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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, 1997
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 20, 1998, as reported on the NASDAQ National
Market, was approximately $47,039,000.
The number of shares outstanding of the Registrant's Common Stock as of
March 20,1998: 4,824,498 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 16,1998 are incorporated by reference into Part III of this
Report.
Page 2 of __28__Pages
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 and corporate
reseller 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, Canada, Italy, Germany,
Austria, the United Kingdom, France and the Netherlands, and also operates
software-only reseller businesses in each of those countries.
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, product
announcements 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
1997, the Company distributed over 7.6 million catalogs, typically featuring
more than 1,000 stock keeping units ("SKUs") in its larger catalogs. The Company
estimates that its catalog operations, which have historically had the highest
gross margin of the Company's distribution channels, contributed 40% of its
revenue and 59% of gross margin in 1997.
Through its multiple channels, the Company offers more than 12,000 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.
The Company also operates via the Internet through its domestic and
international websites. Each site is linked to each other and fully capable of
electronic commerce. The Company recently announced the introduction of ISP*
eCOS, a new business-to-business e-commerce solution. ISP* eCOS offers the
end-user a comprehensive product database with multimedia capabilities,
providing information on products, prices and availability as well as electronic
purchase requests. The Company believes that this technology will be extremely
beneficial to its corporate customers, both in terms of process cost reductions
and in improved accessibility to corporate goods and services.
International expansion is an integral part of the Company's strategy, with
its European-based operations accounting for approximately 60% of sales in the
year ended December 31,1997, 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
Page 3 of___28 Pages
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 January1995, 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, 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. In August 1997, the Company formed Programmer's Paradise, Canada Inc.
located in Mississauga, Ontario, to serve the growing developer market in
Canada. In September 1997, the Company acquired Logicsoft Holding BV (Logicsoft)
the holding company for Logicsoft Europe BV, located in Amsterdam, the
Netherlands. Logicsoft is the largest software-only corporate reseller of PC
software in The Netherlands. As a result of the acquisition, the Company now
holds the lead position in over 40% of the European software market.
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 (732) 389-8950.
PRODUCTS
The Company offers over 12,000 SKUs consisting of technical and general
business application software from more than 1,000 publishers, including
Microsoft, Sybase, Borland, IBM, Symantec, Blue Sky Software and NuMega
Technologies, at prices generally discounted below manufacturer's suggested
retail prices. The Company screens new products and selects products for
inclusion in its catalogs 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, NT Supershop and System Science), corporate reselling to
large accounts (ISP-USA in the United States, ISP*D in Germany, ISP*F in France,
Logicsoft Europe BV in The Netherlands, ISP*UK in the United Kingdom and ISP*I
in Italy) 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
Page 4 of___28 Pages
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, 1997. 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 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 Programmer's Supershop, each containing approximately
100 to 120 pages, are full color "magalogs" which combine traditional catalog
sales offerings with detailed product descriptions, product announcements 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., the Company's 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. In conjunction with the Supershop
and recently introduced NT Supershop catalogs, 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.
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. During 1997, the Company developed and launched it's
newest segmented catalog- NT Supershop, which is directed to the IT professional
working with the NT operating platform. In September 1997, the Company opened a
distribution and call-center in Mississauga, Canada and launched Programmer's
Paradise, Canada to support the growing Canadian developer 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 150,000 customers who have purchased
products from the Company within the 24 months ended December 31, 1997, plus
selected names from the Company's prospect list, lists of names provided by
publishers and lists of names rented from others.
Page 5 of___28 Pages
The Company seeks to have these catalogs reach a similar status in Europe.
The Company's European catalogs (Programmer's Paradise Italia, Software Paradise
Deutschland, Programmer's Paradise Deutschland Corporate Edition, Programmer's
Paradise U.K., Programmer's Paradise France and the 1997 introduction of
Programmer's Paradise- The Netherlands) are offshoots of the U.S. versions. They
are published in local languages and present offerings in local currencies,
while using similar but localized cover graphics, including the Company's
proprietary logo, the "Island Man" cartoon character. The Company also
distributes the popular System Science catalog in the United Kingdom. This
catalog has long been established as one of the pre-eminent publications for
programmers in the U.K. and is produced four times per year.
The Company creates its domestic catalogs in-house with its own design team
and production artists using a computer-based desktop publishing system. The
in-house preparation of the catalogs streamlines the production process,
provides greater flexibility and creativity in catalog production and results in
significant cost savings.
Electronic Distribution. The Company also conducts business via the
Internet through its two domestic websites: and foreign websites. Through an
agreement announced in July 1996, with CyberSource Corporation of Menlo Park,
California, the Company began electronic delivery of software. At December 31,
1997, the Company had approximately 170 products available for electronic
distribution. Electronic distribution is also mission critical to the Company's
foreign subsidiaries. Each of the foreign websites is linked to each other as
well as the domestic site and each is capable of electronic commerce. The
Company recently introduced a new business-to-business e-commerce solution
called ISP* eCOS. ISP* eCOS offers a comprehensive product database with
multimedia capabilities giving the end-user instant information on a wide range
of products, pricing and availability while enabling the user to generate
electronic purchase requests. The Company believes that this technology will be
extremely beneficial to its corporate customers both in terms of process cost
reductions and in improved accessibility to corporate goods and services.
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, 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 1997, the Company's cooperative and fee-based advertising
reimbursements totaled less than 12% of total product revenues
Page 6 of___28 Pages
in the Company's domestic operations, and significantly smaller percentages in
the European operations.
CORPORATE RESELLING
Direct corporate reselling is primarily conducted in Europe by ISP*D, which
was acquired by the Company in June 1994. The Company has been capitalizing on
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. The acquisition of Logicsoft Holding BV was the most recent example of
the Company's strategy to provide value-added services to its pan-European and
eventually worldwide customer base. 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. In pursuit of that
goal, the Company has been certified by Microsoft as an Authorized Reseller for
its Select Licensing Program. Select status in the United States enhances the
Company's ability to provide seamless agreements to its corporate customers that
require international service.
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 established a full-time consulting, training and programming
services division (ISP*D Corporate Services) and in 1997, formed a joint venture
with National TechTeam to provide Help-Desk services 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. During 1997, ISP*D Corporate Services became a Certified
Microsoft Solution Provider and attained the status of a Microsoft Authorized
Training and Education Center.
