ITEM 1. BUSINESS.
GENERAL
Programmer's Paradise, Inc., a Delaware corporation (the "Company"), is a recognized international direct marketer of software for microcomputers, servers and networks, operating through three separate distribution channels in the United States and Europe - catalog, corporate reseller and wholesale distribution - with a strategic focus on expanding its catalog activities aimed at people who design, program, document, support and use software. The Company currently offers catalogs in local languages and with prices in local currencies in the United States, Italy, Germany, Austria, the United Kingdom and France.
A key element of the Company's strategy is to build upon its distinctive catalogs - the established PROGRAMMER'S PARADISE catalog, directed at independent professional programmers, and its PROGRAMMER'S SUPERSHOP catalog , acquired in 1996 and directed at programmers working in large corporations. These catalogs are full color "magalogs" created in-house, which combine traditional catalog sales offerings with detailed product descriptions, magazine style articles, product announcements and interviews with industry leaders, and contain substantial amounts of paid and cooperative advertising. The Programmer's Paradise catalog features the Company's proprietary and brand-distinctive logo, the "Island Man" cartoon character. In 1996, the Company distributed over 5.1 million catalogs, typically featuring more than 1,500 stock keeping units ("SKUs") in each catalog. The Company estimates that its catalog operations, which have historically had the highest gross margin of the Company's distribution channels, contributed 46% of its revenue and 62% of gross margin in 1996.
Through its multiple channels, the Company offers more than 10,000 SKUs, consisting of technical and general business application software, from over 1,000 publishers at prices generally discounted below manufacturers' suggested retail prices. The Company's catalogs contain substantial amounts of advertising and offer one of the most complete collections of microcomputer technical software, including programming languages, tools, utilities, libraries, development systems, interfaces and communications products. Many technical software programs are difficult for developers to source on their own and, notwithstanding the large selection of programs offered by the Company, the Company frequently searches for titles requested by its customer base. The Company believes that its catalogs are important marketing vehicles for microcomputer software publishers and that they provide a cost-effective and service-oriented means to market, sell and fulfill technical software products.
International expansion is an integral part of the Company's strategy, with its European-based operations accounting for approximately 56% of sales in the year ended December 31,1996, and approximately 46% of gross margin for the same period. The Company began European-based operations in the first quarter of 1993 when it acquired a controlling interest in Lifeboat Associates Italia Srl ("Lifeboat Italy"), a long-standing software wholesale distributor in Italy with an orientation towards technical software. In June 1994, the Company acquired a controlling interest in ISP*D International Software Partners GmbH ("ISP*D"), a large software-only dealer, a leading independent supplier of Microsoft Select licenses in Germany and a significant microcomputer software dealer to many large German and Austrian companies. In late 1994, the Company organized a subsidiary in the United Kingdom to engage in catalog operations, and in December 1995 the Company acquired Systematika Limited, a leading reseller of technical software in the United Kingdom and the publisher of the popular SYSTEM SCIENCE catalog. In January 1996, the Company formed ISP*F International Software Partners France SA ("ISP*F"), as a full service corporate reseller of PC software, based in
Paris and majority owned by Programmer's Paradise France SARL. ISP*F was formed by merging the resources and assets of L & A Logiciels Et Applications SA ("L & A France"), LAN Technologie, a division of Devnet SA, and Programmer's Paradise France SARL. L & A France is a well known corporate reseller of PC software and also publishes the ACCESS DIRECT catalog, which is targeted to small and medium sized companies. LAN Technologie is a high-end PC software supplier and systems integrator.
The Company was incorporated in Delaware in 1982. In May 1995, the Company changed its name from "Voyager Software Corp" to "Programmer's Paradise, Inc." The Company's principal executive offices are located at 1163 Shrewsbury Avenue, Shrewsbury, New Jersey 07702 and its telephone number is (908) 389-8950.
PRODUCTS
The Company offers over 10,000 SKUs consisting of technical and general business application software from more than 1,000 publishers, including Microsoft, Powersoft, Borland, IBM, Symantec, Lotus and Computer Associates, at prices generally discounted below manufacturer's suggested retail prices. The Company screens new products and selects products for inclusion in its catalogs based on features, quality, sales trends, price, margins and warranties
Software upgrades are a significant category of product offered by the Company. The Company is authorized by most major microcomputer technical software publishers to stock upgrades. Upgrades are revisions to previously published software that improve or enhance certain features of the software or correct errors found in previous versions. The Company believes it offers several advantages to its customers in the upgrade process, including timely and reliable service and the ability to combine upgrades with other products on the same order.
MARKETING AND SALES
The Company operates three separate distribution channels - catalog operations (PROGRAMMER'S PARADISE, PROGRAMMER'S SUPERSHOP, INTERNET PARADISE, COMPONENTS PARADISE AND SYSTEM SCIENCE), corporate reselling to large accounts (Corsoft in the U.S., ISP*D in Germany and ISP*F in France) and wholesale distribution to dealers and large resellers (Lifeboat Distribution in the U.S. and Lifeboat Italy in Milan, Italy). Management believes that this diversification of distribution channels is complementary and operationally cost effective. Further, due to the volume of purchasing by the Company, and also due to the unique magazine/catalog format of the Company's catalogs, the Company believes it is able to obtain favorable pricing, prompt supply of upgrades and significant marketing funds.
TELEMARKETING AND TECHNICAL SUPPORT. The Company employs telemarketing representatives who assist customers in purchasing decisions, process product orders and respond to customer inquiries on order status, product pricing and availability. The telemarketers are trained to answer all basic questions about products. On technical issues, there is an in-house technical support staff, which is able to respond to most inquiries over the phone, with the balance researched off-line. For product literature and technical fact sheets, the Company employs its fax on demand literature service supported by a CD-ROM-based reference library. Through the Company's sophisticated domestic information systems, a telemarketer can quickly access a customer's record which details past purchases as well as billing information. Similar capabilities exist in the Company's international operations.
CUSTOMERS AND BACKLOG. No single customer, including direct end users or resellers of products, accounted for more than 5% of the Company's revenues during the fiscal year ended December 31, 1996. Because the Company generally ships products within 48 hours of receipt of an order from a customer, backlog is not material to an understanding of its business.
