, located in Paris, France. Telemarketing operations are
presently conducted in the United States, the United Kingdom and in Germany. The
U.S. telemarketing operations are an offshoot of the catalog channel targeting
corporate customers for both technical software and desktop applications.
Wholesale operations include distributions to dealers and large resellers
through Lifeboat Distribution Inc. in the U.S. and Lifeboat Italy in Milan,
Italy, also subsidiaries of the Company.
The Company was founded in 1982 as a wholesaler and reseller of
educational software. In June 1986, the Company acquired Lifeboat Associates, a
wholesale distributor and publisher of software founded in 1976. Later in 1986,
Programmer's Paradise was started by the Company as a catalog marketer of
technical software. In 1988, the Company acquired Corsoft Inc., a corporate
reseller founded in 1983, and combined it with the operations of the
Programmer's Paradise catalog and Lifeboat Associates, both of which were
involved in the marketing of technical software for microcomputers. In May 1995,
the Company changed its name from "Voyager Software Corp" to "Programmer's
Paradise, Inc." In July 1995, the Company completed an initial public offering
of its common stock. In June 1996, the Company acquired substantially all of the
assets of The Software Developer's Company, Inc. including The Programmer's
Supershop catalog, its largest domestic competitor at the time.
The Company began European-based operations in the first quarter of
1993, when it acquired a controlling interest in Lifeboat Italy, a long-standing
software distributor in Italy. In January and April 1994, the Company purchased
the remaining ownership interest in Lifeboat Italy. In June 1994, the Company
acquired a 90% controlling interest in ISP*D, a large software-only dealer and a
leading independent supplier of Microsoft Select licenses and other software to
many large German and Austrian companies. In January 1995, the remaining 10%
interest in ISP*D was purchased by the Company. In late 1994, the Company
organized a subsidiary in the United Kingdom to engage in catalog operations. In
December 1995, the Company acquired Systematika Ltd., a leading reseller of
technical software in the United Kingdom and the publisher of the popular System
Science catalog. In January 1996, the Company formed ISP*F International
Software Partners France SA, as a full service corporate reseller of PC
software, based in Paris and majority owned by Programmer's Paradise France
SARL. In September 1997, the Company acquired Logicsoft Holding BV, the parent
company of Logicsoft Europe BV, the predominate Large Account Reseller in the
Benelux territory. The Company is using its European-based operations as a
platform for pan-European business development, including the distribution of
local versions of its catalogs.
The Company has experienced in the past and will experience in the
future seasonal variations in net sales and net income. Factors that have
contributed to seasonal operating results include product cycles of suppliers
that are not controlled or influenced by the Company, product availability,
supplier relationships, customer licenses and contracts, the timing of catalog
mailings, catalog response rates, product mix, past and potential acquisitions,
the condition of the software industry in general, traditional softness in
summertime European commercial activity, shifts in demand for software products
and industry announcements, releases of new products and upgrades and corporate
purchasing cycles.
Results of Operations
The following table sets forth for the years indicated certain
financial information derived from the Company's consolidated statement of
operations expressed as a percentage of net sales:
% to Net Sales % Change
----------------------------------- ---------------
For the years ended December 31,
1997 1998 1999 98 v 97 99 v 98
------------------------------------- ------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales 85.4% 87.5% 89.3%
Gross profit 14.6% 12.5% 10.7% (2.1%) (1.8%)
Selling, general and
administrative expenses 10.6% 9.7% 10.0% (0.9%) 0.3%
Amortization of goodwill 0.5% 0.4% 0.7% (0.1%) 0.3%
Income (loss) from operations 3.5% 2.4% 0.0% (1.1%) (2.4%)
Interest (income), expense net (0.1%) (0.1%) (0.1%) (0.0%) (0.0%)
Unrealized foreign exchange
(gain) loss 0.0% 0.0% (0.1%) 0.0% (0.1%)
Income (loss) before taxes 3.6% 2.5% 0.2% (1.1%) (2.3%)
Provision for income tax (1.4%) (1.0%) (0.5%) (0.4%) 0.5%
Net income (loss) 2.2% 1.5% (0.3%) (0.7%) (1.8%)
NET SALES
Net sales of the Company represents the gross consolidated revenue of
the Company less returns. Although net sales consist primarily of sales of
software, revenue from marketing services and advertising is also included
within net sales. Net sales of the Company increased by $9.7 million or 4% to
$244.1 million in 1999, and by $58.3 million or 33%, to $234.4 million in 1998
as compared to the respective preceding periods. The increase in revenues in
1999 is primarily attributable to growth in the direct sales channel. Revenues
within the direct sales channel increased 3% or $5 million in 1999. The Company
posted gains in the direct sales channel domestically and also in France, which
grew by 60% and 28%, respectively. Revenues within the catalog channel increased
from 1998 by approximately 4% to $69.1 million. Most catalog customers are
individual programmers and developers and as such, were extensively involved in
Y2K conversion projects and therefore delaying other development projects. In
addition, no significant new technical software products were introduced into
the channel during the second half of 1999 due to potential concerns surrounding
Y2K issues.
The growth in net sales in 1998 resulted from a strong growth in the
direct sales channel. Revenues within the direct sales channel increased 69% or
$62.4 million in 1998, the majority of which resulted from the acquisition of
Logicsoft in September 1997. The Company also posted strong gains in the direct
sales channel in both France and Germany, which grew by 30% and 29%,
respectively. Revenues within the catalog channel declined from 1997 by
approximately 5% to $66.5 million primarily due to the Y2K issue as well as the
lack of new products being introduced. Most catalog customers are individual
programmers and developers and as such, were extensively involved in Y2K
conversion projects and therefore delaying scheduled development projects. In
addition, no significant new technical software products were introduced during
1998 with the exception of Microsoft's upgrades for Visual C++ and Visual Basic
in September 1998.
GROSS PROFIT
Gross profit represents the difference between net sales and cost of
sales. Cost of sales is composed primarily of amounts paid by the Company to
publishers and vendors plus catalog printing and mailing costs. Publisher and
vendor rebates are credited against cost of sales. Gross profit as a percentage
of net sales decreased by 1.8% in 1999 from 12.5% to 10.7% reflecting a shift in
the mix of sales through the Company's distribution channels as a result of the
substantial increase in lower margin direct sales and Microsoft Select licensing
sales.
In the past, gross margins have been affected by the mix of products
sold and the mix of distribution channels. Historically, the gross margins
attained in the catalog channel have been higher than either the direct sales or
distribution channels. In 1999, catalog operations contributed approximately 28%
of revenue and approximately 40% of gross margin dollars as compared with 28% of
revenue and 44% of gross margin dollars in 1998. Direct sales operations
contributed approximately 65% of revenue and approximately 52% of gross margin
dollars in 1999 and 65% of revenue and 49% of gross margin dollars in 1998. The
distribution channel contributed approximately 7% of revenue and approximately
8% of gross margin dollars in 1999 compared with 6% of revenue and 8% of margin
dollars in 1998.
The historically higher margins attained in the catalog channel are
related to both the product focus on technical software, including numerous
specialized products, and on the relatively fragmented customer base of the
catalog channel, in comparison to the direct sales channel, which primarily
serves large corporations purchasing high volumes of widely available business
applications. In the future, the Company's gross margins will be affected by
several factors, including, among others, the price of products sold, the
distribution channel used, increases in product costs, price competition and the
introduction of new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses include all
corporate personnel costs (including salaries and health benefits), depreciation
and amortization, non-personnel-related marketing and administrative costs and
provision for doubtful accounts. Depreciation and amortization consists
primarily of equipment depreciation and leasehold improvements amortization.
