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, 2000
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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3136104
- ---------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 389-8950
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: Common Stock,
par value $0.01 per share (Title Of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant computed by reference to the closing sales price for the
Registrant's Common Stock on March 19, 2001, as reported on the Nasdaq National
Market, was approximately $20,840,500.
The number of shares outstanding of the Registrant's Common Stock as of
March 19, 2001 is 5,210,125 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 2001 Annual Meeting of Stockholders to be
filed on or before April 30, 2001 are incorporated by reference into Part III of
this Report.
The Exhibit Index appears on page: 27.
Page 1 of 29 Pages
PART I
Item 1 Business
General
Programmer's Paradise, Inc. (the "Company") is a recognized marketer of
software targeting the software development and Information Technology
professionals within enterprise organizations. During 2000, the Company operated
principally through five distribution channels in North America and Europe -
Internet, catalog, direct sales, telemarketing, and wholesale distribution.
Internet sales encompass the Company's domestic and international websites.
Catalog operations include catalog sales, advertising and publishing. Direct
sales operations include Programmer's Paradise Corporate Sales in the United
States. Telemarketing operations are conducted in the United States. Wholesale
operations include distribution to dealers and large resellers in the United
States through the Company's subsidiary, Lifeboat Distribution Inc.
Pursuant to an Agreement, dated December 1, 2000 ("Stock Sale Agreement"),
between the Company and PC-Ware Information Technologies AG, a German
corporation ("PC-Ware"), on January 9, 2001 the Company sold all of the shares
of its European subsidiaries (except for Programmer's Paradise France S.A.R.L.)
for 14,500,000 Euros, of which 3,275,000 Euros are being held in a 240-day
escrow as security for any claim of PC-Ware arising from alleged breaches of
representations by the Company under the Stock Sale Agreement. Such claims are
subject to a 300,000 Euro de minimus amount and a 7,500,000 Euro maximum amount.
The pro forma balance sheet for the Company's North American operations and
Programmer's Paradise France S.A.R.L., after the sale of its European
subsidiaries, is presented in the notes to the consolidated financial
statements. The Company maintains operations in the North America marketplace
through its U.S. and Canadian companies. The Company continues to reach-out to
the software developer's and IT professional's through its five distribution
channels.
The Company's strategic focus is to expand its catalog and Internet
activities while solidifying its position as a leading direct sales company to
the software developer and IT professional within the North American
marketplace. A key element of this strategy is to build upon the Company's
distinctive catalogs - the established Programmer's Paradise catalog, directed
at the software developer's community, and its Programmer's Supershop catalog,
directed at Information Technology professionals working in large corporations,
and to utilize the catalogs to direct traffic to the Company's websites as well
as being the initial conduit to developing its telemarketing channel. The
Company's focus for direct sales is to expand revenues and income by assisting
companies to manage hardware and software expenditures by delivering excellent
customer service.
Through its multiple distribution channels, the Company now offers products
representing more than 70,000 stock keeping units, or SKUs, consisting of
technical and general business application software and PC hardware and
components from more than 2,000 publishers and manufacturers, at prices
generally discounted below manufacturers' suggested retail prices. The Company's
catalogs are full color "magalogs" and offer one of the most complete
collections of microcomputer technical software, including programming
languages, tools, utilities, libraries, development systems, interfaces and
communication products. The Company has created a niche for hard to source
technical software programs and has demonstrated an ongoing capability to search
and obtain titles requested by its customer base.
Page 2 of 29 Pages
The Company believes that its catalogs are important marketing vehicles for
software publishers and manufacturers. These catalogs provide a cost-effective
and service-oriented means to market, sell and fulfill software products. The
Company utilizes its proprietary and brand-distinctive logo, the "Island Man"
cartoon character, on its flagship Programmer's Paradise catalog and many of
it's international catalogs.
The European-based operations (sold effective January 9, 2001 pursuant to
the Stock Sale Agreement) accounted for approximately 59% of sales for the year
ended December 31, 2000 and approximately 49% of gross profit for the same
period. The Company began European-based operations in the first quarter of 1993
when it acquired a controlling interest in Lifeboat Associates Italia Srl, a
long-standing software wholesale distributor in Italy with an orientation
towards technical software. In June 1994, the Company acquired a controlling
interest, and in January 1995, the Company acquired the remaining interest in
ISP*D International Software Partners GmbH, a large software-only dealer and a
leading independent supplier of Microsoft Select licenses and other software to
many large German and Aus-trian companies. In late 1994, the Company organized a
subsidiary in the United Kingdom to engage in catalog operations and in December
1995, the Company acquired Systematika Ltd., a leading reseller of technical
software in the United Kingdom and the publisher of the popular System Science
catalog. In January 1996, the Company formed ISP*F International Software
Partners France SA, as a full service corporate reseller of PC software, based
in Paris and majority-owned by Programmer's Paradise France S.A.R.L. In August
1997, the Company formed Programmer's Paradise, Canada Inc. located in
Mississauga, Ontario, to serve the growing developer market in Canada. In
September 1997, the Company acquired Logicsoft Holding BV, the parent company of
Logicsoft Europe BV, the largest software-only corporate reseller of PC software
in The Netherlands.
Programmer's Paradise, Inc. was incorporated under the laws of the State of
Delaware in 1982. The Company's principal executive offices are located at 1157
Shrewsbury Avenue, Shrewsbury, New Jersey 07702 and its telephone number is
(732) 389-8950. Website addresses are www.programmersparadise.com and
www.supershops.com. Information contained on our websites is not, and should not
be deemed to be, a part of this report.
Industry Background
According to industry data published in June 2000, the worldwide package
software market grew 14.2% in 1999 reaching revenues of $156.8 billion. It is
projected that by 2003, there will be an estimated 17.4 million professional
developers. The worldwide application development and deployment ("AD&D")
revenue in 1999 is estimated to be $36.5 billion, reflecting an increase of
15.1% over 1998. Oracle leads the worldwide AD&D market and is followed closely
by Microsoft and IBM. Oracle generated AD&D revenue of $5.4 billion in 1999,
whereas Microsoft revenue was $5.0 billion, and IBM was close behind at $4.6
billion. The AD&D market drivers should result in strong teen-high annual growth
for AD&D markets over the next five years. The compounded annual growth rate
("CAGR") for 1999 through 2004 is projected at 19.8%. This would make AD&D the
fastest growing of the primary software markets. If past patterns continue,
worldwide AD&D was estimated to be $42.7 billion in 2000 and should reach $90.2
billion by 2004. Growth in AD&D revenue is highest in North America at a CAGR of
20.7% over the forecast period (1999 through 2004), driving revenue from $18.5
billion in 1999 to $47.4 billion in 2004.
The Company believes that through the Internet, catalog, direct sales,
telemarketing, and wholesale distribution channels, it is positioned to
participate in a significant way in the U.S. and Canadian software developers
market.
Page 3 of 29
Industry Segment and Geographic Information
The Company operates in one principal industry segment. Information
regarding financial data by geographic area and amounts of total revenue for
each class of similar products or services that represents 10 percent or more of
total revenue is set forth in Part II, Item 8 of this Form 10-K at Note 10,
"Industry Segment and Geographic Information."
Products
The Company offers products representing over 70,000 SKUs, from more than
2,000 publishers and manufacturers, including Microsoft, Computer Associates,
Sybase, Borland, IBM, Symantec, Blue Sky Software and NuMega Technologies.
Through the Company's Product Marketing Group, new products are screened for
inclusion in its catalogs and websites 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 an authorized dealer to maintain stock and distribute
upgrades. Upgrades are revisions to previously published software enhancing
certain features of the software or correct errors found in previous versions.
The Company believes it offers several advantages to its customers including
timely and excellent customer service, the ability to combine upgrades with
other products on the same order, and competitive pricing. The Company has a
successful track record planning the launch of new products and upgrades. This
expertise allows the Company to achieve a competitive advantage over its
competitor's when supporting software publisher's marketing strategies.
Marketing and Sales
The Company operates principally through five distribution channels -
Internet, catalog, direct sales, telemarketing and wholesale distribution.
Management believes that this diversification of distribution channels is
complementary and operationally cost effective. Further, due to the volume of
purchasing by the Company, and also due to the unique "magalog" format of the
Company's catalogs, the Company believes it is able to obtain favorable pricing,
prompt supply of upgrades and significant marketing funds to bring our
publishing partners products to the market.
Telemarketing and Technical Support. The Company employs customer service
representatives who assist customers in purchasing decisions, process orders,
respond to customer inquiries on order status, product pricing and availability,
and maintain close contact with customers. The customer service representatives
receive continuous training from the Company's in-house Product Marketing Group
and directly from the Company's software partners on the features, functions and
benefits of products and are able to provide excellent customer service support
to our customers. The in-house technical support staff is able to respond
quickly to customer inquiries over the phone, and if necessary, research the
appropriate response off-line.
Customers and Backlog. No customer accounted for more than 10% of
consolidated net sales in 1998, 1999, or 2000. No material part of the business
is dependent upon a single customer or a few customers. The Company generally
ships products within 48 hours of confirming a customer's order. This allows for
minimum backlog in the business.
Page 4 of 29
Internet
The Company conducts business via the Internet through its two E-commerce
enabled websites: www.programmersparadise.com, and www.supershops.com. Both
websites link to each other thus creating an Internet presence. The Company's
strategy with respect to expanding its business-to-consumer and
business-to-business E-commerce revenues is to capitalize on its proprietary
"Island Man" brand. The Company strongly believes it will increase market
penetration by leveraging its expertise in catalog circulation management,
strategic marketing relationships with on-line advertisers and its own marketing
campaigns to strengthen brand awareness.
The Company's Websites contain an online catalog of over 70,000 SKU's of
products available to purchase over the Internet. In responding to the
requirements of the customers, the E-commerce catalog offers product information
through a comprehensive search engine, extensive product descriptions and
third-party reviews. Website functionality includes one-to-one personalization
and recommendations.
To further our focus on content and community building, the Company has
developed a Vendor Support area on its global search. This empowers the
Company's vendors to create and maintain product data and adjunct information.
In 2001, the Company plans to print and distribute more than 500 million
impressions of product listings and ads as banner advertising for its E-commerce
sites. In addition, the Company plans to continue to establish strategic
partnership arrangements with leading content-only Websites as a source of
information to our present and future customers.
Electronic Software Distribution ("ESD") Capabilities
The Company's ESD capabilities provide vendors the ability to deliver fully
licensed and functioning products via the Internet. Currently, the Company
offers over 500 individual titles available for download. The Company recognizes
the strategic importance of ESD and will provide support to customers electing
this fulfillment service.
ESD provides customers with three benefits. First, distributing software
within an organization via the company's internal network. Within a large
organization, this will reduce the total cost of ownership of desktop computing
assets. Second, ESD facilitates hardware and software asset management, remote
desktop support and automatic installation of packaged and custom software to
the desktop. Finally, ESD offers the direct connection of business-to-consumer
and business-to-business via electronic links such as the Internet. This
provides the customer with fast delivery of software products and positions the
Company to be highly responsive to the rapidly changing developer market.
Catalog Operations
The Company has two primary established catalogs - Programmer's Paradise,
directed at Software Developer's and The Programmer's Supershop, directed at
Information Technology professionals working in large corporations. These
catalogs are full color "magalogs" which combine traditional catalog sales
offerings with detailed product descriptions, product announcements and contain
substantial amounts of paid and cooperative advertising. The Programmer's
Paradise catalog
Page 5 of 29 Pages
features the Company's distinctive "Island Man" cartoon character and is
recognized as a leading source for technical software.
