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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, 1996
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 13-136104
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation)
1163 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 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 21, 1997, as reported on the NASDAQ National Market, was
approximately $33,526,000.
The number of shares outstanding of the Registrant's Common Stock as of
March 21, 1997: 4,789,423 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 23, 1997 are incorporated by reference into Part III of this Report.
PART I
ITEM 1. BUSINESS.
GENERAL
Programmer's Paradise, Inc., a Delaware corporation (the "Company"), is
a recognized international direct marketer of software for microcomputers,
servers and networks, operating through three separate distribution channels in
the United States and Europe - catalog, corporate reseller and wholesale
distribution - with a strategic focus on expanding its catalog activities aimed
at people who design, program, document, support and use software. The Company
currently offers catalogs in local languages and with prices in local currencies
in the United States, Italy, Germany, Austria, the United Kingdom and France.
A key element of the Company's 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
, acquired in 1996 and directed at programmers working in large corporations.
These catalogs are full color "magalogs" created in-house, which combine
traditional catalog sales offerings with detailed product descriptions, magazine
style articles, product announcements and interviews with industry leaders, and
contain substantial amounts of paid and cooperative advertising. The
Programmer's Paradise catalog features the Company's proprietary and
brand-distinctive logo, the "Island Man" cartoon character. In 1996, the Company
distributed over 5.1 million catalogs, typically featuring more than 1,500 stock
keeping units ("SKUs") in each catalog. The Company estimates that its catalog
operations, which have historically had the highest gross margin of the
Company's distribution channels, contributed 46% of its revenue and 62% of gross
margin in 1996.
Through its multiple channels, the Company offers more than 10,000
SKUs, consisting of technical and general business application software, from
over 1,000 publishers at prices generally discounted below manufacturers'
suggested retail prices. The Company's catalogs contain substantial amounts of
advertising and offer one of the most complete collections of microcomputer
technical software, including programming languages, tools, utilities,
libraries, development systems, interfaces and communications products. Many
technical software programs are difficult for developers to source on their own
and, notwithstanding the large selection of programs offered by the Company, the
Company frequently searches for titles requested by its customer base. The
Company believes that its catalogs are important marketing vehicles for
microcomputer software publishers and that they provide a cost-effective and
service-oriented means to market, sell and fulfill technical software products.
International expansion is an integral part of the Company's strategy,
with its European-based operations accounting for approximately 56% of sales in
the year ended December 31,1996, and approximately 46% 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
("Lifeboat Italy"), a long-standing software wholesale distributor in Italy with
an orientation towards technical software. In June 1994, the Company acquired a
controlling interest in ISP*D International Software Partners GmbH ("ISP*D"), a
large software-only dealer, a leading independent supplier of Microsoft Select
licenses in Germany and a significant microcomputer software dealer 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 Limited, 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 ("ISP*F"), as a full service corporate reseller of
PC software, based in
Paris and majority owned by Programmer's Paradise France SARL. ISP*F was formed
by merging the resources and assets of L & A Logiciels Et Applications SA ("L &
A France"), LAN Technologie, a division of Devnet SA, and Programmer's Paradise
France SARL. L & A France is a well known corporate reseller of PC software and
also publishes the ACCESS DIRECT catalog, which is targeted to small and medium
sized companies. LAN Technologie is a high-end PC software supplier and systems
integrator.
The Company was incorporated in Delaware in 1982. In May 1995, the
Company changed its name from "Voyager Software Corp" to "Programmer's Paradise,
Inc." The Company's principal executive offices are located at 1163 Shrewsbury
Avenue, Shrewsbury, New Jersey 07702 and its telephone number is (908) 389-8950.
PRODUCTS
The Company offers over 10,000 SKUs consisting of technical and general
business application software from more than 1,000 publishers, including
Microsoft, Powersoft, Borland, IBM, Symantec, Lotus and Computer Associates, at
prices generally discounted below manufacturer's suggested retail prices. The
Company screens new products and selects products for inclusion in its catalogs
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 most 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.
MARKETING AND SALES
The Company operates three separate distribution channels - catalog
operations (PROGRAMMER'S PARADISE, PROGRAMMER'S SUPERSHOP, INTERNET PARADISE,
COMPONENTS PARADISE AND SYSTEM SCIENCE), corporate reselling to large accounts
(Corsoft in the U.S., ISP*D in Germany and ISP*F in France) and wholesale
distribution to dealers and large resellers (Lifeboat Distribution in the U.S.
and Lifeboat Italy in Milan, Italy). 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 telemarketing
representatives who assist customers in purchasing decisions, process product
orders and respond to customer inquiries on order status, product pricing and
availability. The telemarketers 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 sophisticated domestic information
systems, a telemarketer 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.
CUSTOMERS AND BACKLOG. No single customer, including direct end users
or resellers of products, accounted for more than 5% of the Company's revenues
during the fiscal year ended December 31, 1996. 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.
CATALOG AND PUBLISHING OPERATIONS
Catalog. The Company has two primary established catalogs -
PROGRAMMER'S PARADISE, directed at independent programming professionals, and,
THE PROGRAMMER'S SUPERSHOP directed at programmers in large corporations.
PROGRAMMER'S PARADISE and THE PROGRAMMER'S SUPERSHOP, each containing
approximately 90 to 150 pages, are full color "magalogs" which combine
traditional catalog sales offerings with detailed product descriptions, product
announcements, interviews with industry leaders, magazine-style articles and
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.
THE PROGRAMMER'S SUPERSHOP catalog was acquired in June 1996, from the
Software Developer's Company, Inc., its largest competitor in the catalog
channel. Under the terms of the purchase, the Company received all rights and
title to THE PROGRAMMER'S SUPERSHOP catalog business, inbound and outbound
telemarketing, reseller operations, web site and the operations of Software
Developers Company German subsidiary. THE PROGRAMMER'S SUPERSHOP catalog is
produced on a quarterly basis and carries a circulation of approximately 400,000
copies. The success of THE PROGRAMMER'S SUPERSHOP, has reoriented the Company's
traditional approach to catalog marketing both in the United States and
internationally. In conjunction with the SUPERSHOP catalog, the Company has
energized and supported an outbound telemarketing program as part of its
domestic catalog operations, which targets mid-size to large commercial,
governmental and educational accounts in the United States. This program is
still in its early development stage in the United States as the Company builds
an infrastructure of outbound telemarketers.
In addition to its two flagship catalogs, the Company developed and
launched two additional catalogs during 1996. COMPONENTS PARADISE was launched
in March 1996 and is directed to the Visual Basic add-on marketplace. INTERNET
PARADISE was developed and launched in May 1996 to capture the internet
development tool market.
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 a core PROGRAMMER'S PARADISE and PROGRAMMER'S
SUPERSHOP buyer list of approximately 171,000 customers who have purchased
products from the Company within the 24 months ended December 31, 1996, plus
selected names from the Company's prospect list, lists of names provided by
publishers and lists of names rented from others.
The Company seeks to have these catalogs reach a similar status in
Europe. The Company's European catalogs (PROGRAMMER'S PARADISE ITALIA,
PROGRAMMER'S PARADISE DEUTSCHLAND, PROGRAMMER'S PARADISE DEUTSCHLAND CORPORATE
EDITION, PROGRAMMER'S PARADISE U.K. and PROGRAMMER'S PARADISE FRANCE) 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 U.K. and is produced four times
per year.
The Company creates its 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.
ELECTRONIC DISTRIBUTION. The Company also conducts business via the
internet through its two websites; www.pparadise.com and
computing.supershops.com. Through an agreement announced in July, 1996, with
CyberSource Corporation of Menlo Park, California, the Company began electronic
delivery of software. At December 31, 1996, the Company had approximately 75
products available for electronic distribution and plans to increase that
product selection to approximately 350 titles by the end of 1997.