SG&A expenses have decreased as a percentage of revenues from 10.6% in 1997 to
9.7% in 1998 and then had a slight increase to 10% of net revenues in 1999. The
decline in SG&A expense as a percentage of revenues in 1997 is attributable to
the increase in revenues in the reseller channel, which has generally lower SG&A
costs as a percentage of revenues and also the impact of the acquisition of
Logicsoft Holding BV. This is further exemplified by the percentage reduction in
SG&A as a percentage of revenues in 1998 as the full year impact of the
acquisition of Logicsoft was felt as well as certain economies of scale that
were realized. The slight increase in SG&A expense as a percent of revenues in
1999 was primarily attributable to an increase in staff within the Internet
Development and Commerce teams.
Each year SG&A has increased in absolute dollars, reflecting the cost of
operations of the Company's acquisitions such as the Programmer's Supershop,
System Science, ISP*D and Logicsoft Holding BV. The Company anticipates that
SG&A as a percentage of revenues will decline as revenues continue
to grow and cost containment directives remain in place, however, there can be
no assurances that this will occur.
AMORTIZATION
Amortization expense includes the systematic write-off of goodwill. The
Company recorded goodwill with the acquisition of both ISP*D and Lifeboat Italia
which it is amortizing over 20 years. In addition, the Company recorded goodwill
in conjunction with the acquisition of both Systematika Ltd. and ISP*F
International Software Partners France. The Company recognized approximately
$9.5 million in goodwill from the acquisition of the assets of The Software
Developer's Company, Inc. in June 1996, which is being amortized over a
fifteen-year period for both financial and tax accounting purposes. During 1999,
the Company recorded a one-time charge for the write-off of goodwill associated
with Lifeboat Italia, SRL, which amounted to approximately $613,000 as a result
of poor operating results and taking into consideration projected cash flows. In
connection with the acquisition of Logicsoft Holding BV, the Company recorded
approximately $4.6 million in goodwill, which is being amortized over a
fifteen-year period. This includes the $2.3 million "earn out" feature recorded
as a result of the contract with Logicsoft Holding BV.
INTEREST INCOME AND EXPENSE
The Company generated net interest income of $140,000, $294,000 and
$212,000 in 1999, 1998 and 1997, respectively.
INCOME TAXES
Prior to 1995, the Company had accumulated net operating loss
carryforwards and other deductible temporary differences for income tax purposes
of approximately $10.5 million, which could be used to offset taxable income
through the year 2005. The Company's initial public offering triggered an
ownership change, which imposes a limit on the use of these net operating loss
carryforwards. See Note 5 to the Consolidated Financial Statements.
Statement of Financial Accounting Standards No. 109 requires that a
valuation allowance be recorded for deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets depends upon the existence of
future taxable income.
For the year ended December 31, 1999, the Company recorded a provision
for income taxes of $1.3 million, which consists of a provision for foreign
taxes of approximately $1.7 million, offset in part, by a benefit for federal
and state taxes of $400,000. In 1998, the Company recorded a provision for
income taxes of $2.4 million, which consists of a provision for state and
federal taxes of approximately $600,000 and also a provision for foreign taxes
of approximately $1.8 million. In 1997, the Company recorded a provision for
income taxes of $2.4 million, which consists of a provision for state and
federal taxes of approximately $1.4 million and also a provision for foreign
taxes of approximately $1.0 million.
Undistributed earnings of the Company's foreign subsidiaries amounted
to approximately $5,115,000 and $3,300,000 at December 31, 1999 and 1998,
respectively. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided. Upon distribution of those earnings in the form of dividends, the
Company would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to various foreign countries.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working
capital requirements created by its sales growth and to make acquisitions.
Historically, the Company's primary sources of financing have been borrowings
under its domestic and international lines of credit with financial institutions
and the issuance of common and preferred stock.
Cash flows provided by operations were $1,468,000 for the year ended
December 31, 1999 compared to $2,728,000 and $6,948,000 for 1998 and 1997,
respectively. In 1999, the decrease in accounts receivable $(6,687,000) and the
net change of other assets and liabilities of $937,000 accounted for the
majority of the cash flows in. The decrease in accounts payable of $(7,437,000)
was covered through cash reserves and short-term lending facilities.
Cash used in investing activities totaled $3,270,000 for the year
ended December 31, 1999. The Company's capital expenditures for 1999 and 1998
amounted to $996,000 and $1,975,000, respectively, which was comprised of
computer hardware and software, office furniture and leasehold improvements. In
addition, cash in the amount of $2,274,000 was used to pay the "earn-out" amount
relating to the purchase of Logicsoft Europe BV.
Cash used in financing activities was $319,000 for 1999. Cash used
under the line of credit totaled $0 in 1998 as compared to $2,628,000 in 1999.
During 1999, the Company purchased treasury stock for $(1,137,000) as compared
to $(545,000) in 1998. Also, during 1997, the Company entered into a five-year
term loan agreement in the US Dollar equivalent of $3,000,000 bearing interest
at 6.17%. Due to the strong US Dollar, the loan was prepaid during the second
quarter of 1999, which resulted in a cash outflow of approximately $2,435,000.
At December 31, 1999, the Company had cash and cash equivalents of
$17,597,000 and net working capital of $14,806,000 compared with cash and cash
equivalents of $21,167,000 and net working capital of $17,686,000 at December
31, 1998. The decrease in working capital at December 31, 1999 is attributable
to the loss for the year then ended and the payment resulting from the
"earn-out" provisions of the acquisition of Logicsoft Holding BV.
Domestically, the Company has a committed line of credit whereby it
can borrow up to $7,500,000 with interest at either the prime rate or Euro-rate
plus 200 basis points. The facility expires on June 30, 2000 and is secured by
all the domestic assets of the Company and 65% of the outstanding stock of the
foreign subsidiaries and contains certain covenants that require the Company to
maintain a minimum level of tangible net worth and working capital. At December
31, 1999, there was $2,628,000 outstanding under the line.
At December 31, 1999, the Company was in default of its consolidated
leverage ratio covenant under its line of credit agreement. The Company received
a waiver for the default as of December 31, 1999. The Company expects to meet
its covenant requirements under the line of credit agreement in 2000, however if
the covenant requirements are not met, additional waivers may be needed.
The Company maintains a secured, demand revolving line of credit for
its German subsidiary, pursuant to which it may borrow in Deutschmarks up to DM
1,500,000 (the equivalent of approximately $777,500 at December 31, 1999), based
upon its eligible accounts receivable and eligible inventory, and the creditor
is entitled to the benefit of a limited guarantee by the Company of up to DM
300,000 (the equivalent of approximately $155,500 at December 31, 1999). The
line bears interest at 7%. At December 31, 1999, there were no amounts
outstanding under the line.
In Italy, Lifeboat Italy has banking arrangements with several Italian
banks, pursuant to which it may borrow in Lire on an unsecured, demand basis to
finance working capital requirements, through credit and overdrafting
privileges, as well as receivables-based advances. The aggregate credit and
overdraft limits of such arrangements at December 31, 1999 were approximately
Lit 2,800,000,000 (the equivalent of approximately $1,464,000 at December 31,
1999). The unsecured borrowings bear interest at market rates ranging from 6% to
8.375%. At December 31, 1999 there were no amounts outstanding under this line.
The Company's subsidiary in The Netherlands, Logicsoft Holding, BV,
maintains a demand revolving line of credit pursuant to which it may borrow in
guilders up to DFL 2,500,000 (the equivalent of approximately $1,150,000 at
December 31, 1999), and is secured by its accounts receivable and inventory. The
line bears interest at 5.75%. There were no amounts outstanding under this line
at December 31, 1999.
FOREIGN EXCHANGE
The Company's shipments to foreign subsidiaries are invoiced in U.S.