In addition to its two flagship catalogs, the Company offers an additional
catalog - Enterprise Supershop, which is directed to the IT professional working
with the NT operating platform. In September 1997, the Company launched
Programmer's Paradise - Canada to support the growing Canadian software
developer and IT professional markets.
The Company creates its domestic catalogs in-house employing 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. Keeping the
catalog production in-house results in significant cost savings and more control
over the production process.
The Company continuously attracts new customers by selectively mailing
catalogs and other direct mail materials to prospective customers, as well as
through advertising in magazines and trade journals. The Company's domestic
mailing list currently consists of core Programmer's Paradise and The
Programmer's Supershop buyer lists include approximately 150,000 customers who
have purchased products from the Company within the 36 months ended December 31,
2000, plus selected names from the Company's prospect list and lists of names
provided by publishers.
In conjunction with The Programmer's Supershop and Enterprise Supershop
catalogs, the Company has energized and supported an outbound telemarketing
program as part of its domestic catalog operations. This telemarketing program
targets mid-size to large commercial, governmental and educational accounts in
the United States.
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 builds important relationships with leading software
publishers. The Company offers a menu of fee-based services to help its
suppliers sell products, including cooperative space advertising, banner
advertising on its websites, trade show support, special publisher catalogs,
demonstration disks, shipment stuffers, telephone sold-on-hold advertising and a
variety of custom direct mail services. As part of these services, the Company
works closely with supplier's personnel on the launch of new product
introductions, to help build product awareness within the channels, conducting
marketing programs which are targeted at specific audiences and provide a broad
range of product support.
Cooperative and Fee-Based Advertising. The Company engages in cooperative
and fee-based advertising with software publishers in accordance with written
advertising insertion order agreements. Under these agreements, the Company
places advertisements or prints catalogs that feature publisher products at
discounted prices from retail, advertising allowances and rebates. Frequently,
the Programmer's Paradise logo and telephone number are included in the
promotion of selected publishers and incoming calls are handled by Company
representatives. In addition, the Company often coordinates its catalog
distribution and other marketing initiatives to coincide with new product
releases. Many suppliers also provide funds to the Company based upon an agreed
amount of coverage given in the catalogs for their respective products, thereby
financing the cost of catalog publication and distribution. In 2000, the
Company's cooperative and fee-based advertising reimbursements totaled less than
6.5% of total product revenues in the Company's domestic operations, and
significantly smaller percentages in the European operations.
Page 6 of 29 Pages
Direct Sales
The direct sales channel offers flexible software acquisition, volume
software licensing and maintenance options specially customized to meet the
needs of mid-size to large commercial, governmental and educational accounts.
Appointment of "Select" status in the United States enhances the Company's
ability to develop the business-to-business market while servicing customers
that have international licensing needs.
The Company's experienced sales force, each member of which is assigned a
specific territory, has built relationships with corporate customers through
regular phone contact and personalized service. Account executives work directly
with procurement managers, management information system managers and computer
support managers of existing and potential customers to identify the specific
needs of each customer and to facilitate the acquisition of software within the
customer's organizational framework. The Company's licensing consultants can
assist customers in selecting the most advantageous form of licensing available
based on specific needs or constraints. They also maintain close contact with
customers in order to provide them with timely communications and assistance
with any special or strategic requests.
Wholesale Operations
Wholesale operations in the United States and Canada include distribution
to dealers and large resellers through its subsidiaries, Lifeboat Distribution
Inc. ("Lifeboat"). Through Lifeboat, the Company concentrates on marketing and
the reselling of programming tools and other quality technical computing product
lines. Lifeboat customers consist of corporate resellers, value added resellers
(VARs), consultants, system integrators and retailers who have an interest in
servicing the software development and other high tech communities.
Telemarketing
The Company employs customer service representatives to assist customers
with all aspects of purchasing decisions, process products ordered and respond
to customer inquiries on order status, product pricing and availability. The
customer service representatives are trained to answer all basic questions about
the features and functionality of 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 information
systems, a customer service representative can immediately access a customer's
record, which details purchase history as well as billing information.
Page 7 of 29 Pages
Purchasing and Fulfillment
The Company's success is dependent, in part, 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 and hardware at competitive
prices. The Company believes that volume purchases enable it to obtain favorable
and competitive product pricing. The Company purchases products from more than
2,000 publishers. Domestically, in 2000 the Company purchased approximately 57%
of its products directly from manufacturers and publishers and the balance from
multiple distributors. The largest volume of purchases by the Company from
distributors was from Ingram, representing approximately 26% of domestic
purchases in 2000. The Company believes it can purchase substantially all
products purchased from Ingram 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 are bar coded and located in computer-designated areas which are easily
identified on the packing slip. All such orders are checked with bar code
scanners prior to packing to ensure that each order is filled correctly. The
Company also conducts a semi-annual physical inventory to verify its inventory
levels on a timely basis.
Additionally, some suppliers or distributors will "drop ship" products
directly to the customers, which reduces physical handling by the Company. These
inventory management techniques allow the Company to offer a greater range of
products without increased inventory requirements. Generally, the Company has
been able to return unsold or obsolete inventory within specified intervals of
the purchase date to its vendors through written agreements with, or unwritten
policies of, such vendors. Domestic orders are shipped via an overnight courier
service. Upon request, at an additional charge, overnight delivery services are
available. The Company operates distribution facilities in Shrewsbury, New
Jersey and Mississauga, Canada.
Page 8 of 29 Pages
Management Information Systems
The Company operates a management information system that allows for
centralized management of key functions, including inventory and accounts
receivable, purchasing, sales and distribution. The system allows the Company,
among other things, to track direct marketing campaign performance, to monitor
sales trends, make marketing event driven purchasing decisions, and provide
product availability and order status information. In addition to the main
system, the Company has systems of networked personal computers, which
facilitates data sharing and provides an automated office environment, as well
as microcomputer-based desktop publishing systems.
All Website development and maintenance are performed in-house by qualified
technicians and maintained on independent servers in-house. The Company believes
this is a cost-effective approach that enables it to make timely adjustments to
marketing initiatives.
Trademarks, Intellectual Property and Licenses
The Company conducts its business under the trademarks and service marks of
Programmer's Paradise, The Programmer's Supershop, The "Island Man" cartoon
character logo, Lifeboat, DEMO, demo-it!. The Company believes the 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.
The Company is a Microsoft Select Large Account Reseller (LAR) and is
authorized to negotiate Microsoft Open, Select, and Enterprise volume licensing
agreements. The Company is similarly authorized to negotiate license agreements
for software products published by IBM / Lotus, Computer Associates, Adobe and
Veritas. The Company also has annual alliance agreements in place with other key
publishers such as Merant, Compuware, WebGAIN, and Sybase.
Employees
After giving effect to the sale of the European operations (completed
January 9, 2001), the U.S. and Canadian companies on March 27, 2001 employed 106
full-time and 4 part-time persons. At December 31, 2000, the Company and its
subsidiaries employed 244 full-time and 16 part-time persons. The Company is not
a party to any collective bargaining agreements with its employees, has
experienced no work stoppages and considers its relations with its employees to
be satisfactory.
Competition
The software distribution market is highly competitive. Pricing is very
aggressive, and the Company expects pricing pressure to continue. The Company
faces competition from a wide variety of sources including vendors who sell
direct to customers, software resellers, superstores, catalogers, websites 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. The market for developer software
products is characterized by rapid changes in technology, user requirements, and
Page 9 of 29 Pages
customer specifications. 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 software
developer and IT professional 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, allows it to compete effectively. The Company
competes to gain distribution rights for new products primarily on the basis of
its reputation, the relationships which management of the Company has
established with product authors and the Company's ability to promote and market
new products successfully.
The manner in which software products are distributed and sold is also
changing, and new methods of distribution and sale may emerge or expand.
Software developers and publishers have sold, and may intensify their efforts to
sell, their products directly to end-users. The emergence of the Internet as a
viable platform in which to conduct e-commerce business transactions has both
lowered the barriers for competition and broadened customer's 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 software
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 new releases or
upgrades directly to end users, they have not attempted to completely bypass the
reseller channel. Future efforts by such entities to bypass third-party sales
channels could materially and adversely affect the Company's operations.
In addition, resellers and publishers may attempt to increase the volume of
software products distributed electronically through EDS technology, through
CD-ROM based subscription services and through on-line shopping services. Any of
these competitive programs, if successful, could have a material adverse effect
on the Company's operations and financial condition.
Sales Tax and Regulatory Matters
The Company presently collects state sales tax, or other similar tax, only
on sales of products to residents of the State of New Jersey. Various states
have tried to impose on direct marketers the burden of collecting state sales
taxes on the sale of products shipped to residents of such states. The United
States Supreme Court has affirmed its position that it is unlawful for a state
to impose state sales tax collection obligations on an out-of-state mail order
company whose only contacts with the state are the distribution of catalogs and
other advertising materials through the mail and subsequent delivery of
purchased goods by parcel post and interstate common carriers. However, it is
possible that legislation may be passed to overturn such decision or the Supreme
Court may change its position. Additionally, it is currently uncertain as to
whether electronic commerce, which includes the Company's Internet sales
activities, will be subject to state sales tax. The imposition of new state
sales tax collection obligations on the Company in states to which it ships
products would result in additional administrative expenses to the Company and
could result in price increases to the customer, which could adversely affect
the Company's business, financial condition and results of operations.
Page 10 of 29 Pages
The Company seeks to expand its in-house list of customers and prospects.
In the event that federal or state 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.
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
William H. Willett 64 President, Chief Executive Officer and
Chairman of the Board
William H. Sheehy 44 Chief Financial Officer,
Vice President - Finance and Treasurer
Secretary
Simon Nijnens 29 Vice President
Jeffrey Largiader 44 Vice President - Marketing
John LoRe 54 Vice President - Information Technology and
Chief Information Officer
William H. Willett has served as a director of the Company since 1996. In July
1998, Mr. Willett was appointed to the position of Chairman, President and Chief
Executive Officer. Prior to joining the Company and since 1994, Mr.Willett was
the President and Chief Operating Officer of Colorado Prime Foods located in New
York.
William H. Sheehy has served as Vice-President and Chief Financial Officer since
February 2000. Prior to joining the Company and since 1997, Mr. Sheehy served as
President and Chief Operating Officer of TechniLogix located in New Jersey.
Prior to serving as President and Chief Operating Officer, he was Chief
Financial Officer of TechniLogix for worldwide operations since 1996. From 1994
to 1996, Mr. Sheehy served as Chief Financial Officer of DLB Systems for its US
and UK operations.
Simon Nijnens has served as Vice-President since February 2001. Previously, Mr.
Nijnens served as the Vice-President and Chief Operating Officer of the
Company's European operations from November 1999 through January 2001. Prior to
that appointment, he was European Controller and Corporate Controller of the
Company. Mr. Nijnens began his career as a registered accountant with Ernst &
Young in Amsterdam, The Netherlands.
Jeffrey Largiader has served as the Vice-President - Marketing since 1989 and is
responsible for catalog production, product marketing, vendor relations, media
planning and marketing communications. Prior to that and since 1983, he held
various sales and product management positions with the Company and a
predecessor, Lifeboat Associates, Inc.
John LoRe has served as the Company's Vice-President - Information Technology
and Chief Information Officer since September 2000. Prior to this post he served
as Vice President and Chief Information Officer of Best Manufacturing of New
York. Between 1992 and 1998, Mr. LoRe held similar positions with Fila USA, Inc.
of Baltimore, Maryland and Disney Direct Marketing, Inc. of New York. Preceding
this, he had global responsibility for Information and Technology for Polo Ralph
Lauren Corporation from 1986 through 1992.
