UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 33-92810
Programmer's Paradise, Inc.
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(Name of issuer in its charter)
Delaware 13-3136104
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(State or other jurisdiction of (I.R.S. Employer Identification
No.) incorporation or organization)
1163 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number (908) 389-8950
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past
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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
There were 4,809,998 outstanding shares of Common Stock, par value $.01
per share, as of November 3, 1997.
Page 1
Exhibit index is on page 14.
PROGRAMMER'S PARADISE, INC.
Index to Form 10-Q
Page No.
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Income for the Nine Months and Three Months
Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule 15
Page 2
PART I - FINANCIAL INFORMATION
PROGRAMMER'S PARADISE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
ASSETS
September 30, December 31,
1997 1996
---- ----
(Unaudited) *
Current Assets
Cash and cash equivalents $ 15,026 $ 16,281
Accounts receivable 24,214 26,826
Inventory 4,445 4,464
Prepaid expenses and other current assets 2,773 2,946
Deferred income taxes 1,680 1,097
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Total current assets 48,138 51,614
Equipment and leasehold improvements 1,944 1,695
Goodwill 14,020 12,768
Other assets 972 912
Deferred income taxes 1,710 2,220
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$ 66,784 $ 69,209
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $ 3,108 $ 1,135
Accounts payable and accrued expenses 30,327 35,760
Other current liabilities 2,267 2,303
--------- --------
Total current liabilities 35,702 39,198
Other liabilities 102 116
Notes payable to banks - long term - 1,050
Stockholders' equity
Common stock 48 48
Additional paid-in capital 33,530 33,510
Accumulated deficit (1,637) (4,220)
Treasury stock (355) (376)
Cumulative foreign currency adjustment (606) (117)
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Total stockholders' equity 30,980 28,845
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$ 66,784 $ 69,209
========= ========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
PROGRAMMER'S PARADISE INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
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1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 114,921 $ 85,757 $ 36,882 $ 34,614
Cost of sales 97,395 71,922 31,460 29,202
--------- -------- -------- --------
Gross profit 17,526 13,835 5,422 5,412
Selling, general and administrative expenses 12,833 12,282 4,177 4,548
Amortization expense 661 265 208 208
--------- -------- -------- ---------
Income from operations 4,032 1,288 1,037 656
Interest income (expense), net 170 219 67 (68)
Unrealized foreign exchange gain (loss) (84) - 16 -
--------- -------- -------- --------
Income before income taxes 4,118 1,507 1,120 588
Income tax expense 1,535 721 357 338
Minority interest - 424 - 191
--------- -------- -------- --------
Net income $ 2,583 $ 1,210 $ 763 $ 441
========= ======== ======== ========
Weighted average common shares outstanding 5,336 5,131 5,416 5,117
Net income per common share $.48 $.24 $.14 $.09
---- ---- ---- -----
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
PROGRAMMER'S PARADISE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
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1997 1996
---- ----
Cash provided by (used for)
Operations:
Net income $ 2,583 $ 1,210
Adjustments for non cash charges 1,310 750
Changes in assets and liabilities (3,254) (8,996)
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Net cash provided by (used for) operations 639 (7,036)
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Investing:
Capital expenditures (522) (367)
Capitalized software costs (50) (16)
Acquisitions, net of cash acquired (2,286) (11,295)
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Net cash (used for) investing (2,858) (11,678)
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Financing:
Purchase of treasury stock - (376)
Net proceeds from sale of common stock 41 4
Borrowings under lines of credit 6,412 7,447
Repayments under lines of credit (5,489) (7,852)
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Net cash provided by (used for) financing activities 964 (777)
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Net change in cash (1,255) (19,491)
Cash at beginning of year 16,281 27,702
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Cash at end of period $15,026 $ 8,211
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
PROGRAMMER'S PARADISE, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 1997
1. The financial information included herein is unaudited; however, such
information has been prepared in accordance with generally accepted
accounting principles and reflects all adjustments, consisting solely
of normal recurring adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim
periods. Operating results for the three and nine month period ended
September 30, 1997, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's 1996 10-K filing dated March 28,
1997.
2. Assets and liabilities of the foreign subsidiaries, all of which are
located in Europe, have been translated at current exchange rates, and
related revenues and expenses have been translated at average rates of
exchange in effect during the year. Resulting cumulative translation
adjustments have been recorded as a separate component of stockholders'
equity.
3. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will
be excluded. The impact is expected to result in an increase in primary
earnings per share for the quarters ended September 30, 1997 and
September 30, 1996 of $0.02 and $0.00 per share, respectively. For the
nine months ended September 30, 1997 and September 30, 1996, the impact
is expected to result in an increase in primary earnings per share of
$0.06 and $0.02 per share, respectively. The impact of Statement 128 on
the calculation of fully diluted earnings per share for these quarters
is not expected to be material.
Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a distributor of software, operating through
three distribution channels-cataloging, corporate reseller and wholesale
operations. Catalog operations include worldwide catalog sales, advertising and
publishing. Corporate reseller operations include Corsoft, Inc. in the U.S. and
ISP*D International Software Partners Gmbh ("ISP*D") in Munich, Germany, wholly
owned subsidiaries of the Company, and ISP*F International Software Partners
France ("ISP*F"), a majority-owned company located in Paris, France. Wholesale
operations include distribution to dealers and large resellers through Lifeboat
Distribution Inc. in the U.S. and Lifeboat Associates Italia Srl ("Lifeboat
Italy") in Milan, Italy, also subsidiaries of the Company.
The Company began European-based operations in the first
quarter of 1993, when it acquired a controlling interest in Lifeboat Italy, a
long-standing software distributor in Italy. In January and April 1994, the
Company purchased the remaining ownership interest in Lifeboat Italy. In June
1994, the Company acquired a 90% controlling interest in ISP*D, a large
software-only dealer and a leading independent supplier of Microsoft Select
licenses and other software to many large German and Austrian companies. In
January 1995, the remaining 10% interest in ISP*D was purchased by the Company.
In late 1994, the Company organized a subsidiary in the United Kingdom to engage
in catalog operations, and in December 1995 the Company acquired Systematika
Limited ("System Science"), a leading reseller of technical software in the
United Kingdom and the publisher of the popular System Science catalog. In
January 1996, the Company formed ISP*F International Software Partners France SA
("ISP*F"), as a full service corporate reseller of PC software, based in Paris
and majority-owned by Programmers' Paradise France SARL. The Company is using
its European-based operations as a platform for pan-European business
development, including the distribution of local versions of its catalogs.
In June, 1996, the Company acquired substantially all of the
assets and business of The Software Developer's Company, Inc. ("SDC") related to
The Programmer's Supershop ("TPS") catalog, inbound and outbound telemarketing,
reseller operations, web site, and all of the operations of its German
subsidiary. SDC had been the Company's largest direct mail competitor, offering
a similar array of technical software.
In September 1997, the Company acquired Logicsoft Holding BV
("Logicsoft"), which operates Logicsoft Europe BV, located in Amsterdam, The
Netherlands. Logicsoft is the largest software-only corporate reseller of PC
software in The Netherlands.
Page 7
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated
certain financial information derived from the Company's consolidated statement
of operations expressed as a percentage of net sales.
Nine months ended Three months ended
September 30, September 30,
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1997 1996 1997 1996
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 84.7 83.9 85.3 84.4
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Gross Profit 15.3 16.1 14.7 15.6
Selling, general and administrative expenses 11.2 14.3 11.3 13.1
Amortization expense 0.6 0.3 0.6 0.6
------- ------- ------- -------
Income from operations 3.5 1.5 2.8 1.9
Interest income (expense), net 0.1 0.2 0.2 (0.2)
Unrealized foreign exchange gain (loss) (0.1) - 0.1 -
------- ------- ------- -------
Income before income taxes 3.5 1.7 3.1 1.7
Income taxes (1.3) (0.8) (1.0) (1.0)
Minority interest - 0.5 - 0.6
------- ------- ------- -------
Net income 2.2% 1.4% 2.1% 1.3%
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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 for the quarter ended September 30, 1997
increased by $2,268,000, or 6.6%, to $36,882,000, over the quarter ended
September 30, 1996. Net sales for the nine months ended September 30, 1997
increased by $29,164,000, or 34.0%, to $114,921,000, over the same period in
1996.
The increase in net sales for the nine months ended September
30, 1997 as compared to the same period in 1996 primarily reflects the growth of
the Company's catalog and corporate reseller businesses, as well as growth
through acquisitions. The increase in net sales for the three months ended
September 30, 1997 as compared to the same period in 1996 primarily reflects the
growth of the Company's corporate reseller businesses, partially offset by
reduced catalog revenues. Consolidated reseller revenues increased by 30.9% or
$4.1 million for the third quarter of 1997, primarily as a result of market
share gains in both France and Germany, compared to the same period in 1996.
Catalog revenues decreased 11.0% or $2.0 million for the third quarter of 1997
reflecting the impact of reduced domestic catalog mailings during the three
months ended September 30, 1997, compared to the same period in 1996.