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 Micro Age and
Comp USA, while the resellers include ASAP Software Express, Stream
International, Software House International, Softmart Incorporated and Software
Spectrum. In addition, Lifeboat Italy wholesales productivity software.
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.
Page 7 of___28 Pages
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 1997 the Company purchased approximately 50% of its
products directly from manufacturers and publishers and the balance from two
distributors - Ingram and Merisel. Internationally, in 1997 the Company's
foreign subsidiaries purchased approximately 66% of its products directly from
manufacturers and publishers. The largest volume of purchases by the Company
from distributors was from Ingram, representing approximately 12.7% of worldwide
purchases in 1997. 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 71% of its purchases. The leading five international vendors of
the Company accounted for approximately 74% of its consolidated purchases.
Management estimates that during 1997 approximately 56% of worldwide revenues of
the Company were derived from products published by Microsoft.
The Company attempts to manage its inventory position to generate a high
number of inventory turns consistent with achieving high product availability
and order fill rates. Inventory levels may vary from period to period, due in
part to increases or decreases in sales levels, the Company's practice of making
large-volume purchases when it deems the terms of such purchases to be
attractive, and the addition of new suppliers and products. Moreover, the
Company's order fulfillment and inventory control allow the Company to order
certain products just in time for next day shipping. The Company promotes the
use of electronic data interchange ("EDI") with its suppliers, which helps
reduce overhead and the use of paper in the ordering process. All inventory
items in the U.S. 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, the Netherlands and Germany, and monthly in France and the
U.K. 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; Mississauga, Canada;
Munich, Germany; Milan, Italy; London, England; Paris, France and Amsterdam, The
Netherlands.
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. 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
is more adaptive to direct marketing organizations than the Company's prior
system. The system allows the Company, among other things, to track direct
marketing campaign performance, to monitor sales trends, make marketing event
driven purchasing decisions, and provide product availability and order status
information. In addition to the main system, the Company has systems of
networked personal computers, which facilitates data sharing and provides an
automated office environment, as well as microcomputer-based desktop publishing
systems. The Company's European operations use local systems, which are being
modified to allow exchange of data with the Company's U.S.
Page 8 of___28 Pages
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, ISP*F and
Logicsoft. The Company believes that its trademarks and service marks have
significant value and are an important factor in the marketing of its products.
The Company intends to use and protect these and related marks, as necessary.
The Company does not maintain a traditional research and development group, but
works closely with software authors and publishers and other technology
developers to stay abreast of the latest developments in microcomputer
technology. 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, ISP*F, ISP-USA and Logicsoft are Microsoft Select Large Account
Resellers (LAR). The Company has multiple other alliances with publishers such
as Lotus, Borland, Sybase, Attachmate, NuMega, Intersolv and Logic Works.
EMPLOYEES
As of December 31, 1997, the Company had 95 full-time employees in North
America, including 54 in sales and marketing, 15 in purchasing and distribution,
and 26 in administration, accounting and MIS and 3 part-time employees. As of
December 31, 1997, the Company had 142 full-time employees in Europe, including
62 in sales and marketing, 22 in consulting and technical training, 30 in
purchasing and distribution, 28 in administration and accounting and 8 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.
Page 9 of___28 Pages
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 catalog and
related operations. 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. The emergence of the
Internet as a viable platform in which to conduct business transactions has both
lowered the barriers for competition and broadened customers access to products
and information. This transition has heightened the Company's awareness to
maintain a competitive edge in this market. From time to time certain developers
and publishers have instituted programs for the direct sale of large order
quantities of software to certain major corporate accounts. These types of
programs may continue to be developed and used by various developers and
publishers. While Microsoft and other vendors currently sell their update
products directly to end users, they have not attempted to completely bypass the
reseller channel. Future efforts by such entities to bypass third-party sales
channels could materially and adversely affect the Company's operations.
In addition, 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
Page 10 of___28 Pages
with potentially burdensome regulations concerning the solicitation of consents
to keep or add customer names to its mailing lists.
The direct response business is subject to the Mail or Telephone Order
Merchandise Rule and related regulations promulgated by the Federal Trade
Commission. While the Company believes it is in compliance with such regulations
and has implemented programs and systems to assure its ongoing compliance with
such regulations, no assurance can be given that new laws or regulations will
not be enacted or adopted which might adversely affect the Company's operations.
SEASONALITY
The Company has traditionally experienced a decrease in domestic net sales
in its third quarter compared to the other quarters. This traditional downturn
in domestic net sales is exacerbated by the decline of European commercial
activity in general and software sales in particular during the summer months.
ITEM 2 PROPERTIES.
At of December 31, 1997, the Company leased 15,000 square feet of space for
its offices on the first floor at 1163 Shrewsbury Avenue, Shrewsbury, New Jersey
and an additional 9,103 square feet of space at an adjacent property. Both
leases are presently on a month to month basis while the Company's landlord
completes construction of a new 18,000 square foot facility for the Company
adjacent to the present facility at 1163 Shrewsbury Avenue. The Company
anticipates occupancy during 1998 at which time it will retain approximately
6,000 square feet of warehouse space in its present location. Basic monthly rent
payments amount to approximately $22,000. Additionally, the Company also leases
approximately 3,584 square feet of office space under a three-year lease in
Mississauga, Canada that calls for monthly rental payments in the amount of
$1,750. The Company's European facilities, all of which are leased under long
term arrangements, are as follows: 17,890 square feet in Munich, Germany, 8,600
square feet in Milan, Italy, 3,100 square feet in London, England, 6,200 square
feet in Amsterdam, the Netherlands and 9,174 square feet in Paris, France. Total
annual rent expense for the European facilities is approximately $733,000. 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.
Page 11 of___28 Pages
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company are as follows:
Name Age Position
- --------------------------------------------------------------------------------
Roger Paradis 53 President, Chief Executive Officer and
Chairman of the Board
Joseph V. Popolo 61 Executive Vice President -
USA Operations and Secretary
Peter W. Lorenz 49 Executive Vice President-
European Operations
John P. Broderick 48 Chief Financial Officer, Vice President-
Finance and Treasurer
Peter Lindsey 46 Vice President European Catalogs
Jeffrey Largiader 41 Vice President - Catalog Operations and
Marketing Development
Kathleen Innacelli 37 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
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 an
independent financial consultant to the Company since 1993. Mr. Broderick began
his career as a CPA with Price Waterhouse LLP and has held similar positions
with Waterford Glass Inc., an importer/distributor of Irish crystal and Olympic
Limousine Corp., a transportation conglomerate from 1979 through 1992.
Page 12 of__28__Pages
PETER LINDSEY has served as the Company's Vice President of European Catalogs
since 1997 and joined the company in December 1995 at the time of the
acquisition of Systematika Ltd.. Mr. Lindsey was the founder of Systematika Ltd.
in 1982 and introduced the first full color catalog for developer tools in the
UK.
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. Prior to that and since 1983 held other positions with the Company and
Lifeboat Associates.
Page 14 of__28__Pages
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
1997
First Quarter 8 1/4 6 7/8
Second Quarter 10 1/4 6 1/4
Third Quarter 13 1/4 9
Fourth Quarter 13 3/4 7 1/4
During 1997, 31,065 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 $1.60.
HOLDERS OF COMMON STOCK
On March 20, 1998, 4,824,498 shares of the Company's Common Stock were
outstanding. On such date, there were approximately 74 holders of record.
DIVIDENDS
No dividends have been paid on the Company's Common Stock. The Company is
limited in its ability to pay dividends by its domestic facility agreement,
which presently prohibits the payments of dividends. The Company does not
currently anticipate declaring or paying dividends.
ITEM 6 SELECTED FINANCIAL DATA.
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:
Page 14 of__28__Pages
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth, selected consolidated financial data for
the Company for the five years ended December 31, 1997. 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
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
STATEMENT OF OPERATIONS DATA (1):
Net sales $45,032 $71,334 $93,286 $127,680 $176,157
Income from operations 838 1,370 2,275 2,936 6,217
Income before minority interest 263 1,095 4,203 2,199 3,964
Net income 239 l,050 4,203 2,298 3,964
Basic net income per common share $0.10 $0.45 $1.14 $0.48 $0.84
======== ======= ======= ====== ========
Diluted net income per common
share $0.10 $0.35 $1.03 $0.44 $0.75
======== ======== ======= ====== =======
Weighted average
common shares outstanding-basic 2,354 2,354 3,703 4,764 4,740
Weighted average
common shares outstanding-diluted 2,887 3,142 4,102 5,198 5,280
BALANCE SHEET DATA:
Working capital $ 1,950 $ 2,731 $21,689 $12,415 $16,077
Total assets 11,714 24,730 58,329 68,490 86,368
Short-term debt 3,303 3,489 2,469 1,135 958
Long-term debt -- -- -- 1,050 2,220
Redeemable preferred
stock and Stockholders'
equity 3,379 4,597 26,989 28,844 32,213
(1) Comparability of the Statement of Operations is affected by acquisitions
occurring throughout the periods presented. See Note 2 to the Consolidated
Financial Statements. (2) The earnings per share amounts prior to 1997 have been
restated as required to comply with Statement of Financial Accounting Standards
No. 128.
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. OVERVIEW
The Company is a distributor of software, operating through three
distribution channels - cataloging, corporate reseller and wholesale operations.
Catalog operations include worldwide catalog sales, advertising and publishing.
Corporate reseller operations include ISP-USA, in the United States and ISP*D
International Software Partners GmbH ("ISP*D") in Munich, Germany, wholly-owned
subsidiaries of the Company, ISP*F International Software Partners France
("ISP*F"), a majority-owned company located in Paris, France and Logicsoft
Holding BV, a recently acquired and wholly-owned subsidiary located in
Amsterdam, The Netherlands. Wholesale operations include distributions
Page 15 of__28__Pages
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.". 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. In September 1997, the Company announced that it had acquired Logicsoft
Holding BV, the parent company of Logicsoft Europe BV, the predominate LAR in
the Benelux territory. The Company is using its European-based operations as a
platform for pan-European business development, including the distribution of
local versions of its catalogs.
The Company has experienced in the past and will experience in the future
seasonal variations in net sales and net income. Factors that have contributed
to seasonal operating results include product cycles of suppliers that are not
controlled or influenced by the Company, product availability, supplier
relationships, customer licenses and contracts, the timing of catalog mailings,
catalog response rates, product mix, past and potential acquisitions, the
condition of the software industry in general, traditional softness in
summertime European commercial activity, shifts in demand for software products
and industry announcements, releases of new products and upgrades and corporate
purchasing cycles.
Page 16 of__28__Pages
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
----------------------------------- -------------------
1995 1996 1997 96 v 95 97 v 96
----------------------------------- ------- -------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 84.4% 83.8% 85.4%
Gross Profit 15.6% 16.2% 14.6% 0.6% (1.6%)
Selling, general and
administrative expenses 13.1% 13.5% 10.6% 0.4% (2.9%)
Amortization of goodwill 0.1% 0.4% 0.5% 0.3% 0.1%
Income from operations 2.4% 2.3% 3.5% (0.1%) 1.2%
Interest (income), expense net (0.3%) (0.2%) (0.1%) 0.1% (0.1%)
Income before taxes 2.7% 2.5% 3.6% (0.2%) 1.1%
Income tax benefit (provision) 1.9% (0.8%) (1.4%) (2.7%) 0.6%
Minority interest (loss) (0.1%) (0.1%) 0.1%
Net Income 4.6% 1.8% 2.2% (2.8%) 0.4%
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 $48.5 million or 38%, to $176.2
million in 1997 and by $34.4 million, or 37%, to $127.7 million in 1996 as
compared to the respective preceding periods. The increase in revenues in 1997
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 19% or $11.3 million in 1997, the majority of which was
incurred in the United States and reflects the full year impact of the
acquisition of The Programmer's Supershop acquired in June 1996 as well as the
introduction and development of the Company's newest segmented catalog: NT
Supershop. Domestic catalog circulation increased by approximately 1.7 million
catalog drops reflecting the growth of the Company's five catalog offerings.
Revenues within the corporate reseller channel increased 66% in 1997 primarily
resulting from a significant increase in the amount of German and Austrian
reseller customers as well as the acquisition of Logicsoft Holding BV in
September 1997. Revenues within Germany and Austria increased by approximately
47% over 1996 while revenues in the United Kingdom increased by 26% over 1996.
The increase in revenues reflects an increase in market share and is directly
attributable to the value-added services and pan-European capabilities being
delivered by the group.
The growth in net sales in 1996 resulted from market share growth in
both the catalog and reseller channels as well as the acquisition of The
Programmer's Supershop in June 1996. Revenues within the catalog channel
increased 65% or $23.2 million primarily as a result of the acquisition of The
Programmer's Supershop as well as the full year impact of 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
Page 17 of __28__Pages
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 stemming from market share growth in the German and
Austrian markets as well as from the positive impact of forming the French
reseller, ISP*F.
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 decreased by 1.6% in 1997 from 16.2% to 14.6% reflecting a shift in the
mix of sales through the Company's distribution channels as a result of the
substantial increase in lower margin corporate resales and Microsoft Select
licensing sales. The acquisition of Logicsoft Holding BV was an instrumental
factor in the overall shift of the revenue mix by increasing lower margin
corporate resales. Gross profit as a percentage of 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 Programmer's Supershop be on parity.
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 1997, catalog operations contributed approximately 40%
of revenue and approximately 59% of gross margin dollars as compared with 46% of
revenue and 62% of gross margin dollars in 1996 and 38% of revenue and 53% of
gross margin dollars in 1995. Corporate reseller operations contributed
approximately 51% of revenue and approximately 32% of gross margin dollars in
1997 and 43% of revenue and 26% of gross margin dollars in 1996 as compared to
46% of revenue and 32% of gross margin dollars in 1995. The distribution channel
contributed approximately 9% of revenue and approximately 9% of gross margin
dollars in 1997 compared with 11% of revenue and 12% of margin dollars in 1996
and 16% of revenue and 15% of margin dollars in 1995.
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 and
amortization, non-personnel-related marketing and administrative costs and
provision for doubtful accounts. Depreciation and amortization consists
primarily of equipment depreciation and leasehold amortization. SG&A expenses
have increased as a percentage of revenues from 13.1% in 1995 to 13.5% in 1996
and then decreased to 10.6% of net revenues in 1996. 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.
Page 18 of __28__Pages
The French corporate reseller operation required mid-year restructuring which
involved the separation and payment of severance for several employees. The
decline in SG&A expense as a percentage of revenues in 1997 is attributable to
the increase in revenues in the reseller channel, which has generally lower SG&A
costs as a percentage of revenue and also the impact of the acquisition of
Logicsoft Holding BV. 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., ISP*D and most recently, Logicsoft
Holding BV. 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 50% of total SG&A expenditures while the European operations
accounted for approximately 50%. This represents an increase from 1996 where
domestic SG&A expenditures accounted for approximately 47% of total consolidated
expenditures.
AMORTIZATION
Amortization expense includes the systematic write-off of goodwill. The
Company incurred goodwill with the acquisition of both ISP*D and Lifeboat Italia
which it is amortizing over 20 years. In addition, the Company recorded goodwill
in conjunction with the acquisition of both Systematika Ltd. and ISP*F
International Software Partners France. The Company recognized approximately
$9.5 million in goodwill from the acquisition of the assets of The Software
Developer's Company, Inc. in June 1996 which is being amortizing over a fifteen
year period for both financial and tax accounting purposes. In connection with
the acquisition of Logicsoft Holding BV, the Company recognized approximately
$2.4 million in goodwill, which is being amortized over a fifteen-year period.
INTEREST INCOME AND EXPENSE
The Company generated net interest income of approximately $212,000,
$223,000 and $250,000 in 1997, 1996 and 1995 respectively. Net interest income
in 1997 was offset by the interest charge under the term-loan financing for the
acquisition of Logicsoft Holding BV. 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.
Page 19 of __28__Pages
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.
At December 31, 1997, the Company recorded a provision for income taxes of
approximately $2.4 million, which consists of a provision for state and, federal
taxes of approximately $2.35 million and also a provision for foreign taxes of
approximately $54,000. 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.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $2,900,000 and $563,000 at December 31, 1997 and 1996,
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
$2,419,000, 915,000 and $1,137,000 for the years 1997, 1996 and 1995,
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 $6,196,000 for the year ended
December 31, 1997 compared to $1,166,000 and $9,211,000 for 1996 and 1995,
respectively. In 1997, 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,
reflecting strong fourth quarter sales. Cash flows from operations for 1996 were
also provided by the net income of the Company and by similar reductions in
inventory and increases in amounts payable but not yet due to Microsoft. In
addition, 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,
offset by an increase of accounts receivable and an increase in inventories.
Page 20 of __28__Pages
At December 31, 1997, the Company had cash and cash equivalents of $20.6
million and net working capital of $16.1 million compared with cash and cash
equivalents of $16.3 million and net working capital of $12.4 million at
December 31, 1996 compared with cash and cash equivalents and net working
capital of $27.7 million and $21.7 million respectively, at December 31, 1995.
The increase in working capital at December 31, 1997 is attributable to the
earnings for the year then ended as well as the effect of the working capital
acquired as part of the acquisition of Logicsoft Holding BV. The decrease in
working capital at December 31, 1996 is primarily attributable to the
acquisition of the assets of The Software Developer's Company, Inc., 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 Developer's
Company, Inc. and in return were to receive approximately $1,500,000 in net
assets.
The Company's capital expenditures for 1997 and 1996 amounted to
approximately $718,000 and $517,000, respectively, primarily for computer
hardware and software, office furniture and leasehold improvements. In addition,
in 1997, the Company acquired approximately $187,000 of assets as part of the
acquisition of Logicsoft Holding BV. 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.
There were no amounts outstanding under the line at December 31, 1997.
Subsequent to the end of the year, the Company renegotiated its facility
agreement, whereby the Company can borrow up to $7.5 million under a committed
line of credit with interest at either the prime rate or Euro-rate plus 200
basis points. The new facility expires on June 30, 1999 and is secured by all
the domestic assets of the Company and 65% of the outstanding stock of the
foreign subsidiaries and contains certain covenants that require the Company to
maintain a minimum level of tangible net worth and working capital.
During the year, the Company entered into a five-year term loan agreement
in the US $ equivalent of $3.0 million bearing interest at 6.17%. The loan is
denominated in Dutch Guilders and is secured by the assets of the Company and
65% of the stock of foreign subsidiaries.
The Company maintains a secured, demand revolving line of credit for its
German subsidiary, pursuant to which it may borrow in deutschmarks up to DM
1,500,000 (the equivalent of approximately $830,000 at December 31, 1997), 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 $165,000 at December 31, 1997). The
line bears interest at 8.25%. At December 31, 1997, there were no amounts
outstanding under the line. 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), which was paid in full in March
1997.
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, 1997 and 1996 were
approximately Lit 3,300,000,000 and 3,200,0000 respectively. (the equivalent of
approximately $1.9 million and $2.0
Page 21 of __28__Pages
million at December 31, 1997 and 1996). At December 31, 1997 and 1996, there
were no amounts outstanding under this line.
The Company's subsidiary in the Netherlands, Logicsoft Europe, BV,
maintains a demand revolving line of credit pursuant to which it may borrow in
guilders up to DFL 2.5 million (the equivalent of approximately $1.23 million at
December 31, 1997), and is secured by its accounts receivable and inventory. The
line bears interest at 5.875%. There were no amounts outstanding under the line
at December 31, 1997.
In France, ISP*F maintains a demand revolving line of credit pursuant to
which it may borrow up to FRF 5.0 million (the equivalent of approximately
$830,000 at December 31, 1997), and is secured by its accounts receivable and
inventory and a FRF 3.0 million letter of credit. At December 31, 1997, FRF
2,165,000 (the equivalent of approximately $360,000 at December 31, 1997) of the
line of credit was utilized bearing interest at 7.00%.
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.
IMPACT OF YEAR 2000
The Company presently believes that with minor modifications to existing
operating systems, the Year 2000 Issue will not pose significant operational
problems for its computer systems. The Company believes the costs for these
modifications to be minimal.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements at Item 14(a).
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
Page 22 of __28__Pages
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information (other than the information regarding executive officers
of the Company called for by Item 401 of Regulation S-K which is included in
Part I hereof as Item 4A in accordance with General Instruction G(3)) will be
contained in the Company's definitive Proxy Statement with respect to the
Company's Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission within 120 days following the end of the Company's fiscal
year, and is hereby incorporated by reference thereto.
ITEM 11 EXECUTIVE COMPENSATION.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Page 23 of __28__Pages
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements and Schedules
Report of Independent Auditors
Consolidated Balance Sheets - as of
December 31, 1996 and December 31, 1997
Consolidated Statements of Income - Years
ended December 31, 1995, December 31, 1996 and
December 31, 1997
Consolidated Statement of Stockholders' Equity Years ended
December 31, 1995, December 31, 1996 and December 31,
1997
Consolidated Statements of Cash Flows - Years ended December
31, 1995, December 31, 1996 and December 31, 1997
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.*
Page 24 of __28__Pages
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.+
Page 25 of __28__Pages
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
Page 26 of __28__Pages
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.
Page 27 of __28__Pages
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 27, 1998.
PROGRAMMER'S PARADISE, INC.
By:
---------------------------------
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 27, 1998
and Chairman of the Board of Directors
- ---------------------------
Roger Paradis
Chief Financial and March 27, 1998
Accounting Officer
- ---------------------------
John P. Broderick
Director March 27, 1998
- ---------------------------
Edwin H. Morgens
Director March 27, 1998
- ---------------------------
Allan Weingarten
Director March 27, 1998
- ---------------------------
Daniel S. Bricklin
Director March 27, 1998
- ---------------------------
F. Duffield Meyercord
- --------------------------- Director March 27, 1998
William Willett
Page 28 of __28__Pages
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-22
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
Programmer's Paradise, Inc.
We have audited the accompanying consolidated balance sheets of Programmer's
Paradise, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 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.
MetroPark, New Jersey Ernst & Young LLP
January 27, 1998
F-2
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
DECEMBER 31
1996 1997
-------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $16,281 $20,571
Accounts receivable, net of allowances of $583 and
$509 in 1996 and 1997, respectively 26,826 38,517
Inventory 4,464 4,627
Prepaid expenses and other current assets 2,227 2,561
Deferred income taxes 1,097 1,619
-------------------------------------
Total current assets 50,895 67,895
Equipment and leasehold improvements, net 1,695 1,862
Goodwill, net of accumulated amortization of $690
and $1,600 in 1996 and 1997, respectively 12,768 14,185
Other assets 912 707
Deferred income taxes 2,220 1,719
-------------------------------------
$68,490 $86,368
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $35,041 $46,979
Notes payable to banks 1,135 958
Other current liabilities 2,303 3,881
-------------------------------------
Total current liabilities 38,479 51,818
Other liabilities 116 117
Notes payable - Long-term 1,050 2,220
Stockholders' equity:
Common Stock $.01 par value: Authorized, 10,000,000 shares,
issued 4,762,220 and 4,793,295 in 1996 and 1997, respectively 48 48
Additional paid-in capital 33,509 33,633
Treasury stock, at cost, 65,000 and 59,500 shares in 1996 and 1997,
respectively (375) (343)
Accumulated deficit (4,220) (256)
Cumulative foreign currency translation adjustment (117) (869)
-------------------------------------
Total stockholders' equity 28,845 32,213
-------------------------------------
$68,490 $86,368
=====================================
See accompanying notes.
F-3
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31
1995 1996 1997
--------------------------------------------------------
Net sales $93,286 $127,680 $176,157
Cost of sales 78,717 107,041 150,452
--------------------------------------------------------
Gross profit 14,569 20,639 25,705
Selling, general and administrative expenses 12,195 17,230 18,574
Amortization of goodwill 99 473 914
--------------------------------------------------------
Income from operations 2,275 2,936 6,217
Other (expense) income:
Interest expense (265) (373) (326)
Interest income 515 596 538
Unrealized foreign exchange (loss) gain (49) 31 (58)
--------------------------------------------------------
Income before income taxes and minority interest 2,476 3,190 6,371
Income tax (benefit) provision (1,727) 991 2,407
--------------------------------------------------------
Income before minority interest 4,203 2,199 3,964
Minority interest in net income of subsidiary 99
--------------------------------------------------------
Net income $ 4,203 $ 2,298 $ 3,964
========================================================
Basic net income per common share $ 1.14 $ .48 $ .84
========================================================
Diluted net income per common share $ 1.03 $ .44 $ .75
========================================================
Weighted average common shares outstanding-Basic 3,703 4,764 4,740
========================================================
Weighted average common shares outstanding-Diluted 4,102 5,198 5,280
========================================================
See accompanying notes.
F-4
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
NON-CUMULATIVE
REDEEMABLE
CONVERTIBLE COMMON STOCK ADDITIONAL
PREFERRED ------------------------ PAID-IN TREASURY ACCUMULATED
STOCK SHARES AMOUNT CAPITAL STOCK DEFICIT
-----------------------------------------------------------------------------------
Balance at January 1, 1995 $ 373 229,115 $ 2 $15,272 $(10,721)
Net income 4,203
Stock issued in ISP*D acquisition 165,000 2 108
Conversion of Series A (223) 1,674,071 17 (17)
Conversion of Series B (150) 450,690 4 (4)
Exercise of stock options, including
$83,000 in income tax benefits 89,369 1 18
Issuances of common stock in connection
with initial public offering, net of
expenses 2,070,000 21 18,028
Translation adjustment
-----------------------------------------------------------------------------------
Balance at December 31, 1995 - 4,678,245 47 33,405 (6,518)
Net income 2,298
Exercise of stock options, including
$86,000 in income tax benefits 83,975 1 104
Purchase of 65,000 treasury stock shares $(375)
Translation adjustment
-----------------------------------------------------------------------------------
Balance at December 31, 1996 - 4,762,220 48 33,509 (375) (4,220)
Net income 3,964
Exercise of stock options, including
$65,000 in income tax benefits 31,075 124 32
Translation adjustment
-----------------------------------------------------------------------------------
Balance at December 31, 1997 4,793,295 48 33,633 (343) (256)
===================================================================================
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT TOTAL
----------------------------
Balance at January 1, 1995 44 $ 4,597
Net income 4,203
Stock issued in ISP*D acquisition 110
Conversion of Series A -
Conversion of Series B -
Exercise of stock options, including
$83,000 in income tax benefits 19
Issuances of common stock in connection
with initial public offering, net of
expenses 18,049
Translation adjustment 11 11
----------------------------
Balance at December 31, 1995 55 26,989
Net income 2,298
Exercise of stock options, including
$86,000 in income tax benefits 105
Purchase of 65,000 treasury stock shares (375)
Translation adjustment (172) (172)
----------------------------
Balance at December 31, 1996 (117) 28,845
Net income 3,964
Exercise of stock options, including
$65,000 in income tax benefits 156
Translation adjustment (752) (752)
----------------------------
Balance at December 31, 1997 (869) 32,213
============================
See accompanying notes.
F-5
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31
1995 1996 1997
------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,203 $ 2,298 $ 3,964
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in net income of subsidiary (99)
Depreciation expense 375 701 736
Amortization expense 243 621 1,019
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable (1,804) (6,103) (8,167)
Inventory (1,717) 2,279 173
Prepaid expenses and other current assets (678) 708 (85)
Accounts payable and accrued expenses 11,060 1,176 7,708
Deferred tax asset (2,762) 49 (22)
Net change in other operating assets and liabilities 291 (464) 870
------------------------------------------------------
Net cash provided by operating activities 9,211 1,166 6,196
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (631) (620) (788)
Purchases of businesses, net of cash acquired (1,447) (11,236) (2,268)
------------------------------------------------------
Net cash used in investing activities (2,078) (11,856) (3,056)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under lines of credit (1,021) (461) (1,818)
Borrowings under long term debt 2,962
Repayments under long term debt (150)
Purchase of treasury stock (375)
Net proceeds from issuance of common stock 18,068 105 156
------------------------------------------------------
Net cash provided by (used in) financing activities 17,047 (731) 1,150
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 24,180 (11,421) 4,290
Cash and cash equivalents at beginning of year 3,522 27,702 16,281
------------------------------------------------------
Cash and cash equivalents at end of year $ 27,702 $ 16,281 $ 20,571
======================================================
See accompanying notes.
F-6
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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.
BASIS OF PRESENTATION
Certain balances in the 1996 financial statements have been reclassed to conform
with the current year presentation.
MAJOR CUSTOMER AND SUPPLIER
In 1995, 1996 and 1997 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 46%,
47% and 55% of Company revenues for 1995, 1996 and 1997, 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-7
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-8
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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
The Company capitalizes the advertising costs associated with producing its
catalogs. The costs of these catalogs are amortized over the estimated shelf
life of the catalogs, generally 3-5 months. The unamortized balance of
non-reimbursed advertising costs at any period end are minimal. Advertising
costs for 1995, 1996, and 1997 amounted to approximately $3,320,000, $5,571,000
and $5,725,000, respectively.
NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement No. 128
requirements.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board ("FASB") which
are not required to be adopted at December 31, 1997, include the following
Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive (all changes in equity during a period
except those resulting from investments by and distributions to owners) and its
components in the financial statements. This new standard, which will be
effective for the Company for the year ending December 31, 1998, is not
currently anticipated to have a significant impact on the Company's financial
statements.
F-9
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. This new standard
will require the Company to report financial information on the basis that is
used internally for evaluating segment performance and deciding how to allocate
resources to segments, which may result in more detailed information in the
notes to the Company's financial statements than is currently required and
provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
2. ACQUISITIONS
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.
In September 1997, the Company acquired 100% of the outstanding stock of
Logicsoft Holding BV ("Logicsoft"), which operates Logicsoft Europe BV, located
in Amsterdam, The Netherlands, at a cost of approximately $3,300,000. Logicsoft
is a corporate reseller of PC software in The Netherlands.
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-10
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
The following table presents the unaudited pro forma consolidated results of
operations for the two years ended December 31, 1997 as if the above
acquisitions had occurred on January 1 of the year preceding the acquisition
(dollars in thousands):
1996 1997
-----------------------------------
Sales $169,072 $192,351
Net income 3,640 4,011
Basic net income per common share $.76 $.85
Diluted net income per common share $.70 $.76
The pro forma amounts reflect amortization of the excess of purchase price over
the net assets acquired, the reduction in operating expenses as a result of
combining the operations, the reduction in interest income as a result of the
utilization of cash and the related tax effect of these items. The pro forma
results are not necessarily indicative of the results of operations that would
have occurred had the 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 borrowings under a U.S. revolving line of
credit, the outstanding balance under a five year term loan and revolving lines
of credit available at each of the Company's foreign subsidiaries.
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 is due on demand 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 8.50% at December 31, 1997.
There were no amounts outstanding under the line at December 31, 1997.
F-11
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE TO BANKS (CONTINUED)
Subsequent to the end of the year, the Company renegotiated the limit under the
U.S. revolving line of credit whereby the Company can borrow up to $7,500,000
under a committed line of credit with interest at either the prime rate or
Euro-rate plus 200 basis points. The new facility expires on June 30, 1999 and
is secured by all the domestic assets of the Company and 65% of the outstanding
stock of the foreign subsidiaries and contains certain covenants that require
the Company to maintain a minimum level of tangible net worth and working
capital.
The Company maintains a secured, demand revolving line of credit for its German
subsidiary, pursuant to which it may borrow in deutschmarks up to DM 1,500,000
(the equivalent of approximately $830,000 at December 31,1997), based upon its
eligible accounts receivable and inventory, and a limited guarantee by the
Company of up to DM 300,000 (the equivalent of approximately $165,000 at
December 31,1997). The line bears interest at 8.25%. At December 31, 1997 there
were no amounts outstanding under the line. A subsidiary of ISP*D has a secured
term loan with the same creditor, in the original amount of DM 1,000,000 (the
equivalent of approximately $645,000 at December 31, 1996), which was paid in
full in March 1997.
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 overdrafting limits
of such arrangements at December 31, 1997 and 1996 were approximately Lit
3,300,000,000 and 3,200,000,000 respectively, (the equivalent of approximately
$1.9 million and $2.0 million at December 31, 1997 and 1996). The unsecured
borrowings bear interest at market rates ranging from 6.25% to 9.00%. At
December 31, 1997 and 1996, there were no amounts outstanding under the line.
The Company's subsidiary in The Netherlands, Logicsoft Europe, BV, maintains a
demand revolving line of credit pursuant to which it may borrow in guilders up
to DFL 2,500,000 (the equivalent of approximately $1,230,000 at December 31,
1997), and is secured by its accounts receivable and inventory. The line bears
interest at 5.875%. At December 31, 1997, there were no amounts outstanding
under the line.
In France, ISP*F, maintains a demand revolving line of credit pursuant to which
it may borrow up to FRF 5,000,000 (the equivalent of approximately $830,000 at
December 31, 1997), and is secured by its accounts receivable and inventory and
a FRF 3,000,000 letter of credit. At December 31, 1997, FRF 2,165,000 (the
equivalent of approximately $360,000 at December 31, 1997) of the line of credit
was utilized, bearing interest at 7.00%.
F-12
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE TO BANKS (CONTINUED)
In connection with the Logicsoft acquisition (see Note 2), the Company secured a
five year term loan in the US $ equivalent of approximately $3,000,000. The term
loan bears interest at 6.17% and principal and interest are payable quarterly.
The loan is payable in Netherland guilders and had an outstanding balance at
December 31, 1997 of $2,812,731 (DFL 5,700,000), of which $592,154 (DFL
1,200,000) is classified as current in the accompanying consolidated balance
sheet. The term loan is secured by all assets of the Company and 65% of the
outstanding stock of the foreign subsidiaries. Maturities under the term loan
are as follows:
1998 $592,154 (DFL 1,200,000)
1999 592,154 (DFL 1,200,000)
2000 592,154 (DFL 1,200,000)
2001 592,154 (DFL 1,200,000)
2002 444,115 (DFL 900,000)
The weighted average interest rate for notes payable to banks and long term debt
was 12.80%, 10.10% and 8.00% at December 31, 1995, 1996 and 1997, respectively.
Interest paid was approximately $290,000, $343,000 and $260,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
4. BALANCE SHEET DETAILS
Equipment and leasehold improvements consists of the following (dollars in
thousands)
1996 1997
---------------------------------
Equipment $ 2,967 $ 3,576
Leasehold improvements 295 337
---------------------------------
3,262 3,913
Less accumulated depreciation and amortization (1,567) (2,051)
---------------------------------
$ 1,695 $ 1,862
=================================
Accounts payable and accrued expenses consists of the following (dollars in
thousands):
1996 1997
---------------------------------
Trade accounts payable $11,002 $11,937
Accrued licensing costs 19,038 30,810
Other accrued expenses 5,001 4,232
---------------------------------
$35,041 $46,979
=================================
F-13
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES
The (benefit) provision for income taxes consisted of the following (dollars in
thousands):
YEAR ENDED DECEMBER 31
1995 1996 1997
--------------------------------------------------
Current:
Federal $ 446 $ 502 $ 984
State 276 275 386
Foreign 313 165 1,058
--------------------------------------------------
1,035 942 2,428
Deferred:
Federal (2,760) 473 76
State (2) 30 (54)
Foreign (454) (43)
--------------------------------------------------
(2,762) 49 (21)
--------------------------------------------------
$ (1,727) $ 991 $ 2,407
==================================================
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 (dollars in thousands):
YEAR ENDED DECEMBER 31
1995 1996 1997
--------------------------------------------------
Statutory rate applied to pretax income $ 842 $ 1,084 $ 2,166
Amortization of goodwill 33 39 40
State income taxes, net of benefit
of federal income taxes 181 211 219
Foreign income taxes (benefit) over U.S.
statutory rate 271 (350) 54
Net reduction in amount of federal valuation
allowance (3,135)
Other items 81 7 (72)
--------------------------------------------------
Income tax (benefit) expense $ (1,727) $ 991 $ 2,407
==================================================
F-14
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are as follows
(dollars in thousands):
YEAR ENDED DECEMBER 31
1995 1996 1997
-----------------------------------------------
Fixed assets $ 21 $ 4 $ 4
Accruals and reserves 492 328 546
Intangibles (36)
Net operating loss carryforwards 2,937 3,936 2,772
Credit carryforwards 90 25 16
-----------------------------------------------
Gross deferred tax assets 3,504 4,293 3,338
Valuation allowance (138) (976)
-----------------------------------------------
Net deferred tax asset $ 3,366 $ 3,317 $ 3,338
===============================================
The Company has recorded a U.S. deferred tax asset at December 31, 1997 of
$2,019,000 reflecting the benefit of $5,939,000 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 (dollars in thousands):
YEAR ENDED DECEMBER 31
1995 1996 1997
--------------------------------------------
United States $2,352 $3,010 $3,543
Foreign 124 180 2,828
--------------------------------------------
$2,476 $3,190 $6,371
============================================
At December 31, 1997, the Company had approximately $765,000 net operating loss
carryforwards for German income tax purposes.
F-15
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $2,900,000 at December 31, 1997. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon.
During the years ended December 31, 1997, 1996 and 1995, the Company paid
approximately $1,492,000, $483,000 and $455,000, respectively, in income taxes.
6. 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.
The options generally vest in equal annual installments over five years. There
are no additional options available for grant under the Company's 1986 Employee
Stock Option Plan.
On April 21, 1995, the Board of Directors adopted the Company's 1995 Employee
Stock Plan ("1995 Plan"). The 1995 Plan, as amended on 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. Options granted under the plan
are exercisable at an exercise price equal to but not less than the fair market
value of the common stock on the grant date. ISO's generally vest in equal
annual installments over five years.
On April 21, 1995, the Board of Directors adopted the Company's 1995
Non-Employee Director Plan ("1995 Director Plan"). The 1995 Director Plan
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%.
F-16
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
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 1996 and 1997, respectively: risk
free interest rates of 6.28% and 5.49%, dividend yields of 0% in both periods,
volatility factors of the expected market price of the Company's common stock of
.61 and .60, and a weighted-average expected life of the option of 9 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
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):
1996 1997
------------------------
Net income as reported $2,298 $3,964
Net income pro forma 1,902 3,395
Basic net income per share, as reported $.48 $.84
Basic net income per share, pro forma $.40 $.72
Diluted net income per share, as reported $.44 $.75
Diluted net income per share, pro forma $.38 $.67
The weighted average fair value of options granted during 1996 and 1997 is $3.51
and $6.09, respectively.
F-17
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
Changes during 1996 and 1997 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
Granted in 1997 264,400 8.08
Canceled in 1997 (27,550) 5.13
Exercised in 1997 (31,075) 1.60
---------------
Outstanding at December 31, 1997 999,539 4.30
===============
Exercisable at December 31, 1997 590,577 3.41
===============
Stock options outstanding at December 31, 1997 are summarized as follows:
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED
RANGE OF OPTIONS AT REMAINING AVERAGE
EXERCISE DECEMBER CONTRACTUAL EXERCISE
PRICES 31, 1997 LIFE PRICE
---------------------------------------------------------------------
$0.24 81,713 3.7 .24
.67 - 1.00 276,500 6.3 .76
4.00 - 6.00 325,076 7.6 4.72
6.25 - 8.38 258,950 9.1 6.97
9.00 - 12.94 57,300 9.6 12.62
---------
999,539
=========
Under the various plans, options that are cancelled can be reissued. At December
31, 1997, options for 64,250 shares were available for grant and 1,063,789
shares were reserved for future issuance.
F-18
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. 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, 1995, 1996 and 1997, the Company expensed
approximately $54,000, $59,000 and $82,000, respectively, related to this plan.
8. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (dollars and shares in thousands):
1995 1996 1997
--------------------------------------------
Numerator:
Net income for basic and diluted net income
per share $ 4,203 $ 2,298 $ 3,964
--------------------------------------------
Denominator:
Denominator for basic net income per share -
weighted average common shares 3,703 4,764 4,740
Effect of dilutive securities:
Employee Stock Options 399 434 540
--------------------------------------------
Denominator for diluted net income per share -
adjusted weighted average common
Shares and assumed conversion 4,102 5,198 5,280
============================================
Basic net income per common share $ 1.14 $ .48 $ .84
============================================
Diluted net income per common share $ 1.03 $ .44 $ .75
============================================
For additional disclosures regarding the employee stock options and related
stock option plans, see Note 6.
F-19
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 (dollars in thousands):
1998 $ 1,182
1999 1,215
2000 959
2001 697
2002 282
2003 and thereafter 1,256
--------
$ 5,591
========
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $618,000, $752,000 and $1,075,000, respectively.
The Company has royalty agreements, which require payments based on sale of
certain products. Royalty expense for the years ended December 31, 1995, 1996
and 1997 was approximately $348,000, $265,000 and $156,500, 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, 1997, the unamortized amount of this payment
was approximately $111,000.
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 (dollars in thousands):
INCOME
NET FROM IDENTIFIABLE
SALES OPERATIONS ASSETS
-------------------------------------------------
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
=================================================
F-20
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
INCOME
NET FROM IDENTIFIABLE
SALES OPERATIONS ASSETS
-------------------------------------------------
1996
Italy $ 8,374 $ 138 $ 4,496
Germany 49,128 426 26,032
France 8,924 (738) 4,970
Other foreign 4,535 402 2,672
-------------------------------------------------
Total foreign 70,961 228 38,170
U.S. 56,719 2,708 30,320
-------------------------------------------------
Total $127,680 $2,936 $68,490
=================================================
1997
Italy $ 7,497 $ (55) $ 4,288
Germany 72,299 1,175 28,869
France 9,298 (102) 5,745
United Kingdom 5,695 520 3,114
Netherlands 11,617 994 14,102
Canada 537 11 518
-------------------------------------------------
Total foreign 106,943 2,543 56,636
U.S. 69,214 3,674 29,732
-------------------------------------------------
Total $176,157 $6,217 $86,368
=================================================
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 (dollars in thousands):
1995 1996 1997
------------------------------------------------
Fair value of assets acquired:
Current assets excluding cash $ 564 $ 7,207 $ 4,108
Fixed assets 139 676 187
Other assets, principally goodwill 1,610 10,778 2,202
Less liabilities assumed:
Current liabilities 732 7,248 4,229
Notes payable 177
Payable to seller 24
Common stock issued to seller 110
------------------------------------------------
Net cash paid $ 1,447 $ 11,236 $ 2,268
================================================
F-21
Programmer's Paradise, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In Thousands)
CHARGED TO CHARGED IN
BEGINNING COST AND OTHER ENDING
DESCRIPTION BALANCE EXPENSE ACCOUNTS DEDUCTIONS BALANCE
- -----------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Allowances for accounts receivable $583 326 32 (1) 432 $509
Reserve for Obsolescence $170 220 130 (1) 62 $458
Year ended December 31, 1996:
Allowances for accounts receivable $777 223 417 $583
Reserve for Obsolescence $623 28 481 $170
Year ended December 31, 1995:
Allowances for accounts receivable $842 270 2 (1) 337 $777
Reserve for Obsolescence $606 30 13 $623
(1) Arose from acquisitions.
F-22