Page 11 of 29 Pages
Item 2 Properties
The Company leases 18,000 square feet of space at 1157 Shrewsbury Avenue,
Shrewsbury, New Jersey for its corporate headquarters under a ten-year lease
expiring in June 30, 2007 and an additional 7,250 square feet of space at 1163
Shrewsbury Avenue under a five-year lease, which expires in April 2002. Total
annual rent expense for these premises is approximately $270,000. Additionally,
the Company leases approximately 3,600 square feet of office space in
Mississauga, Canada, under a three-year lease, which expires on July 31, 2003.
Total annual rent expense for these premises is approximately $23,000.
Item 3 Legal Proceedings
There are no legal proceedings pending against the Company or any of
its subsidiaries.
Item 4 Submission of Matters to a Vote of Security Holders
The Company submitted the Stock Sale Agreement for a vote of its
stockholders at a special meeting on December 21, 2000 (adjourned to January 3,
2001). See Item 1-General for a summary description of the Stock Sale Agreement.
The following indicates the results of the voting on the Stock Sale Agreement:
3,100,694 shares (59.5%) voted for approval
4,500 shares (0.1%) voted against approval
2,950 shares (0.0%) abstained
2,101,981 shares (40.4%) were broker non-votes
------------------------------------------------------
5,210,125 shares were outstanding and entitled to vote
Page 12 of 29 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.
High Low
1999
First Quarter 17.000 9.750
Second Quarter 15.500 10.500
Third Quarter 15.250 6.625
Fourth Quarter 7.625 5.000
2000
First Quarter 7.125 5.500
Second Quarter 5.625 3.063
Third Quarter 3.938 3.125
Fourth Quarter 3.563 2.438
During 2000, 14,475 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 $5.83.
Holders of Common Stock
On March 19, 2001, 5,210,125 shares of the Company's Common Stock were
outstanding. On such date, there were approximately 62 holders of record.
Dividends
The Company has never paid any dividends on its Common Stock and does not
currently expect to pay any dividends (cash or otherwise) on its Common Stock
for the foreseeable future. Also, the Company's credit facility with Hudson
United Bank, executed on February 9, 2001, restricts the Company's ability to
pay future dividends. Item 6 Selected Financial Data.
Page 13 of 29 Pages
Item 6 Selected Financial Data
Year Ended December 31,
---------------------------------------------------------
(In thousands, except per share data)
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Statement of Operations Data (1):
Net sales 127,680 $176,157 $234,429 244,139 $216,543
Income (loss) from operations 2,936 6,217 5,527 (92) (15,125)
Net income (loss) 2,298 3,964 3,442 (729) (17,474)
Basic net income (loss)
per common share $0.48 $0.84 $0.72 $(0.14) $(3.51)
Diluted net income (loss)
per common share $0.44 $0.75 $0.66 $(0.14) $(3.51)
Weighted average
common shares outstanding-basic 4,764 4,740 4,797 5,100 4,983
Weighted average
common shares outstanding-diluted 5,198 5,280 5,249 5,100 4,983
Balance Sheet Data:
Working capital $12,415 $16,077 $17,686 $14,806 $17,326
Total assets 68,490 86,368 104,877 95,757 33,855
Notes payable - current 1,135 958 674 2,628 --
Notes payable - long term 1,050 2,220 1,761 -- --
Total stockholders' equity 28,845 32,213 36,241 34,849 18,906
(1) Comparability of the Statement of Operations is affected by acquisitions
occurring throughout the periods presented.
(2) The loss from operations and the net loss for 2000 was primarily the result
of the impairment of goodwill related to the Software Developers Corporation
acquisition in June 1996 ($7.0 million), the loss on the sale of the Company's
European subsidiaries ($2.1 million), and an increase in the valuation allowance
for the deferred tax assets ($2.8 million).
Item 7 Management Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
The Company is a distributor of software, operating principally through
five distribution channels - Internet, catalogs, direct sales, telemarketing and
wholesale operations. Internet sales encompass the Company's websites. Catalog
operations include catalog sales, advertising and publishing. The Company
markets its products through direct sales and telemarketing. The Company's
telemarketing operations are an offshoot of the catalog channel targeting
corporate customers for both technical software and desktop applications.
Wholesale operations include distributions to dealers and large resellers
through the Company's subsidiary, Lifeboat Distribution.
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, shifts in demand for industry
announcements, releases of new products and upgrades and corporate purchasing
cycles and prior to the sale of the European subsidiaries, traditional softness
in summertime European commercial activities.
Page 14 of 29 Pages
Results of Operations
The following table sets forth for the years indicated certain financial
information derived from the Company's consolidated statement of operations
expressed as a percentage of net sales:
% to Net Sales % Change
-------------------------------- --------------------
For the years ended December 31,
1998 1999 2000 99 v 98 00 v 99
---- ---- ---- ------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.5% 89.3% 90.0%
Gross profit 12.5% 10.7% 10.0% (1.8%) (0.7%)
Selling, general and
administrative expenses 9.7% 10.0% 11.8% 0.3% 1.8%
Amortization of goodwill 0.4% 0.7% 0.7% 0.3% (0.0%)
Impairment of goodwill 0.0% 0.0% 3.2% 0.0% 3.2%
Impairment of investment 0.0% 0.0% 0.3% 0.0% 0.3%
Loss on sale of European
subsidiaries 0.0% 0.0% 0.9% 0.0% 0.9%
Income (loss) from operations 2.4% 0.0% (6.9%) (2.4%) (6.9%)
Interest (income), expense net (0.1%) (0.1%) (0.0%) (0.0%) 0.1%
Unrealized foreign exchange
(gain) loss 0.0% (0.1%) 0.1% (0.1%) 0.2%
Income (loss) before income taxes 2.5% 0.2% (7.0%) (2.3%) (7.2%)
Provision for income taxes (1.0%) (0.5%) (1.2%) 0.5% (0.7%)
Net income (loss) 1.5% (0.3%) (8.2%) (1.8%) (7.9%)
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 decreased by $27.6 million or 11% to $216.5
million in 2000, and increased by $9.7 million or 4%, to $244.1 million in 1999
as compared to the respective preceding periods. The overall decrease in
revenues in 2000 is primarily attributable to delays in software development
projects and software product purchases caused by the potential Y2K conversion.
For the year ended December 31, 2000, net sales from the catalog and Internet
channel decreased slightly by $1.8 million or 2.7% as compared to the same
period in 1999. Net sales from the direct channel decreased by $30.8 million or
19.5% as compared to the same period in 1999. Net sales from the wholesale
distribution channel increased $5.0 million or 29% as compared to 1999. The
Company posted gains in North American revenue of $7.9 million or 10% over 1999.
Revenues from the European Subsidiaries declined over 1999 by $35.5 million or
22%. Net sales of the North America companies in 2000 were $88.6 million as
compared to $80.7 million in 1999. Net sales of the European Subsidiaries in
2000 were $127.9 million as compared to $163.4 million in 1999.
Page 15 of 29 Pages
Gross Profit
Gross profit represents the difference between net sales and cost of sales.
Cost of sales is composed primarily of amounts paid by the Company to publishers
and vendors plus catalog printing and mailing costs. Publisher and vendor
rebates are credited against cost of sales. Gross profit as a percentage of net
sales decreased by 0.7% in 2000 from 10.7% to 10.0% reflecting a shift in the
mix of sales through the Company's distribution channels as a result of the
substantial increase in lower margin direct sales and Microsoft Select licensing
sales.
Gross profit for the year ended December 31, 2000 was $21.6 million as
compared to $26.1 million in 1999. For North America, the gross profit was $11.1
million as compared to $11.3 million for the same period in 1999. The European
Subsidiaries generated gross profit of $10.5 million for 2000 as compared to
$14.8 million for 1999. The decline in gross profit from the European
subsidiaries was primarily the result increased competitive pressures on pricing
and clients requiring more value added services (such as training, hardware
configuration, and software implementation) within the German marketplace. For
North America, the decline in gross profit was primarily the result of gross
profit as a percentage of sales ("gross margin") pressure due to the increased
competitive environment.
Gross margin for the year ended December 31, 2000 in North America was
12.5% as compared to 13.5% for the same period in 1999. The decrease in gross
margin in North America primarily resulted from increased competition within the
catalog and reseller channels. Gross margin for the European Subsidiaries was
8.2% as compared to 9.1% in 1999. In Europe, the decline was mainly contributed
by increased competition within the reseller channel.
In the past, the mix of products sold and the delivery channel has affected
gross margin. Historically, the gross margins attained in the catalog channel
have been higher than either the direct sales or distribution channels. In 2000,
catalog operations contributed approximately 31% of revenue and approximately
48% of gross margin dollars as compared with 28% of revenue and 40% of gross
margin dollars in 1999. Direct sales operations contributed approximately 59% of
revenue and approximately 40% of gross margin dollars in 2000 and 65% of revenue
and 52% of gross margin dollars in 1999. The distribution channel contributed
approximately 10% of revenue and approximately 12% of gross margin dollars in
2000 compared with 7% of revenue and 8% of margin dollars in 1999.
The historically higher margins attained in the catalog channel are related
to both the product focus on technical software, including numerous specialized
products, and on the relatively fragmented customer base of the catalog channel,
in comparison to the direct sales channel, which primarily serves large
corporations purchasing high volumes of widely available business applications.
In the future, the Company's gross margins will be affected by several factors,
including, among others, the price of products sold, the distribution channel
used, increases in product costs, price competition and the introduction of new
products.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses include all corporate
personnel costs (including salaries and health benefits), depreciation and
amortization, non-personnel-related marketing and administrative costs and
provision for doubtful accounts. Depreciation and amortization consists
Page 16 of 29 Pages
primarily of equipment depreciation and leasehold improvements amortization.
Loss from the sale of the European Subsidiaries consists of the purchase price
less all related investments, transaction costs, forgiveness of inter-company
debt, and other items recorded in the consolidated balance sheet.
SG&A expenses for the year ended December 31, 2000 were $25.6 million as
compared to $24.4 million for the same period in 1999, an increase of $1.2
million or 5.0%. This increase was primarily the result from investments in
eCommerce technology and an increase in the allowance for doubtful accounts.
SG&A expenses in North America were $12.7 million for the year ended December
31, 2000 as compared to $10.4 million in 1999. SG&A expenses in Europe were
$12.9 million in 2000 as compared to $14.0 million in 1999. SG&A expenses as a
percentage of revenues increased to 11.8% from 10.0% in 1999. The slight
increase in SG&A expense as a percent of revenues in 1999 was primarily
attributable to an increase in staff within the Internet Development and
e-Commerce teams. SG&A expenses as a percentage of revenues increased to 10.0%
in 1999 from 9.7% in 1998.
Each year SG&A has increased in absolute dollars, reflecting the cost of
operations of the Company's acquisitions and implementing the business plans.
The Company anticipates that SG&A as a percentage of revenues will decline as
revenues continue to grow and cost containment directives remain in place,
however, there can be no assurances that this will occur.
Amortization
During the fourth quarter of 2000, the goodwill from the acquisition of
Software Developers Corporation ("SDC") in June 1996 was evaluated and
determined to be impaired and was adjusted accordingly, as a result of the
Company's ongoing evaluation of the realizability of such goodwill. The goodwill
was the result of excess purchase price over the net assets acquired from SDC.
There had been a decline in sales generated from the Programmer's Supershop
Catalog, which became more substantial in 2000. In 2000, the customer list and
catalog production and distribution processes were evaluated and the Company
determined the value previously recognized was impaired. The customers buying
patterns have changed based upon increased competition from other direct market
resellers and the accessibility to procure software products through competing
websites.