Dollars. As a result, the Company believes its foreign exchange exposure caused
by these shipments is insignificant. The Company is, however, exposed to
exchange conversion differences in translating foreign results of operations to
U.S. Dollars. Depending upon the strengthening or weakening of the U.S. Dollar,
these conversion differences could be significant.
Sales to the customers in European countries and borrowings by the
Company's European subsidiaries are denominated in local currencies. The Company
does not hedge its net asset exposure to fluctuations in the U.S. Dollar against
any such local currency exchange rates. Although the Company does maintain bank
accounts in local currencies to reduce currency exchange fluctuations, the
Company is, nevertheless, subject to risks associated with such fluctuations.
UPDATE ON YEAR 2000 COMPUTER ISSUES
The Company did not experience any computer or systems problems
relating to the Year 2000. Upon review of its internal and external systems
during 1999, the Company determined that it did not have any material exposure
to such computer problems and that the software and systems required to operate
its business and provide services were Year 2000 compliant. As a result, the
Company did not incur, and does not expect to incur, any material expenditures
relating to Year 2000 systems remediation.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
Certain statements contained in, or incorporated by reference in, this
Form 10-K are forward-looking in nature. Such statements can be identified by
the use of forward-looking terminology such as "believes", "expects", "may",
"will", "should" or "anticipates" or the negative thereof or comparable
terminology, or by discussions of strategy. The Company wishes to ensure that
such statements are accompanied by meaningful cautionary statements, so as to
ensure to the fullest extent possible the protections of the safe harbor
established in the Private Securities Litigation Reform Act of 1995.
Accordingly, such statements are qualified in their entirety by reference to and
are accompanied by the following discussion of certain important factors that
could cause actual results to differ materially from those projected in such
forward-looking statements. The Company cautions the reader that this list of
factors may not be exhaustive. The Company operates in a rapidly changing
business, and new risk factors emerge from time to time. Management cannot
predict every risk factor, nor can it assess the impact, if any, of all such
risk factors on the Company's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
projected in any forward-looking statements. Accordingly, forward-looking
statements should not be relied upon as a prediction of actual results.
Competition. The direct marketing industry and the computer software
distribution business, in particular, are highly competitive. The Company
competes with consumer electronic and computer retail stores, including
superstores, and other direct marketers of software and computer related
products. Certain software vendors are selling their products directly through
their own catalogs and over the Internet. Certain competitors of the Company
have financial, marketing and other resources greater than those of the Company.
There can be no assurance that the Company can continue to compete effectively
against existing competitors or new competitors that may enter the market. In
addition, price is an important competitive factor in the personal computer
software market and there can be no assurance that the Company will not be
subject to increased price competition. An increase in the amount of competition
faced by the Company or its failure to compete effectively against its
competitors could have a material adverse effect on the Company's business,
financial condition and results of operations.
Quarterly Fluctuations and Seasonality. The Company's sales and results
of operations have fluctuated and are expected to continue to fluctuate on a
quarterly basis as a result of a number of factors, including: the condition of
the software industry in general; shifts in demand for software products;
industry shipments of new software products or upgrades; the timing of new
merchandise and catalog offerings; fluctuations in response rates; fluctuations
in postage, paper, shipping and printing costs and in merchandise returns;
adverse weather conditions that affect response, distribution or shipping;
shifts in the timing of holidays; and changes in the Company's product
offerings. The Company's operating expenditures are based on sales forecasts. If
revenues do not meet expectations in any given quarter, operating results may be
materially adversely affected.
The Company has traditionally experienced a decrease in domestic net
sales in its third quarter compared to other quarters. This traditional downturn
in domestic net sales is exacerbated by the decline of European commercial
activity in general and software sales in particular during the summer months.
Foreign Operations. In addition to its activities in the United States,
67% of the Company's 1999 sales were generated internationally. Foreign
operations are subject to general risks attendant to the conduct of business in
each foreign country, including economic uncertainties and each foreign
government's regulations. In addition, the Company's international business may
be affected by changes in demand or pricing resulting from fluctuations in
currency exchange rates or other factors.
Privacy Concerns With Respect To List Development And Maintenance. The
Company mails catalogs and sends electronic messages to names in its proprietary
customer database and to potential customers whose names are obtained from
rented or exchanged mailing lists. There has been increasing worldwide public
concern regarding right to privacy issues involved with the rental and use of
customer mailing lists and other customer information. Any domestic or foreign
legislation enacted limiting or prohibiting these practices could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management Information Systems. The Company's success is dependent on
the accuracy and proper utilization of its management information systems,
including its telephone and Internet system. The Company's ability to manage its
inventory and accounts receivable collections; to purchase, sell and ship its
products efficiently and on a timely basis; and to maintain its operations is
dependent upon the quality and effective utilization of the information
generated by its management information systems. The Company recognizes the need
to continually upgrade its management information systems to most effectively
manage its operations and customer database. In that regard, the Company
anticipates that it will, from time to time, require software and hardware
upgrades for its present management information systems.
Increases In Postage, Shipping And Paper Costs. Increases in postal or
shipping rates and paper costs could have a significant impact on the cost of
production and mailing of the Company's catalogs and the shipment of customer
orders. Postage prices and shipping rates increase periodically, and the Company
has no control over increases that may occur in the future. Paper prices
historically have been cyclical and significant increases have been experienced
by the Company in the past. Significant increases in postal or shipping rates
and paper costs could have a material adverse effect on the Company's business,
financial condition and result of operations, particularly to the extent the
Company is unable to pass on such increases directly to its customers or offset
such increases by reducing other costs. In addition, strikes or other service
interruptions by the postal service or third party couriers could adversely
affect the Company's ability to deliver products on a timely basis.
New Software Releases. The Company's operating results could be
adversely affected by a delay in the introduction of a major new software
product or upgrading of more specialized products. Purchasers of software may
delay the ordering of new software applications in the period immediately
preceding such introduction for fear of technological obsolescence. The Company
believes that software publishers often delay the release of related software
products so as to coordinate with the release of these major new products or
delay development of new products until after the importance of these new
products can be evaluated. Delayed introductions of these new products could
result in the delay or reduction of sales because the unreleased product cannot
be delivered and could also adversely affect sales in that the Company, which
often coordinates new catalog drops and marketing initiatives with such
introductions and product upgrades, would be focusing catalog marketing on such
unreleased products.
Changing Methods Of Software Distribution. The software distribution
industry is undergoing significant change and consolidation. Software
distributors are consolidating operations and acquiring or
merging with other distributors or retailers to achieve economies of scale and
increased efficiency. The current consolidation trend could cause the industry
to become even more competitive and make it more difficult for the Company to
maintain its operating margins. The manner in which software products are
distributed and sold is also changing, and new methods of distribution and sale
may emerge or expand. Software developers and publishers have sold, and may
intensify their efforts to sell, their products directly to end-users. The
emergence of the Internet as a viable platform in which to conduct business
transactions has both lowered the barriers for competition and broadened
customers' access to products and information. This transition has heightened
the Company's awareness to maintain a competitive edge in this market. From time
to time certain developers and publishers have instituted programs for the
direct sale of large order quantities of software to certain major corporate
accounts. These types of programs may continue to be developed and used by
various developers and publishers. While Microsoft and other vendors currently
sell their products directly to end users, they have not attempted to completely
bypass the reseller channel. Future efforts by such entities to bypass
third-party sales channels could materially and adversely affect the Company's
operations.
In addition, certain major publishers, including Microsoft, have
implemented programs for the master copy distribution or site licensing of
software. These programs generally grant an organization the right to make a
number of copies of software for distribution within the organization provided
that the organization pays a fee to the developer for each copy made. Also,
resellers and publishers may attempt to increase the volume of software products
distributed electronically through downloading to end users' microcomputers,
through CD-ROM unlocking technology, through CD-ROM-based subscription services
and through on-line shopping services. Any of these competitive programs, if
successful, could have a material adverse effect on the Company's operations and
financial condition.