CATALOG AND PUBLISHING OPERATIONS
Catalog. The Company has two primary established catalogs - PROGRAMMER'S PARADISE, directed at independent programming professionals, and, THE PROGRAMMER'S SUPERSHOP directed at programmers in large corporations. PROGRAMMER'S PARADISE and THE PROGRAMMER'S SUPERSHOP, each containing approximately 90 to 150 pages, are full color "magalogs" which combine traditional catalog sales offerings with detailed product descriptions, product announcements, interviews with industry leaders, magazine-style articles and substantial amounts of paid and cooperative advertising. The PROGRAMMER'S PARADISE catalog features the Company's distinctive "Island Man" cartoon character and is recognized as a leading source for technical software in the United States.
THE PROGRAMMER'S SUPERSHOP catalog was acquired in June 1996, from the Software Developer's Company, Inc., its largest competitor in the catalog channel. Under the terms of the purchase, the Company received all rights and title to THE PROGRAMMER'S SUPERSHOP catalog business, inbound and outbound telemarketing, reseller operations, web site and the operations of Software Developers Company German subsidiary. THE PROGRAMMER'S SUPERSHOP catalog is produced on a quarterly basis and carries a circulation of approximately 400,000 copies. The success of THE PROGRAMMER'S SUPERSHOP, has reoriented the Company's traditional approach to catalog marketing both in the United States and internationally. In conjunction with the SUPERSHOP catalog, the Company has energized and supported an outbound telemarketing program as part of its domestic catalog operations, which targets mid-size to large commercial, governmental and educational accounts in the United States. This program is still in its early development stage in the United States as the Company builds an infrastructure of outbound telemarketers.
In addition to its two flagship catalogs, the Company developed and launched two additional catalogs during 1996. COMPONENTS PARADISE was launched in March 1996 and is directed to the Visual Basic add-on marketplace. INTERNET PARADISE was developed and launched in May 1996 to capture the internet development tool market.
The Company continuously attracts new customers by selectively mailing catalogs and other direct mail materials to prospective customers, as well as through advertising in magazines and trade journals. The Company's domestic mailing list currently consists of a core PROGRAMMER'S PARADISE and PROGRAMMER'S SUPERSHOP buyer list of approximately 171,000 customers who have purchased products from the Company within the 24 months ended December 31, 1996, plus selected names from the Company's prospect list, lists of names provided by publishers and lists of names rented from others.
The Company seeks to have these catalogs reach a similar status in Europe. The Company's European catalogs (PROGRAMMER'S PARADISE ITALIA, PROGRAMMER'S PARADISE DEUTSCHLAND, PROGRAMMER'S PARADISE DEUTSCHLAND CORPORATE EDITION, PROGRAMMER'S PARADISE U.K. and PROGRAMMER'S PARADISE FRANCE) are offshoots of the U.S. versions. They are published in local languages and present offerings in local currencies, while using similar but localized cover graphics, including the Company's proprietary logo, the "Island Man" cartoon character. The Company also distributes the popular SYSTEM SCIENCE catalog in the United Kingdom. This catalog has long been established as one of the pre-eminent publications for programmers in the U.K. and is produced four times per year.
The Company creates its catalogs in-house with its own design team and production artists using a computer-based desktop publishing system. The in-house preparation of the catalogs streamlines the production process, provides greater flexibility and creativity in catalog production and results in significant cost savings.
ELECTRONIC DISTRIBUTION. The Company also conducts business via the internet through its two websites; www.pparadise.com and computing.supershops.com. Through an agreement announced in July, 1996, with CyberSource Corporation of Menlo Park, California, the Company began electronic delivery of software. At December 31, 1996, the Company had approximately 75 products available for electronic distribution and plans to increase that product selection to approximately 350 titles by the end of 1997.
UPSTREAM MARKETING TO SUPPLIERS. The Company engages in upstream marketing to its suppliers who are software publishers by providing important services designed to enhance such supplier's ability to market its products in the programmer and developer marketplace. The Company believes that its advertising and other supplier-directed marketing activities maximize the Company's marketing reach and build relationships with leading publishers. The Company offers a menu of fee services to help its suppliers sell products, including cooperative space advertising, trade show support, special publisher catalogs, demonstration disks, a FAXcetera hot line for product literature, shipment stuffers, telephone sold-on-hold advertising and a variety of custom direct mail services. As part of these services, the Company works closely with suppliers' personnel on the timing and nature of new product introductions and policies, helps build product awareness, conducts marketing programs to selected users on behalf of publishers and provides a broad range of product support.
COOPERATIVE AND FEE-BASED ADVERTISING. The Company engages in cooperative and fee-based advertising with software publishers in accordance with written advertising insertion order agreements. Under these agreements, the Company places advertisements or prints catalogs that feature publisher discounts, advertising allowances and rebates. Frequently, the PROGRAMMER'S PARADISE logo and telephone number are included in the promotion of selected publishers and incoming calls are handled by Company representatives. In addition, the Company often coordinates its catalog distribution and other marketing initiatives to coincide with new product releases. Many suppliers also provide funds to the Company based upon an agreed amount of coverage given in the catalogs for their respective products, thereby financing the cost of catalog publication and distribution. In 1996, the Company's cooperative and fee-based advertising reimbursements totaled less than 14% of total product revenues in the Company's domestic operations, and significantly smaller percentages in the European operations.
PUBLISHING. As part of its catalog operations, the Company also operates a software publishing operation under the name Lifeboat Publishing. Lifeboat Publishing promotes, markets, distributes and supports technical software titles which it owns or to which it has rights under publishing contracts. The Company does not itself develop from inception any of the software programs it publishes, but is principally engaged in identifying end user requirements, defining specifications and functions which would satisfy those requirements, and working with product authors or development companies which have core products designed to fit these requirements. To publish a product, the Company generally obtains exclusive license rights to a software product in exchange for the payment of royalties by the Company based on subsequent sales of the product. In some instances, the Company is required to pay minimum annual royalty payments.
The Company believes there is a synergy between the publishing operations and its three distribution channels, as the catalog, corporate reseller and wholesale operations help launch and sell products published by Lifeboat Publishing. Lifeboat Publishing sales generally are made at substantially higher margins than other products sold by the Company. Of the 250 best selling SKUs in
the PROGRAMMER'S PARADISE and THE PROGRAMMER'S SUPERSHOP catalogs in 1996, six were published by Lifeboat Publishing. The Company's family of publishing products currently includes DAN BRICKLIN'S DEMO-IT!, WINWIDGET, AND VISUAL IMAGE.