The impairment of goodwill was determined by analyzing the historical
trends and future projections of the Programmer's SuperShop Catalog. The number
of customers mailed were reviewed and based upon the data it was evident the
amount of catalogs mailed were declining. Additionally, the volume of catalog
sales was analyzed and the sales amounts were decreasing. Gross profit dollars
during the period were experiencing pricing pressures from competitors and
increased distributors and websites to procure software products. This is
leading to decreasing gross profit dollars and increased catalog and production
costs. Finally, the buying patterns of customers were analyzed and the Company
determined that repeat buying was not increasing, and the number of one-time
buyer's greater than 36 months making a second purchase were not materializing.
Projections of sales, gross profit and undiscounted cash flows were
prepared using catalog mailing plans and historical data. Based upon these
valuations, the Company determined goodwill to be impaired in the amount of $7.0
million and the remaining goodwill related to SDC as of December 31, 2000 is
$255,000. The impairment of SDC goodwill is included in loss from operations
amount within the Statement of Operations.
The catalog and Internet sales distribution channel is affected by this
impairment. Programmer's SuperShop catalog is one of many catalogs created and
distributed by the Company.
Page 17 of 29 Pages
SuperShop customer list will be reviewed and if appropriate, included in the
Programmer's Paradise Catalog mailing and production plans. Although results
associated with the Programmer's Supershop Catalog have continued to decline,
the Company plans to continue the Programmer's SuperShop catalog production and
distribution to its customers.
Loss on Sale of European Subsidiaries
Pursuant to an Agreement, dated December 1, 2000 ("Stock Sale Agreement"),
between the Company and PC-Ware Information Technologies AG, a German
corporation ("PC-Ware"), on January 9, 2001 the Company sold all of the shares
of its European subsidiaries (except for Programmer's Paradise France S.A.R.L.)
for 14,500,000 Euros, of which 3,275,000 Euros are being held in a 240-day
escrow as security for any claim of PC-Ware arising from alleged breaches of
representations by the Company under the Stock Sale Agreement. Such claims are
subject to a 300,000 Euro de minimus amount and a 7,500,000 Euro maximum amount.
As a result of this sale, the Company has presented the balance sheets of
its European subsidiaries combined in one line on the December 31, 2000 balance
sheet as "net assets held for sale." In the fourth quarter of 2000, the Company
recognized a loss on this sale of $2,081, which is presented as a separate line
in its statement of operations.
Loss on Investment
In 1999, the Company acquired an interest in Healy Hudson GmbH ("Healy
Hudson"), a privately held German Internet e-Commerce software company. This
investment was accounted for under the cost method.
During the fourth quarter of 2000, the Company evaluated the carrying value
of Healy Hudson. As a privately held company targeting the e-Commerce markets in
Europe and the US, gaining market share requires attracting various resources to
be successful. Gaining financial support from existing and new investors is
necessary to continue Healy Hudson's progress in penetrating these markets.
Based upon the financial market conditions, which make it difficult to raise
additional capital and financial performance including continuing losses,
significant cash burn rate and declining cash balances, the Company determined a
valuation allowance of $590,000 is necessary.
Interest Income and Expense
The Company generated net interest income/(expense) of ($52,000), $140,000
and $294,000 in 2000, 1999 and 1998, respectively. During 2000, the decreasing
sales from the European subsidiaries required external funding from bank
institutions. In addition, the Company did not pursue payment of intercompany
product software purchases, which required the North American operations to
borrow against lending facilities.
Page 18 of 29 Pages
Income Taxes
Prior to 1995, the Company had accumulated net operating loss carryforwards
and other deductible temporary differences for income tax purposes of
approximately $10.5 million, which could be used to offset taxable income
through the year 2005. The Company's initial public offering triggered an
ownership change, which imposes a limit on the use of these net operating loss
carryforwards. See Note 5 to the Consolidated Financial Statements.
Statement of Financial Accounting Standards No. 109 requires that a
valuation allowance be recorded for deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets depends upon the existence of
future taxable income.
The Company had recorded a US deferred tax asset at December 31, 2000 of
approximately $7.0 million reflecting, in part, a benefit of $6.9 million in
federal and state tax loss carryforwards, which will expire in varying amounts
between 2001 and 2020. In following the guidance set forth in FASB 109, the
Company has recorded a valuation allowance for the full amount.
For the year ended December 31, 2000, the Company recorded a provision for
income taxes of $2.5 million, which consists of a benefit of $.4 million and
$4.2 million for foreign and federal and state taxes respectively, offset by a
deferred tax valuation allowance of $7.1 million. For the year ended December
31, 1999, the Company recorded a provision for income taxes of $1.3 million,
which consisted of a provision for foreign taxes of approximately $1.7 million,
offset in part, by a benefit for federal and state taxes of $400,000. In 1998,
the Company recorded a provision for income taxes of $2.4 million, which
consists of a provision for state and federal taxes of approximately $600,000
and also a provision for foreign taxes of approximately $1.8 million.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $1,943,000 and $5,115,000 at December 31, 2000 and 1999,
respectively. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided. Upon distribution of those earnings in the form of dividends, the
Company would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to various foreign countries.
Liquidity and Capital Resources
The Company's primary capital needs have been to fund the working capital
requirements created by its sales growth. Historically, the Company's primary
sources of financing have been borrowings under domestic and, prior to the sale
of the European subsidiaries, international lines of credit with financial
institutions and the issuance of common and preferred stock.
Cash provided by operations was $2,235,000 for the year ended December 31,
2000 compared to $1,468,000 and $2,728,000 for 1999 and 1998, respectively.
During 2000, the net cash flow from operating activities was primarily
attributable to the net loss for the year ($17,474,000) and decrease in income
taxes payable offset by the loss on the sale of the European subsidiaries
($2,081,000), the impairment of the goodwill related to the SDC acquisition
($7,000,000), a reduction in inventory (791,000), increase in accounts payable
and accrued expenses ($6,822,000), and the reduction of deferred income taxes
($2,834,000). In 1999, the decrease in accounts receivable $(6,687,000) and the
net change of other assets and liabilities of $937,000 accounted for the
majority of the cash flows in.
Page 19 of 29 Pages
The decrease in accounts payable of $(7,437,000) was covered through cash
reserves and short-term lending facilities.
Cash used in investing activities totaled $14,988,000 for the year ended
December 31, 2000. The majority of the cash used in 2000 was related to the
change in net assets held for sale in the amount of $14,407,000. The Company's
capital expenditures for 2000 and 1999 amounted to $581,000 and $996,000,
respectively, which was comprised of computer hardware and software, office
furniture and leasehold improvements. In 1999, cash in the amount of $2,274,000
was used to pay the "earn-out" amount relating to the purchase of Logicsoft
Europe BV.
Cash used in financing activities was $2,628,000 for 2000. In 2000,
repayments under the line of credit totaled $2,628,000 in 2000 as compared to
net borrowings of $2,628,000 in 1999. During 1999, the Company purchased
treasury stock for $(1,137,000) as compared to $(545,000) in 1998. Also, during
1997, the Company entered into a five-year term loan agreement in the US Dollar
equivalent of $3,000,000 bearing interest at 6.17%. Due to the strong US Dollar,
the loan was prepaid during the second quarter of 1999, which resulted in a cash
outflow of approximately $2,435,000.
At December 31, 2000, the Company had cash and cash equivalents of
$2,091,000 and net working capital of $17,326,000 compared with cash and cash
equivalents of $17,597,000 and net working capital of $14,806,000 at December
31, 1999. The increase in working capital at December 31, 2000 is mainly
attributable to the net assets held for sale of the European subsidiaries and
the decrease of the deferred tax assets. On January 9, 2001, the Company
received net cash of approximately $12.1 million from the sale of its European
subsidiaries discussed above. The Company believes that its cash resources
(including the proceeds from the sale) will be sufficient to support the
Company's operations for at least the next twelve months.
The Company and PNC Bank, National Association (the "PNC") entered into a
letter agreement dated February 24, 1998 (the "Letter Agreement"), providing for
a line of credit of up to $7.5 million. The Company and PNC executed Amendment
No. 1 to the Letter Agreement, dated June 30, 1999, which extended the
expiration date to March 31, 2000. The Company and the Lender executed a second
amendment, dated March 31, 2000, which extended the expiration date to June 30,
2000. On August 10, 2000, the Company and the Lender entered into a forbearance
agreement (the "Forbearance Agreement") whereby (i) PNC agreed to forbear from
exercising its rights and remedies arising as a result of defaults then
outstanding until December 31,2000 (unless certain other events of default
occurred prior to such date), (ii) the amount the Company could borrow was
reduced from $7.5 million to the lesser of (x) $2 million and (y) 60% of certain
of the Company's accounts receivable, (iii) the expiration date was extended to
December 31, 2000, and (iv) the Company paid a fee of $40,000 to the Lender and
a field audit cost of about $9,000. Under the Forbearance Agreement, the amount
borrowed bore interest at PNC's prime rate. The Company initiated discussions
with banks and financing companies to determine a level of interest for
providing borrowing facilities and, after entering into negotiations with Hudson
United Bank ("Hudson"), the Company paid in full in December 2000 all of its
outstanding obligations under the Letter Agreement.
On February 9, 2001, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Hudson. The new Loan Agreement provides for a
revolving credit facility of up to $5.0 million with an initial term expiring
April 1, 2003. The amount of available credit is determined by the level of
certain eligible accounts receivable. The facility bears interest at Hudson's
prime rate (8.5% at March 1, 2001) plus 1%. Additionally, the Loan Agreement
contains various covenants including a financial covenant that generally
requires the Company to maintain a current ratio (as
Page 20 of 29 Pages
defined in the Loan Agreement) of 1.5 to 1. The Loan Agreement is subject to
customary event of default and acceleration provisions and is collateralized by
substantially all of the Company's assets.
As of December 31, 2000, the Company's subsidiary in The Netherlands,
Logicsoft Holding, BV, maintained a demand revolving line of credit pursuant to
which it could borrow in guilders up to DFL 2,500,000 (the equivalent of
approximately $1,018,000 at December 31, 2000), and which was secured by its
accounts receivable and inventory. The line bore interest at 6.00%. At December
31, 2000, there was DFL 295,985 (the equivalent of approximately $265,529)
outstanding under the line. This amount has been included in the net assets of
European subsidiaries held for sale.
Foreign Exchange
As a result of the sale by the Company of its European subsidiaries,
3,275,000 Euros (the equivalent of approximately $2,938,000 at December 31,
2000) is being held in escrow to indemnify PC-Ware Information Technologies AG
against alleged breaches by the Company as security for the Company's
indemnification of representations under the Stock Sale Agreement dated December
1, 2000, subject to a 300,000 Euro de minimus amount and a 7.5 million Euro
maximum amount. The amount is subject to fluctuations in the Euro to U.S. dollar
exchange rate at risk until converted to U.S. dollars at the expiration of the
warranty period on September 6, 2001 and settlement of any potential claims.
Certain Factors Affecting Operating Results
This report includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Statements in
this report regarding future events or conditions, including statements
regarding industry prospects and the Company's expected financial position,
business and financing plans, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations are set forth in the
paragraphs below and are disclosed elsewhere in this report, and include risks
and uncertainties related to the continued acceptance of the Company's
distribution channel by vendors and customers, the timely availability and
acceptance of new products, and contribution of key vendor relationships and
support programs, as well as factors that effect the software industry
generally.
The Company operates in a rapidly changing business, and new risk factors
emerge from time to time. Management cannot predict every risk factor, nor can
it assess the impact, if any, of all such risk factors on the Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those projected in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results and readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
21 of 29 Pages
Competition. The direct marketing industry and the computer software
distribution business, in particular, are highly competitive. The Company
competes with consumer electronic and computer retail stores, including
superstores, and other direct marketers of software and computer related
products. Certain software vendors are selling their products directly through
their own catalogs and over the Internet. Certain competitors of the Company
have financial, marketing and other resources greater than those of the Company.