Consolidated catalog mailings totaled approximately 4.9 million for the nine
months ended September 30, 1997, compared to approximately 5.2 million for the
same period in 1996. Consolidated reseller revenues increased by 43.6% or $15.0
million for the nine months ended September 30, 1997, primarily as a result of
market share gains in both France and Germany, compared to the same period in
1996. Catalog revenues for the nine months ended September 30, 1997 increased
approximately 31.0% or $12.7 million primarily due to the impact of the
acquisition of The Programmer's Supershop. Revenues within the distribution
channel were up approximately 15.1% or $1.5 million for the nine months ended
September 30, 1997, which is also primarily the result of the acquisition of The
Programmer's Supershop.
Geographically, approximately 57% and 54% of the revenues were
derived from the European operations for the three and nine months ended
September 30, 1997, respectively.
Page 8
GROSS PROFIT
Gross profit represents the difference between net sales and
costs 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. For the
three-month and nine-month periods ended September 30, 1997, gross profit as a
percentage of sales decreased by 0.9% and 0.8% respectively over the same
periods in 1996 reflecting a shift in the mix of sales through the Company's
distribution channels. Gross profit in absolute dollars for the three-month and
nine-month periods ended September 30, 1997 increased by $10,000 and $3,691,000,
respectively, over the previous year. These increases are primarily attributable
to increased gross margins attained within the corporate reseller channel,
offset by reduced gross margins within the catalog channel.
Gross margins have been affected by the mix of products sold
and the mix of distribution channels. Historically, the gross margins attained
in the catalog channel have been higher than either the corporate reseller or
distribution channels. Margins within the corporate reseller channel are also
subject to mix variations as Microsoft Select License sales typically produce
lower gross margin results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses include
all corporate personnel costs (including salaries and health benefits),
depreciation, non-personnel-related marketing and administrative costs and a
provision for doubtful accounts. Depreciation consists primarily of equipment
depreciation. SG&A expenses as a percentage of revenues have decreased to 11.3%
for the quarter and to 11.2% for the nine months ended September 30, 1997. The
decline in SG&A as a percentage of revenues reflect the economies of scale
associated with the increase in revenues from The Programmer's Supershop
acquisition, as well as the increase in revenue from the corporate reseller
channel. In absolute dollars, SG&A expenses decreased by $371,000 for the three
months ended September 30, 1997 when compared to the same period in 1996. This
decrease reflects the positive effects of the reorganization of the abnormally
high cost structure that was associated with the French subsidiary in 1996, as
well as a reduction of operating costs domestically in response to a temporary
business slow down. During the nine months ended September 30, 1997, SG&A
expenses increased by $551,000 when compared to the same period in 1996. This
increase reflects the additional overhead associated with The Programmer's
Supershop operations in the U.S., partially offset by the savings realized by
the positive effects of the reorganization of the abnormally high cost structure
that was associated with the French subsidiary in 1996.
AMORTIZATION EXPENSE
Amortization expense includes the systematic write-off of
intangible assets, primarily goodwill. Amortization expense for the three months
September 30, 1997 was unchanged as compared to the same period in 1996. For the
nine months ended September 30, 1997, amortization expense increased by $396,000
as compared to the same period in 1996. This increase reflects the amortization
of the excess of the purchase price over the fair value of the net assets
acquired during 1996. The acquisition of substantially all of the net assets of
The Programmer's Supershop resulted in goodwill of approximately $10.0 million,
which is being amortized over a period of 15 years.
Page 9
INTEREST INCOME AND EXPENSE
Net interest income increased by $135,000 for the three months
September 30, 1997 as compared to the same period in 1996, primarily reflecting
the April 1997 liquidation of the Company's long-term debt of approximately $1.3
million associated with the acquisition of Systematika Ltd. For the nine months
ended September 30, 1997, interest income decreased by $49,000 as compared to
the same period in 1996, primarily reflecting the use of the Company's funds to
acquire substantially all of the assets of The Programmer's Supershop. The
Company paid approximately $11.0 million for the assets of The Programmer's
Supershop and in return received approximately $1.5 million in net assets
comprised principally of receivables, inventory, and fixed assets offset by
accounts payable.
INCOME TAXES
Income tax expense was $1,535,000 for the nine months ended
September 30, 1997, compared to $721,000 in the same period in 1996. This
primarily reflects higher tax provisions in the U.S., Germany and in the U.K.
resulting from increased earnings at those operations during the nine months
ended September 30, 1997 in comparison to the same period in the prior year.