CORPORATE RESELLING
Direct corporate reselling is primarily conducted in Europe by ISP*D, which was acquired by the Company in June 1994. The Company hopes to utilize ISP*D's strength in Germany as a base for pan-European business development, utilizing the offices and operations of all of the Company's subsidiaries in Europe. Additionally, it is the Company's strategy to become the European-based corporate reseller of choice for European companies desiring coordinated purchasing agreements for U.S. subsidiaries. The formation of ISP*F is the continuation of the Company's planned European expansion in the reselling channel.
ISP*D's experienced sales force, each member of which is assigned a specific territory in Germany or Austria, has built relationships with corporate customers through regular phone contact and personalized service. Account executives work directly with procurement managers, management information system managers and computer support managers of existing and potential customers to identify the specific needs of each customer and to facilitate the acquisition of software within the customer's organizational framework. They also maintain close contact with customers in order to provide them with timely communications and assistance with any special or strategic requests. In January 1996, ISP*D formed a full-time consulting staff as a value added service for its reseller customers enabling the Company to market itself on the basis of its overall price and service advantage in an environment where customers typically utilize two or more suppliers to satisfy their software needs.
ISP*D's corporate reseller operations are now being supplemented by the recently introduced PROGRAMMER'S PARADISE DEUTSCHLAND and PROGRAMMER'S PARADISE DEUTSCHLAND CORPORATE EDITION, as is ISP*F's operation with the PROGRAMMER'S PARADISE FRANCE catalog.
WHOLESALE OPERATIONS
Through Lifeboat Distribution and Lifeboat Italy, the Company sells, at wholesale, technical software to storefront retail dealers, superstores, resellers and mail order companies. The U.S. retailers include Software Etc. and MEI/Micro Center, while the resellers include ASAP Software Express, Stream, Corporate Software, Softmart and Software Spectrum. In addition, Lifeboat Italy wholesales productivity software. In 1996, Lifeboat Distribution - Germany began to wholesale productivity software under exclusive distribution arrangements with certain suppliers.
PURCHASING AND FULFILLMENT
The Company's success is, in part, dependent upon the ability of its suppliers to develop and market products that meet the changing requirements of the marketplace. The Company believes it enjoys good relations with its vendors. The Company and its principal vendors have cooperated frequently in product introductions and other marketing programs. In addition, the Company typically receives price protection should a vendor subsequently lower its price. As is customary in the industry, the Company has no long-term supply contracts with any of its suppliers. Substantially all the Company's contracts with its vendors are terminable upon 30 days' notice or less.
The Company believes that effective purchasing is a key element of its business strategy to provide technical software at competitive prices. The Company believes that volume purchases enable it to obtain favorable and competitive product pricing. The Company purchases products from more than 1,000 publishers. Domestically, in 1996 the Company purchased approximately 56.5% of its products directly from manufacturers and publishers and the balance from three distributors - Ingram, Merisel and DistribuPro. The largest volume of purchases by the Company from distributors was from Ingram, representing approximately 13.4% of worldwide purchases in 1996. The Company believes it can purchase substantially all products purchased from Ingram from other competing wholesalers under similar terms. Domestically, the leading 10 vendors of the Company accounted for approximately 61.1% of its purchases. Management estimates that during 1996 approximately 47% of worldwide revenues of the Company were derived from products published by Microsoft.
ISP*D purchased approximately 72% of its products directly from manufacturers and publishers and the balance from more than six distributors. The leading three suppliers of ISP*D accounted for approximately 8.6% of purchases in 1996. ISP*D is a Microsoft Select dealer, entitling it to license Microsoft products and distribute such products from master lists forwarded by Microsoft and to sell documentation separate from the software media. Approximately 79% of ISP*D's sales in 1996 were of Microsoft products. Lifeboat Italy, also an authorized Miscrosoft distributor, purchased approximately 34% of its products directly from manufacturers and publishers and the balance from three distributors in 1996. The largest volume of purchases by Lifeboat Italy was from JSoft, related to Microsoft software, which represented approximately 61% of purchases in 1996. Under a 1994 distribution reorganization by Microsoft, Lifeboat Italy retained its designation as a Microsoft distributor, however, it was required to purchase Microsoft products through a direct ship distributor such as JSoft. The Company believes that it can purchase substantially all products obtained from JSoft from other competing wholesalers under similar terms.
The Company attempts to manage its inventory position to generate a high number of inventory turns consistent with achieving high product availability and order fill rates. Inventory levels may vary from period to period, due in part to increases or decreases in sales levels, the Company's practice of making large-volume purchases when it deems the terms of such purchases to be attractive, and the addition of new suppliers and products. Moreover, the Company's order fulfillment and inventory control allow the Company to order certain products just in time for next day shipping. The Company promotes the use of electronic data interchange ("EDI") with its suppliers, which helps reduce overhead and the use of paper in the ordering process. All inventory items in the U.S. and Italy are bar coded and located in computer designated areas which are easily identified on the packing slip. All such orders are checked with bar code scanners prior to packing to ensure that each order is filled correctly. The Company also conducts a quarterly physical inventory in the United States and Germany, and three times per year in Italy, to verify its inventory levels on a timely basis. Additionally, some suppliers or distributors will "drop ship" products directly to the customers, which reduces physical handling by the Company. These inventory management techniques allow the Company to offer a greater range of products without increased inventory requirements. Generally, the Company has been able to return unsold or obsolete inventory within specified intervals of the purchase date to its vendors through written agreements with, or unwritten policies of, such vendors. Domestic orders are shipped via United Parcel Service. Upon request, at an additional charge, overnight delivery services are available. The Company operates distribution facilities in Shrewsbury, New Jersey; Munich, Germany; Milan, Italy; London, England; and Paris, France.
MANAGEMENT INFORMATION SYSTEMS
In the U.S., the Company operates a management information system that allows for centralized management of key functions, including inventory and accounts receivable management, purchasing, sales and distribution. Such system has been customized to provide for the preparation of daily operating control reports regarding key aspects of the Company's business. The Company's
existing U.S. management information system is a multi-processor, UNIX-based package designed for a transaction-intensive distribution system, with financial, inventory, purchasing and sales modules. The system provides operators with direct computer-generated fax capabilities which are used extensively for expediting purchase orders, customer service confirmations and automatic follow-up of accounts receivable collections. This system supports telemarketing, marketing, purchasing, accounting, customer service, warehousing and distribution. As part of the acquisition of substantially all of the assets of The Software Developer's Company, Inc., the Company acquired SDC's management information system which are more adaptive to direct marketing organizations than the Company's. The Company is presently in the process of installing this system. The system allows the Company, among other things, track direct marketing campaign performance, to monitor sales trends, make informed purchasing decisions, and provide product availability and order status information. In addition to the main system, the Company has systems of networked personal computers, which facilitates data sharing and provides an automated office environment, as well as microcomputer-based desktop publishing systems. The Company's European operations use local systems, which are expected over time to be modified to allow exchange of data with the Company's U.S. operations. The Company believes that its management information systems and planned enhancements are sufficient to sustain its present operations and its anticipated growth for the foreseeable future.