There can be no assurance that the Company can continue to compete effectively
against existing competitors or new competitors that may enter the market. In
addition, price is an important competitive factor in the personal computer
software market and there can be no assurance that the Company will not be
subject to increased price competition. An increase in the amount of competition
faced by the Company or its failure to compete effectively against its
competitors could have a material adverse effect on the Company's business,
financial condition and results of operations.
Quarterly Fluctuations and Seasonality. The Company's sales and results of
operations have fluctuated and are expected to continue to fluctuate on a
quarterly basis as a result of a number of factors, including: the condition of
the software industry in general; shifts in demand for software products;
industry shipments of new software products or upgrades; the timing of new
merchandise and catalog offerings; fluctuations in response rates; fluctuations
in postage, paper, shipping and printing costs and in merchandise returns;
adverse weather conditions that affect response, distribution or shipping;
shifts in the timing of holidays; and changes in the Company's product
offerings. The Company's operating expenditures are based on sales forecasts. If
revenues do not meet expectations in any given quarter, operating results may be
materially adversely affected.
Privacy Concerns With Respect To List Development And Maintenance. The
Company mails catalogs and sends electronic messages to names in its proprietary
customer database and to potential customers whose names are obtained from
rented or exchanged mailing lists. There has been increasing worldwide public
concern regarding right to privacy issues involved with the rental and use of
customer mailing lists and other customer information. Any domestic or foreign
legislation enacted limiting or prohibiting these practices could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management Information Systems. The Company's success is dependent on the
accuracy and proper utilization of its management information systems, including
its telephone and Internet systems. The Company's ability to manage its
inventory and accounts receivable collections; to purchase, sell and ship its
products efficiently and on a timely basis; and to maintain its operations is
dependent upon the quality and effective utilization of the information
generated from the management information systems. The Company recognizes the
need to continually upgrade its management information systems to most
effectively manage its operations and customer database. In that regard, the
Company anticipates that it will, from time to time, require software and
hardware upgrades for its present management information systems.
Increases In Postage, Shipping And Paper Costs. Increases in postal or
shipping rates and paper costs could have a significant impact on the cost of
production and mailing of the Company's catalogs and the shipment of customer
orders. Postage prices and shipping rates increase periodically, and the Company
has no control over increases that may occur in the future. Paper prices
historically have been cyclical and significant increases have been experienced
by the Company in the past. Significant increases in postal or shipping rates
and paper costs could have a material adverse effect on the Company's business,
financial condition and result of operations, particularly to the extent the
Company is unable to pass on such increases directly to its customers or offset
such increases by reducing other costs. In addition, strikes or other service
interruptions by the postal service or third party couriers could adversely
affect the Company's ability to deliver products on a timely basis.
Page 22 of 29 Pages
New Software Releases. The Company's operating results could be adversely
affected by a delay in the introduction of a major new software product or
upgrading of more specialized products. Purchasers of software may delay the
ordering of new software applications in the period immediately preceding such
introduction for fear of technological obsolescence. The Company believes that
software publishers often delay the release of related software products so as
to coordinate with the release of these major new products or delay development
of new products until after the importance of these new products can be
evaluated. Delayed introductions of these new products could result in the delay
or reduction of sales because the unreleased product cannot be delivered and
could also adversely affect sales in that the Company, which often coordinates
new catalog drops and marketing initiatives with such introductions and product
upgrades, would be focusing catalog marketing on such unreleased products.
Changing Methods Of Software Distribution. The software distribution
industry is undergoing significant change and consolidation. Software
distributors are consolidating operations and acquiring or merging with other
distributors or retailers to achieve economies of scale and increased
efficiency. The current consolidation trend could cause the industry to become
even more competitive and make it more difficult for the Company to maintain its
operating margins. The manner in which software products are distributed and
sold is also changing, and new methods of distribution and sale may emerge or
expand. Software developers and publishers have sold, and may intensify their
efforts to sell, their products directly to end-users. The emergence of the
Internet as a viable platform in which to conduct business transactions has both
lowered the barriers for competition and broadened customers' access to products
and information. This transition has heightened the Company's awareness to
maintain a competitive edge in this market. From time to time certain developers
and publishers have instituted programs for the direct sale of large order
quantities of software to certain major corporate accounts. These types of
programs may continue to be developed and used by various developers and
publishers. While Microsoft and other vendors currently sell their products
directly to end users, they have not attempted to completely bypass the reseller
channel. Future efforts by such entities to bypass third-party sales channels
could materially and adversely affect the Company's operations.
In addition, certain major publishers, including Microsoft, have
implemented programs for the master copy distribution or site licensing of
software. These programs generally grant an organization the right to make a
number of copies of software for distribution within the organization provided
that the organization pays a fee to the developer for each copy made. Also,
resellers and publishers may attempt to increase the volume of software products
distributed electronically through downloading to end users' microcomputers,
through CD-ROM unlocking technology, through CD-ROM-based subscription services
and through on-line shopping services. Any of these competitive programs, if
successful, could have a material adverse effect on the Company's operations and
financial condition.
Dependence Upon Vendors. As is customary in the industry, the Company has
no long-term supply contracts with any of its suppliers. Substantially all the
Company's contracts with its vendors are terminable upon 30 days' notice or
less. Termination or interruption of the Company's relationships with its
suppliers or modification of the terms of or discontinuance of their agreements
with the Company could adversely affect the Company's operating results.
Page 23 of 29 Pages
Certain of the products offered by the Company might be subject to
manufacturer allocations, which limit the number of units of manufacturers'
products available to resellers, including the Company. The Company's business
may be adversely affected if certain products become unavailable to the Company
or if the number of units allocated to the Company becomes limited, whether such
unavailability or limitation is due to the loss of authorized dealer status,
allocation limitations or other conditions. Many key vendors finance portions of
the cost of catalog publication and distribution based upon the amount of
coverage given in the catalogs to their respective products. A reduction in or
discontinuation of this practice could have a material adverse effect on the
Company.
Rapid Changes In Software Products And Risk Of Inventory Obsolescence. The
software products industry is characterized by rapid technological change and
the frequent introduction of new products and product enhancements. The
Company's success depends in large part on its ability to identify and obtain
the right to market products that will meet the changing requirements of the
marketplace. The Company has sought to minimize its inventory exposure through a
variety of inventory control procedures and policies, including formal and
informal vendor price protection programs. In order to satisfy customer demand
and to obtain greater purchasing discounts, the Company expects to carry
increased inventory levels of certain products in the future. In addition, large
software firms continue to develop products that include the features of utility
and subroutine products published and/or sold by the Company in their software
languages, thus rendering certain of such products unnecessary. Additionally, if
the growth rate of the personal computer market were to decrease, with a
corresponding decrease in demand for computer software, the Company's operating
results could be adversely affected. There can be no assurance that the Company
will be able to identify and offer products necessary to remain competitive or
avoid losses related to obsolete inventory, or that unexpected new product
introductions will not have a material adverse effect on the demand for the
Company's inventory.
Stock Volatility. The technology sector of the United States stock markets
has experienced substantial volatility in recent periods. Numerous conditions,
which impact the technology sector or the stock market in general or the Company
in particular, whether or not such events relate to or reflect upon the
Company's operating performance, could adversely affect the market price of the
Company's Common Stock. Furthermore, fluctuations in the Company's operating
results, announcements regarding litigation, the loss of a significant vendor,
increased competition, reduced vendor incentives and trade credit, higher
postage and operating expenses, and other developments, could have a significant
impact on the market price of the Company's Common Stock.
Acquisitions Strategy. The Company plans to continue to pursue acquisitions
of complementary businesses. However, there can be no assurance that suitable
acquisitions will be available to the Company on acceptable terms, that
financing for future acquisitions will be available on acceptable terms, that
future acquisitions will be advantageous to the Company or that anticipated
benefits of such acquisitions will be realized. The pursuit, timing and
integration of possible future acquisitions may cause substantial fluctuations
in operating results.
State Sales Tax Collection. The Company presently collects state sales tax,
or other similar tax, only on sales of products to residents of the State of New
Jersey. Various states have tried to impose on direct marketers the burden of
collecting state sales taxes on the sale of products shipped to state residents.
The United States Supreme Court has affirmed its position that it is unlawful
for a state to impose state sales tax collection obligations on an out-of-state
mail order company whose only contacts with the state are the distribution of
catalogs and other advertising materials through the mail and subsequent
delivery of purchased goods by parcel post and interstate common carriers.
However, it is possible that legislation may be passed to overturn such decision
or the Supreme Court may change
Page 24 of 29 Pages
its position. Additionally, it is currently uncertain as to whether electronic
commerce, which will likely include the Company's Internet sales activities,
will be subject to state sales tax. The imposition of new state sales tax
collection obligations on the Company in states to which it ships products would
result in additional administrative expenses to the Company and could result in
price increases to the customer, which could adversely affect the Company's
business, financial condition and results of operations.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
In addition to its activities in the United States, 59% of the Company's
2000 sales were generated internationally. Prior to the sale by the Company of
its European-based operations, the Company was subject to general risks
attendant to the conduct of business in each of the foreign countries where such
European-based operations were located, including economic uncertainties and
foreign government regulations. In addition, the Company's international
business was subject to changes in demand or pricing resulting from fluctuations
in currency exchange rates or other factors.
In the normal course of operations, the Company is exposed to market risks
arising from adverse changes in interest rates. Market risk is defined for these
purposes as the potential change in the fair value resulting from an adverse
movement in interest rates. As of December 31, 2000, the Company terminated the
borrowing agreement with PNC, and has subsequently replaced it with a Loan
Agreement with Hudson United Bank, effective February 9, 2001, which bears
interest at a variable rate based upon Hudson's prime rate (8.5% at March 1,
2001) plus 1%.
Information regarding quantitative and qualitative disclosures about market
risk related to a portion of the proceeds from the sale by the Company of its
European subsidiaries that is being held in escrow is set forth in Part I, Item
7 of this Annual Report on Form 10-K under the heading "Foreign Exchange."
Item 8 Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements at Item 14(a).
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not applicable.
PART III
Item 10 Directors and Executive Officers of the Registrant.
This information 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 25 of 29 Pages
Item 11 Executive Compensation.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Item 12 Security Ownership of Certain Beneficial Owners and Management.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Item 13 Certain Relationships and Related Transactions.
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements:
Index to Consolidated Financial Statements and Schedule
Report of Independent Auditors
Consolidated Balance Sheets - as of
December 31, 1999 and 2000
Consolidated Statements of Operations - Years
ended December 31, 1998, 1999 and 2000
Consolidated Statement of Stockholders' Equity - Years ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
Page 26 of 29 Pages
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.
2.1 Agreement for the Sale and Purchase of Shares, dated as of January 9,
2001, between the Company and PC-Ware Information Technologies, AG.+
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.*
10.1 Loan and Security Agreement, dated as of February 7, 2001, between the
Company and Hudson United Bank.***
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.*
10.8 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.*
10.17 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.*
10.38 Employment Agreement dated July 14, 1998 between William Willett and
the Company*
10.42 Lease dated as of May 14, 1997 between Robert C. Baker, et al as
Landlord and the Company**
21.1 Subsidiaries of the Registrant.
Page 27 of 29 Pages
23.1 Consent of Ernst & Young LLP
27 Financial data schedule
* Incorporated by reference to exhibits of the same number filed with the
Registrant's Registration Statement on Form S-1 or amendments thereto
(File No. 33-92810).
** Incorporated by reference to Exhibit 10.42 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998 filed on March
31, 1999.