Dependence Upon Vendors. As is customary in the industry, the Company
has no long-term supply contracts with any of its suppliers. Substantially all
the Company's contracts with its vendors are terminable upon 30 days' notice or
less. Termination or interruption of the Company's relationships with its
suppliers or modification of the terms of or discontinuance of their agreements
with the Company could adversely affect the Company's operating results.
Certain of the products offered by the Company may be subject to
manufacturer allocations, which limit the number of units of manufacturers'
products available to resellers, including the Company. The Company's business
may be adversely affected if certain products become unavailable to the Company
or if the number of units allocated to the Company becomes limited, whether such
unavailability or limitation is due to the loss of authorized dealer status,
allocation limitations or other conditions. Many key vendors finance portions of
the cost of catalog publication and distribution based upon the amount of
coverage given in the catalogs to their respective products. A reduction in or
discontinuation of this practice could have a material adverse effect on the
Company.
Rapid Changes In Software Products And Risk Of Inventory Obsolescence.
The software products industry is characterized by rapid technological change
and the frequent introduction of new products and product enhancements. The
Company's success depends in large part on its ability to identify and obtain
the right to market products that will meet the changing requirements of the
marketplace. The Company has sought to minimize its inventory exposure through a
variety of inventory control procedures and policies, including formal and
informal vendor price protection programs. In order to satisfy customer demand
and to obtain greater purchasing discounts, the Company expects to carry
increased inventory levels of certain products in the future. In addition, large
software firms continue to develop products that include the features of utility
and subroutine products published and/or
sold by the Company in their software languages, thus rendering certain of such
products unnecessary. Additionally, if the growth rate of the personal computer
market were to decrease, with a corresponding decrease in demand for computer
software, the Company's operating results could be adversely affected. There can
be no assurance that the Company will be able to identify and offer products
necessary to remain competitive or avoid losses related to obsolete inventory,
or that unexpected new product introductions will not have a material adverse
effect on the demand for the Company's inventory.
Stock Volatility. The technology sector of the United States stock
markets has experienced substantial volatility in recent periods. Numerous
conditions, which impact the technology sector or the stock market in general or
the Company in particular, whether or not such events relate to or reflect upon
the Company's operating performance, could adversely affect the market price of
the Company's Common Stock. Furthermore, fluctuations in the Company's operating
results, announcements regarding litigation, the loss of a significant vendor,
increased competition, reduced vendor incentives and trade credit, higher
postage and operating expenses, and other developments, could have a significant
impact on the market price of the Company's Common Stock.
Acquisitions Strategy. The Company plans to continue to pursue
acquisitions of complementary businesses. However, there can be no assurance
that suitable acquisitions will be available to the Company on acceptable terms,
that financing for future acquisitions will be available on acceptable terms,
that future acquisitions will be advantageous to the Company or that anticipated
benefits of such acquisitions will be realized. The pursuit, timing and
integration of possible future acquisitions may cause substantial fluctuations
in operating results.
State Sales Tax Collection. The Company presently collects state sales
tax, or other similar tax, only on sales of products to residents of the State
of New Jersey. Various states have tried to impose on direct marketers the
burden of collecting state sales taxes on the sale of products shipped to state
residents. The United States Supreme Court has affirmed its position that it is
unlawful for a state to impose state sales tax collection obligations on an
out-of-state mail order company whose only contacts with the state are the
distribution of catalogs and other advertising materials through the mail and
subsequent delivery of purchased goods by parcel post and interstate common
carriers. However, it is possible that legislation may be passed to overturn
such decision or the Supreme Court may change its position. Additionally, it is
currently uncertain as to whether electronic commerce, which will likely include
the Company's Internet sales activities, will be subject to state sales tax. The
imposition of new state sales tax collection obligations on the Company in
states to which it ships products would result in additional administrative
expenses to the Company and could result in price increases to the customer,
which could adversely affect the Company's business, financial condition and
results of operations.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about
market risk is set forth in Part I, Item 7 of this Form 10-K at "Foreign
Operations."
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements at Item 14(a).
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information (other than the information regarding executive
officers of the Company called for by Item 401 of Regulation S-K which is
included in Part I hereof as Item 4A in accordance with General Instruction
G(3)) will be contained in the Company's definitive Proxy Statement with respect
to the Company's Annual Meeting of Stockholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of the Company's
fiscal year, and is hereby incorporated by reference thereto.
ITEM 11 EXECUTIVE COMPENSATION.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements and Schedule
Report of Independent Auditors
Consolidated Balance Sheets - as of
December 31, 1998 and 1999
Consolidated Statements of Operations - Years
ended December 31, 1997, 1998 and 1999
Consolidated Statement of Stockholders' Equity - Years ended
December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows - Years ended December
31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted for the reason that the information is
included in the financial statements or the notes thereto or that they are not
required or are not applicable.
3. EXHIBITS:
Exhibit
Number Description of Exhibits.
- ------- -----------------------
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company.*
3.2 Form of Amended and Restated By-Laws of the Company.*
4.1 Specimen of Common Stock Certificate.*
10.2 Amended and Restated Revolving Loan and Security Agreement, dated as of
March 4, 1993, between Midlantic National Bank and the Company together
with Revolving Loan Note; First Amendment to Amended and Restated
Revolving Loan and Security Agreement, dated as of March 4, 1993,
between Midlantic National Bank and the Company, Corsoft, Inc. and
Lifeboat together with First Allonge to Revolving Loan Note; Consent of
Midlantic National Bank.*
10.3 ISP*D Loan Agreements.*
10.4 Lifeboat Italy Loan Agreement.*
10.5 Lease, dated as of August 27, 1987, by and between Robert C. Baker,
Robert C. Baker, Trustee under Trust Agreement dated March 15, 1984 for
the Benefit of Ashley S. Baker, Gerald H. Baker, Harvey B. Oshins,
Baker 1985 Family Partnership, Gregory J. Stepic and John G. Orrico
("Landlord") and Computer Library, Inc., and First Modification of
Lease, dated as of April 24, 1991, between Landlord and the Company.*
10.6 ISP*D Office Lease.*
10.7 Lifeboat Italy Office Lease.*
10.8 Agreement dated as of December 29, 1994, between Lifeboat Publishing
and Software Garden, Inc.; License for Trademark "Dan Bricklin", dated
as of December 29, 1994, between the Company and Daniel Bricklin; First
Amendment to Software License Agreement and Trademark License Agreement
dated March 30, 1995.*
10.9 Employment Letter with Roger Paradis dated as of May 24, 1995.*
10.11 Employment Letter with Joseph V. Popolo dated as of December 16, 1994.*
10.12 Employment Letter with John P. Broderick dated as of May 10, 1995.*