TRADEMARKS, INTELLECTUAL PROPERTY AND LICENSES
The Company conducts its business under the trademarks and service marks of PROGRAMMER'S PARADISE, THE PROGRAMMER'S SUPERSHOP, The "Island Man" cartoon character logo, Lifeboat, DEMO, demo-it!, System Science, ISP*D and ISP*F. The Company believes that its trademarks and service marks have significant value and are an important factor in the marketing of its products. The Company intends to use and protect these and related marks, as necessary. The Company does not maintain a traditional research and development group, but works closely with software authors and publishers and other technology developers to stay abreast of the latest developments in microcomputer technology. In connection with its publishing operations, from time to time the Company has funded a portion of the development of publishing properties under license to the Company, by providing the author advances, which are applied against royalties.
ISP*D is a Microsoft Select dealer. The Company has multiple other alliances with publishers such as Lotus, Borland, Powersoft, Attachmate, Nu-Mega, Intersolv and Logic Works.
EMPLOYEES
As of December 31, 1996, the Company had 92 full-time employees in the United States, including 58 in sales and marketing, 13 in purchasing and distribution, and 21 in administration, accounting and MIS and 2 part-time employees. As of December 31, 1996, the Company had 101 full-time employees in Europe, including 44 in sales and marketing, 9 in consulting and technical training, 25 in purchasing and distribution, 23 in administration and accounting and 3 part-time employees.
The Company is not a party to any collective bargaining agreements with its employees, has experienced no work stoppages and considers its relations with its employees to be satisfactory.
COMPETITION
The software distribution market is highly competitive. Pricing is very aggressive, and the Company expects pricing pressure to continue. The Company faces competition from a wide variety of
sources including direct sales by vendors, software resellers, superstores, catalogers and other direct marketers of software products, some of which are significantly larger and have substantially greater resources than the Company. Many of these competitors compete principally on the basis of price, product availability, customer service and technical support, and may have lower costs than the Company. The market for technical software is characterized by rapid changes in technology and user needs. The Company competes both in the acquisition of lists of prospects and of new products from software authors, developers and publishers, as well as in the marketing and sale of its existing products to its customers.
Although many of the Company's competitors have greater financial resources than the Company, the Company believes that an ability to offer the professional programmer a wide selection of products, at low prices, with prompt delivery, and high customer service levels and its good relationships with its vendors and suppliers, allow it to compete effectively. The Company competes to gain distribution rights for new products primarily on the basis of its reputation, the relationships which management of the Company has established with product authors and the Company's ability to promote and market new products successfully.
The software distribution industry is undergoing significant change and consolidation. Software distributors are consolidating operations and acquiring or merging with other distributors or retailers to achieve economies of scale and increased efficiency. During 1996, the Company acquired its principle competitor within the catalog industry- THE PROGRAMMER'S SUPERSHOP. One of the primary benefits of the transaction was the economies of scale as the Company was able to absorb the entire operations of The Programmer's Supershop within its existing location while substantially reducing overhead run rates.
The current consolidation trend could cause the industry to become even more competitive and make it more difficult for the Company to maintain its operating margins. The manner in which software products are distributed and sold is also changing, and new methods of distribution and sale may emerge or expand. Software developers and publishers have sold, and may intensify their efforts to sell, their products directly to end-users. From time to time certain developers and publishers have instituted programs for the direct sale of large order quantities of software to certain major corporate accounts. These types of programs may continue to be developed and used by various developers and publishers. While Microsoft and other vendors currently sell their update products directly to end users, they have not attempted to completely bypass the reseller channel. Future efforts by such entities to bypass third-party sales channels could materially and adversely affect the Company's operations.
In addition, certain major publishers, including Microsoft, have implemented programs for the master copy distribution or site licensing of software. These programs generally grant an organization the right to make a number of copies of software for distribution within the organization provided that the organization pays a fee to the developer for each copy made. Also, resellers and publishers may attempt to increase the volume of software products distributed electronically through downloading to end users' microcomputers, through CD-ROM unlocking technology, through CD-ROM based subscription services and through on-line shopping services. Any of these competitive programs, if successful, could have a material adverse effect on the Company's operations and financial condition.
SALES TAX AND REGULATORY MATTERS
The Company believes that it is presently required to collect sales tax on sales of products through its catalogs to residents of New Jersey. Various states have sought to impose on direct marketers the burden of collecting state sales tax on the sale of products shipped to that state's
residents. The United States Supreme Court has ruled that the various states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order company whose only contact with the taxing state is the distribution of catalogs and other advertisement materials through the mail and whose subsequent delivery of purchased goods is by U.S. mail or interstate common carrier. If legislation is ultimately enacted to overturn such decision, or state courts otherwise impose a duty to collect sales or use tax, imposition of a tax collection obligation on the Company in states to which it ships products may result in additional administrative expenses to the Company and price increases to its customers.
The Company seeks to expand its in-house list of customers and prospects. In the event that federal or state governments or European governments enact privacy legislation resulting in the increased regulation of mailing lists, the Company's ability to enhance or expand its lists could be adversely affected. In such event, the Company could also experience increased costs in complying with potentially burdensome regulations concerning the solicitation of consents to keep or add customer names to its mailing lists.
The direct response business is subject to the Mail or Telephone Order Merchandise Rule and related regulations promulgated by the Federal Trade Commission. While the Company believes it is in compliance with such regulations and has implemented programs and systems to assure its ongoing compliance with such regulations, no assurance can be given that new laws or regulations will not be enacted or adopted which might adversely affect the Company's operations.
SEASONALITY
The Company has traditionally experienced a decrease in domestic net sales in its third quarter compared to the other quarters. This traditional downturn in domestic net sales is exacerbated by the decline of European commercial activity in general and software sales in particular during the summer months.
ITEM 2.
ITEM 2. PROPERTIES.