*** Incorporated by reference to the Registrant's Current Report on Form
8-K filed on February 9, 2001.
+ Incorporated by reference to Annex I to the Registrant's Definitive
Special Meeting Proxy Statement filed on December 1, 2001.
(b) Reports on Form 8-K.
None.
Page 28 of 29 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 April 16, 2001.
PROGRAMMER'S PARADISE, INC.
By: /s/ William H. Willett
------------------------------
William H. Willett, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature Title Date
President, Chief Executive Officer April 16, 2001
/s/ William H. Willett and Chairman of the Board of
- ---------------------- Directors
William H. Willett
Chief Financial and April 16, 2001
/s/ William H. Sheehy Accounting Officer
- ---------------------
William H. Sheehy
/s/ Edwin H. Morgens Director
- -------------------- April 16, 2001
Edwin H. Morgens
/s/ Allan Weingarten Director April 16, 2001
- --------------------
Allan Weingarten
/s/ F. Duffield Meyercord Director April 16, 2001
- -------------------------
F. Duffield Meyercord
Page 29 of 29 Pages
Programmer's Paradise, Inc. and Subsidiaries
Index to Consolidated Financial Statements and Schedule
Page
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-26
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, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Programmer's
Paradise, Inc. and subsidiaries at December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 30, 2001
F-2
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31
1999 2000
---------------------------
Assets
Current assets:
Cash and cash equivalents $17,597 $2,091
Accounts receivable, net of allowances of $1,430 and
$530 in 1999 and 2000, respectively 46,316 13,048
Inventory 5,620 2,631
Prepaid expenses and other current assets 4,468 2,342
Deferred income taxes 1,713
Net assets of European subsidiaries held for sale 12,163
------------------------------
Total current assets 75,714 32,275
Equipment and leasehold improvements, net 2,135 934
Goodwill, net of accumulated amortization of $4,381
and $18,669, in 1999 and 2000, respectively 14,543 255
Other assets 1,505 391
Deferred income taxes 1,860
------------------------------
$95,757 $33,855
==============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $50,383 $14,939
Notes payable to banks 2,628
Other current liabilities 7,897 10
------------------------------
Total current liabilities 60,908 14,949
Stockholders' equity:
Common Stock $.01 par value: Authorized, 10,000,000
shares, issued 5,280,438 and 5,287,813 in 1999 and 2000,
respectively 53 53
Additional paid-in capital 35,872 35,476
Treasury stock, at cost, 230,650 and 224,800 shares in
1999 and 2000, respectively (1,356) (1,325)
Retained earnings/(deficit) 2,457 (15,017)
Accumulated other comprehensive loss (2,177) (281)
------------------------------
Total stockholders' equity 34,849 18,906
------------------------------
$95,757 $33,855
==============================
See accompanying notes.
F-3
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year ended December 31
1998 1999 2000
--------------------------------------------
Net sales $234,429 $244,139 $216,543
Cost of sales 205,241 218,014 194,964
--------------------------------------------
Gross profit 29,188 26,125 21,579
Selling, general and administrative expenses 22,682 24,422 25,648
Amortization of goodwill 979 1,795 1,385
Impairment of goodwill 7,000
Impairment of investment 590
Loss on sale of European subsidiaries 2,081
--------------------------------------------
Income (loss) from operations 5,527 (92) (15,125)
Other (expense) income:
Interest expense (250) (408) (353)
Interest income 544 548 301
Unrealized foreign exchange gain 62 525 186
--------------------------------------------
Income (loss) before provision for income taxes 5,883 573 (14,991)
Provision for income taxes 2,441 1,302 2,483
--------------------------------------------
Net income (loss) $ 3,442 (729) (17,474)
============================================
Basic net income (loss) per common share $ 0.72 (0.14) $(3.51)
============================================
Diluted net income (loss) per common share $ 0.66 $(0.14) $(3.51)
============================================
Weighted average common shares outstanding-Basic 4,797 5,100 4,983
============================================
Weighted average common shares outstanding-Diluted 5,249 5,100 4,983
============================================
See accompanying notes
F-4
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
Accumulated
Additional Retained other
Common Stock Paid-In Treasury Earnings/ comprehensive
Shares Amount Capital Stock (Deficit) Income (loss) Total
-----------------------------------------------------------------------
Balance at January 1, 1998 4,793,295 $48 $33,633 ($343) ($256) ($869) $32,213
Net income 3,442 3,442
Other comprehensive income:
Translation adjustment 141 141
---
Comprehensive income 3,583
Exercise of stock options, including
$372 in income tax benefits 157,775 2 319 669 990
Purchase of 102,500 treasury stock (545) (545)
shares
------------------------------------------------------------------------
Balance at December 31, 1998 4,951,070 50 33,952 (219) 3,186 (728) 36,241
Net loss (729) (729)
Other comprehensive loss:
Translation adjustment (1,449) (1,449)
-------
Comprehensive loss
(2,178)
Exercise of stock options, including
$1,054 in income tax benefits 284,568 3 1,676 223 1,902
Issuance of common stock for
severance and bonus 44,800 244 244
Purchase of 231,500 treasury stock
shares 1,360) (1,360)
------------------------------------------------------------------------
Balance at December 31, 1999 5,280,438 53 35,872 (1,356) 2,457 (2,177) 34,849
Net loss 7,474) (17,474)
Other comprehensive loss:
Translation adjustment (1,164) (1,164)
-------
Comprehensive loss (18,638)
Translation balance included
in net assets held for sale 3,060 3,060
Reduction of tax liability from
exercise of stock options (365) (365)
Repayment of proceeds from stock
option exercise (35) (35)
Exercise of stock options 7,375 4 31 35
------------------------------------------------------------------------
Balance at December 31, 2000 5,287,813 $53 35,476 $(1,325) $(15,017) $(281) $18,906
========================================================================
See accompanying notes
F-5
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31
1998 1999 2000
---- ---- ----
Cash flows from operating activities
Net income (loss) $ 3,442 $ (729) $ (17,474)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Impairment of investment 590
Deferred income taxes 88 4 2,834
Depreciation expense 934 1,177 957
Amortization expense 1,114 1,929 1,609
Loss on sale of European subsidiaries 2,081
Impairment of goodwill 7,000
Changes in operating assets and liabilities, net
of assets held for sale:
Accounts receivable (14,486) 6,687 (3,027)
Inventory (708) (285) 791
Prepaid expenses and other current assets (364) (815) 406
Accounts payable and accrued expenses 11,085 (7,437) 6,822
Net change in other operating assets and liabilities 1,623 937 (354)
Net cash provided by operating activities 2,728 1,468 2,235
Cash flows from investing activities
Purchase of equipment, leasehold improvements
and other (1,975) (996) (581)
Change in net assets held for sale (14,407)
Purchases of businesses, net of cash acquired (2,274)
--------------------------------------------
Net cash used in investing activities (1,975) (3,270) (14,988)
Cash flows from financing activities
Borrowings (repayments) under lines of credit (743) 2,628 (2,628)
Repayments under long term debt (2,435)
Purchase of treasury stock (545) (1,137)
Repayment of proceeds from stock option exercise (35)
Net proceeds from issuance of common stock 990 625 35
--------------------------------------------
Net cash used in financing activities (298) (319) (2,628)
--------------------------------------------
Effect of foreign exchange rate on cash 141 (1,449) (125)
--------------------------------------------
Net increase (decrease) in cash and cash equivalents 596 (3,570) (15,506)
Cash and cash equivalents at beginning of year 20,571 21,167 17,597
--------------------------------------------
Cash and cash equivalents at end of year $21,167 $17,597 $2,091
============================================
See accompanying notes.
F-6
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
1. Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of Programmer's
Paradise, Inc., it's wholly owned subsidiaries and its majority-owned
subsidiaries (the "Company"). Programmer's Paradise, Inc. is a recognized
international marketer of software targeting the software development
professional and information technology professional within enterprise
organizations. The Company operates principally, through five distribution
channels in North America and Europe - Internet, catalog, direct sales,
telemarketing, and wholesale distribution. All inter-company balances and
transactions have been eliminated in consolidation. The Company completed the
sale of its European operations on January 9, 2001 (see Note 12)
Concentrations of Credit Risk
The Company's accounts receivable are potentially exposed to concentrations of
credit risk. These receivables reflect a broad customer base, which is dispersed
across many different industries and geographies. Credit limits, periodic credit
evaluations and account monitoring procedures are utilized to minimize the risk
of loss. Collateral is generally not required. Credit losses related to accounts
receivable have been consistent with management's expectations. The carrying
value of accounts receivable and notes payable to banks approximate fair value.
Significant Customers and Suppliers
No customer accounted for more than 10% of consolidated net sales in 1998, 1999
and 2000 and no material part of the business is dependent upon a single
customer or a few customers, the loss of any one or more which would have a
materially adverse effect on the Company.
The Company has authorized dealership or distribution agreements with various
suppliers. Products from two of these suppliers accounted for approximately 61%,
63% and 59% of Company revenues for 1998, 1999 and 2000, respectively.
Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents.
F-7
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
Significant Accounting Policies (continued)
Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries, all of which are located in
Europe, have been translated at current exchange rates, and related revenues and
expenses have been translated at average rates of exchange in effect during the
year. Cumulative translation adjustments have been classified within other
comprehensive income (loss), which is a separate component of stockholders
equity in accordance with FASB Statement No. 130, "Reporting Comprehensive
Income".
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventory
Inventory, consisting primarily of finished products held for resale, is stated
at the lower of cost (weighted average) or market.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are calculated using the straight-line method over three to five
years. Leasehold improvements are amortized over the estimated useful lives of
the assets or the related lease terms, whichever is shorter.
Accounting for Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets used in
operations when events and circumstances indicate that an asset's carrying value
may not be recoverable. An impairment loss is recognized when the sum of the
expected future undiscounted net cash flows is less than the carrying value of
the asset. An impairment loss would be measured by comparing the amount by which
the carrying value exceeds the fair value of the asset being evaluated for
impairment.
F-8
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
1. Significant Accounting Policies (continued)
Goodwill
Goodwill represents the excess of costs over fair values of net assets acquired
and is being amortized on a straight-line basis substantially over periods,
which range from fifteen to twenty years.
During the fourth quarter ended December 31, 2000, the goodwill from the
acquisition of Software Developers Corporation ("SDC") in June 1996 was
determined the to be impaired and was adjusted accordingly as a result of the
Company's ongoing evaluation of the realizability of such goodwill. The goodwill
was the result of excess purchase price over assets from SDC. There had been a
steady decline in sales generated from the Programmer's Supershop Catalog, which
become more substantial in 2000. In 2000, the catalog production and
distribution processes were evaluated and determined the value previously
recognized was impaired. The customers buying patterns were beginning change
based upon increased competition from other direct market resellers and the
accessibility to procure software products through competing websites.
The impairment of goodwill was determined by analyzing the historical trends and
future undiscounted net cash flow projections of the Programmer's SuperShop
Catalog. The number of customers mailed were reviewed and based upon the data it
was evident the amount of catalogs mailed were declining. Additionally, the
volume of catalog sales was analyzed and the sales amounts were decreasing.
Gross profit dollars during the period was experiencing pricing pressures from
competitors and increased distributors and websites to procure software
products. This is leading to decreasing gross profit dollars and increased
catalog and production costs. Finally, the buying patterns of customers was
analyzed and determined that repeat buying was not increasing, and the number of
one-time buyer's greater than 36 months making a second purchase were not
materializing.
Projections of sales, gross profit and undiscounted net cash flows were prepared
using catalog mailing plans and historical data. Based upon these valuations,
goodwill was determined to be impaired in the amount of $7.0 million and the
remaining goodwill related to SDC as of December 31, 2000 is $255,000. The
impairment of SDC goodwill is included in loss from operations amount within the
Statement of Operations.
The catalog and Internet sales distribution channel is affected by this
impairment. Programmer's SuperShop catalog is one of many catalogs created and
distributed by the Company. SuperShop customer list will be reviewed and if
appropriate, included in the Programmer's Paradise Catalog mailing and
production plans. Although results associated with th Programmer's Supershop
Catalog have continued to decline, the Company plans to continue the
Programmer's SuperShop catalog production and distribution to its customers.
F-9
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
Investment in Healy Hudson
In 1999, the Company acquired an interest in Healy Hudson GmbH ("Healy Hudson"),
a privately held Internet e-Commerce software company. This investment was
accounted for under the cost method.
During the fourth quarter of 2000, the Company evaluated the carrying value of
Healy Hudson. As a privately held company targeting the e-Commerce markets in
Europe and the US, gaining market share requires attracting various resources to
be successful. Gaining financial support from existing and new investors is
necessary to continue Healy Hudson's progress in penetrating these markets.
Based upon the financial market conditions, which make it difficult to raise
additional capital and financial performance including continuing losses,
significant cash burn rate and declining cash balances, the Company determined a
valuation allowance of $590,000 is necessary.
Stock-Based Compensation
As permitted by FASB Statement No. 123 "Accounting for Stock-Based Compensation"
(FASB 123), the Company has elected to follow Accounting Principal Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock option plans. Under APB 25,
no compensation expense is recognized at the time of option grant because the
exercise price of the Company's employee stock option equals the fair market
value of the underlying common stock on the date of grant.
Revenue Recognition
The Company recognizes revenue from the sale of software for microcomputers,
servers and networking upon shipment or upon electronic delivery of the product.
Advertising Costs
The Company capitalizes the advertising costs associated with producing its
catalogs. The costs of these catalogs are amortized over the estimated shelf
life of the catalogs, generally 3-5 months. The unamortized balance of
non-reimbursed advertising costs at any period end is minimal. Advertising costs
for 1998, 1999, and 2000 amounted to approximately $6,159, $6,611 and $4,391
respectively.
Net Income (Loss) Per Common Share
Basic and diluted income (loss) per share are calculated in accordance with
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share".
F-10
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. This method also requires a valuation
allowance against net deferred tax asset if, based on the weighted available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
Impact of Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not currently use derivative instruments and, therefore,
does not expect that the adoption of SFAS 133 will have any impact on its
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes the SEC's
views in applying generally accepted accounting principles to revenue
recognition. The adoption of SAB 101 had no impact on the Company's operating
results and financial position.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" (FIN 44"), which contains
rules designed to clarify the application of APB 25. Fin 44 became effective on
July 1, 2000 at which time the Company adopted the interpretation. The adoption
of FIN 44 had no impact on the Company's operating results and financial
position.
2. Acquisitions
In September 1997, the Company acquired 100% of the outstanding stock of
Logicsoft Holding BV ("Logicsoft"), a direct sales company of PC software, which
operates Logicsoft Europe BV, located in Amsterdam, The Netherlands, at a cost
of approximately $3,300 plus a contingent earn-out payment, based upon increases
in achievement's earnings in 1998 over a base amount. The earn-out amount of
approximately $ 2,274 was accrued and recorded as goodwill as of December 31,
1998 and paid in May 1999. The Company accounted for the this acquisition as a
purchase.
F-11
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
3. Notes Payable to Banks
The Company and PNC Bank, National Association (the "PNC") entered into a letter
agreement dated February 24, 1998 (the "Letter Agreement"), providing for a line
of credit of up to $7,500. The Company and PNC executed Amendment No. 1 to the
Letter Agreement, dated June 30, 1999, which extended the expiration date to
March 31, 2000. The Company and the Lender executed a second amendment, dated
March 31, 2000, which extended the expiration date to June 30, 2000. On August
10, 2000, the Company and the Lender entered into a forbearance agreement (the
"Forbearance Agreement") whereby (i) PNC agreed to forbear from exercising its
rights and remedies arising as a result of defaults then outstanding until
December 31,2000 (unless certain other events of default occurred prior to such
date), (ii) the amount the Company could borrow was reduced from $7.5 million to
the lesser of (x) $2 million and (y) 60% of certain of the Company's accounts
receivable, (iii) the expiration date was extended to December 31, 2000, and
(iv) the Company paid a fee of $40,000 to the Lender and a field audit cost of
about $9,000. Under the Forbearance Agreement, the amount borrowed bore interest
at PNC's prime rate plus 1%. There was $2,628 outstanding under the line at
December 31, 1999. The Company paid in full in December, 2000 all of its
outstanding obligations under the Letter Agreement
On February 9, 2001, the Company entered into a Loan and Security Agreement (the
"Loan Agreement") with Hudson United Bank ("Hudson") (see Note 12).
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 $1,018 at December 31, 2000),
and is secured by its accounts receivable and inventory. The line bears interest
at 6.00%. There was $0 and $265 outstanding under the line at December 31, 1999
and 2000, respectively, included in the net assets of European subsidiaries held
for sale.
The weighted average interest rate for notes payable to banks was 6%, 8% and 6%
at December 31, 1998, 1999 and 2000, respectively.
Interest paid was approximately $316, $298 and $353 for the years ended December
31, 1998, 1999 and 2000, respectively.
F-12
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
4. Balance Sheet Detail
Equipment and leasehold improvements consists of the following as of December
31:
1999 2000
----------------------
Equipment $ 4,924 $ 2,594
Leasehold improvements 541 294
----------------------
5,465 2,888
Less accumulated depreciation and amortization (3,330) (1,954)
----------------------
$ 2,135 $ 934
======================
Accounts payable and accrued expenses consists of the following as of December
31:
1999 2000
----------------------
Trade accounts payable $ 19,341 $ 6,497
Accrued inventory 30,504 6,649
Other accrued expenses 538 1,793
----------------------
$ 50,383 $ 14,939
======================
F-13
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
5. Income Taxes
The provision for income taxes is as follows:
Year ended December 31
1998 1999 2000
---- ---- ----
Current:
Federal $ 332 $ (145) $ -
State 77 5 -
Foreign 1,944 1,764 -
-------------------------------------
2,353 1,624 -
Deferred:
Federal 225 (244) 2,195
State (7) (17) 639
Foreign (130) (61) (351)
-------------------------------------
88 (322) 2,483
-------------------------------------
$2,441 $ 1,302 2,483
=====================================
The reasons for the difference between total tax expense and the amount computed
by applying the U.S. statutory federal income tax rate to income before income
taxes are as follows:
Year ended December 31
1998 1999 2000
---- ---- ----
Statutory rate applied to pretax income $ 2,000 $ 195 $ (5,247)
Impairment of goodwill 748
Amortization of goodwill 69 341 113
State income taxes, net of benefit
of federal income taxes 46 (8) (704)
Foreign income taxes over U.S.
statutory rate 326 763 495
Net increase in valuation allowance - - 7,078
Other items - 11 -
--------------------------------
Income tax expense $ 2,441 $ 1,302 $ 2,483
================================
F-14
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
5. Income Taxes (continued)
Significant components of the Company's deferred tax assets are as follows as
of:
December 31
1999 2000
---------------------------------
Fixed assets $ 787 $ 1,314
Accruals and reserves 335 4,607
Net operating loss carryforwards 2,435 2,436
Credit carry forwards 16 16
---------------------------------
Deferred tax assets $ 3,573 $ 8,373
---------------------------------
Valuation allowance (7,078)
---------------------------------
Deferred tax assets $ 3,573 $ 1,295
=================================
At December 31, 2000, the Company had approximately $6,869 in federal net
operating loss carryovers, which expire in varying amounts between 2001 and 2020
($1,695 in 2001, $862 in 2002 and $1576 in 2003). As a result of the current
uncertainty of realizing the benefits of the tax loss carryforward, valuation
allowances equal to the tax benefits for the U.S. deferred taxes have been
established. The remaining deferred tax assets relate to the European
subsidiaries sold on January 9, 2001 and accordingly the amount has been
included in "net assets held for sale" on the balance sheet at Decmeber 31,
2000. The full realization of the tax benefit associated with the carryforward
depends predominantly upon the Company's ability to generate taxable income
during the carryforward period. The valuation allowance will be evaluated at the
end of each reporting period, considering positive and negative evidence about
whether the deferred tax asset will be realized. At that time, the allowance
will either be increased or reduced; reduction could result in the complete
elimination of the allowance if positive evidence indicates that the value of
the deferred tax assets is no longer impaired and the allowance is no longer
required. The Company's ability to utilize certain net operating loss
carryforwards is restricted to approximately $1.5 million per year cumulatively,
as a result of an ownership change pursuant to Section 382 of the Internal
Revenue Code.
For financial reporting purposes, income before income taxes includes the
following components:
Year ended December 31
1998 1999 2000
-------------------------------------------
United States $1,504 $(721) $(12,574)
Foreign 4,379 1,294 (2,417)
-------------------------------------------
$5,883 $573 $(14,991)
===========================================
During the years ended December 31, 1998, 1999 and 2000, the Company paid
approximately $1,956, $1,471 and $783, respectively, in income taxes.
F-15
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
6. Stockholder's Equity and Stock Option Plans
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 May 7, 1998, provides for
the grant of options to purchase up to 1,137,500 shares of the Company's common
stock to officers, directors, employees and consultants of the Company. The 1995
Plan requires that each option shall expire on the date specified by the
Compensation Committee, but not more than ten years from its date of grant in
the case of ISO's and Non-Qualified Options. Options granted under the plan are
exercisable at an exercise price equal to but not less than the fair market
value of the common stock on the grant date. ISO's generally vest in equal
annual installments over five years.
On April 21, 1995, the Board of Directors adopted the Company's 1995
Non-Employee Director Plan ("1995 Director Plan"). The 1995 Director Plan, as
amended on May 7, 1998, provides for the grant of options to purchase up to
187,500 shares of the Company's common stock to persons who are members of the
Company's Board of Directors and not employees or officers of the Company. The
1995 Director Plan requires that options granted thereunder will expire ten
years from the date of grant. Each option granted under the 1995 Director Plan
becomes exercisable over a five year period, and vests in an installment of 20%
of the total option grant upon the expiration of one year from the date of the
option grant, and thereafter vests in equal quarterly installments of 5%. 6.
F-16
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
6. Stockholder's Equity and Stock Option Plans (continued)
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 1998, 1999 and 2000,
respectively: risk free interest rates of 5.49%, 6.64% and 4.63%, dividend
yields of 0% in all three periods, volatility factors of the expected market
price of the Company's common stock of .65, .87 and .73, and a weighted-average
expected life of the option of 5.9 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
Year ended December 31
1998 1999 2000
---- ---- ----
Net income (loss) as reported $3,442 $(729) $(17,474)
Net income (loss) pro forma $2,649 $(1,731) $(17,718)
Basic net income (loss) per share, as reported $.72 $(.14) $(3.51)
Basic net income (loss) per share, pro forma $.55 $(.34) $(3.56)
Diluted net income (loss) per share, as reported $.66 $(.14) $(3.51)
Diluted net income (loss) per share, pro forma $.52 $(.34) $(3.56)
The weighted average fair value of options granted during 1998, 1999 and 2000 is
$6.54, $6.23 and $5.32, respectively.
F-17
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
6. Stockholder's Equity and Stock Option Plans (continued)
Changes during 1998, 1999 and 2000 in options outstanding for the combined plans
were as follows:
Weighted
Number Average
of Exercise
Options Price
-------------------------------
Outstanding at January 1, 1998 999,539 4.30
Granted in 1998 349,150 6.51
Canceled in 1998 (34,035) 5.94
Exercised in 1998 (157,775) 1.90
-----------
Outstanding at December 31, 1998 1,156,879 5.25
Granted in 1999 55,000 6.23
Canceled in 1999 (99,222) 6.33
Exercised in 1999 (326,418) 2.57
-----------
Outstanding at December 31, 1999 786,239 6.28
Granted in 2000 120,000 5.32
Canceled in 2000 (176,734) 5.53
Exercised in 2000 (14,475) 2.10
-----------
Outstanding at December 31, 2000 715,030 6.37
===========
Exercisable at December 31, 2000 564,635 6.46
===========
Stock options outstanding at December 31, 2000 are summarized as follows:
Weighted
Outstanding Average Weighted
Range of Exercise Options at Remaining Average
Prices December Contractual Exercise Price
31, 2000 Life
- ------------------------------------------------------------------------
$0.00 - 1.29 34,900 1.6 .47
2.59 - 3.88 25,000 9.7 3.50
3.89 - 5.18 57,400 3.5 4.00
5.19 - 6.47 427,601 6.8 6.23
6.48 - 7.76 85,629 3.3 7.05
7.77 - 9.06 26,000 6.4 8.68
9.07 - 10.35 5,500 8.1 9.73
10.36 - 11.64 3,000 3.0 10.50
11.64 - 12.94 50,000 6.7 12.94
-------
715,030
=======
Under the various plans, options that are cancelled can be reissued. At December
31, 2000 561,366 shares were reserved for future issuance.
F-18
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
7. Defined Contribution Plan
The Company maintains a defined contribution plan covering substantially all
domestic employees. Participating employees may make contributions to the plan,
through payroll deductions. Matching contributions are made by the Company equal
to 50% of the employee's contribution to the extent such employee contribution
did not exceed 6% of their compensation. During the years ended December 31,
1998, 1999 and 2000, the Company expensed approximately $79, $95 and $93
respectively, related to this plan.
8. Net Income (Loss) per Share
Basic earnings per share are based upon the weighted average number of shares of
common stock outstanding. Diluted earnings per share are based upon the weighted
average number of shares of common stock and dilutive potential shares of common
stock outstanding. Potential shares of common stock are outstanding options,
which are included under the treasury stock method for the year ended December
31, 1998. For the years ended December 31, 1999 and 2000, potentially dilutive
securities have been excluded from the computation, as their effect is
antidilutive.
The following table sets forth the computation of basic and diluted net income
(loss) per share:
Year Ended December 31
-------------------------------------
1998 1999 2000
-------------------------------------
Numerator:
Net income (loss) for basic and diluted net
income per share $ 3,442 $(729) $ (17,474)
--------------------------------------
Denominator:
Denominator for basic net income (loss) per
share - weighted average common shares 4,797 5,100 4,983
Effect of dilutive securities:
Employee stock options 452 - -
--------------------------------------
Denominator for diluted net income (loss) per
share - adjusted weighted average common
shares and assumed conversion 5,249 5,100 4,983
======================================
Basic net income (loss) per common share $ .72 $(.14) $(3.51)
======================================
Diluted net income (loss) per common share $ .66 $(.14) $(3.51)
======================================
F-19
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
9. Commitments
The Company leases the space used for its operations and certain equipment under
long-term operating leases. The future minimum rental payments for the US and
Canada for the remaining terms of the leases are as follows:
2001 $285
2002 285
2003 276
2004 264
2005 264
2006 and thereafter 299
----------
$1,673
==========
Rent expense for the years ended December 31, 1998, 1999 and 2000 was
approximately $1,050, $1,135 and $949 respectively.
The Company has royalty agreements, which require payments based on sale of
certain products. Royalty expense for the years ended December 31, 1998, 1999
and 2000 was approximately $141, $131 and $19, respectively.
F-20
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
10. Industry
segment and Geographic information
The Company's single business segment is the marketing of technical software for
microcomputers, servers and networking across geographically diverse
marketplaces.
Geographic financial information is as follows:
------------------------------------
1998 1999 2000
------------------------------------
Net sales to Unaffiliated Customers:
North America $70,922 $80,730 $88,625
Europe 163,507 163,409 127,918
------------------------------------
Total 234,429 244,139 216,543
====================================
Income (loss) from operations by Geographic Areas:
North America $ 1,842 $ 183 $(12,552)
Europe 3,685 (275) (2,573)
------------------------------------
Total 5,527 (92) (15,125)
====================================
Identifiable Assets by Geographic Areas:
North America $35,854 $28,875 $21,692
Europe 69,023 66,882 12,163
------------------------------------
Total 104,877 95,757 33,855
====================================
"North America" is comprised of the United States and Canada. "Europe" is
comprised of Austria, France, Germany, Italy, the Netherlands and the United
Kingdom.
F-21
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
11. Quarterly Results of Operations
The following table presents summarized quarterly results for 2000:
(Unaudited)
--------------------------------------------------------
First Second Third Fourth
--------------------------------------------------------
Revenues $52,686 $51,949 $42,304 $69,604
Gross profit 5,335 5,057 4,668 6,519
Net loss (699) (1,044) (452) (15,279)
Basic and dilutive
net loss per share $(0.14) $(0.21) $(0.09) $(3.07)
The net loss for the fourth quarter of 2000 was primarily the result of the
impairment of goodwill from the Software Developers Corporation acquisition from
June 1996 ($7,000), the loss on the sale of the European subsidiaries ($2,081),
and an increase in the valuation allowance for the deferred tax assets as set
forth in the Statement of Financial Accounting Standards No. 109 ($2,834).
The following table presents summarized quarterly results for 1999:
(Unaudited)
------------------------------------------------------
First Second Third Fourth
------------------------------------------------------
Revenues $57,368 $60,770 $50,195 $75,805
Gross profit 6,762 7,459 4,267 7,636
Net income/(loss) 987 963 (2,323) (356)
Basic net income/
(loss) per share $0.20 $0.19 $(0.45) $(0.07)
Diluted net income/
(loss) per share $0.18 $0.17 $(0.45) $(0.07)
12. Subsequent Events
Sale of European Subsidiaries
Pursuant to an Agreement, dated December 1, 2000 ("Stock Sale Agreement"),
between the Company and PC-Ware Information Technologies AG, a German
corporation ("PC-Ware"), on January 9, 2001 the Company sold all of the shares
of its European subsidiaries (except for Programmer's Paradise France S.A.R.L.)
for 14,500,000 Euros, of which 3,275,000 Euros are being held in a 240-day
escrow as security for any claim of PC-Ware arising from alleged breaches of
representations by the Company under the Stock Sale Agreement. Such claims are
subject to a 300,000 Euro de minimus amount and a 7,500,000 Euro maximum amount.
F-22
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
12. Subsequent Events (continued)
As a result of this sale, the Company has presented the balance sheets of its
European subsidiaries combined in one line on the December 31, 2000 balance
sheet as "net assets held for sale." In the fourth quarter of 2000, the Company
recognized a loss on this sale of $2,081, which is presented as a separate line
in its statement of operations. Pro forma data related to the Company's
continuing operations are reflected below.
The pro forma financial information as of and for the years ended December 31,
2000, gives effect to the following pro forma adjustments:
Balance Sheet
Pro
Balance Forma
December Pro forma as
31, 2000 Adjustments Adjusted
Assets
Current assets:
Cash and cash equivalents $2,091 $12,163 (1) $14,254
Accounts receivable, net 13,048 13,048
Inventory - finished goods 2,631 2,631
Prepaid expenses and other current assets 2,342 2,342
Net assets held for sale of European subsidiaries 12,163 (12,163)(1) 0
------ -------- -------
Total current assets 32,275 0 32,275
Equipment and leasehold improvements, net 934 934
Goodwill 255 255
Other assets 391 391
------- --------- -------
Total assets $33,855 $0 $33,855
======= ========= =======
Liabilities & Stockholders' equity
Current liabilities:
Accounts payable and accrued expenses 14,939 14,939
Other current liabilities 10 10
Total current liabilities 14,949 14,949
------ ------
Stockholders' equity:
Common Stock 53 53
Additional paid-in-capital 35,476 35,476
Treasury stock (1,325) (1,325)
Retained earnings (15,017) (15,017)
Accumulated other comprehensive loss (281) (281)
------- --------- --------
Total stockholders' equity 18,906 0 18,906
------- --------- --------
Total liabilities & stockholders' equity $33,855 $0 $33,855
======= ========= ========
F-23
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
Statement of Operations
Year Ended December 31, 2000
Pro Forma Pro Forma
Historical Adjustments as Adjusted
---------- ----------- -----------
Net sales $216,543 $127,918 (1) $88,625
Cost of sales $194,964 $117,388 (1) $77,576
-------- -------- -------
Gross profit 21,579 10,530 11,049
Selling, general and administrative expenses 25,648 13,547 (1) 12,101
Amortization of goodwill 1,385 83 (1) 1,302
Impairment of goodwill 7,000 7,000
Loss on sale of European Subsidiaries 2,081 2,081 (1)
Impairment of investment 590 590
-------- -------- -------
Loss from operations (15,125) (5,181) (9,944)
Other (expense) income:
Interest expense (353) (352) (1,2)
Interest income 301 148 (1) 152
Unrealized foreign exchange gain (loss) 186 (21) (1) 207
-------- -------- -------
Loss before income taxes (14,991) (5,406) (9,585)
Income tax provision (benefit) 2,483 (351) (1) 2,834
--------- --------- ---------
Net loss $(17,474) $ (4,905) $(12,419)
========== ========== =========
Basic net loss per common share $ (3.51) $ (2.50)
========== =========
Diluted net loss per common share $ (3.51) $ (2.50)
========== =========
Weighted average common shares outstanding-Basic 4,983 4,983
========== =========
Weighted average common shares outstanding-Diluted 4,983 4,983
========== =========
Balance Sheet:
1. Represents the net cash received offset against the net
assets held for sale of the European subsidiaries.
Statement of Operations:
1. Reflects the elimination of the operating results of the European
subsidiaries.
2. To reflect a reduction in the Company's interest expense
of $142, for the year ended December 31, 2000 incurred relating to the
revolving line of credit with PNC Bank, National Association, assuming the
application of proceeds from the sale of the European subsidiaries to repay
the outstanding indebtedness under this facility.
F-24
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except share amounts)
Hudson United Bank Loan Agreement
On February 9, 2001, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Hudson. The new Loan Agreement provides for a
revolving credit facility of up to $5.0 million with an initial term
expiring April 1, 2003. The amount of available credit is determined by the
level of certain eligible accounts receivable. The facility bears interest
at Hudson's prime rate (8.5% at March 1, 2001) plus 1%. Additionally, the
Loan Agreement contains various covenants including a financial covenant
that generally requires the Company to maintain a current ratio (as defined
in the Loan Agreement) of 1.5 to 1. The Loan Agreement is subject to
customary event of default and acceleration provisions and is
collateralized by substantially all of the Company's assets.
F-25
Programmer's Paradise, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In Thousands)
Charged to Amounts
Beginning Cost and transferred Ending
Description Balance Expense to net Deductions Balance
assets held
for sale
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Allowances for accounts receivable $ 950 674 444 $1,180
Reserve for Obsolescence $ 752 311 585 $ 478
Year ended December 31, 1999:
Allowances for accounts receivable $1,180 919 669 $1,430
Reserve for Obsolescence $ 478 205 296 $ 387
Year ended December 31, 2000:
Allowances for accounts receivable $1,430 918 (1,442) 376 $ 530
Reserve for Obsolescence $ 387 376 (257) 65 $ 441
F-26