MINORITY INTEREST
Minority interest represents the share of the operating losses
of ISP*F related to the 49% stock ownership, which was not owned by the Company
at March 31, 1996. An additional equity contribution was subsequently funded in
October 1996 as part of a reorganization, which resulted in an adjustment in
minority ownership to 28%. Because the operating losses for ISP*F have exceeded
minority interest, the Company recognized substantially all of the operating
losses through September 30, 1996. For the nine months ended September 30, 1997,
the cumulative operating losses for ISP*F have exceeded minority interest, thus
no minority interest benefit has been recognized.
NET INCOME
Net income was $763,000 or $.14 per share with approximately
5,416,000 weighted average common shares outstanding for the quarter ended
September 30, 1997 compared to $441,000 or $.09 per share with approximately
5,117,000 weighted average common shares outstanding for the same period of the
previous year. Net income for the nine months ended September 30, 1997 was
$2,583,000 or $.48 per share with approximately 5,336,000 weighted average
common shares outstanding versus $1,210,000 or $.24 per share with approximately
5,131,000 weighted average shares outstanding for the nine months ended
September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the
working capital requirements created by its sales growth and to make
acquisitions. The Company had cash and cash equivalents of approximately $15.0
million at September 30, 1997.
Net cash provided by operations was approximately $639,000
for the nine months ended September 30, 1997 compared with $7,036,000 of cash
used for operating activities in the same period of the previous year. For the
first nine months of 1997, cash flow was primarily provided by a decrease in
accounts receivable (approximately $5.8 million) as well as an increase in net
earnings for the current year period as compared to the same period in the prior
year, offset by a decrease in accounts payable (approximately $8.8 million),
specifically amounts due to Microsoft by ISP*D under the Microsoft Select
License program. For 1996, cash flow was primarily used to reduce accounts
payable (approximately $9.2 million), specifically amounts due to Microsoft by
ISP*D under the Microsoft Select License program, offset by decreases in
inventory (approximately $1.2 million) and income earned during the period.
Page 10
Domestically, the Company has a secured, demand revolving line
of credit, pursuant to which the Company may borrow up to $4.0 million, based
upon 80% of its eligible accounts receivable plus 50% of its eligible inventory,
at a rate of interest of prime plus .50%. The credit facility is secured by all
of the domestic assets of the Company and contains certain covenants which
require the Company to maintain a minimum level of tangible net worth and
working capital. In connection with the acquisition of Logicsoft, the Company
has utilized approximately $3.0 million under the line of credit which is
included in notes payable to banks as of September 30,1997.
The Company maintains a secured, demand revolving line of
credit for its German subsidiary, pursuant to which it may borrow in
deutschmarks up to DM 1,500,000 (the equivalent of approximately $852,000 at
September 30, 1997), based upon its eligible accounts receivable and eligible
inventory. Such credit facility is secured by ISP*D's accounts receivable and
inventory, and the creditor is entitled to the benefit of a limited guarantee by
the Company of up to DM 300,000 (the equivalent of approximately $170,000 at
September 30, 1997). At September 30, 1997, there were no amounts outstanding
under such line of credit.
The Company's Italian subsidiary, Lifeboat Italy, maintains
banking arrangements with several Italian banks, pursuant to which it may borrow
in lire on an unsecured, demand basis to finance its working capital
requirements, through credit and overdrafting privileges, as well as
receivables-based advances. The aggregate credit and overdraft limits of such
arrangements at September 30, 1997 was Lit 3,200,000,000 (the equivalent of
approximately $1.9 million at September 30, 1997). At September 30, 1997, there
were no amounts outstanding under such credit facilities.
The Company's subsidiary in France, ISP*F, maintains a demand
revolving line of credit pursuant to which it may borrow up to FRF 5,000,000
(the equivalent of approximately $845,000 at September 30, 1997), and is secured
by its accounts receivable and inventory and a FRF 3,000,000 letter of credit.
At September 30, 1997, approximately FRF 605,000 (the equivalent of
approximately $102,000) of the line of credit was utilized, bearing interest at
8.50%.
The Company's subsidiary in The Netherlands, Logicsoft,
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 $1,262,000 at
September 30, 1997), and is secured by its accounts receivable and inventory. At
September 30, 1997, there were no amounts outstanding under such line of credit.
Page 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
Page 12
SIGNATURES
Pursuant to the requirements 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.
PROGRAMMER'S PARADISE, INC.
November 14, 1997 By: /s/ John P. Broderick
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Date John P. Broderick, Chief Financial Officer,
Vice President of Finance and duly authorized
officer
Page 13
EXHIBIT INDEX
Exhibit
Number Description of Exhibits Page No.
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27 Financial Data Schedule 15
Page 14