As of December 31, 1996, the Company currently leases 15,000 square feet of space for its offices on the first floor at 1163 Shrewsbury Avenue, Shrewsbury, New Jersey. The lease is presently on a month to month basis while the Company is negotiating various options including renewing its current lease. Basic monthly rent payments amount to approximately $11,000. Additionally, the Company also leases approximately 3,500 square feet of office space under a short-term lease that calls for monthly rental payments in the amount of $3,750. The Company's European facilities, all of which are leased under long term arrangements, are as follows: 14,269 square feet in Munich, Germany, 8,606 square feet in Milan, Italy, 3,000 square feet in London, England and 4,300 square feet in Paris, France. Total annual rent expense for the European facilities is approximately $ 467,000. See Note 9 to the Consolidated Financial Statements.
ITEM 3.
ITEM 3. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information (other than the information regarding executive officers of the Company called for by Item 401 of Regulation S-K which is included in Part I hereof as Item 4A in accordance with General Instruction G(3)) will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference thereto.
ITEM 4.
ITEM 4. EXECUTIVE COMPENSATION.
This information will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference thereto.
ITEM 5.
ITEM 5. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference thereto.
ITEM 6.
ITEM 6. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference thereto.
PART IV
ITEM 7.
ITEM 7. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements and Schedules Report of Independent Certified Public Accountants Consolidated Balance Sheets - as of December 31, 1996 and December 31, 1995 Consolidated Statements of Income - Years ended December 31, 1996, December 31, 1995 and December 31, 1994 Consolidated Statements of Cash Flows - Years ended December 31, 1996, December 31, 1995 and December 31, 1994 Consolidated Statement of Stockholders' Equity Years ended December 31, 1996, December 31, 1995 and December 31, Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required or are not applicable.
3. EXHIBITS:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS.
3.1 Form of Amended and Restated Certificate of Incorporation of the Company.*
3.2 Form of Amended and Restated By-Laws of the Company.*
4.1 Specimen of Common Stock Certificate.*
10.2 Amended and Restated Revolving Loan and Security Agreement, dated as of March 4, 1993, between Midlantic National Bank and the Company together with Revolving Loan Note; First Amendment to Amended and Restated Revolving Loan and Security Agreement, dated as of March 4, 1993, between Midlantic National Bank and the Company, Corsoft, Inc. and Lifeboat together with First Allonge to Revolving Loan Note; Consent of Midlantic National Bank.*
10.3 ISP*D Loan Agreements.*
10.4 Lifeboat Italy Loan Agreement.*
10.5 Lease, dated as of August 27, 1987, by and between Robert C. Baker, Robert C. Baker, Trustee under Trust Agreement dated March 15, 1984 for the Benefit of Ashley S. Baker, Gerald H. Baker, Harvey B. Oshins, Baker 1985 Family Partnership, Gregory J. Stepic and John G. Orrico ("Landlord") and Computer Library, Inc., and First Modification of Lease, dated as of April 24, 1991, between Landlord and the Company.*
10.6 ISP*D Office Lease.*
10.7 Lifeboat Italy Office Lease.*
10.8 Agreement dated as of December 29, 1994, between Lifeboat Publishing and Software Garden, Inc.; License for Trademark "Dan Bricklin", dated as of December 29, 1994, between the Company and Daniel Bricklin; First Amendment to Software License Agreement and Trademark License Agreement dated March 30, 1995.*
10.9 Employment Letter with Roger Paradis dated as of May 24, 1995.*
10.11 Employment Letter with Joseph V. Popolo dated as of December 16, 1994.*
10.12 Employment Letter with John P. Broderick dated as of May 10, 1995.*
10.13 Employment Letter with Massimo Freschi dated as of June 18, 1992.*
10.14 Employment Letter with Frederick W. Schmidt dated as of January 19, 1994.*
10.15 Form of Confidentiality and Non-Compete Agreement.*
10.16 Employment Agreement dated as of May 26, 1994, between Peter Lorenz, ISP*D and the Company.*
10.17 1986 Stock Option Plan and Form of Employee Stock Option Agreement.*
10.18 1995 Stock Plan.*
10.19 1995 Non-Employee Director Plan.*
10.20 Form of Officer and Director Indemnification Agreement.*
10.21 Registration Rights Agreement dated as of May , 1988.*
10.22 Agreement, dated December 19, 1995, by and between Programmer's Paradise (UK) Limited and the former shareholders of Systematika Limited, as supplemented by a letter agreement dated December 19, 1995 between Peter Lindsey and Programmer's Paradise (UK) Limited.+
10.23 Employment Agreement dated December 19, 1995 between Peter Lindsey and Systematika Limited.+
10.24 Share Sale Agreement dated December 29, 1995 between Raphael and Rosario Perez and Programmer's Paradise France relating to Logiciels & Applications SA.++
10.25 Shareholders' Agreement dated December 29, 1995 between Raphael Perez, Softway, Inc., Selsid and Programmer's Paradise France relating to Logiciels & Applications SA.++
10.26 Warranty Agreement dated January 18, 1996 by and among Raphael Perez, Rosario Perez and Programmer's Paradise France relating to Logiciels & Applications SA.++
10.27 Share Sale Agreement Amendment Agreement dated January 18, 1996 Relating to Logiciels & Applications by and among Raphael Perez, Rosario Perez and Programmer's Paradise France.++
10.28 Call Option Agreement dated January 18, 1996 between Raphael Perez and Programmer's Paradise France.++
10.29 Side Agreement dated January 18, 1996 to Call Option Agreement dated January 18, 1996 between Raphael Perez and Programmer's Paradise France.++
10.30 Call Option Agreement dated January 18, 1996 by and among Softway, Inc., Selsid and Programmer's Paradise France.++
10.31 Employment Agreement dated January 22, 1996 between Raphael Perez and Logiciels Et Applications.++
10.32 Agreement of Purchase and Sales of Assets, dated as of May 16, 1996, between the Registrant and the Selling Parties, and the exhibits thereto. **
10.33 Bill of Sale, dated as of June 28, 1996, executed by the Selling Parties.**
10.34 Facilities and Employee Use Agreement, dated as of June 28, 1996, between the Registrant and SDC.**
10.35 Closing Statement, dated as of June 28, 1996, between the Registrant and the Selling Parties**
10.36 Letter Agreement regarding the Acquisition of Stock of SDEV Germany, dated as of June 28, 1996, between the Registrant and the Selling Parties.**
10.37 Stock Acquisition Escrow Agreement, dated as of June 28, 1996, between the Registrant, the Selling Parties and Golenbock, Eiseman, Assor & Bell, as escrow agent.**
10.38 Consent of Independent Auditors**
21.1 Subsidiaries of the Registrant.*
24.1 Powers of Attorney.*
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of the fiscal year covered by this Report.