10.13 Employment Letter with Massimo Freschi dated as of June 18, 1992.*
10.14 Employment Letter with Frederick W. Schmidt dated as of January 19,
1994.*
10.15 Form of Confidentiality and Non-Compete Agreement.*
10.16 Employment Agreement dated as of May 26, 1994, between Peter Lorenz,
ISP*D and the Company.*
10.17 1986 Stock Option Plan and Form of Employee Stock Option Agreement.*
10.18 1995 Stock Plan.*
10.19 1995 Non-Employee Director Plan.*
10.20 Form of Officer and Director Indemnification Agreement.*
10.21 Registration Rights Agreement dated as of May , 1988.*
10.22 Agreement, dated December 19, 1995, by and between Programmer's
Paradise (UK) Limited and the former shareholders of Systematika
Limited, as supplemented by a letter agreement dated December 19, 1995
between Peter Lindsey and Programmer's Paradise (UK) Limited.+
10.23 Employment Agreement dated December 19, 1995 between Peter Lindsey and
Systematika Limited.+
10.24 Share Sale Agreement dated December 29, 1995 between Raphael and
Rosario Perez and Programmer's Paradise France relating to Logiciels &
Applications SA. ++
10.25 Shareholders' Agreement dated December 29, 1995 between Raphael Perez,
Softway, Inc., Selsid and Programmer's Paradise France relating to
Logiciels & Applications SA. ++
10.26 Warranty Agreement dated January 18, 1996 by and among Raphael Perez,
Rosario Perez and Programmer's Paradise France relating to Logiciels &
Applications SA. ++
10.27 Share Sale Agreement Amendment Agreement dated January 18, 1996
Relating to Logiciels & Applications by and among Raphael Perez,
Rosario Perez and Programmer's Paradise France. ++
10.28 Call Option Agreement dated January 18, 1996 between Raphael Perez and
Programmer's Paradise France. ++
10.29 Side Agreement dated January 18, 1996 to Call Option Agreement dated
January 18, 1996 between Raphael Perez and Programmer's Paradise
France. ++
10.30 Call Option Agreement dated January 18, 1996 by and among Softway,
Inc., Selsid and Programmer's Paradise France. ++ 10.31 Employment
Agreement dated January 22, 1996 between Raphael Perez and Logiciels Et
Applications. ++
10.32 Agreement of Purchase and Sales of Assets, dated as of May 16, 1996,
between the Registrant and the Selling Parties, and the exhibits
thereto. **
10.33 Bill of Sale, dated as of June 28, 1996, executed by the Selling
Parties.**
10.34 Facilities and Employee Use Agreement, dated as of June 28, 1996,
between the Registrant and SDC.**
10.35 Closing Statement, dated as of June 28, 1996, between the Registrant
and the Selling Parties**
10.36 Letter Agreement regarding the Acquisition of Stock of SDEV Germany,
dated as of June 28, 1996, between the Registrant and the Selling
Parties.**
10.37 Stock Acquisition Escrow Agreement, dated as of June 28, 1996, between
the Registrant, the Selling Parties and Golenbock, Eiseman, Assor &
Bell, as escrow agent.**
10.38 Employment Agreement dated July 14, 1998 between William Willett and
the Company*
10.39 Employment Agreement dated June 9, 1998 between John P. Broderick and
the Company*
10.40 Employment Agreement dated December 29, 1998 between Peter Lorenz and
the Company* 10.41 Employment Agreement dated January 2, 1999 between
Frans van der Helm and the Company* Lease dated as of May 14, 1997
between Robert C. Baker, et al as Landlord and the Company
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Ernst & Young LLP
24.1 Powers of Attorney.*
27 Financial data schedule
* Incorporated by reference to exhibits of the same number filed with the
Registrant's Registration Statement on Form S-1 or amendments thereto
(File No. 33-92810).
+ Incorporated by reference to the Registrant's Report on Form 8-K dated
January 2, 1996 or amendments thereto.
++ Incorporated by reference to exhibits of the same number filed with the
Registrant's Report on Form 10-K dated March 28, 1996.
** Incorporated by reference to the Registrant's Report on Form 8-K dated
July 19, 1996 or amendments thereto.
(b) Reports on Form 8-K.
Form 8K filed on November 18, 1999 relating to a Rights
Agreement between the Company and the American Stock Transfer & Trust Company as
Rights Agent.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in Shrewsbury, New
Jersey, on March 29, 2000.
PROGRAMMER'S PARADISE, INC.
By: /s/ William H. Willett
-----------------------------
William H. Willett, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
Chief Executive Officer March 29, 2000
/s/ William H. Willett and Chairman of the Board of Directors
- ------------------------------------
William H. Willett
/s/ William H. Sheehy Chief Financial and March 29, 2000
- ------------------------------------ Accounting Officer
William H. Sheehy
/s/ Edwin H. Morgens Director March 29, 2000
- ------------------------------------
Edwin H. Morgens
/s/ Allan Weingarten Director March 29, 2000
- ------------------------------------
Allan Weingarten
/s/ Duffield Meyercord Director March 29, 2000
- -----------------------------------
Duffield Meyercord
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-21
F - 1
Report of Independent Auditors
The Board of Directors and Stockholders
Programmer's Paradise, Inc.
We have audited the accompanying consolidated balance sheets of Programmer's
Paradise, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Programmer's
Paradise, Inc. and subsidiaries at December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 31, 2000
F - 2
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
DECEMBER 31
1998 1999
-------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $21,167 $17,597
Accounts receivable, net of allowances of $1,180 and
$1,430 in 1998 and 1999, respectively 53,002 46,316
Inventory 5,335 5,620
Prepaid expenses and other current assets 2,925 4,468
Deferred income taxes 1,988 1,713
-------------------------------------
Total current assets 84,417 75,714
Equipment and leasehold improvements, net 2,317 2,135
Goodwill, net of accumulated amortization of $2,579
and $4,381, in 1998 and 1999, respectively 15,595 14,543
Other assets 1,286 1,505
Deferred income taxes 1,262 1,860
-------------------------------------
$104,877 $95,757
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $58,064 $50,383
Notes payable to banks 674 2,628
Other current liabilities 7,993 7,897
-------------------------------------
Total current liabilities 66,731 60,908
Other liabilities 144
Notes payable - long-term 1,761
Stockholders' equity:
Common Stock $.01 par value: Authorized, 10,000,000 shares,
issued 4,951,070 and 5,280,438 in 1998 and 1999, respectively 50 53
Additional paid-in capital 33,952 35,872
Treasury stock, at cost, 41,000 and 230,650 shares in 1998
and 1999, respectively (219) (1,356)
Retained earnings 3,186 2,457
Accumulated other comprehensive loss (728) (2,177)
-------------------------------------
Total stockholders' equity 36,241 34,849
-------------------------------------
$104,877 $95,757
=====================================
See accompanying notes.
F - 3
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31
1997 1998 1999
---------------------------------------------------------
Net sales $ 176,157 $ 234,429 $ 244,139
Cost of sales 150,452 205,241 218,014
---------------------------------------------------------
Gross profit 25,705 29,188 26,125
Selling, general and administrative expenses 18,574 22,682 24,422
Amortization of goodwill 914 979 1,795
---------------------------------------------------------
Income (loss) from operations 6,217 5,527 (92)
Other (expense) income:
Interest expense (326) (250) (408)
Interest income 538 544 548
Unrealized foreign exchange (loss) gain (58) 62 525
---------------------------------------------------------
Income before income taxes 6,371 5,883 573
Income tax provision 2,407 2,441 1,302
---------------------------------------------------------
Net income (loss) $ 3,964 $ 3,442 $ (729)
=========================================================
Basic net income (loss) per common share $ 0.84 $ 0.72 $ (0.14)
=========================================================
Diluted net income (loss) per common share $ 0.75 $ 0.66 $ (0.14)
=========================================================
Weighted average common shares outstanding-Basic 4,740 4,797 5,100
=========================================================
Weighted average common shares outstanding-Diluted 5,280 5,249 5,100
=========================================================
See accompanying notes.