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, trade show support, special publisher
catalogs, demonstration disks, a FAXcetera hot line for product literature,
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
suppliers' 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
discounts, 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 1996, the Company's cooperative and
fee-based advertising reimbursements totaled less than 14% of total product
revenues in the Company's domestic operations, and significantly smaller
percentages in the European operations.
PUBLISHING. As part of its catalog operations, the Company also
operates a software publishing operation under the name Lifeboat Publishing.
Lifeboat Publishing promotes, markets, distributes and supports technical
software titles which it owns or to which it has rights under publishing
contracts. The Company does not itself develop from inception any of the
software programs it publishes, but is principally engaged in identifying end
user requirements, defining specifications and functions which would satisfy
those requirements, and working with product authors or development companies
which have core products designed to fit these requirements. To publish a
product, the Company generally obtains exclusive license rights to a software
product in exchange for the payment of royalties by the Company based on
subsequent sales of the product. In some instances, the Company is required to
pay minimum annual royalty payments.
The Company believes there is a synergy between the publishing
operations and its three distribution channels, as the catalog, corporate
reseller and wholesale operations help launch and sell products published by
Lifeboat Publishing. Lifeboat Publishing sales generally are made at
substantially higher margins than other products sold by the Company. Of the 250
best selling SKUs in
the PROGRAMMER'S PARADISE and THE PROGRAMMER'S SUPERSHOP catalogs in 1996, six
were published by Lifeboat Publishing. The Company's family of publishing
products currently includes DAN BRICKLIN'S DEMO-IT!, WINWIDGET, AND VISUAL
IMAGE.
CORPORATE RESELLING
Direct corporate reselling is primarily conducted in Europe by ISP*D,
which was acquired by the Company in June 1994. The Company hopes to utilize
ISP*D's strength in Germany as a base for pan-European business development,
utilizing the offices and operations of all of the Company's subsidiaries in
Europe. Additionally, it is the Company's strategy to become the European-based
corporate reseller of choice for European companies desiring coordinated
purchasing agreements for U.S. subsidiaries. The formation of ISP*F is the
continuation of the Company's planned European expansion in the reselling
channel.
ISP*D's experienced sales force, each member of which is assigned a
specific territory in Germany or Austria, 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. They
also maintain close contact with customers in order to provide them with timely
communications and assistance with any special or strategic requests. In January
1996, ISP*D formed a full-time consulting staff as a value added service for its
reseller customers enabling the Company to market itself on the basis of its
overall price and service advantage in an environment where customers typically
utilize two or more suppliers to satisfy their software needs.
ISP*D's corporate reseller operations are now being supplemented by
the recently introduced PROGRAMMER'S PARADISE DEUTSCHLAND and PROGRAMMER'S
PARADISE DEUTSCHLAND CORPORATE EDITION, as is ISP*F's operation with the
PROGRAMMER'S PARADISE FRANCE catalog.
WHOLESALE OPERATIONS
Through Lifeboat Distribution and Lifeboat Italy, the Company sells, at
wholesale, technical software to storefront retail dealers, superstores,
resellers and mail order companies. The U.S. retailers include Software Etc.
and MEI/Micro Center, while the resellers include ASAP Software Express, Stream,
Corporate Software, Softmart and Software Spectrum. In addition, Lifeboat Italy
wholesales productivity software. In 1996, Lifeboat Distribution - Germany began
to wholesale productivity software under exclusive distribution arrangements
with certain suppliers.
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 1,000
publishers. Domestically, in 1996 the Company purchased approximately 56.5% of
its products directly from manufacturers and publishers and the balance from
three distributors - Ingram, Merisel and DistribuPro. The largest volume of
purchases by the Company from distributors was from Ingram, representing
approximately 13.4% of worldwide purchases in 1996. The Company believes it can
purchase substantially all products purchased from Ingram from other competing
wholesalers under similar terms. Domestically, the leading 10 vendors of the
Company accounted for approximately 61.1% of its purchases. Management estimates
that during 1996 approximately 47% of worldwide revenues of the Company were
derived from products published by Microsoft.
ISP*D purchased approximately 72% of its products directly from
manufacturers and publishers and the balance from more than six distributors.
The leading three suppliers of ISP*D accounted for approximately 8.6% of
purchases in 1996. ISP*D is a Microsoft Select dealer, entitling it to license
Microsoft products and distribute such products from master lists forwarded by
Microsoft and to sell documentation separate from the software media.
Approximately 79% of ISP*D's sales in 1996 were of Microsoft products. Lifeboat
Italy, also an authorized Miscrosoft distributor, purchased approximately 34% of
its products directly from manufacturers and publishers and the balance from
three distributors in 1996. The largest volume of purchases by Lifeboat Italy
was from JSoft, related to Microsoft software, which represented approximately
61% of purchases in 1996. Under a 1994 distribution reorganization by Microsoft,
Lifeboat Italy retained its designation as a Microsoft distributor, however, it
was required to purchase Microsoft products through a direct ship distributor
such as JSoft. The Company believes that it can purchase substantially all
products obtained from JSoft from other competing wholesalers under similar
terms.
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. and Italy 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 quarterly physical
inventory in the United States and Germany, and three times per year in Italy,
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. Upon request, at an
additional charge, overnight delivery services are available. The Company
operates distribution facilities in Shrewsbury, New Jersey; Munich, Germany;
Milan, Italy; London, England; and Paris, France.
MANAGEMENT INFORMATION SYSTEMS
In the U.S., the Company operates a management information system that
allows for centralized management of key functions, including inventory and
accounts receivable management, purchasing, sales and distribution. Such system
has been customized to provide for the preparation of daily operating control
reports regarding key aspects of the Company's business. The Company's
existing U.S. management information system is a multi-processor, UNIX-based
package designed for a transaction-intensive distribution system, with
financial, inventory, purchasing and sales modules. The system provides
operators with direct computer-generated fax capabilities which are used
extensively for expediting purchase orders, customer service confirmations and
automatic follow-up of accounts receivable collections. This system supports
telemarketing, marketing, purchasing, accounting, customer service, warehousing
and distribution. As part of the acquisition of substantially all of the assets
of The Software Developer's Company, Inc., the Company acquired SDC's management
information system which are more adaptive to direct marketing organizations
than the Company's. The Company is presently in the process of installing this
system. The system allows the Company, among other things, track direct
marketing campaign performance, to monitor sales trends, make informed
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 expected
over time to be 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.
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*D and
ISP*F. 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. In connection with its publishing operations, from time to time the
Company has funded a portion of the development of publishing properties under
license to the Company, by providing the author advances, which are applied
against royalties.
ISP*D is a Microsoft Select dealer. The Company has multiple other
alliances with publishers such as Lotus, Borland, Powersoft, Attachmate,
Nu-Mega, Intersolv and Logic Works.
EMPLOYEES
As of December 31, 1996, the Company had 92 full-time employees in the
United States, including 58 in sales and marketing, 13 in purchasing and
distribution, and 21 in administration, accounting and MIS and 2 part-time
employees. As of December 31, 1996, the Company had 101 full-time employees in
Europe, including 44 in sales and marketing, 9 in consulting and technical
training, 25 in purchasing and distribution, 23 in administration and accounting
and 3 part-time employees.
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 technical 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 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. During 1996, the Company acquired its principle
competitor within the catalog industry- THE PROGRAMMER'S SUPERSHOP. One of the
primary benefits of the transaction was the economies of scale as the Company
was able to absorb the entire operations of The Programmer's Supershop within
its existing location while substantially reducing overhead run rates.
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. 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, 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.