The Company filed a Report on Form 8-K on January 2, 1996 and filed an amendment thereto on Form 8-KA on March 4, 1996, with respect to the acquisition of the stock of Systematika Limited, an English corporation, by Programmer's Paradise (UK) Limited (See Item 1). The Company also filed a Report on Form 8-K on July 19,1996 and filed an amendment thereto on Form 8-KA on September 16, 1996, with respect to the acquisition of substantially all of the assets of Software Developers Company, Inc..
* Incorporated by reference to exhibits of the same number filed with the Registrant's Registration Statement on Form S-1 or amendments thereto (File No. 33-92810).
+ Incorporated by reference to the Registrant's Report on Form 8-K dated January 2, 1996 or amendments thereto.
++ Incorporated by reference to exhibits of the same number filed with the Registrant's Report on Form 10-K dated March 28, 1996.
** Incorporated by reference to the Registrant's Report on Form 8-K dated July 19, 1996 or amendments thereto.
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Financial Statements
Page ---- Report of Independent Public Accounts
Consolidated Balance Sheets
Consolidated Statement of Income
Consolidated Statement of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statments
Schedule II-Valuation and Qualifying Accounts
Report of Independent Auditors
The Board of Directors and Stockholders Programmer's Paradise, Inc.
We have audited the accompanying consolidated financial statements of Programmer's Paradise, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index of Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Programmer's Paradise, Inc. and subsidiaries at December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth herein.
ERNST & YOUNG LLP
MetroPark, New Jersey January 31, 1997
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Balance Sheets
See accompanying notes.
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Income
See accompanying notes.
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
See accompanying notes.
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying notes.
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of Programmer's Paradise, Inc., its wholly-owned subsidiaries and its majority-owned subsidiaries (the "Company"). The Company is a marketer of software for microcomputers, servers and networks, with a focus on providing software products, known as technical software, to people who design, program and support software, operating through three distribution channels-catalog, corporate reseller and wholesale distribution. All intercompany balances and transactions have been eliminated in consolidation.
The Company's accounts receivable are potentially exposed to concentrations of credit risk. These receivables reflect a broad customer base, which is dispersed across many different industries and geographies. Credit limits, periodic credit evaluations and account monitoring procedures are utilized to minimize the risk of loss. Collateral is generally not required. Credit losses related to accounts receivable have been consistent with management's expectations and, historically, have not been material. The carrying value of accounts receivable and notes payable to banks approximate fair value.
Major Customer and Supplier
Sales to one customer were $8.8 million, or 12.4% of net sales in 1994. In 1995 and 1996 no single customer exceeded 10% of net sales.
The Company has authorized dealership or distribution agreements with various suppliers. Products of one of these suppliers accounted for approximately 39%, 46% and 47% of Company revenues for 1994, 1995 and 1996, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original maturities of 90 days or less to be cash equivalents.
Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries, all of which are located in Europe, have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the year. Resulting cumulative translation adjustments have been recorded as a separate component of stockholders' equity.
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.
1. Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes revenue from the sale of software for microcomputers, servers and networking upon shipment.
Advertising Costs
Non-reimbursed advertising costs were expensed when incurred prior to 1995. The Company adopted the Statement of Position 93-7 "Reporting on Advertising Costs" in 1995. The effect of adoption of the Statement did not have a material effect on the Company's financial position or results of operations because publication of new catalogs occur frequently during the year. The unamortized balance of non-reimbursed advertising costs at any period end are minimal. Advertising costs for 1994, 1995, and 1996 amounted to approximately $3,406,000, $3,320,000 and $5,571,000, respectively.
Income Taxes
Deferred income tax assets and liabilities arise from differences between the tax basis of assets or liabilities and the amount reported in the consolidated financial statements.
Net Income Per Common Share
The net income per common share is computed using the weighted average number of common shares and common share equivalents outstanding during the period, assuming the exercise of common stock options using the treasury stock method. Stock options granted by the Company during the twelve months immediately preceding the date of the initial filing by the Company of its initial public offering have been included in the calculation of the shares used in computing net income per common share as if they were outstanding throughout the entire period for all periods presented.
Reclassification
Certain 1994 and 1995 financial statement amounts have been reclassified to conform to 1996 presentation.
2. Acquisitions
In June 1994, the Company acquired 90% of the outstanding stock of ISP*D International Software Partners GmbH and its subsidiary ("ISP*D"), computer software resellers
2. Acquisitions (continued)
located in Germany and Austria. In connection with this transaction, approximately $429,000 of transaction and other costs were recorded. In January 1995, the Company exercised its option to purchase the remaining 10% of ISP*D for cash and shares of the Company's common stock amounting to $134,000. Additional consideration equal to approximately $170,000 was issued to the seller as a result of the reduction in certain guarantees of debt of ISP*D in May 1995.
In March 1995, the Company made a final payment of $125,000 to the former owners of South Mountain Software, Inc., in connection with the 1992 acquisition of certain assets and assumption of certain liabilities thereof.
In December 1995, the Company acquired 100% of the outstanding stock of Systematika Limited, doing business as System Science ("System Science"), at a cost of approximately $1,540,000. System Science is a reseller of technical software in the United Kingdom and is the publisher of the System Science catalog.
In January 1996, the Company's wholly-owned French subsidiary, Programmer's Paradise France SARL, acquired a majority-owned interest in ISP*F International Software Partners SA (ISP*F), a newly formed full service corporate reseller of PC software, based in Paris. The Company's capital contribution in connection with the acquisition of ISP*F is approximately $1,214,000.
In June 1996, the Company acquired substantially all of the assets and business of The Software Developer's Company, Inc. (SDC) for cash at a cost of approximately $11,000,000. SDC had been the Company's largest direct mail competitor, offering a similar array of technical software.
The Company accounted for the above acquisitions as purchases. Accordingly, the acquired assets and liabilities assumed have been recorded at the estimated fair values at the dates of acquisition. The results of operations of the acquired businesses are included in the accompanying consolidated statements of income from their respective dates of acquisition.