F - 4
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
-------------------- PAID-IN TREASURY EARNINGS/ COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCK (DEFICIT) INCOME (LOSS) TOTAL
-----------------------------------------------------------------------------------
Balance at January 1, 1997 4,762,220 48 33,509 (375) (4,220) (117) 28,845
Net income 3,964 3,964
Other comprehensive income:
Translation adjustment (752) (752)
----------
Comprehensive income 3,212
Exercise of stock options, including
$65 in income tax benefits 31,075 124 32 156
-----------------------------------------------------------------------------------
Balance at December 31, 1997 4,793,295 48 33,633 (343) (256) (869) 32,213
Net income 3,442 3,442
Other comprehensive income:
Translation adjustment 141 141
----------
Comprehensive income 3,583
Exercise of stock options, including
$372 in income tax benefits 157,775 2 319 669 990
Purchase of 102,500 treasury stock
shares (545) (545)
-----------------------------------------------------------------------------------
Balance at December 31, 1998 4,951,070 50 33,952 (219) 3,186 (728) 36,241
Net loss (729) (729)
Other comprehensive loss:
Translation adjustment (1,449) (1,449)
----------
Comprehensive loss (2,178)
Exercise of stock options, including
$1,054 in income tax benefits 284,568 3 1,676 223 1,902
Issuance of common stock for
severance and bonus 44,800 244 244
Purchase of 231,500 treasury stock
shares (1,360) (1,360)
-----------------------------------------------------------------------------------
Balance at December 31, 1999 5,280,438 $53 $35,872 $(1,356) $2,457 $(2,177) $34,849
===================================================================================
See accompanying notes
F - 5
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31
1997 1998 1999
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,964 $ 3,442 $ (729)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation expense 736 934 1,177
Amortization expense 1,019 1,114 1,929
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable (8,167) (14,486) 6,687
Inventory 173 (708) (285)
Prepaid expenses and other current assets (85) (364) (815)
Accounts payable and accrued expenses 7,708 11,085 (7,437)
Deferred income taxes (22) 88 4
Net change in other operating assets and liabilities 1,622 1,623 937
-----------------------------------------------
Net cash provided by operating activities 6,948 2,728 1,468
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment, leasehold improvements and other (788) (1,975) (996)
Purchases of businesses, net of cash acquired (2,268) (2,274)
-----------------------------------------------
Net cash used in investing activities (3,056) (1,975) (3,270)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) under lines of credit (1,818) (743) 2,628
Borrowings under long term debt 2,962
Repayments under long term debt (150) (2,435)
Purchase of treasury stock (545) (1,137)
Net proceeds from issuance of common stock 156 990 625
-----------------------------------------------
Net cash provided by (used in) financing activities 1,150 (298) (319)
-----------------------------------------------
Effect of foreign exchange rate on cash (752) 141 (1,449)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,290 596 (3,570)
Cash and cash equivalents at beginning of year 16,281 20,571 21,167
-----------------------------------------------
Cash and cash equivalents at end of year $ 20,571 $ 21,167 $ 17,597
===============================================
See accompanying notes.
F - 6
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND OPERATIONS
The consolidated financial statements include the accounts of Programmer's
Paradise, Inc.; it's wholly owned subsidiaries and its majority-owned
subsidiaries (the "Company"). Programmer's Paradise, Inc. is a recognized
international marketer of software targeting the software development
professional and information technology professional within enterprise
organizations. The Company operates principally, through five distribution
channels in North America and Europe- Internet, catalog, direct sales,
telemarketing, and wholesale distribution. All intercompany balances and
transactions have been eliminated in consolidation.
CONCENTRATIONS OF CREDIT RISK
The Company's accounts receivable are potentially exposed to concentrations of
credit risk. These receivables reflect a broad customer base, which is dispersed
across many different industries and geographies. Credit limits, periodic credit
evaluations and account monitoring procedures are utilized to minimize the risk
of loss. Collateral is generally not required. Credit losses related to accounts
receivable have been consistent with management's expectations and,
historically, have not been material. The carrying value of accounts receivable
and notes payable to banks approximate fair value.
SIGNIFICANT CUSTOMERS AND SUPPLIERS
No customer accounted for more than 10% of consolidated net sales in 1999, 1998
and 1997 and no material part of the business is dependent upon a single
customer or a few customers, the loss of any one or more which would have a
materially adverse effect on the Company.
The Company has authorized dealership or distribution agreements with various
suppliers. Products from two of these suppliers accounted for approximately 59%,
61% and 63% of Company revenues for 1997, 1998 and 1999, respectively.
CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents.
F - 7
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the foreign subsidiaries, all of which are located in
Europe, have been translated at current exchange rates, and related revenues and
expenses have been translated at average rates of exchange in effect during the
year. Cumulative translation adjustments have been classified within other
comprehensive income (loss), which is a separate component of stockholders
equity in accordance with FASB Statement No. 130, "Reporting Comprehensive
Income".
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INVENTORY
Inventory, consisting primarily of finished products held for resale, is stated
at the lower of cost (weighted average) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are calculated using the straight-line method over three to five
years. Leasehold improvements are amortized over the estimated useful lives of
the assets or the related lease terms, whichever is shorter.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
F - 8
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of costs over fair values of net assets acquired
and is being amortized on a straight-line basis substantially over periods,
which range from fifteen to twenty years. During the third quarter of 1999, as a
result of poor operating results and taking into consideration projected cash
flows, the Company wrote off the remaining goodwill (approximately $613,000)
associated with the acquisition of Lifeboat Italia, Srl.
STOCK-BASED COMPENSATION
As permitted by FASB Statement No. 123 "Accounting for Stock-Based Compensation"
(FASB 123), the Company has elected to follow Accounting Principal Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock option plans. Under APB 25,
no compensation expense is recognized at the time of option grant because the
exercise price of the Company's employee stock option equals the fair market
value of the underlying common stock on the date of grant.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of software for microcomputers,
servers and networking upon shipment or upon electronic delivery of the product.
ADVERTISING COSTS
The Company capitalizes the advertising costs associated with producing its
catalogs. The costs of these catalogs are amortized over the estimated shelf
life of the catalogs, generally 3-5 months. The unamortized balance of
non-reimbursed advertising costs at any period end is minimal. Advertising costs
for 1997, 1998, and 1999 amounted to approximately $5,725, $6,159 and $6,611
respectively.
NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted income (loss) per share are calculated in accordance with
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share".
All earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement No. 128 requirements.
F - 9
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain 1997 and 1998 amounts have been reclassified to conform with the current
year presentation.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. SFAS 133 will be effective for the Company's fiscal year
ending December 31, 2000. Management believes that this Statement will not have
a significant impact on the Company.
RECENTLY ISSUED STAFF ACCOUNTING BULLETIN
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial Statements.
The SAB spells out four basic criteria that must be met before registrants can
record revenue. In addition, the SAB also provides guidance on the disclosures
(both in footnotes and in Management's Discussion and Analysis of Financial
Condition and Results of Operations) registrants should make about their revenue
recognition policies and the impact of events and trends on revenue. The SAB
states that all registrants are expected to apply the accounting and disclosures
described in it no later than the first fiscal quarter of the fiscal year
beginning after December 15, 1999. Management is currently evaluating the impact
of SAB No. 101 on the Company's financial condition and results of operations.
2. ACQUISITIONS
In September 1997, the Company acquired 100% of the outstanding stock of
Logicsoft Holding BV ("Logicsoft"), a direct sales company of PC software, which
operates Logicsoft Europe BV, located in Amsterdam, The Netherlands, at a cost
of approximately $3,300 plus a contingent earn-out payment, based upon increases
in achievement's earnings in 1998 over a base amount. The earn-out amount of
approximately $ 2,274 was accrued and recorded as goodwill as of December 31,
1998 and paid in May 1999.
The Company accounted for the above acquisition as a purchase. Accordingly, the
acquired assets and liabilities assumed have been recorded at the estimated fair
values at the date of
F - 10
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
2. ACQUISITIONS (CONTINUED)
acquisition. The results of operations of the acquired business are included in
the consolidated statements of operations from the date of acquisition.
The following table presents the unaudited pro forma consolidated results of
operations for the year ended December 31, 1997 as if the above acquisition had
occurred on January 1, 1997:
1997
--------------------
Sales $192,351
Net income 4,011
Basic net income per common share $.85
Diluted net income per common share $.76
The pro forma amounts reflect amortization of the excess of purchase price over
the net assets acquired, the reduction in operating expenses as a result of
combining the operations, the reduction in interest income as a result of the
utilization of cash and the related tax effect of these items. The pro forma
results are not necessarily indicative of the results of operations that would
have occurred had the acquisition taken place at the beginning of the period
presented nor are they intended to be indicative of results that may occur in
the future.
3. NOTES PAYABLE TO BANKS
The Company can borrow up to $7,500 under a committed line of credit with
interest at the prime rate or Euro-rate plus 200 basis points. The facility
expires on June 30, 2000 and is secured by all the domestic assets of the
Company and 65% of the outstanding stock of the foreign subsidiaries and
contains certain covenants that require the Company to maintain a minimum level
of tangible net worth and working capital. The bank's prime rate was 7.75 % and
8.5% at December 31, 1998 and 1999, respectively. There was $0 and $2,628
outstanding under the line at December 31, 1998 and 1999, respectively.
At December 31, 1999, the Company was in default of its consolidated leverage
ratio covenant related to its $7,500 line of credit. The Company received a
waiver for the default as of December 31, 1999.
The Company maintains a secured, demand revolving line of credit for its German
subsidiary, pursuant to which it may borrow in deutschmarks up to DM 1,500,000
(the equivalent of approximately $777 at December 31,1999), based upon its
eligible accounts receivable and inventory, and a limited guarantee by the
Company of up to DM 300,000 (the equivalent of approximately $155 at December
31, 1999). The line bears interest at 7%. At December 31, 1998 and 1999, there
were no amounts outstanding under the line.
In Italy, Lifeboat Italy has banking arrangements with several Italian banks,
pursuant to which it may borrow in lire on an unsecured, demand basis to finance
working capital
F - 11
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
3. NOTES PAYABLE TO BANKS (CONTINUED)
requirements, through credit and overdrafting privileges, as well as
receivables-based advances. The aggregate credit and overdrafting limits of such
arrangements at December 31, 1999 was approximately Lit 2,800,000,000 (the
equivalent of approximately $1,464 at December 31, 1999). The unsecured
borrowings bear interest at market rates ranging from 6% to 8.375%. At December
31, 1998 and 1999, there were no amounts outstanding under the line.
The Company's subsidiary in The Netherlands, Logicsoft Europe, BV, maintains a
demand revolving line of credit pursuant to which it may borrow in guilders up
to DFL 2,500,000 (the equivalent of approximately $1,150 at December 31, 1999),
and is secured by its accounts receivable and inventory. The line bears interest
at 5.75%. At December 31, 1998 and 1999, there were no amounts outstanding under
the line.
The weighted average interest rate for notes payable to banks was 8%, 6% and 8%
at December 31, 1997, 1998 and 1999, respectively.
Interest paid was approximately $260, $316 and $298 for the years ended December
31, 1997, 1998 and 1999, respectively.
4. BALANCE SHEET DETAIL
Equipment and leasehold improvements consists of the following as of December
31:
1998 1999
---------------------------------
Equipment $ 4,727 $ 4,924
Leasehold improvements 486 541
---------------------------------
5,213 5,465
Less accumulated depreciation and amortization (2,896) (3,330)
---------------------------------
$ 2,317 $ 2,135
=================================
Accounts payable and accrued expenses consists of the following as of December
31:
1998 1999
--------------------------------
Trade accounts payable $ 19,492 $ 19,341
Accrued licensing costs 38,040 30,504
Other accrued expenses 532 538
---------------------------------
$ 58,064 $ 50,383
=================================
F - 12
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
5. INCOME TAXES
The provision for income taxes is as follows:
YEAR ENDED DECEMBER 31
1997 1998 1999
--------------------------------------------------
Current:
Federal $ 984 $ 332 $ (145)
State 386 77 5
Foreign 1,058 1,944 1,764
--------------------------------------------------
2,428 2,353 1,624
Deferred:
Federal 76 225 (244)
State (54) (7) (17)
Foreign (43) (130) (61)
--------------------------------------------------
(21) 88 (322)
--------------------------------------------------
$ 2,407 $ 2,441 $ 1,302
==================================================
The reasons for the difference between total tax expense and the amount computed
by applying the U.S. statutory federal income tax rate to income before income
taxes are as follows:
YEAR ENDED DECEMBER 31
1997 1998 1999
-----------------------------------------------
Statutory rate applied to pretax income $ 2,166 $ 2,000 $ 195
Amortization of goodwill 40 69 341
State income taxes, net of benefit of federal
income tax 219 46 (8)
Foreign income taxes over U.S. statutory rate 54 326 763
Other items (72) - 11
-----------------------------------------------
Income tax expense $ 2,407 $ 2,441 $ 1,302
===============================================
F - 13
5. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are as follows as
of:
DECEMBER 31
1998 1999
--------------------------------
Fixed assets $ 633 $ 787
Accruals and reserves 534 335
Net operating loss carryforwards 2,051 2,435
Credit carry forwards 32 16
--------------------------------
Deferred tax assets $ 3,250 $ 3,573
================================
The Company has recorded a U.S. deferred tax asset at December 31, 1999 of
$2,238 reflecting the benefit of $6,121 in federal and state tax loss
carryforwards, which expire in varying amounts between 2001 and 2020. The
Company's ability to utilize certain net operating loss carryforwards is
restricted to approximately $1.5 million per year, as a result of an ownership
change pursuant to Section 382 of the Internal Revenue Code.
For financial reporting purposes, income before income taxes includes the
following components:
YEAR ENDED DECEMBER 31
1997 1998 1999
---------------------------------------
United States $3,543 $1,504 $(721)
Foreign 2,828 4,379 1,294
---------------------------------------
$6,371 $5,883 $573
=======================================
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $5,115 at December 31, 1999. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon.
During the years ended December 31, 1997, 1998 and 1999, the Company paid
approximately $1,492, $1,956 and $1,471, respectively, in income taxes.
6. STOCKHOLDER'S EQUITY AND STOCK OPTION PLANS
The Company's 1986 Employee Stock Option Plan, as amended on June 15, 1994,
provides for the grant of options to purchase up to 698,133 shares of the
Company's common stock to employees, officers and directors of the Company. The
terms of the options are for a maximum of ten years from date of grant and
generally are exercisable at an exercise price equal to but not less than the
fair market value of the common stock on the date that the option
F - 14
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
6. STOCKHOLDER'S EQUITY AND STOCK OPTION PLANS (CONTINUED)
is granted. The options generally vest in equal annual installments over five
years. There are no additional options available for grant under the Company's
1986 Employee Stock Option Plan.
On April 21, 1995, the Board of Directors adopted the Company's 1995 Employee
Stock Plan ("1995 Plan"). The 1995 Plan, as amended on May 7, 1998, provides for
the grant of options to purchase up to 1,137,500 shares of the Company's common
stock to officers, directors, employees and consultants of the Company. The 1995
Plan requires that each option shall expire on the date specified by the
Compensation Committee, but not more than ten years from its date of grant in
the case of ISO's and Non-Qualified Options. Options granted under the plan are
exercisable at an exercise price equal to but not less than the fair market
value of the common stock on the grant date. ISO's generally vest in equal
annual installments over five years.
On April 21, 1995, the Board of Directors adopted the Company's 1995
Non-Employee Director Plan ("1995 Director Plan"). The 1995 Director Plan, as
amended on May 7, 1998, provides for the grant of options to purchase up to
187,500 shares of the Company's common stock to persons who are members of the
Company's Board of Directors and not employees or officers of the Company. The
1995 Director Plan requires that options granted thereunder will expire ten
years from the date of grant. Each option granted under the 1995 Director Plan
becomes exercisable over a five year period, and vests in an installment of 20%
of the total option grant upon the expiration of one year from the date of the
option grant, and thereafter vests in equal quarterly installments of 5%.
FASB 123 requires pro forma information regarding net income and earnings per
share 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, 1998 and 1999,
respectively: risk free interest rates of 5.49%, 5.49% and 6.64%, dividend
yields of 0% in all three periods, volatility factors of the expected market
price of the Company's common stock of .60, .65 and .87, and a weighted-average
expected life of the option of 7.3 years.
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 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.
F - 15
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
6. STOCKKHOLDER'S EQUITY AND STOCK OPTION PLANS (CONTINUED)
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 is as follows:
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1998 1999
------------------------------------
Net income (loss) as reported $3,964 $3,442 $(729)
Net income (loss) pro forma 3,395 2,649 $(1,731)
Basic net income (loss) per share, as reported $.84 $.72 $(.14)
Basic net income (loss) per share, pro forma $.72 $.55 $(.34)
Diluted net income (loss) per share, as reported $.75 $.66 $(.14)
Diluted net income (loss) per share, pro forma $.67 $.52 $(.34)
The weighted average fair value of options granted during 1997, 1998 and 1999 is
$6.09, $6.54 and $6.23, respectively.
Changes during 1997, 1998 and 1999 in options outstanding for the combined plans
were as follows:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
-----------------------------
Outstanding at January 1, 1997 793,764 2.91
Granted in 1997 264,400 8.08
Canceled in 1997 (27,550) 5.13
Exercised in 1997 (31,075) 1.60
---------------
Outstanding at December 31, 1997 999,539 4.30
Granted in 1998 349,150 6.51
Canceled in 1998 (34,035) 5.94
Exercised in 1998 (157,775) 1.90
---------------
Outstanding at December 31, 1998 1,156,879 5.25
Granted in 1999 55,000 6.23
Canceled in 1999 (99,222) 6.33
Exercised in 1999 (326,418) 2.57
---------------
Outstanding at December 31, 1999 786,239 6.28
===============
Exercisable at December 31, 1999 543,472 6.20
===============
F - 16
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
6. STOCKHOLDER'S EQUITY AND STOCK OPTION PLANS (CONTINUED)
Stock options outstanding at December 31, 1999 are summarized as follows:
OUTSTANDING
RANGE OF EXERCISE OPTIONS AT WEIGHTED AVERAGE
PRICES DECEMBER REMAINING WEIGHTED AVERAGE
31, 1999 CONTRACTUAL LIFE EXERCISE PRICE
- -----------------------------------------------------------------------------
$0.24 20,000 1.7 .24
.67 - 1.00 23,975 3.6 .70
4.00 - 6.00 219,314 6.5 4.95
6.25 - 8.63 453,450 8.0 6.61
9.00 - 12.94 69,500 7.8 11.96
-------------------
786,239
===================
Under the various plans, options that are cancelled can be reissued. At December
31, 1999, 534,232 shares were reserved for future issuance.
During 1999, the Company issued 44,800 shares of common stock with a fair value
of approximately $244 to two former employees as payment for severance and
bonuses.
7. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution plan covering substantially all
domestic employees. Participating employees may make contributions to the plan,
through payroll deductions. Matching contributions are made by the Company equal
to 50% of the employee's contribution to the extent such employee contribution
did not exceed 6% of their compensation. During the years ended December 31,
1997, 1998 and 1999, the Company expensed approximately $82, $79 and $95
respectively, related to this plan.
F-17
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
8. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1998 1999
--------------------------------------------
Numerator:
Net income (loss) for basic and diluted net income
(loss) per share $ 3,964 $ 3,442 $ (729)
--------------------------------------------
Denominator:
Denominator for basic net income (loss) per
share-weighted average common shares 4,740 4,797 5,100
Effect of dilutive securities:
Employee stock options 540 452 -
--------------------------------------------
Denominator for diluted net income (loss) per share
- adjusted weighted average common
shares and assumed conversion 5,280 5,249 5,100
============================================
Basic net income (loss) per common share $ .84 $ .72 $(.14)
============================================
Diluted net income (loss) per common share $ .75 $ .66 $(.14)
============================================
9. COMMITMENTS
The Company leases the space used for its operations and certain equipment under
long-term operating leases. Future minimum rental payments over the remaining
terms of these leases are as follows:
2000 $1,146
2001 1,068
2002 808
2003 662
2004 411
2005 and thereafter 622
------
$4,717
======
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $1,075, $1,050 and $1,135 respectively.
The Company has royalty agreements, which require payments based on sale of
certain products. Royalty expense for the years ended December 31, 1997, 1998
and 1999 was approximately $157, $141 and $131 respectively.
F - 18
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
10. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company's single business segment is the marketing of technical software for
microcomputers, servers and networking across geographically diverse
marketplaces.
Geographic financial information is as follows:
-------------------------------------
1997 1998 1999
-------------------------------------
Net sales to Unaffiliated Customers:
North America $ 69,751 $ 70,922 $ 80,730
Europe 106,406 163,507 163,409
-------------------------------------
Total 176,157 234,429 244,139
=====================================
Income (loss) from operations by Geographic Areas:
North America $ 3,762 $ 1,842 $ 183
Europe 2,455 3,685 (275)
-------------------------------------
Total 6,217 5,527 (92)
=====================================
Identifiable Assets by Geographic Areas:
North America $ 30,250 $ 35,854 $ 28,875
Europe 56,118 69,023 66,882
-------------------------------------
Total 86,368 104,877 95,757
=====================================
"North America" is comprised of the United States and Canada. "Europe" is
comprised of Austria, France, Germany, Italy, the Netherlands and the United
Kingdom.
F - 19
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
11. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
The Company made an acquisition in 1997, which is more fully described in Note
2. The purchase price was allocated to the assets acquired and liabilities
assumed based on their fair market values as follows:
1997
----------------
Fair value of assets acquired:
Current assets excluding cash $ 4,108
Fixed assets 187
Other assets, principally goodwill 2,202
Less liabilities assumed:
Current liabilities 4,229
Notes payable -
Payable to seller -
Common stock issued to seller -
----------------
Net cash paid $ 2,268
================
12. QUARTERLY RESULTS OF OPERATIONS
The following table presents summarized quarterly results for 1999:
(UNAUDITED)
-------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------------------------------------------
Revenues $57,368 $60,770 $50,195 $75,805
Gross profit 6,762 7,459 4,267 7,636
Net income (loss) 987 963 (2,323) (356)
Diluted net income
(loss) per share $0.18 $0.17 $(0.45) $(0.07)
The following table presents summarized quarterly results for 1998:
(UNAUDITED)
-------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------------------------------------------
Revenues $53,193 $50,780 $54,461 $75,995
Gross profit 6,514 6,506 6,707 9,461
Net income 760 338 680 1,665
Diluted net income
per share $0.14 $0.06 $0.13 $0.32
F - 20
Programmer's Paradise, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In Thousands)
CHARGED TO CHARGED IN
BEGINNING COST AND OTHER ENDING
DESCRIPTION BALANCE EXPENSE ACCOUNTS DEDUCTIONS BALANCE
- -----------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Allowances for accounts receivable $1,024 326 32 (1) 432 $ 950
Reserve for Obsolescence $ 464 220 130 (1) 62 $ 752
Year ended December 31, 1998:
Allowances for accounts receivable $ 950 674 444 $1,180
Reserve for Obsolescence $ 752 311 585 $ 478
Year ended December 31, 1999:
Allowances for accounts receivable $1,180 919 669 $1,430
Reserve for Obsolescence $ 478 205 296 $ 387
(1) Arose from acquisitions.
F - 21