SALES TAX AND REGULATORY MATTERS
The Company believes that it is presently required to collect sales tax
on sales of products through its catalogs to residents of New Jersey. Various
states have sought to impose on direct marketers the burden of collecting state
sales tax on the sale of products shipped to that state's
residents. The United States Supreme Court has ruled that the various states,
absent congressional legislation, may not impose tax collection obligations on
an out-of-state mail order company whose only contact with the taxing state is
the distribution of catalogs and other advertisement materials through the mail
and whose subsequent delivery of purchased goods is by U.S. mail or interstate
common carrier. If legislation is ultimately enacted to overturn such decision,
or state courts otherwise impose a duty to collect sales or use tax, imposition
of a tax collection obligation on the Company in states to which it ships
products may result in additional administrative expenses to the Company and
price increases to its customers.
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.
As of December 31, 1996, the Company currently leases 15,000 square
feet of space for its offices on the first floor at 1163 Shrewsbury Avenue,
Shrewsbury, New Jersey. The lease is presently on a month to month basis while
the Company is negotiating various options including renewing its current lease.
Basic monthly rent payments amount to approximately $11,000. Additionally, the
Company also leases approximately 3,500 square feet of office space under a
short-term lease that calls for monthly rental payments in the amount of $3,750.
The Company's European facilities, all of which are leased under long term
arrangements, are as follows: 14,269 square feet in Munich, Germany, 8,606
square feet in Milan, Italy, 3,000 square feet in London, England and 4,300
square feet in Paris, France. Total annual rent expense for the European
facilities is approximately $ 467,000. See Note 9 to the Consolidated Financial
Statements.
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
- --------------------------------------------------------------------------------
Roger Paradis 52 President, Chief Executive Officer and
Chairman of the Board
Joseph V. Popolo 60 Executive Vice President -
USA Operations and Secretary
Peter W. Lorenz 48 Executive Vice President-
European Operations
John P. Broderick 47 Chief Financial Officer, Vice President -
Finance and Treasurer
Massimo Freschi 40 Vice President Europe and Managing Director
European-wide Catalog and Distribution
Operations
Jeffrey Largiader 40 Vice President - Catalog Operations and
Marketing Development
Kathleen Innacelli 36 Vice President - Fulfillment Operations
ROGER PARADIS has served as the President, Chief Executive Officer and a
director of the Company since 1988. During 1996, he was also appointed as
Chairman of the Board of Directors. Prior to joining the Company, he was
President of Amerinex Corporation, a private venture capital firm in Saddle
Brook, New Jersey.
JOSEPH V. POPOLO has served as the Company's Executive Vice President -
Operations since joining the Company in January 1995. From 1977 to 1985, he was
the President of MISCO, a computer products cataloger. From 1985 until joining
the Company, Mr. Popolo was an independent consultant to corporations desiring
to expand or build business-to-business catalog operations. Mr. Popolo has
served as a consultant to Catalog Age magazine and is the founder and a charter
member of the Direct Marketing Association's International Council.
PETER W. LORENZ has served as the Managing Director of ISP*D since its inception
in 1989 and joined the Company in June 1994 at the time of the acquisition of
ISP*D by the Company. Since January 1995, he has served as Executive Vice
President- European Operations. Mr. Lorenz is a founding member of the German
Software Association, and was its chairman from 1987 until 1990. He currently is
Treasurer and a member of the Board of Directors of the Software Publishing
Association (SPA), Europe.
JOHN P. BRODERICK has served as the Company's Chief Financial Officer and Vice
President - Finance of the Company since May 1995. He has also served as a
financial consultant to the Company since 1993. From 1990 through 1992, Mr.
Broderick was the Chief Financial Officer of Olympic Limousine Service, Inc., a
transportation conglomerate.
MASSIMO FRESCHI has served as the Managing Director of Lifeboat Italy since 1990
and joined the Company in January 1993 at the time of the acquisition of
Lifeboat Italy by the Company. He also has served as Vice President - European
Distribution and Catalog Operations since January 1995. Prior thereto and since
1986, he served in various sales and marketing positions with Lifeboat Italy.
JEFFREY LARGIADER has served as the Vice President - Catalog Operations and
Marketing Development 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 Lifeboat Associates.
KATHLEEN INNACELLI has served as the Vice President - Fulfillment Operations of
the Company since 1993 and is responsible for purchasing and warehouse
operations. From 1990 through 1993, Ms. Innacelli held the position of Manager
of Purchasing and was the Vice President - Telesales and Client Services of the
Company and prior to that and since 1983 held other positions with the Company
and Lifeboat Associates.
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
-------- --------
1995
Third Quarter 12 3/8 10 1/2
Fourth Quarter 10 1/2 6 3/4
1996
First Quarter 7 5 1/4
Second Quarter 7 3/8 4 7/8
Third Quarter 6 3/4 5 1/4
Fourth Quarter 7 1/2 5
During 1996, 83,975 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 $.36.
HOLDERS OF COMMON STOCK
On March 21, 1997, 4,789,423 shares of the Company's Common Stock were
outstanding. On such date, there were approximately 76 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 loan agreement, which
presently prohibits the payments of dividends. The Company does not currently
anticipate declaring or paying dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The following is a summary of selected financial data of the Company
for each of the five years ended on the dates set forth below, which should be
read in conjunction with the financial statements of the Company and the notes
thereto:
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth, selected consolidated financial data for the
Company for the five years ended December 31, 1996. The selected consolidated
financial data for the five years are derived from the Company's audited
consolidated financial statements. The consolidated financial data set forth
below
should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Results of Operations and Financial Condition" contained herein.
(In thousands, except per share data)
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA (1):
Net sales $32,333 $45,032 $71,334 $93,286 $127,680
Income from operations 362 838 1,370 2,275 2,936
Income before minority interest 159 263 1,095 4,203 2,199
Net income 159 239 l,050 4,203 2,298
Net income per common
share $0.09 $0.10 $0.35 $1.03 $0.44
===== ===== ===== ===== ========
Weighted average number of
common shares outstanding 2,187 2,887 3,142 4,102 5,198
BALANCE SHEET DATA:
Working capital $ 801 $ 1,950 $ 2,731 $21,689 $12,416
Total assets 9,075 11,714 24,730 58,329 69,209
Short-term debt 2,900 3,303 3,489 2,469 1,367
Long-term debt -- -- -- -- 1,050
Redeemable preferred
stock and Stockholders'
equity 1,773 3,379 4,597 26,989 28,845
- ----------
(1) Comparability of the Statement of Operations is affected by acquisitions
occurring throughout the periods presented. See Note 2 to the Consolidated
Financial Statements.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
The Company is a distributor of software, operating through three
distribution channels - cataloging, corporate reseller and wholesale operations.
Catalog operations include worldwide catalog sales, advertising and publishing.
Corporate reseller operations include Corsoft, Inc. in the US and ISP*D
International Software Partners GmbH ("ISP*D") in Munich, Germany, wholly owned
subsidiaries of the Company, and ISP*F International Software Partners France
("ISP*F") a majority owned company located in Paris, France. Wholesale
operations include distributions to dealers and large resellers through Lifeboat
Distribution Inc. in the U.S. and Lifeboat Associates Italia Srl ("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." and consolidated its U.S. catalog and software publishing
operations in a new subsidiary, Lifeboat Distribution, 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.
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 ("ISP*F"), as a full service corporate reseller of
PC software, based in Paris and majority owned by Programmer's Paradise France
SARL. 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 periods indicated certain
financial information derived from the Company's consolidated statement of
operations expressed as a percentage of net sales:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
% TO NET SALES % CHANGE
----------------------------------- -----------------------
1994 1995 1996 95 V 94 96 V 95
---- ---- ---- ----------------------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 83.1% 84.4% 83.8%
Gross Profit 16.9% 15.6% 16.2% ( 1.3%) 0.6%
Selling, general and
administrative expenses 14.8% 13.1% 13.5% ( 1.7%) 0.4%
Amortization expense 0.1% 0.1% 0.4% 0.0% 0.3%
Income from operations 2.0% 2.4% 2.3% 0.4% (0.1%)
Interest ( income ), expense net 0.6% (0.3%) (0.2%) ( 0.9%) 0.1%
Income before taxes 1.4% 2.7% 2.5% 1.3% (0.2%)
Income tax benefit (provision) 0.2% 1.9% (0.8%) 1.7% (2.7%)
Minority interest (loss) 0.1% (0.1%) (0.1%) (0.1%)
Net Income 1.5% 4.6% 1.8% 3.1% (2.8%)
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 $34,394,000, or 37%, to
$127,680,000 in 1996 and by $21,952,000, or 31%, to $93,286,000 in 1995 as
compared to the respective preceding periods. The increase in revenues in 1996
resulted from a combination of the growth of the catalog and corporate reseller
channels as well as growth through acquisitions. Revenues within the catalog
channel increased 65% or $23.2 million primarily as a result of the acquisition
of the Programmer's Supershop in June 1996 as well as the acquisition of
Systematika Limited, a London based direct marketer in the technical software
industry in December 1995. Domestic catalog circulation increased by
approximately 800,000 catalog drops without the addition of THE PROGRAMMER'S
SUPERSHOP in 1996 as the Company introduced two new segmented catalogs:
COMPONENTS PARADISE launched in March 1996 and INTERNET PARADISE, launched in
May 1996. Revenues within the corporate reseller channel increased 26.4% in 1996
primarily resulting from a significant increase in the amount of German and
Austrian reseller customers as well as the positive impact of forming the French
reseller, ISP*F. Revenues within Germany and Austria increased by approximately
20% over 1995. This increase, in part, is attributed to the formation of a
consulting division, which has provided value-added services to German reseller
customers.
The growth in net sales in 1995 resulted from market share growth in
both the catalog and reseller channels and the full year impact of the
acquisition of ISP*D. Revenues within the catalog channel in 1995, increased 80%
or $11.2 million, in part to the start-up of new catalogs in France and the
United Kingdom. Domestic catalog circulation increased by approximately 200,000
in 1995 as the Company concentrated on improving the quality of its customer and
prospect files and upgrading its circulation plan for rentals. Growth in the
reseller channel increased 45% or $13.3 million primarily from the addition of
ISP*D.
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 costs of sales. Gross Profit as a percentage
of net sales increased by 0.6% in 1996 from 15.6% to 16.2% primarily from
increased revenues within the catalog channel stemming from the acquisition of
The Programmer's Supershop as well as the full year effect of the acquisition of
Systematika Ltd. During 1996, the Company was able to enhance its gross margins
within the catalog channel by raising both product pricing and advertising rates
in order that its primary catalogs, PROGRAMMER'S PARADISE and THE PROGRAMMER'S
SUPERSHOP be on parity. Gross profit as a percentage of net sales decreased by
1.3% in 1995 primarily due to a shift in the mix of sales through the Company's
distribution channels resulting from the acquisition of ISP*D, reflecting an
increase in the percentage of relatively lower margin corporate resales 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 corporate
reseller or distribution channels. In 1996, catalog operations contributed
approximately 46% of revenue and approximately 62% of gross margin dollars as
compared with 35% of revenue and 49% of gross margin dollars in 1995 and 35% of
revenue and 46% of gross margin
dollars in 1994. Corporate reseller operations contributed approximately 43% of
revenue and approximately 26% of gross margin dollars in 1996 and 49% of revenue
and 36% of gross margin dollars in 1995 as compared 41% of revenue and 32% of
gross margin dollars in 1994. The distribution channel contributed approximately
11% of revenue and approximately 12% of gross margin dollars in 1996 compared
with 16% of revenue and 15% of margin dollars in 1995 and 24% of revenue and 22%
of margin dollars in 1994.
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 corporate reseller 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, non-personnel-related marketing and administrative costs and a
provision for doubtful accounts. Depreciation consists primarily of equipment
depreciation. SG&A expenses have decreased as a percentage of revenues from
14.9% in 1994 to 13.1% in 1995 and then increased to 13.5% of net revenues in
1996. The decline in SG&A in prior years is primarily attributable to the
acquisition of ISP*D which has generally lower SG&A as a percentage of revenue.
The increase in SG&A expense as a percentage of revenues in 1996 is attributable
to the abnormally high overheads incurred with the start-up of the French
corporate reseller operation. The French corporate reseller operation required
mid-year restructuring which involved the separation and payment of severance
for several employees. The Company does not anticipate any further restructuring
requirements, however, there can be no guarantee that such a need will not
arise. 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,
Systematika Ltd. and ISP*D. The Company does anticipate that SG&A as a
percentage of revenues will continue to decline as revenues continue to grow and
cost containment directives remain in place, however, there can be no assurances
that this will occur
Geographically, the domestic operations of the Company accounted for
approximately 47% of total SG&A expenditures while the European operations
accounted for approximately 53%. This represents a decrease from 1995 where
domestic SG&A expenditures accounted for approximately 50% of total consolidated
expenditures.
AMORTIZATION
Amortization expense includes the systematic write-off of capitalized software
and goodwill. The Company incurred goodwill with the acquisition of both ISP*D
and Lifeboat Italia which it is amortizing over 40 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 Developers Company Inc. in June 1996 which is being
amortizing over a fifteen year period for both financial and tax accounting
purposes.
INTEREST INCOME AND EXPENSE
As a result of the Company's Initial Public Offering on July 18, 1995,
the Company was able to liquidate its domestic bank debt and invest the net
proceeds in short-term instruments. The Company generated net interest income of
approximately $223,000 and $250,000 in 1996 and 1995 respectively, compared with
net interest expense in 1994 of approximately $372,000. Overall interest income
for
1996 was negatively impacted by the utilization of cash to finance the
acquisitions of ISP*F and The Software Developer's Company, Inc.
MINORITY INTEREST
Minority interest represents the share of the ISP*F losses related to
the 28% stock ownership, which was not owned by the Company at December 31,
1996. An additional minority equity contribution was funded in October 1996 as
part of a reorganization and adjustment in ownership percentage. Operating
losses for ISP*F are offset against minority interest. Because the operating
losses for ISP*F exceeded minority interest, the Company recognized
substantially all of the operating losses through September 30, 1996. This
amounted to approximately $775,000.
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. The Company had previously recorded a tax valuation
allowance in accordance with SFAS No. 109. As a result of its recent history of
carryforward utilization and projected future taxable income, the Company has
reduced the tax valuation allowance by approximately $3.1 million in 1995 and
approximately $565,000 in 1994.
At December 31, 1996, the Company recorded a provision for income taxes
of approximately $991,000 which consists of a provision for state and federal
taxes of approximately $1.3 million offset by a reduction in the tax valuation
allowance of approximately $350,000 associated with prior period losses of the
German subsidiary. At December 31, 1995, benefit for income taxes amounted to
approximately $1.7 million, which consists of a reduction in the tax valuation
allowance of approximately $3.1 million offset primarily by provisions for local
and foreign taxes of approximately $1.4 million. At December 31, 1994, the net
income tax benefit amounted to approximately $143,000, which primarily consists
of a reduction in the tax valuation allowance of approximately $565,000 offset
by local and foreign tax provisions of approximately $422,000.
Undistributed earnings of the Company's foreign subsidiaries amounted
to approximately $563,000 and $413,000 at December 31, 1996 and 1995,
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.
Assuming a 40% combined U.S. federal and state statutory tax rate and
actual foreign tax rates, the income tax expense would have been approximately
$396,000, $1,137,000 and $915,000 for the years 1994, 1995 and 1996,
respectively.
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 preferred stock to private investors, financial institutions
and investment funds. In July 1995, the Company completed an initial public
offering of its common stock, which resulted in net proceeds to the Company of
approximately $18 million.
Cash flows from operations were approximately $1,166,000 for the year
ended December 31, 1996 compared to $9,211,000 and $4,095,000 for 1995 and 1994,
respectively. In 1996, cash was provided primarily by the net income of the
Company and by a reduction in inventories and an increase in accounts payable,
reflecting the increase in Microsoft Select business and related amounts payable
but not yet due to Microsoft, offset by an increase in accounts receivable,
primarily associated with acquired entities. Cash flows from operations for 1996
were negatively impacted by the losses generated by the operations of ISP*F, the
French corporate reseller and a DSO in France that is unusually long in
comparison to other entities within the Company. For 1995, in addition to the
proceeds received from the IPO which were used to reduce debt and invest in
short term securities, cash flow was primarily provided by net income of the
Company and by an increase in accounts payable, primarily due to amounts payable
but not then due to Microsoft by ISP*D under the Microsoft Select program,
offset by an increase of accounts receivable and an increase in inventories. For
1994, cash flow was primarily provided by net income of the Company, a similar
increase in accounts payable related to amounts due under the Microsoft Select
program offset by an increase in accounts receivable.
At December 31, 1996, the Company had cash and cash equivalents of
$16.3 million and net working capital of $12.4 million compared with cash and
cash equivalents and net working capital of $27.7 million and $21.7 million
respectively, at December 31, 1995. The decrease in working capital at December
31, 1996 is primarily attributable to the acquisition of the assets of Software
Developer's Corporation in June, 1996 as well as ISP*F in January, 1996. Under
the terms of the purchase, the Company paid $11,000,000 cash for the assets of
the Software Developers Company and in return received approximately $1,500,000
in net assets. The increase in working capital at December 31, 1995 over the
respective period in 1994, of approximately $19.0 million is primarily
attributable to the proceeds received from the completion of the initial public
offering as well as from the earnings for the year then ended. The increase in
cash at December 31, 1995 is due to both the proceeds from the initial public
offering and an accumulation of amounts payable but not then due to Microsoft by
ISP*D under the Microsoft Select program.
The Company's capital expenditures for 1996 and 1995 amounted to
approximately $517,000 and $615,000, respectively, primarily for computer
hardware and software, office furniture and leasehold improvements. In addition,
in 1996, the Company acquired approximately $625,000 of assets, as part of the
acquisition of the Software Developers Company primarily comprised of computer
systems and furniture.
Domestically, the Company has a secured, demand revolving line of
credit, pursuant to which the Company may borrow up to $4.0 million, based upon
80% of its eligible accounts receivable plus 50% of its eligible inventory, at a
rate of interest of prime plus .50%. The credit facility is secured by all of
the domestic assets of the Company and contains certain covenants that require
the Company to maintain a minimum level of tangible net worth and working
capital. Approximately $1,350,000 (related to the acquisition of Systematika
Limited) of the line was converted to a five year term loan at December 31,
1996.
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
1,000,000 (the equivalent of
approximately $645,000 at December 31, 1996), 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 $194,000 at December 31, 1996). At December 31, 1996, there were
no amounts outstanding under the line. In addition, a subsidiary of ISP*D has a
secured term loan with the same bank, in the original principal amount of DM
1,000,000 (the equivalent of approximately $645,000 at December 31, 1996),
maturing in March 1997. At December 31, 1996, the full amount was outstanding
under such term loan, bearing interest at 4.35%.
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, 1996 and 1995 were both
approximately Lit 3,200,000,000 (the equivalent of approximately $2.0 million).
At December 31, 1996, there were no amounts outstanding under this line. At
December 31, 1995, there was approximately Lit 1,336,000,000 (the equivalent of
approximately $842,000) outstanding under such credit facilities, bearing
interest at rates ranging from 11.0% to 14.6%.
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.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements at Item 14(a).
ITEM 2. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 3. 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 4. 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 5. 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 6. 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 7. 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 Schedules
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - as of
December 31, 1996 and December 31, 1995
Consolidated Statements of Income - Years
ended December 31, 1996, December 31, 1995 and
December 31, 1994
Consolidated Statements of Cash Flows - Years ended December
31, 1996, December 31, 1995 and December 31, 1994
Consolidated Statement of Stockholders' Equity Years ended
December 31, 1996, December 31, 1995 and December 31,
1994
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 Consent of Independent Auditors**
21.1 Subsidiaries of the Registrant.*
24.1 Powers of Attorney.*
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of
the fiscal year covered by this Report.
The Company filed a Report on Form 8-K on January 2, 1996 and
filed an amendment thereto on Form 8-KA on March 4, 1996, with respect to the
acquisition of the stock of Systematika Limited, an English corporation, by
Programmer's Paradise (UK) Limited (See Item 1). The Company also filed a Report
on Form 8-K on July 19,1996 and filed an amendment thereto on Form 8-KA on
September 16, 1996, with respect to the acquisition of substantially all of the
assets of Software Developers Company, Inc..
* 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.
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Financial Statements
Index to Financial Statements
Page
----
Report of Independent Public Accounts F-0
Consolidated Balance Sheets F-1
Consolidated Statement of Income F-2
Consolidated Statement of Stockholders' Equity F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statments F-5
Schedule II-Valuation and Qualifying Accounts F-20
Report of Independent Auditors
The Board of Directors and Stockholders
Programmer's Paradise, Inc.
We have audited the accompanying consolidated financial statements of
Programmer's Paradise, Inc. and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index of
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. 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 herein.
ERNST & YOUNG LLP
MetroPark, New Jersey
January 31, 1997
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1995 1996
------------------------------------
Assets
Current assets:
Cash and cash equivalents $27,701,777 $16,281,055
Accounts receivable, net of allowances of $777,000 and
$583,000 in 1995 and 1996, respectively 15,625,035 26,825,971
Inventory 5,452,623 4,463,747
Prepaid expenses and other current assets 2,116,797 2,945,810
Deferred income taxes 1,341,918 1,097,007
------------------------------------
Total current assets 52,238,150 51,613,590
Equipment and leasehold improvements, net 1,126,982 1,694,900
Goodwill, net of accumulated amortization of $217,000
and $690,000 in 1995 and 1996, respectively 2,358,023 12,768,563
Other assets 581,567 912,124
Deferred income taxes 2,023,854 2,219,854
====================================
$58,328,576 $69,209,031
====================================
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued expenses $27,881,030 $35,760,060
Notes payable to banks 2,468,590 1,134,940
Other current liabilities 199,371 2,303,076
------------------------------------
Total current liabilities 30,548,991 39,198,076
Other liabilities 790,483 116,345
Long-term portion of notes payable to banks 1,050,000
Stockholders' equity:
Common Stock $.01 par value: Authorized, 10,000,000 shares, issued
4,678,245 and 4,762,220 in 1995 and 1996, respectively 46,782 47,622
Additional paid-in capital 33,405,363 33,509,695
Treasury stock, at cost, 65,000 shares in 1996 (375,633)
Accumulated deficit (6,517,673) (4,219,974)
Cumulative foreign currency translation adjustment 54,630 (117,100)
------------------------------------
Total stockholders' equity 26,989,102 28,844,610
------------------------------------
$58,328,576 $69,209,031
====================================
See accompanying notes.
F-1
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31
1994 1995 1996
-----------------------------------------------------
Net sales $ 71,333,977 $93,286,129 $127,679,889
Cost of sales 59,309,598 78,717,559 107,040,575
-----------------------------------------------------
Gross profit 12,024,379 14,568,570 20,639,314
Selling, general and administrative expenses 10,574,545 12,194,601 17,230,145
Amortization of goodwill 80,003 98,848 473,021
-----------------------------------------------------
Income from operations 1,369,831 2,275,121 2,936,148
Other expense (income):
Interest expense 477,083 265,399 373,156
Interest income (104,865) (515,652) (596,046)
Unrealized foreign exchange loss (gain) 46,026 48,958 (30,628)
-----------------------------------------------------
Income before income taxes and minority interest 951,587 2,476,416 3,189,666
Income tax (benefit) provision (143,374) (1,727,035) 990,957
-----------------------------------------------------
Income before minority interest 1,094,961 4,203,451 2,198,709
Minority interest in net (income) loss of subsidiary (44,876) 98,990
-----------------------------------------------------
Net income $ 1,050,085 $ 4,203,451 $ 2,297,699
=====================================================
Net income per common share $ .35 $ 1.03 $ .44
=====================================================
Weighted average common shares outstanding 3,142,267 4,102,440 5,197,994
=====================================================
See accompanying notes.
F-2
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Non-Cumulative
Redeemable Additional
Convertible Common Stock Paid-In Treasury
Preferred -------------------
Stock Shares Amount Capital Stock
------------------------------------------------------------------
Balance at January 1, 1994 $ 373 229,115 $ 2,291 $15,271,592
Net income
Repayment of note receivable
Translation adjustment
---------------------------------------------------
Balance at December 31, 1994 373 229,115 2,291 15,271,592
Net income
Stock issued in ISP*D acquisition 165,000 1,650 108,350
Conversion of Series A (223) 1,674,071 16,741 (16,518)
Conversion of Series B (150) 450,690 4,507 (4,357)
Exercise of stock options, including
$83,000 in income tax benefits 89,369 893 18,571
Issuances of common stock in connection
with initial public offering, net of
expenses 2,070,000 20,700 18,027,725
Translation adjustment
---------------------------------------------------
Balance at December 31, 1995 - 4,678,245 46,782 33,405,363
Net income
Exercise of stock options, including
$86,000 in income tax benefits 83,975 840 104,332
Purchase of 65,000 treasury stock shares $(375,633)
Translation adjustment
------------------------------------------------------------------
Balance at December 31, 1996 $ - 4,762,220 $47,622 $33,509,695 $(375,633)
==================================================================
Cumulative
Foreign
Currency
Accumulated Note Translation
Deficit Receivable Adjustment Total
-----------------------------------------------------------
Balance at January 1, 1994 $(11,771,209) $(36,546) $ (87,935) $ 3,378,566
Net income 1,050,085 1,050,085
Repayment of note receivable 36,546 36,546
Translation adjustment 131,616 131,616
----------------------------------------------------------
Balance at December 31, 1994 (10,721,124) - 43,681 4,596,813
Net income 4,203,451 4,203,451
Stock issued in ISP*D acquisition 110,000
Conversion of Series A -
Conversion of Series B -
Exercise of stock options, including
$83,000 in income tax benefits 19,464
Issuances of common stock in connection
with initial public offering, net of
expenses 18,048,425
Translation adjustment 10,949 10,949
----------------------------------------------------------
Balance at December 31, 1995 (6,517,673) - 54,630 26,989,102
Net income 2,297,699 2,297,699
Exercise of stock options, including
$86,000 in income tax benefits 105,172
Purchase of 65,000 treasury stock shares (375,633)
Translation adjustment (171,730) (171,730)
-----------------------------------------------------------
Balance at December 31, 1996 $ (4,219,974) $ - $(117,100) $28,844,610
===========================================================
See accompanying notes.
F-3
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1994 1995 1996
------------------------------------------------------
Cash flows from operating activities
Net income $ 1,050,085 $ 4,203,451 $ 2,297,699
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in net income (loss) of subsidiary 44,876 (98,990)
Depreciation expense 291,000 374,640 700,809
Amortization expense 189,442 243,479 621,230
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable (3,824,978) (1,803,642) (6,102,802)
Inventory (62,371) (1,717,576) 2,279,468
Prepaid expenses and other current assets (289,199) (677,727) (10,190)
Accounts payable and accrued expenses 6,819,706 11,059,511 1,894,504
Deferred tax asset (282,300) (2,762,149) 48,911
Net change in other operating assets and liabilities 158,348 290,894 (464,152)
------------------------------------------------------
Net cash provided by operating activities 4,094,609 9,210,881 1,166,487
Cash flows from investing activities
Purchase of equipment and leasehold improvements (425,828) (631,506) (620,474)
Purchases of businesses 563,350 (1,446,626) (11,235,800)
Repayment of note receivable 36,546
------------------------------------------------------
Net cash provided by (used in) investing activities 174,068 (2,078,132) (11,856,274)
Cash flows from financing activities
Borrowings under lines of credit 53,253,293 31,947,021 9,619,198
Repayments under lines of credit (54,480,876) (32,967,789) (10,079,672)
Purchase of treasury stock (375,633)
Net proceeds from issuance of common stock 18,067,889 105,172
------------------------------------------------------
Net cash provided by (used in) financing activities (1,227,583) 17,047,121 (730,935)
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,041,094 24,179,870 (11,420,722)
Cash and cash equivalents at beginning of year 480,813 3,521,907 27,701,777
------------------------------------------------------
Cash and cash equivalents at end of year $ 3,521,907 $ 27,701,777 $ 16,281,055
======================================================
See accompanying notes.
F-4
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of Programmer's
Paradise, Inc., its wholly-owned subsidiaries and its majority-owned
subsidiaries (the "Company"). The Company is a marketer of software for
microcomputers, servers and networks, with a focus on providing software
products, known as technical software, to people who design, program and support
software, operating through three distribution channels-catalog, corporate
reseller and wholesale distribution. All intercompany balances and transactions
have been eliminated in consolidation.
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.
Major Customer and Supplier
Sales to one customer were $8.8 million, or 12.4% of net sales in 1994. In 1995
and 1996 no single customer exceeded 10% of net sales.
The Company has authorized dealership or distribution agreements with various
suppliers. Products of one of these suppliers accounted for approximately 39%,
46% and 47% of Company revenues for 1994, 1995 and 1996, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents.
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. Resulting cumulative translation adjustments have been recorded as a
separate component of stockholders' equity.
F-5
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.
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. No such events have occurred since
adoption at January 1, 1995.
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 fifteen
years.
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.
F-6
1. Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes revenue from the sale of software for microcomputers,
servers and networking upon shipment.
Advertising Costs
Non-reimbursed advertising costs were expensed when incurred prior to 1995. The
Company adopted the Statement of Position 93-7 "Reporting on Advertising Costs"
in 1995. The effect of adoption of the Statement did not have a material effect
on the Company's financial position or results of operations because publication
of new catalogs occur frequently during the year. The unamortized balance of
non-reimbursed advertising costs at any period end are minimal. Advertising
costs for 1994, 1995, and 1996 amounted to approximately $3,406,000, $3,320,000
and $5,571,000, respectively.
Income Taxes
Deferred income tax assets and liabilities arise from differences between the
tax basis of assets or liabilities and the amount reported in the consolidated
financial statements.
Net Income Per Common Share
The net income per common share is computed using the weighted average number of
common shares and common share equivalents outstanding during the period,
assuming the exercise of common stock options using the treasury stock method.
Stock options granted by the Company during the twelve months immediately
preceding the date of the initial filing by the Company of its initial public
offering have been included in the calculation of the shares used in computing
net income per common share as if they were outstanding throughout the entire
period for all periods presented.
Reclassification
Certain 1994 and 1995 financial statement amounts have been reclassified to
conform to 1996 presentation.
2. Acquisitions
In June 1994, the Company acquired 90% of the outstanding stock of ISP*D
International Software Partners GmbH and its subsidiary ("ISP*D"), computer
software resellers
F-7
2. Acquisitions (continued)
located in Germany and Austria. In connection with this transaction,
approximately $429,000 of transaction and other costs were recorded. In January
1995, the Company exercised its option to purchase the remaining 10% of ISP*D
for cash and shares of the Company's common stock amounting to $134,000.
Additional consideration equal to approximately $170,000 was issued to the
seller as a result of the reduction in certain guarantees of debt of ISP*D in
May 1995.
In March 1995, the Company made a final payment of $125,000 to the former owners
of South Mountain Software, Inc., in connection with the 1992 acquisition of
certain assets and assumption of certain liabilities thereof.
In December 1995, the Company acquired 100% of the outstanding stock of
Systematika Limited, doing business as System Science ("System Science"), at a
cost of approximately $1,540,000. System Science is a reseller of technical
software in the United Kingdom and is the publisher of the System Science
catalog.
In January 1996, the Company's wholly-owned French subsidiary, Programmer's
Paradise France SARL, acquired a majority-owned interest in ISP*F International
Software Partners SA (ISP*F), a newly formed full service corporate reseller of
PC software, based in Paris. The Company's capital contribution in connection
with the acquisition of ISP*F is approximately $1,214,000.
In June 1996, the Company acquired substantially all of the assets and business
of The Software Developer's Company, Inc. (SDC) for cash at a cost of
approximately $11,000,000. SDC had been the Company's largest direct mail
competitor, offering a similar array of technical software.
The Company accounted for the above acquisitions as purchases. Accordingly, the
acquired assets and liabilities assumed have been recorded at the estimated fair
values at the dates of acquisition. The results of operations of the acquired
businesses are included in the accompanying consolidated statements of income
from their respective dates of acquisition.
F-8
2. Acquisitions (continued)
The following table presents the unaudited pro forma consolidated results of
operations for the three years ended December 31, 1996 as if the above
acquisitions had occurred on January 1 of the year preceding the acquisition:
1994 1995 1996
----------------------------------------------
Sales $83,877,000 $145,575,000 $152,035,000
Net income 1,170,000 7,630,000 3,599,000
Net income per common share $.37 $1.86 $.69
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 acquisitions taken place at the beginning of the periods
presented nor are they intended to be indicative of results that may occur in
the future.
3. Notes Payable to Banks
Notes payable to banks represent the outstanding balance under a U.S. revolving
line of credit, lines of credit with Italian and French banks and a term loan
with a German bank.
The limit under the U.S. revolving line of credit is the lesser of $4,000,000 or
the sum of 80% of its eligible accounts receivable and 50% of its eligible
inventory, as defined. The facility expires in June of 1997 and is secured by
all of the domestic assets of the Company and contains certain covenants which
require the Company to maintain a minimum level of tangible net worth and
working capital. The line of credit prohibits the payment of cash dividends and
contains certain restrictions on the Company's ability to make loans or acquire
interests in other entities without the prior consent of the lender. Advances
under the domestic revolving line of credit bear interest at the bank's prime
rate plus .50%, and are due on demand. The commitment fee on the unused portion
of the line is .5% per annum. The bank's prime rate was 8.25% at December 31,
1996. In connection with the System Science acquisition (see Note 2), the
Company has utilized approximately $1,350,000 under the U.S. revolving line of
credit which was converted to a five year term loan bearing interest at LIBOR
(6.62% at December 31, 1996) plus 2%, of which $300,000 is classified as current
in the accompanying consolidated balance sheet.
F-9
3. Notes Payable to Banks (continued)
A revolving line of credit in Germany is secured by ISP*D accounts receivable,
inventory and up to $180,000 (DM 300,000) by the domestic assets of the Company.
The limit under the line is approximately $645,000 (DM 1,000,000) at December
31, 1996. The line bears interest at 8.25%. As of December 31, 1996, none of
this line had been utilized.
Unsecured lines of credit in Italy, which are denominated in Italian lire, bear
interest at market interest rates (ranging from 11.00% to 14.60% at December 31,
1996) and are payable on demand. The limit under the lines is approximately
$2,080,000 (Lire 3,200,000,000). As of December 31, 1996, none of this line had
been utilized.
The German term loan has an outstanding balance of approximately $645,000 (DM
1,000,000) at December 31, 1996, and matures in March 1997. The term loan is
secured by all accounts receivable and inventory of ISP*D and bears an interest
rate of 4.35%.
The line of credit in France is secured by ISP*F accounts receivable and
inventory and a 3,000,000 French franc letter of credit. The limit under the
line is approximately $382,000 (FRF 2,000,000), bearing interest at a rate of
6.78%. At December 31, 1996, approximately $190,000 (FRF 992,542) of this line
has been utilized.
The weighted average interest rate for notes payable to banks was 9.80%, 12.80%
and 10.10% at December 31, 1994, 1995 and 1996, respectively.
Interest paid was approximately $475,000, $290,000 and $343,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
4. Balance Sheet Details
Equipment and leasehold improvements consists of:
1995 1996
-------------------------------
Equipment $1,670,594$ 2,967,205
Leasehold improvements 322,973 295,089
-------------------------------
1,993,567 3,262,294
Less accumulated depreciation (866,585) (1,567,394)
-------------------------------
$1,126,982$ 1,694,900
===============================
F-10
4. Balance Sheet Details (continued)
Accounts payable and accrued expenses consists of the following:
1995 1996
------------------------------------
Trade accounts payable $10,785,444 $11,721,055
Accrued licensing costs 14,033,583 19,038,071
Other accrued expenses 3,062,003 5,000,934
------------------------------------
$27,881,030 $35,760,060
====================================
5. Income Taxes
The provision (benefit) for income taxes consisted of the following:
Year ended December 31
1994 1995 1996
--------------------------------------------------
Current:
Federal $ 30,739 $ 445,733 $ 502,617
State 80,261 276,400 274,710
Foreign 27,926 312,981 164,719
--------------------------------------------------
138,926 1,035,114 942,046
Deferred:
Federal (387,350) (2,759,603) 473,099
State (63,000) (2,546) 29,812
Foreign 168,050 (454,000)
--------------------------------------------------
(282,300) (2,762,149) 48,911
==================================================
$(143,374) $(1,727,035) $ 990,957
==================================================
F-11
5. Income Taxes (continued)
The reasons for the difference between total tax expense (benefit) 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
1994 1995 1996
--------------------------------------------------
Statutory rate applied to pretax income $ 323,540 $ 841,981 $1,084,486
Amortization of goodwill 18,984 33,609 38,843
State income taxes, net of benefit
of federal income taxes 11,392 180,744 211,121
Foreign income taxes (benefit) over U.S.
statutory rate 42,825 270,664 (350,296)
Net reduction in amount of valuation allowance
(565,100) (3,134,675)
Other items 24,985 80,642 6,803
--------------------------------------------------
come tax (benefit) expense $(143,374) $(1,727,035) $ 990,957
==================================================
Significant components of the Company's deferred tax assets are as follows:
Year ended December 31
1994 1995 1996
------------------------------------------
Fixed assets $ 6,148 $ 20,928 $ 3,842
Accruals and reserves 541,894 491,918 327,893
Intangibles 1,578 (36,366)
Contribution carryforwards 549
Net operating loss carryforwards 3,353,678 2,937,296 3,935,579
Credit carryforwards 58,015 89,996 25,547
------------------------------------------
Gross deferred tax assets 3,961,862 3,503,772 4,292,861
Valuation allowance (3,324,239) (138,000) (976,000)
------------------------------------------
Net deferred tax asset $ 637,623 $3,365,772 $3,316,861
===========================================
The valuation allowance was reduced principally in 1994 as a result of utilizing
net operating loss carryforwards, and in 1995, changes in the estimate of the
realizability of the deferred tax asset in future years based upon expected
taxable income.
F-12
5. Income Taxes (continued)
The Company has recorded a U.S. deferred tax asset at December 31, 1996 of
$2,500,000 reflecting the benefit of $7,400,000 in federal tax loss
carryforwards, which expire in varying amounts between 2000 and 2005.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the net deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. The Company's ability
to utilize these 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 and minority
interest includes the following components:
Year ended December 31
1994 1995 1996
--------------------------------------------
United States $501,143 $2,351,954 $3,010,209
Foreign 450,444 124,462 179,457
--------------------------------------------
$951,587 $2,476,416 $3,189,666
============================================
At December 31, 1996, the Company had approximately $1,779,000 net operating
loss carryforwards for German income tax purposes, $34,000 for UK income tax
purposes, $72,000 for Italian income tax purposes and approximately $503,000 for
French income tax purposes.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $563,000 at December 31, 1996. 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, 1994, 1995 and 1996, the Company paid
approximately $3,000 , $455,000 and $483,000, respectively, in income taxes.
6. Non-Cumulative Redeemable Convertible Preferred Stock
On March 31, 1995, the outstanding shares of Series A non-cumulative redeemable
convertible preferred stock, in accordance with its provisions, were converted
to 1,674,071 shares of common stock.
F-13
6. Non-Cumulative Redeemable Convertible Preferred Stock (continued)
On July 18, 1995, the effective date of the initial public offering, all
outstanding shares of Series B non-cumulative redeemable convertible senior
preferred stock, in accordance with its provisions, were converted to 450,690
shares of common stock.
7. 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 is granted.
On April 21, 1995, the Board of Directors adopted the Company's 1995 Employee
Stock Plan ("1995 Plan"). The 1995 Plan, as amended on June 11, 1996, provides
for the grant of options to purchase up to 462,500 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.
On April 21, 1995, the Board of Directors adopted the Company's 1995
Non-Employee Director Plan ("1995 Director Plan"). The 1995 Director Plan
provides for the grant of options to purchase up to 112,500 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 1995 and 1996: risk free interest
rates of 6.28% in both periods, dividend yields of 0%, volatility factors of the
expected market price of the Company's common stock of .61 in both periods, and
a weighted-average expected life of the option of 5 years.
F-14
7. Stock Option Plans (continued)
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.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share amounts):
1995 1996
------------------------
Net income as reported $4,203 $2,298
Net income pro forma 4,081 1,902
Earnings per share, as reported $1.03 $.44
Earnings per share, pro forma $1.04 $.38
The weighted average fair value of options granted during 1995 and 1996 is $2.41
and $3.51, respectively.
F-15
7. Stock Option Plans (continued)
Changes during 1995 and 1996 in options outstanding for the combined plans were
as follows:
Weighted
Number Average
of Exercise
Options Price
-----------------------------
Outstanding at January 1, 1995 588,960 $ .55
Granted in 1995 289,000 4.22
Canceled in 1995 (64,628) 1.38
Exercised in 1995 (89,197) .36
---------------
Outstanding at December 31, 1995 724,135 1.95
Granted in 1996 188,701 5.99
Canceled in 1996 (35,097) 5.80
Exercised in 1996 (83,975) .36
===============
Outstanding at December 31, 1996 793,764 2.91
===============
Exercisable at December 31, 1996 434,278
===============
Stock options outstanding at December 31, 1996 are summarized as follows:
Weighted
Outstanding Average Weighted
Range of Options at Remaining Average
Exercise December Contractual Exercise
Prices 31, 1996 Life Price
- ---------------------------------------------------------------------
$.24 92,713 4.74 .24
67 - 1.00 289,775 7.26 .77
4.00 - 6.00 350,826 8.63 4.69
6.25 -10.50 60,450 9.73 7.59
------------------
793,764
==================
Under the various plans, options that are cancelled can be reissued. At December
31, 1996, options for 302,800 shares were available for grant and 1,267,911
shares were reserved for future issuance.
F-16
8. Defined Contribution Pension Plan
Effective January 1, 1992, the Company initiated a defined contribution pension
plan covering substantially all 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, 1994, 1995 and 1996, the Company expensed
approximately $51,000, $54,000 and $59,000, respectively, related to this plan.
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:
1997 $ 516,767
1998 479,193
1999 474,192
2000 399,710
2001 -
===============
$1,869,862
===============
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $617,000, $618,000 and $752,000, respectively.
The Company has royalty agreements which require payments based on sale of
certain products. Royalty expense for the years ended December 31, 1994, 1995
and 1996 was approximately $243,000, $348,000 and $265,000, respectively. In
connection with a royalty agreement with a company which is controlled by a
shareholder/member of the Board of Directors of the Company, the Company made an
advance payment of $250,000 in 1994, which is included in other assets in the
consolidated balance sheets, and is being expensed based upon sales of the
related product. At December 31, 1996, the unamortized amount of this payment
was approximately $167,000.
F-17
10. Segment and Geographic Information
The Company's single business segment is the marketing of technical software for
microcomputers, servers and networking.
The following table presents financial information based on the Company's
geographic segments:
Income
Net from Identifiable
Sales Operations Assets
----------------------------------------------
(In Thousands)
1995
Italy $ 9,731 $ (16) $ 5,356
Germany 41,210 546 21,248
Other foreign 1,226 (382) 3,183
----------------------------------------------
Total foreign 52,167 148 29,787
U.S. 41,119 2,127 28,542
----------------------------------------------
Total $93,286 $2,275 $58,329
==============================================
1996
Italy $ 8,374 $ 138 $ 4,496
Germany 49,128 426 26,032
France 8,924 (738) 4,970
United Kingdom 4,535 402 2,672
----------------------------------------------
Total foreign 70,961 228 38,170
U.S. 56,719 2,708 31,039
----------------------------------------------
Total $127,680 $2,936 $69,209
==============================================
F-18
11. Statement of Cash Flows - Supplemental Disclosures
The Company has made acquisitions which are more fully described in Note 2. The
purchase prices are allocated to the assets acquired and liabilities assumed
based on their fair market values as follows:
1994 1995 1996
-------------------------------------------
Fair value of assets acquired:
Current assets excluding cash $4,813,142 $ 563,725 $ 7,207,549
Fixed assets 95,000 139,101 675,956
Other assets, principally goodwill 484,533 1,609,475 10,777,737
Less liabilities assumed:
Current liabilities 4,193,000 731,675 7,248,618
Other liabilities 1,200,423
Notes payable 176,824
Payable to seller 562,602 24,000
Common stock issued to seller 110,000
-------------------------------------------
Net cash (received) paid $ (563,350) $1,446,626 $11,235,800
===========================================
F-19
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, 1996:
Allowances for accounts receivable $777 $223 $417 $583
Year ended December 31, 1995:
Allowances for accounts receivable 842 270 $ 2 (1) 337 777
Year ended December 31, 1994:
Allowances for accounts receivable 375 334 238 (1) 150 842
(1) Arose from acquisitions.
F-20
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 28, 1997.
PROGRAMMER'S PARADISE, INC.
By: /s/ Roger Paradis
-----------------------------------
Roger Paradis, 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 28, 1997
/s/ Roger Paradis and Chairman of the Board of Directors
- ------------------------------------
Roger Paradis
Chief Financial and March 28, 1997
- ------------------------------------- Accounting Officer
John P. Broderick
- -------------------------------------- Director March 28, 1997
Edwin H. Morgens
- -------------------------------------- Director March 28, 1997
Edward F. Glassmeyer
- -------------------------------------- Director March 28, 1997
Daniel S. Bricklin
- -------------------------------------- Director March 28, 1997
F. Duffield Meyercord
- -------------------------------------- Director March 28, 1997
William Willett