2. Acquisitions (continued)
The following table presents the unaudited pro forma consolidated results of operations for the three years ended December 31, 1996 as if the above acquisitions had occurred on January 1 of the year preceding the acquisition:
1994 1995 1996 ---------------------------------------------- Sales $83,877,000 $145,575,000 $152,035,000 Net income 1,170,000 7,630,000 3,599,000 Net income per common share $.37 $1.86 $.69
The pro forma amounts reflect amortization of the excess of purchase price over the net assets acquired, the reduction in operating expenses as a result of combining the operations, the reduction in interest income as a result of the utilization of cash and the related tax effect of these items. The pro forma results are not necessarily indicative of the results of operations that would have occurred had the acquisitions taken place at the beginning of the periods presented nor are they intended to be indicative of results that may occur in the future.
3. Notes Payable to Banks
Notes payable to banks represent the outstanding balance under a U.S. revolving line of credit, lines of credit with Italian and French banks and a term loan with a German bank.
The limit under the U.S. revolving line of credit is the lesser of $4,000,000 or the sum of 80% of its eligible accounts receivable and 50% of its eligible inventory, as defined. The facility expires in June of 1997 and is secured by all of the domestic assets of the Company and contains certain covenants which require the Company to maintain a minimum level of tangible net worth and working capital. The line of credit prohibits the payment of cash dividends and contains certain restrictions on the Company's ability to make loans or acquire interests in other entities without the prior consent of the lender. Advances under the domestic revolving line of credit bear interest at the bank's prime rate plus .50%, and are due on demand. The commitment fee on the unused portion of the line is .5% per annum. The bank's prime rate was 8.25% at December 31, 1996. In connection with the System Science acquisition (see Note 2), the Company has utilized approximately $1,350,000 under the U.S. revolving line of credit which was converted to a five year term loan bearing interest at LIBOR (6.62% at December 31, 1996) plus 2%, of which $300,000 is classified as current in the accompanying consolidated balance sheet.
3. Notes Payable to Banks (continued)
A revolving line of credit in Germany is secured by ISP*D accounts receivable, inventory and up to $180,000 (DM 300,000) by the domestic assets of the Company. The limit under the line is approximately $645,000 (DM 1,000,000) at December 31, 1996. The line bears interest at 8.25%. As of December 31, 1996, none of this line had been utilized.
Unsecured lines of credit in Italy, which are denominated in Italian lire, bear interest at market interest rates (ranging from 11.00% to 14.60% at December 31, 1996) and are payable on demand. The limit under the lines is approximately $2,080,000 (Lire 3,200,000,000). As of December 31, 1996, none of this line had been utilized.
The German term loan has an outstanding balance of approximately $645,000 (DM 1,000,000) at December 31, 1996, and matures in March 1997. The term loan is secured by all accounts receivable and inventory of ISP*D and bears an interest rate of 4.35%.
The line of credit in France is secured by ISP*F accounts receivable and inventory and a 3,000,000 French franc letter of credit. The limit under the line is approximately $382,000 (FRF 2,000,000), bearing interest at a rate of 6.78%. At December 31, 1996, approximately $190,000 (FRF 992,542) of this line has been utilized.
The weighted average interest rate for notes payable to banks was 9.80%, 12.80% and 10.10% at December 31, 1994, 1995 and 1996, respectively.
Interest paid was approximately $475,000, $290,000 and $343,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
4. Balance Sheet Details
Equipment and leasehold improvements consists of:
1995 1996 -------------------------------
Equipment $1,670,594$ 2,967,205 Leasehold improvements 322,973 295,089 ------------------------------- 1,993,567 3,262,294 Less accumulated depreciation (866,585) (1,567,394) ------------------------------- $1,126,982$ 1,694,900 ===============================
4. Balance Sheet Details (continued)
Accounts payable and accrued expenses consists of the following:
1995 1996 ------------------------------------
Trade accounts payable $10,785,444 $11,721,055 Accrued licensing costs 14,033,583 19,038,071 Other accrued expenses 3,062,003 5,000,934 ------------------------------------ $27,881,030 $35,760,060 ====================================
5. Income Taxes
The provision (benefit) for income taxes consisted of the following:
Year ended December 31 1994 1995 1996 --------------------------------------------------
Current: Federal $ 30,739 $ 445,733 $ 502,617 State 80,261 276,400 274,710 Foreign 27,926 312,981 164,719 -------------------------------------------------- 138,926 1,035,114 942,046 Deferred: Federal (387,350) (2,759,603) 473,099 State (63,000) (2,546) 29,812 Foreign 168,050 (454,000) -------------------------------------------------- (282,300) (2,762,149) 48,911 ================================================== $(143,374) $(1,727,035) $ 990,957 ==================================================
5. Income Taxes (continued)
The reasons for the difference between total tax expense (benefit) and the amount computed by applying the U.S. statutory federal income tax rate to income before income taxes are as follows:
Significant components of the Company's deferred tax assets are as follows:
Year ended December 31 1994 1995 1996 ------------------------------------------
Fixed assets $ 6,148 $ 20,928 $ 3,842 Accruals and reserves 541,894 491,918 327,893 Intangibles 1,578 (36,366) Contribution carryforwards 549 Net operating loss carryforwards 3,353,678 2,937,296 3,935,579 Credit carryforwards 58,015 89,996 25,547 ------------------------------------------ Gross deferred tax assets 3,961,862 3,503,772 4,292,861
Valuation allowance (3,324,239) (138,000) (976,000) ------------------------------------------ Net deferred tax asset $ 637,623 $3,365,772 $3,316,861 ===========================================
The valuation allowance was reduced principally in 1994 as a result of utilizing net operating loss carryforwards, and in 1995, changes in the estimate of the realizability of the deferred tax asset in future years based upon expected taxable income.
5. Income Taxes (continued)
The Company has recorded a U.S. deferred tax asset at December 31, 1996 of $2,500,000 reflecting the benefit of $7,400,000 in federal tax loss carryforwards, which expire in varying amounts between 2000 and 2005. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The Company's ability to utilize these net operating loss carryforwards is restricted to approximately $1.5 million per year, as a result of an ownership change pursuant to Section 382 of the Internal Revenue Code.
For financial reporting purposes, income before income taxes and minority interest includes the following components:
Year ended December 31 1994 1995 1996 --------------------------------------------
United States $501,143 $2,351,954 $3,010,209 Foreign 450,444 124,462 179,457 -------------------------------------------- $951,587 $2,476,416 $3,189,666 ============================================
At December 31, 1996, the Company had approximately $1,779,000 net operating loss carryforwards for German income tax purposes, $34,000 for UK income tax purposes, $72,000 for Italian income tax purposes and approximately $503,000 for French income tax purposes.
Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $563,000 at December 31, 1996. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon.
During the years ended December 31, 1994, 1995 and 1996, the Company paid approximately $3,000 , $455,000 and $483,000, respectively, in income taxes.
6. Non-Cumulative Redeemable Convertible Preferred Stock
On March 31, 1995, the outstanding shares of Series A non-cumulative redeemable convertible preferred stock, in accordance with its provisions, were converted to 1,674,071 shares of common stock.
6. Non-Cumulative Redeemable Convertible Preferred Stock (continued)
On July 18, 1995, the effective date of the initial public offering, all outstanding shares of Series B non-cumulative redeemable convertible senior preferred stock, in accordance with its provisions, were converted to 450,690 shares of common stock.
7. Stock Option Plans
The Company's 1986 Employee Stock Option Plan, as amended on June 15, 1994, provides for the grant of options to purchase up to 698,133 shares of the Company's common stock to employees, officers and directors of the Company. The terms of the options are for a maximum of ten years from date of grant and generally are exercisable at an exercise price equal to but not less than the fair market value of the common stock on the date that the option is granted.
On April 21, 1995, the Board of Directors adopted the Company's 1995 Employee Stock Plan ("1995 Plan"). The 1995 Plan, as amended on June 11, 1996, provides for the grant of options to purchase up to 462,500 shares of the Company's common stock to officers, directors, employees and consultants of the Company. The 1995 Plan requires that each option shall expire on the date specified by the Compensation Committee, but not more than ten years from its date of grant in the case of ISO's and Non-Qualified Options.
On April 21, 1995, the Board of Directors adopted the Company's 1995 Non-Employee Director Plan ("1995 Director Plan"). The 1995 Director Plan provides for the grant of options to purchase up to 112,500 shares of the Company's common stock to persons who are members of the Company's Board of Directors and not employees or officers of the Company. The 1995 Director Plan requires that options granted thereunder will expire ten years from the date of grant. Each option granted under the 1995 Director Plan becomes exercisable over a five year period, and vests in an installment of 20% of the total option grant upon the expiration of one year from the date of the option grant, and thereafter vests in equal quarterly installments of 5%.
FASB 123 requires pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1995 and 1996: risk free interest rates of 6.28% in both periods, dividend yields of 0%, volatility factors of the expected market price of the Company's common stock of .61 in both periods, and a weighted-average expected life of the option of 5 years.
7. Stock Option Plans (continued)
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share amounts):
1995 1996 ------------------------
Net income as reported $4,203 $2,298 Net income pro forma 4,081 1,902 Earnings per share, as reported $1.03 $.44 Earnings per share, pro forma $1.04 $.38
The weighted average fair value of options granted during 1995 and 1996 is $2.41 and $3.51, respectively.
7. Stock Option Plans (continued)
Changes during 1995 and 1996 in options outstanding for the combined plans were as follows:
Weighted Number Average of Exercise Options Price -----------------------------
Outstanding at January 1, 1995 588,960 $ .55 Granted in 1995 289,000 4.22 Canceled in 1995 (64,628) 1.38 Exercised in 1995 (89,197) .36 --------------- Outstanding at December 31, 1995 724,135 1.95 Granted in 1996 188,701 5.99 Canceled in 1996 (35,097) 5.80 Exercised in 1996 (83,975) .36 =============== Outstanding at December 31, 1996 793,764 2.91 =============== Exercisable at December 31, 1996 434,278 ===============
Stock options outstanding at December 31, 1996 are summarized as follows:
Weighted Outstanding Average Weighted Range of Options at Remaining Average Exercise December Contractual Exercise Prices 31, 1996 Life Price - ---------------------------------------------------------------------
$.24 92,713 4.74 .24 67 - 1.00 289,775 7.26 .77 4.00 - 6.00 350,826 8.63 4.69 6.25 -10.50 60,450 9.73 7.59 ------------------ 793,764 ==================
Under the various plans, options that are cancelled can be reissued. At December 31, 1996, options for 302,800 shares were available for grant and 1,267,911 shares were reserved for future issuance.
8. Defined Contribution Pension Plan
Effective January 1, 1992, the Company initiated a defined contribution pension plan covering substantially all employees. Participating employees may make contributions to the plan, through payroll deductions. Matching contributions are made by the Company equal to 50% of the employee's contribution to the extent such employee contribution did not exceed 6% of their compensation. During the years ended December 31, 1994, 1995 and 1996, the Company expensed approximately $51,000, $54,000 and $59,000, respectively, related to this plan.
9. Commitments
The Company leases the space used for its operations and certain equipment under long-term operating leases. Future minimum rental payments over the remaining terms of these leases are as follows:
1997 $ 516,767 1998 479,193 1999 474,192 2000 399,710 2001 - =============== $1,869,862 ===============
Rent expense for the years ended December 31, 1994, 1995 and 1996 was approximately $617,000, $618,000 and $752,000, respectively.
The Company has royalty agreements which require payments based on sale of certain products. Royalty expense for the years ended December 31, 1994, 1995 and 1996 was approximately $243,000, $348,000 and $265,000, respectively. In connection with a royalty agreement with a company which is controlled by a shareholder/member of the Board of Directors of the Company, the Company made an advance payment of $250,000 in 1994, which is included in other assets in the consolidated balance sheets, and is being expensed based upon sales of the related product. At December 31, 1996, the unamortized amount of this payment was approximately $167,000.
10. Segment and Geographic Information
The Company's single business segment is the marketing of technical software for microcomputers, servers and networking.
The following table presents financial information based on the Company's geographic segments:
Income Net from Identifiable Sales Operations Assets ---------------------------------------------- (In Thousands) 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 ==============================================
Italy $ 8,374 $ 138 $ 4,496 Germany 49,128 426 26,032 France 8,924 (738) 4,970 United Kingdom 4,535 402 2,672 ---------------------------------------------- Total foreign 70,961 228 38,170
U.S. 56,719 2,708 31,039 ---------------------------------------------- Total $127,680 $2,936 $69,209 ==============================================
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:
Programmer's Paradise, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts (In Thousands)
(1) Arose from acquisitions.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in Shrewsbury, New Jersey, on March 28, 1997.
PROGRAMMER'S PARADISE, INC.
By: /s/ Roger Paradis ----------------------------------- Roger Paradis, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: