SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date of Report (Date of earliest event reported): June 28, 1996
PROGRAMMER'S PARADISE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-92810 13-3136104
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification Number)
incorporation)
1163 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
(Address of principal executive offices)
(908) 389-8950
(Registrant's telephone number,
including area code)
(Former name or former address, if changed since last report)
Exhibit Index on Sequentially Numbered Page 5
Item 2. Acquisition or Disposition of Assets
As of June 28, 1996, pursuant to an Agreement of
Purchase and Sale of Assets (the "Purchase Agreement"), dated as
of May 16, 1996, between the Registrant, The Software Developer's
Company, Inc. ("SDC") and Software Developer's Company GmbH
("SDEV Germany", and together with SDC, the "Selling Parties"),
the Registrant acquired from SDC substantially all of the assets
and business related to The Programmer's SuperShop catalog
business, inbound and outbound telemarketing, reseller
operations, web site, and, subject to the satisfaction of certain
conditions, either all of the capital stock, or all of the
operations of SDEV Germany, its German subsidiary (collectively,
the "Business"). SDC had been the Registrant's largest direct
mail competitor, offering a similar array of technical software.
At the closing, the Registrant paid to SDC an amount
equal to $10,022,089, reflecting a $22,089 adjustment of the
purchase price in respect of the estimated balance sheet of the
Business, and deposited $1,000,000 with an escrow agent to held
as follows: (i) $600,000 to be held for a period of one-year to
secure the Selling Parties' indemnification and other obligations
under the Purchase Agreement, and (ii) $400,000 to be held until
July 22, 1996 (the "Stock Transfer Escrow") pending the closing
of the acquisition of all of the capital stock or assets of SDEV
Germany and the satisfaction of certain conditions in connection
therewith (the "Stock Transfer"). The purchase price is subject
to further adjustment by the amount by which the tangible net
assets of the Business as of June 21, 1996, the business date
preceding the date on which the Registrant took over management
control of the Business, shall be greater or less than
$1,500,000, as set forth on the closing balance sheet of the
Business to be delivered after the closing date.
Additionally, at the closing, the Selling Parties made
the following payments to the Registrant: (i) $200,000 to On-Line
2000 GmbH, an indirect subsidiary of the Registrant, for certain
management services through June 28, 1996; (ii) $200,000 to the
Registrant for certain management services through June 28, 1996;
and (iii) $300,000 to the Registrant, on a non-accountable basis,
in respect of certain moving, bonus, out-placement, employee,
facilities and other fees and expenses.
As of the close of business on July 22, 1996, the
conditions to the Stock Transfer were not satisfied and in
accordance with the terms of that certain Letter Agreement dated as
of June 28, 1996 between the Registrant and the Selling Parties
relating to the Stock Transfer, the Registrant was deemed to have
purchased all of the assets of SDEV Germany as of the closing date
of the Purchase Agreement, $135,000 of the Stock Transfer Escrow
was released to SDC, and $265,000 of the Stock Transfer Escrow was
released to the Registrant.
The Registrant paid the Purchase Price utilizing its
cash on hand.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired - The
following financial statements of Software Developer's Company,
Inc. are filed pursuant to this report:
Balance Sheets for the years ended March 31, 1996 and
1995, Statements of Income and Stockholders Equity and Statements
of Cash Flows for the years ended March 31, 1996, 1995 and 1994.
(b) Pro forma Financial Information - The following
pro forma financial information is filed pursuant to this report:
Unaudited Pro Forma Combined Income Statements and
for the twelve months ended December 31, 1995 and the six months
months ended June 30, 1996.
(c) Exhibits: 1. Agreement of Purchase and Sale of Assets,
dated as of May 16, 1996, between
the Registrant and the Selling
Parties, and the exhibits thereto. *
2. Bill of Sale, dated as of June 28, 1996,
executed by the Selling Parties. *
3. Facilities and Employee Use Agreement, dated
as of June 28, 1996, between the
Registrant and SDC. *
4. Closing Statement, dated as of June 28,
1996, between the Registrant and
the Selling Parties. *
5. Letter Agreement regarding the Acquisition
of Stock of SDEV Germany, dated as
of June 28, 1996, between the
Registrant and the Selling Parties. *
6. Stock Acquisition Escrow Agreement, dated
as of June 28, 1996, between the
Registrant, the Selling Parties and
Golenbock, Eiseman, Assor & Bell,
as escrow agent. *
7. Consent of Independent Accountants.
* Incorporated by reference from the Registrant's Current Report on
Form 8-K filed on July 15,1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant as duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
PROGRAMMER'S PARADISE, INC.
(Registrant)
By: /s/ Roger Paradis
Roger Paradis, President
Dated: September 13, 1996
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
1. Agreement of Purchase and Sale of Assets, dated as of
May 16, 1996, between the Registrant and the Selling
Parties, and the exhibits thereto. *
2. Bill of Sale, dated as of June 28, 1996, executed by
the Selling Parties. *
3. Facilities and Employee Use Agreement, dated as of
June 28, 1996, between the Registrant and SDC. *
4. Closing Statement, dated as of June 28, 1996, between
the Registrant and the Selling Parties. *
5. Letter Agreement regarding the Acquisition of Stock of
SDEV Germany, dated as of June 28, 1996, between the
Registrant and the Selling Parties. *
6. Stock Acquisition Escrow Agreement, dated as of June 28,
1996, between the Registrant, the Selling Parties and
Golenbock, Eiseman, Assor & Bell, as escrow agent. *
7. Consent of Independent Auditors 27
* Incorporated by reference from the Registrant's Current Report
on Form 8-K filed on July 15, 1996.
SOFTWARE DEVELOPER'S COMPANY, INC.
FINANCIAL STATEMENTS
AS OF MARCH 31, 1996
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
The Software Developer's Company, Inc.
We have audited the accompanying consolidated balance sheets of
The Software Developer's Company, Inc. as of March 31, 1996 and
1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years
in the period ended March 31, 1996. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of The Software Developer's
Company, Inc. as of March 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended March 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
May 15, 1996
<TABLE>
THE SOFTWARE DEVELOPER'S COMPANY, INC.
Consolidated Balance Sheets
<CAPTION>
March 31, March 31,
1996 1995
<S> <C> <C>
ASSETS (Note C)
CURRENT ASSETS
Cash and cash equivalents $ 1,410,445 $ 672,386
Accounts receivable--trade, net of allowance for
doubtful accounts of $274,272 and $347,432 in
1996 and 1995, respectively 5,676,239 4,693,728
Accounts receivable--product, net of valuation
reserve of $73,714 and $60,745 in 1996 and 1995,
respectively 83,237 99,977
Inventory 1,292,961 1,695,993
Other current assets 303,429 409,138
TOTAL CURRENT ASSETS 8,766,311 7,571,222
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note B) 745,268 540,971
INTANGIBLE ASSETS, NET, INCLUDING GOODWILL (Note H) 834,266 968,280
THER ASSETS 109,900 89,696
TOTAL ASSETS $10,455,745 $9,170,169
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
THE SOFTWARE DEVELOPER'S COMPANY, INC.
Consolidated Balance Sheets (cont.)
<CAPTION>
March 31, March 31,
1996 1995
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable--trade $ 4,631,213 $4,367,025
Line of credit (Note C) 723,470 1,423,470
Other accrued expenses 2,029,303 658,425
Accrued payroll 498,769 297,468
Customer advances 69,480 124,689
Notes payable - related party (Note C) 300,000 22,092
Current portion of capitalized
lease obligations (Note D) 112,730 27,011
TOTAL CURRENT LIABILITIES 8,364,965 6,920,180
LONG-TERM DEBT-RELATED PARTY (Note C) --- 300,000
LONG-TERM CAPITAL LEASE OBLIGATION (Note D) 187,417 ---
COMMITMENTS AND CONTINGENCIES (Note D) --- ---
STOCKHOLDERS' EQUITY (Notes F and G)
Preferred stock, $.01 par value, authorized 25,000,000 shares:
Series C voting, non-cumulative, (628,330 and 905,968
shares in fiscal 1996 and 1995, respectively) issued and
outstanding (liquidation preference of $2.00 per share) 6,283 9,060
Common Stock, voting, $.01 par value, authorized 25,000,000
shares; issued 8,197,887, outstanding 8,172,786 shares
(7,787,437 and 7,762,336 in 1995) 81,979 77,875
Additional paid-in capital 10,024,710 9,944,908
Cumulative translation adjustment 21,569 22,242
Cumulative deficit (8,147,521) (8,020,439)
1,987,020 2,033,646
Less treasury stock at cost, 25,101 shares (83,657) (83,657)
TOTAL STOCKHOLDERS' EQUITY 1,903,363 1,949,989
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $10,455,745 $9,170,169
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
THE SOFTWARE DEVELOPER'S COMPANY, INC.
Consolidated Statements of Operations
<CAPTION>
Years Ended March 31,
1996 1995 1994
<S> <C> <C> <C>
Net revenues:
Product sale $51,301,158 $36,116,191 $26,585,817
Marketing services 4,805,488 4,733,290 4,307,855
56,106,646 40,849,481 30,893,672
Costs and expenses:
Cost of products sold 42,088,936 29,153,709 20,798,098
Cost of marketing services 2,955,924 3,022,666 3,209,115
Selling, general and administrative 10,757,890 8,230,850 6,991,821
55,802,750 40,407,225 30,999,034
Net income (loss) from operations
before interest and taxes 303,896 442,256 (105,362)
Interest expense, net - third party 126,887 181,251 104,076
Interest expense, net - related party 36,000 36,000 45,000
Provision for taxes 25,200 --- ---
Other (income) expense (13,109) 29,324 15,753
NET INCOME (LOSS) $ 128,918 $ 195,681 $ (270,191)
EARNINGS (LOSS) PER SHARE $0.01 $0.02 $(0.07)
Weighted average shares outstanding 8,835,000 8,594,000 4,833,000
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
THE SOFTWARE DEVELOPER'S COMPANY, INC.
Consolidated Statements of Stockholders' Equity
<CAPTION>
Series C Additional
Preferred Common Paid-in Cumulative Translation Treasury Stockholders'
Stock Stock Capital Deficit Adjustment Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1994 $9,060 $77,834 $9,941,748 $(8,216,120) $(28,075) $(83,657) $1,700,790
Net income --- --- --- 195,681 --- --- 195,681
Issuance of Common Stock
(4,045 shares) --- 41 3,160 --- --- --- 3,201
Translation adjustment --- --- --- --- 50,317 --- 50,317
BALANCE AT MARCH 31, 1995 $9,060 $77,875 $9,944,908 $(8,020,439) $ 22,242 $(83,657) $1,949,989
Net Income --- --- --- 128,918 --- --- 128,918
Conversion of
Preferred Stock
(277,638 shares)
- Series C (2,777) 2,777 --- --- --- --- ---
Issuance of Common Stock
(410,450 shares) --- 1,327 79,802 --- --- --- 81,1290
Translation adjustment --- --- --- --- (673) --- (673)
Distributions --- --- --- (256,000) --- --- (256,000)
BALANCE AT MARCH 31, 1996 $6,283 $81,979 $10,024,710 $(8,147,521) $21,569 $(83,657) $1,903,363
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
THE SOFTWARE DEVELOPER'S COMPANY, INC.
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended March 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 128,918 $ 195,681 $(270,191)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Sale of marketing services for product (867,603) (1,235,590) (1,435,469)
Depreciation and amortization 456,293 473,732 444,823
Provision for losses on inventory 267,030 57,480 61,622
Provision for doubtful accounts receivable 722,415 340,751 380,160
Change in operating assets and liabilities:
Accounts receivable (905,580) (1,940,632) 479,977
Inventory 403,032 944,502 (121,574)
Other current assets 106,709 (17,067) 82,032
Other assets (138,387) (14,250) (22,242)
Accounts payable 278,077 1,928,242 (729,585)
Accrued payroll 201,301 158,823 (37,280)
Other accrued expenses 1,370,878 110,991 (586,419)
Customer Advances (55,209) (138,171) 34,998
Total adjustments 1,838,956 668,811 (1,448,957)
Net cash provided by (used for)
continuing operating activities 1,967,874 864,492 (1,719,148)
Net cash (used for) provided by
discontinued operating activities --- (68,216) 627,581
Net cash provided by (used for)
operating activities $1,967,874 $ 796,276 $(1,091,567)
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
THE SOFTWARE DEVELOPER'S COMPANY, INC.
Consolidated Statements of Cash Flows (cont.)
<CAPTION>
Years Ended March 31,
1996 1995 1994
<S> <C> <C> <C>
INVESTING ACTIVITIES
Capital expenditures for equipment and
leasehold improvements $ (239,824) $ (252,835) $ (227,443)
Business acquired in purchase transaction, net
of cash acquired --- --- 8,228
Net cash used for investing activities $ (239,824) $ (252,835) $ (219,215)
FINANCING ACTIVITIES
Net payments on line of credit (700,000) (1,401,000) (150,500)
Principal debt payments (22,092) (200,000) (121,171)
Principal payments under capital leases (44,711) (42,695) (39,324)
Proceeds from line of credit --- 1,423,470 ---
Net proceeds from debt --- 19,592 200,000
Dividends paid --- --- (49,678)
Distributions to ISC shareholder (231,000) --- ---
Net proceeds from issuance of stock 8,485 5,701 781,193
Net cash (used for) provided by
financing activities $ (989,318) $ (194,932) $ 620,520
Effect of exchange rate changes on cash (673) 50,317 (24,946)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 738,059 398,826 (715,208)
Cash and cash equivalents at beginning of year 672,386 273,560 988,768
CASH AND CASH EQUIVALENTS AT
END OF YEAR $1,410,445 $ 672,386 $ 273,560
Supplemental Disclosures of Cash Flow Information
Interest paid $ 162,887 $ 217,251 $ 208,974
Supplemental Disclosure of Non-Cash Activities
Non-cash distributions to ISC shareholder $ 25,000 --- ---
Property purchased under capitalized leases $ 317,847 --- ---
Collection of products in satisfaction of
accounts receivable-product $ 693,273 $1,203,640 $1,341,735
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
THE SOFTWARE DEVELOPER'S COMPANY, INC.
Notes to Consolidated Financial Statements
NOTE A -- NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The Company currently operates in one industry
segment. It distributes and markets specialty software and hardware and
provides marketing services to third-party software publishers. The financial
statements include the accounts and operations of the Company and its wholly-
owned subsidiaries, Software Developer's Company, GmbH and Internet Security
Corporation ("ISC"). The fiscal 1995 and 1994 financial statements presented
herein have been restated to reflect the financial results of the ISC
acquisition which has been accounted for as a pooling (also see Note I).
The financial statements of the Company also include the accounts and
operations of Personal Computing Tools (PCT), of which the Company acquired
94% of the outstanding capital stock on June 29, 1993. The 6% equity interest
in PCT not acquired by the Company would be shown as minority interest in the
fiscal 1996 and fiscal 1995 consolidated balance sheets and the fiscal 1996,
1995 and 1994 statements of operations, respectively. As of March 31, 1996,
the Company did not report minority interest because PCT incurred net losses
that preclude reporting minority interest (see Note H). All intercompany
amounts and transactions of all subsidiaries have been eliminated in
consolidation.
Cash and Cash Equivalents: Cash and cash equivalents include time deposits
with a maturity of three months or less at the date of purchase.
Concentration of Credit Risk: Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of cash and cash
equivalents and trade receivables. The Company restricts investment of
temporary cash investments to financial institutions with high credit
standing. Credit risk on trade receivables is minimal as a result of the
large and diverse nature of the Company's customer base.
Revenue Recognition: The Company's revenues from continuing operations are
primarily generated from the sale of "off-the-shelf" computer software and
specialty hardware to end-users and other resellers in both foreign and
domestic markets and the sale of advertising space within its own marketing
programs such as "The Programmer's SuperShop" catalog. The Company also
resells advertising space in third-party publications.
Revenues from software and hardware sales are recognized at the time of
shipment. These revenues are reflected as net product sales in the
accompanying Consolidated Statements of Operations and their related costs
are reflected as cost of products sold.
Net revenues from marketing services such as advertising in its
publications, direct mail and trade show promotions are reflected as net
marketing services income in the Consolidated Statements of Operations when
the services are substantially completed and their related costs are
reflected as cost of marketing services income.
Value received for marketing services may be in the form of cash or an
equivalent value of products for inventory. The inventory received as
consideration is sold through The Programmer's SuperShop. The amount owed the
Company in the form of inventory is reflected as accounts receivable - product
in the Consolidated Balance Sheets.
The Company also resells advertising space in other vendors' publications
and those proceeds are recognized upon distribution of the publication and the
proceeds are offset against advertising costs and are reflected in Selling,
General and Administrative expenses in the Consolidated Statements of
Operations.
The Company's ISC subsidiary generates revenue from licensing the rights to
use software products developed by Checkpoint Software to end users and
resellers. ISC also generates revenues from consulting and training services
performed for license customers and from support and software update rights
(i.e., maintenance).
Revenues from perpetual software license agreements are recognized as
revenue upon delivery of the software as long as there are no significant
post-delivery obligations.
Revenues for maintenance are recognized ratably over the term of the support
period. If maintenance is included in a license agreement, such amounts are
unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of ISC's software
products. Such services do not include customization or modification of the
underlying software code. If included in a license agreement, such services are
unbundled at their fair market value based on the value established by the
independent sale of such services to customers. Revenues from consulting and
training services are recognized as the services are performed.
Accounts Receivable-Product: The Company provides marketing services to third-
party software publishers which is paid in cash or product that the Company
resells in the normal course of business. Until these products are received
into inventory, they are carried as accounts receivable - product. These
receivables are valued at the equivalent value of marketing services income.
The Company evaluates the marketability of these products by comparing recent
sales history and forecasted sales levels to the balances in accounts receivable
- - - product, resulting in periodic adjustments to the carrying value of accounts
receivable - product or the resultant inventory balance.
Inventories: Inventories are stated at the lower of cost (first-in, first-out)
or market and consists of products held for sale.
Equipment and Leasehold Improvements: Equipment and leasehold improvements are
stated at cost, less accumulated depreciation and amortization. Depreciation is
provided using an accelerated method over an estimated useful life of five
years. Amortization of leasehold improvements is provided using the straight-
line method over the lives of the respective leases or the useful lives of the
improvements, whichever is shorter.
Maintenance and repairs are charged to operations as incurred. Renewals and
betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts. Any resulting gain or loss is
reflected in earnings.
Intangible Assets: Intangible assets consist of goodwill, customer lists and
non-compete agreements arising from a business acquisition (see Note H). The
values assigned to intangible assets, based in part on independent appraisals,
are being amortized on a straight-line basis.
Goodwill representing the purchase price over the estimated fair value of the
net assets of the acquired business is being amortized over a fifteen-year
period. Other intangible assets are being amortized over a five-year period.
Customer Advances: Prepayments made by customers are included as customer
advances and recorded as sales when shipments are made.
Income Taxes: The Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (SFAS 109) in fiscal 1994.
The adoption of SFAS 109 changes the Company's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability method.
Previously, the Company deferred the tax effects of timing differences between
financial reporting and taxable income. The asset and liability method requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between tax bases and financial
reporting bases of other assets and liabilities.
Marketing Expenses: Marketing expenses are charged to Selling, General &
Administrative expenses as incurred.
Support Services: In conjunction with the sale of "off the shelf" products, the
Company provides, free of charge, pre-sale telephone technical support and
vendor supplied product literature. The Company provides only minimum levels of
post-sales support to its customers, as the manufacturers of the software
generally provide post-sales support to end-users. The costs, which are not
material, relating to these services are expensed as incurred and included in
Selling, General & Administrative expenses.
Earnings (Loss) Per Share: Income per share of common stock is based upon the
weighted average number of common shares outstanding excluding the effects of
options and warrants, which are deemed to be anti-dilutive. The amount of the
assumed dividend was $0 for fiscal 1996 and 1995, and $50,000 for fiscal 1994.
Included in the calculation of weighted average shares is the 465,838 shares
issued for the merger with Internet Security Corporation (see Note J). The
amount of the assumed dividend was $0 for fiscal 1996 and 1995 and $50,000 for
fiscal 1994.
Export Sales: The Company generates revenues through the sale of products both
domestically and overseas. Export sales generated revenues of approximately
$1,694,000, $2,097,000 and $2,842,000 during fiscal 1996, 1995 and 1994,
respectively.
Foreign Currency Translation: The functional currency of the Company's only
foreign subsidiary is the local currency. Balance sheet accounts of the
Company's foreign subsidiary are translated into U.S. dollars at current
exchange rates. Income statement items are translated at the average rates
during the year. Net translation gains or losses are recorded directly to a
separate component of stockholders' equity. Foreign currency transaction gains
and losses are included in the determination of fiscal 1996, 1995 and 1994
income, respectively.
Post-Retirement Benefits Other Than Pensions: The Company does not offer post-
employment benefits to its retirees and as a result, is unaffected by Statement
of Financial Accounting Standards No. 106 or 112 issued in December 1990 and
November 1992, respectively.
401K Plan: Since fiscal year 1991, the Company has maintained a 401K Plan for
its employees. The Plan is intended as a retirement and tax deferred savings
vehicle. All employees of the Company whose customary employment is for more
than 20 hours per week are eligible to participate in the 401K Plan. Employees
make their contributions through biweekly payroll deductions which are invested
in any combination of several investment funds. The Company has no matching
contribution obligation and made no contribution to this Plan in either fiscal
1996, 1995 or 1994.
Fair Value of Financial Instruments: Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments, exclusive of leases, for which it is practicable to estimate fair
value.
For financial instruments including cash, accounts receivable and payable,
and accrued expenses, working capital line of credit and term loan with a
related party due within one year, it is assumed that the carrying amount
approximates fair value due to their short maturities.
Risks and Uncertainties: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reported period. Actual results could differ from those estimates.
NOTE B -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and consist of the
following:
1996 1995
Computer equipment $1,757,049 $1,251,372
Leasehold improvements 581,336 559,892
Furniture and fixtures 330,070 299,520
Vehicle --- 25,000
2,668,455 2,135,784
Less accumulated depreciation
and amortization (1,923,187) (1,594,813)
$ 745,268 $ 540,971
The depreciation expense recognized for the fiscal years ended March 31,
1996, 1995 and 1994 was $328,374, $340,389 and $345,076, respectively.
NOTE C -- BORROWINGS
During March 1995, the Company entered into a working capital line of credit
(the "Line") with Silicon Valley Bank. Under the agreement, the Company may
borrow up to a maximum of $2,000,000 based upon the availability of eligible
accounts receivable. The Line bears interest at Prime plus 2.5%. Prime was
8.25% at March 31, 1996. The Line is collateralized by all assets of the
Company and it expires in July, 1996. The Line requires the Company, among
other things, to maintain certain minimum levels of earnings, net worth and
certain financial ratios.
On October 19, 1993, the Company exchanged and extended a term loan with
Stephen L. Watson, the Company's Chairman of the Board of Directors. The note
is collateralized by all assets of the Company. The note was due and payable in
December 1993 with interest payable monthly at 16% per annum. The principal of
$300,000 was extended to December 1996, with interest accruing at 12% per annum,
interest payable monthly in arrears. In any month which the Company does not
make a profit, the interest will be deferred and paid to the extent of profits
in the following months without compounding unpaid interest. The note is
subordinated to any commercial bank or other financial institution debt up to
$4,000,000.
NOTE D -- COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under leases classified as
operating leases. Rent expense amounted to $585,469 in fiscal 1996, $653,872
in fiscal 1995, and $787,143 in fiscal 1994. During fiscal 1996, the Company
entered into a capital lease for computer software and hardware totaling
$317,847. Total payments on the capitalized lease were $19,243 in fiscal 1996.
Total accumulated amortization on the capitalized lease was $28,066 in fiscal
1996. Future minimum lease payments under all noncancelable capital and
operating leases as of March 31, 1996 are as follows:
Capital Operating
Year ending March 31, Leases Leases
1997 $115,457 $288,291
1998 115,457 40,062
1999 96,214 9,960
2000 --- 2,080
$327,128 $340,393
Less amount representing interest $ 26,981
Present value of net
minimum lease payments $300,147
There are no material outstanding legal proceedings.
NOTE E -- INCOME TAXES
As discussed in Note A, the Company adopted SFAS 109 in fiscal 1994. SFAS
109 requires the recognition of deferred tax assets and liabilities for the
future tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. In addition, the new accounting standard requires the
recognition of future tax benefits, such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.
The cumulative effect of initial adoption on prior years' retained earnings
was not significant. Additionally, the effect of the adoption of SFAS 109 upon
income before taxes for fiscal 1994 was not significant.
The components of the provision for income taxes are as follows:
1996 1995 1994
Current tax expense:
Federal $ 6,200 --- ---
State 19,000 --- ---
Total $25,000 --- ---
Deferred tax expense (benefit):
Federal --- --- ---
State --- --- ---
Total $25,200 --- ---
Significant components of the deferred tax assets are as follows:
1996 1995 1994
Net operating loss carryforward $2,809,833 $3,004,321 $2,928,907
Accruals and reserves 258,662 180,012 457,400
Research and development tax credits 154,238 86,600 86,600
Depreciation 65,524 184,573 165,800
Other, net --- 10,060 58,600
Valuation allowance (3,288,257) (3,465,566) (3,697,307)
$ --- $ --- $ ---
The provision for income taxes differs from the federal statutory rate of 34%
as follows:
1996 1995 1994
Federal provision (benefit) at 34% $43,832 $ 66,532 $(91,865)
State income taxes 19,000 --- ---
Alternative minimum tax-Federal 6,200 --- ---
Meals and entertainment 6,913 3,826 ---
Foreign loss, not benefitted 8,431 77,233 35,900
Goodwill 45,219 45,222 ---
Net operating losses (NOL) - not benefitted --- --- 38,739
Utilization of previously unrecognized NOL (75,787) (192,813) ---
S-Corporation income not subject to tax (28,608) --- ---
Other --- --- 17,226
$25,200 $ --- $ ---
Due to the uncertainty surrounding the realization of tax benefits in future
tax returns, the net deferred tax assets at March 31, 1996, 1995 and 1994 have
been offset by a valuation allowance.
At March 31, 1996, the Company has available for Federal income tax purposes
net operating tax loss carryforwards of approximately $6,975,000 that are
available to offset future taxable income at various dates through fiscal 2011.
Certain provisions in the Internal Revenue Code may limit the net operating loss
available for use in any given year in the event of any significant change of
ownership.
NOTE F -- CAPITAL STOCK AND CAPITAL STOCK WARRANTS
Common Stock: On January 13, 1993 the Company completed a private placement of
537,898 shares of Common Stock for net proceeds of approximately $992,173.
On June 29, 1993 the Company acquired 94% of the outstanding capital stock of
Personal Computing Tools, Inc. (PCT) of Campbell, California in exchange for
392,996 shares of the Company's Common Stock. This agreement became effective
on June 29, 1993 and was accounted for under the purchase method of accounting.
If the actual selling price of the Company's Common Stock failed to average less
than two dollars ($2.00) per share (adjusted for stock splits or stock dividends
or other similar events) for any consecutive thirty-day period within eighteen
months of the June 29, 1993 closing date, additional shares of the Company's
Common Stock would have been issued to the PCT selling stockholders (on a pro-
rata basis) such that the total aggregate number of shares of the Company's
Common Stock to be issued to the PCT selling stockholders (including the initial
shares) would be the number of shares calculated by dividing $850,000 by the
average actual selling price per share of the Company's Common Stock during the
thirty-day period immediately prior to the completion of eighteen months from
the June 29, 1993 closing date.
The actual selling price of the Company's Common Stock did fail to average
less than two dollars ($2.00) per share for a consecutive thirty-day period
within the eighteen-month period ended December 29, 1994. Per the terms of the
Agreement, the amount of additional shares that would have been issued equaled
575,000 shares. On June 26, 1995 the Company and representatives of the former
PCT shareholders signed a Stock Issuance and Settlement Agreement whereby only
an additional 79,460 shares of Common Stock would be issued.
Series C Preferred Stock: On October 19, 1993, the Company completed a private
placement of Series C Preferred Stock and a recapitalization transaction.
Private investors purchased 905,968 shares of Series C Preferred Stock at a
price of $1.00 per share, resulting in net proceeds of approximately $781,000.
The Series C Preferred Stock is convertible into Common Stock on a one-for-one
basis and votes with the Common Stock on the same basis. The Series C Preferred
Stock contains a number of features including a fixed liquidation preference of
$2.00 per share, anti-dilution rights and two (2) Board of Director positions.
The Company used the net proceeds from the private placement for working capital
and general corporate purposes.
The recapitalization transaction involved the exchange of all of the
Company's Series A Preferred Stock and Series B Senior Preferred Stock for
4,288,890 shares of Common Stock, increasing the total number of shares of
Common Stock outstanding to 7,292,453. This recapitalization removed the
liquidation preference, including cumulative dividends, payable to the preferred
holders of approximately $7,000,000. In the recapitalization, holders of the
Company's previously existing preferred stock exchanged their shares for Common
Stock, terminating all prior agreements, but retaining certain registration
rights.
Included in the aggregate of 905,968 shares of Series C Preferred Stock
issued by the Company were 26,877 shares of Series C Preferred Stock issued in
complete satisfaction of a $25,000 note payable plus $1,877 of accrued interest
to Trinity Ventures I, L.P. The note was acquired in the Company's prior
purchase of the capital stock of Personal Computing Tools, Inc.
During fiscal 1996, 277,638 shares of Series C Preferred Stock were converted
into 277,638 shares of Common Stock.
Warrants: In fiscal 1987, warrants to purchase 31,500 shares of Common Stock
exercisable at $2.57 were issued and expire June 30, 1997.
During fiscal 1991, the Company issued warrants to purchase 300,000 shares of
Common Stock at $4.00 per share. These warrants expire June 30, 1997.
At March 31, 1996, the Company has reserved 331,500 shares of Common Stock for
the issuance upon exercise of these warrants.
NOTE G -- STOCK OPTION PLANS
The Company has stock option plans as described hereunder. Options are
granted at fair market value at the date of grant being the average of the
closing bid and asked prices of the Common Stock on the day preceding the date
of grant.
1986 Nonstatutory Stock Option Plan: The 1986 Nonstatutory Stock Option Plan
provides for the issuance of options to purchase shares of Common Stock, up to
an aggregate of 52,500 shares which are reserved for issuance. Options can be
granted to employees, consultants or others as approved by the Board of
Directors. These options have exercise prices of 100% of the fair market value
of Common Stock on the date of grant. The options terminate for employees with
respect to all shares of stock not previously purchased within 30 days upon the
date of termination of the employee's employment or for non-employees at the end
of ten years from the date of grant.
1987 Stock Plan: The 1987 Stock Plan reserves for issuance 750,000 shares of
Common Stock for the benefit of all employees as authorized by the Board of
Directors. Incentive stock options may be granted to employees and officers,
and non-qualified options may be granted to directors, officers, employees and
consultants of the Company under the 1987 Stock Plan. The exercise price is set
at 100% of the fair market value of Common Stock on the date of grant. The
aggregate fair market value of shares issuable under the 1987 Stock Plan due to
the exercising of incentive stock options by an employee or officer may not
exceed $100,000 in any calendar year.
1988 Non-Employee Director Stock Option Plan: The 1988 Non-Employee Director
Stock Option Plan ("1988 Director Plan") offers options to members of the Board
of Directors who are neither employees nor officers of the Company in
appreciation of their service. The 1988 Director Plan is administered by the
Compensation Committee of the Company.
This plan authorizes the grant of options for 70,000 shares of Common Stock.
Each newly elected non-employee director will automatically receive an option to
purchase 8,750 shares. The exercise price per share of options granted under
the 1988 Director Plan is 100% of the fair market value of Common Stock on the
date of grant. The options shall expire six years from the date of the option
grant. They terminate thirty days (or one hundred and eighty days if due to
disability or death) following the date on which the optionee ceases to be a
member of the Board of Directors. They are exercisable in installments, with
20% becoming exercisable on each anniversary of the date of grant.
1990 Employee Stock Purchase Plan: The 1990 Employee Stock Purchase Plan
("Stock Purchase Plan") is intended as an incentive to, and to encourage stock
ownership by, all eligible employees of the Company and participating
subsidiaries and to encourage them to remain in the employ of the Company.
Substantially all employees of the Company and any participating subsidiary who
have completed six months of employment with the Company or any subsidiary and
whose customary employment is for more than 20 hours per week and more than five
months per calendar year are eligible to participate in the Stock Purchase Plan.
The Stock Purchase Plan presently authorizes the issuance of 100,000 shares
of Common Stock (subject to adjustment for capital changes) pursuant to the
exercise of nontransferable options granted to participating employees. During
fiscal 1996, 1995 and 1994, 1,216, 4,045, and 2,325, shares, respectively, of
the Company's Common Stock were issued under the Stock Purchase Plan.
1991 Non-Employee Director Stock Option Plan: The 1991 Non-Employee Director
Stock Option Plan authorizes the grant of options for up to 70,000 shares of
Common Stock. This plan is identical to the 1988 Director Plan, except that
options shall expire ten years from the date of the option grant. On May 15,
1991, each of the non-employee directors was granted options to purchase 8,750
shares of Common Stock. After May 15, 1991, each new director also received an
option to purchase 8,750 shares of Common Stock.
1993 Non-Employee Director Stock Option Plan: The 1993 Non-Employee Director
Stock Option Plan authorizes the grant of options of up to 60,000 shares of
Common Stock. This plan is identical to the 1988 and 1991 Director Plans,
except the options shall expire ten years from the date of the option grant and
options are granted after the performance of services. On each of April 1, 1993
(fiscal year 1994), April 1, 1994 (fiscal year 1995), and April 1, 1995 (fiscal
year 1996) each of the non-employee directors was granted 3,500 shares of Common
Stock.
1994 Stock Plan: The 1994 Stock Plan is authorized to grant up to 1,500,000
options to purchase shares of Common Stock as incentives to officers, directors,
employees and consultants of the Company, as approved by the Board of Directors.
The options have an exercise price of 100% of the fair market value of Common
Stock on the date of the grant and vest over periods as determined by the Board
of Directors. At March 31, 1996, 1,077,500 options have been granted under the
plan.
1994 Non-Employee Director Plan: The 1994 Non-Employee Director Plan authorizes
the grant of up to 105,000 shares to directors who are not employees or officers
of the Company as an inducement to obtain and retain the services of qualified
persons. Each director who is neither an officer nor employee of the Company
was automatically granted an option to purchase 17,500 shares of the Company's
Common Stock at an exercise price equal to 100% of the fair market value of the
Company's Common Stock on the date of grant. Options vest ratably over five
years from the date of grant and expire ten years from the date of grant.
During fiscal 1994, each of the six (6) qualified directors received an option
to purchase 17,500 shares of the Company's Common Stock.
Information as to the Company's stock options is as follows:
1996 1995 1994
Options outstanding at beginning of year 1,389,404 768,330 583,575
Option activity during the year:
Granted 417,500 845,052 435,000
Exercised (75,450) --- ---
Cancelled (207,600) (223,978) (250,245)
Options outstanding at end of year 1,523,854 1,389,404 768,330
Price range of outstanding options $0.50-8.13 $0.50-8.13 $1.00-8.13
Price range of options exercised $0.50-1.25 --- ---
Options exercisable at end of year 852,636 717,495 431,563
Options available for grant at end of year 1,083,646 1,218,096 234,170
NOTE H -- ACQUISITION
On June 29, 1993, the Company acquired 94% of the outstanding capital stock
of Personal Computing Tools, Inc. ("PCT"). PCT, a California corporation, is a
catalog distributor of PC-based specialty hardware and software products for
engineers, scientists and technical professionals. This acquisition has been
recorded using the purchase method of accounting.
In August 1993, the Company integrated the California operations of PCT into
the Company's Massachusetts operations and added PCT's catalog to its line of
direct marketing activities. The results of operations since the acquisition of
PCT have been included in the Company's Consolidated Statements of Operations.
The six percent equity interest in PCT not acquired by the Company would be
shown as minority interest in the fiscal 1996 Consolidated Statement of
Operations and balance sheet. However, as of March 31, 1996, the Company
reported no minority interest because PCT incurred net operating losses that
preclude reporting minority interest.
Intangibles recognized in the transaction consisted of customer lists of
$248,000 and non-compete agreements of $150,000. The intangibles will be
amortized using the straight-line method over a five-year period. Goodwill
recognized in the transaction of $803,000 is being amortized using the straight-
line method over a fifteen-year period. The Company recognized amortization
expense of $134,014, $133,344 and $99,747 for fiscal years ended March 31, 1996,
1995 and 1994, respectively, and had $367,105 and $233,091 in accumulated
amortization as of March 31, 1996 and 1995, respectively.
The Company evaluates the value of intangible assets on an ongoing basis
relying on a number of factors including operating results, business plans,
budgets and economic projections. In addition, the Company's evaluation
considers non-financial data such as market trends, customer relationships,
buying patterns and product development cycles.
The following unaudited pro forma summary presents the Consolidated Results
of Operations (in thousands, except per share data) as if this acquisition had
occurred at the beginning of fiscal year ended March 31, 1994 and does not
purport to be indicative of what would have occurred had the acquisition been
made as of that date.
For the year ended
March 31, 1994
Net sales $31,687
Net income (loss) $ 30
Net loss per common share $ (0.00)
NOTE I -- POOLING OF INTERESTS
On November 16, 1995, the Company ("SDC") acquired 100% of the outstanding
capital stock of Internet Security Corporation ("ISC") in exchange for 465,838
shares of the Company's Common Stock. ISC, a Massachusetts corporation, markets
and distributes certain software products and services under distribution and
reseller agreements with third party software companies. A Form 8-K was duly
filed with the Securities and Exchange Commission on November 30, 1995, a Form
8-KA was subsequently filed on January 30, 1996.
Prior to the consummation of the transaction, ISC made an allowable
distribution of $256,000 to its sole shareholder. The distribution consisted of
cash of $231,000 and a vehicle with a net book value of $25,000. ISC was a
subchapter S corporation prior to the consummation of the transaction, and
therefore did not pay U.S. Federal income taxes. ISC will be included in the
Company's U.S. Federal income tax return effective November 16, 1995, and
therefore, a corresponding charge to income tax expense was recorded to reflect
the anticipated tax due on net income generated from the date of consummation
through March 31, 1996.
The acquisition was accounted for as a "pooling of interest" transaction
and, accordingly, prior financial results of SDC have been restated to reflect
the consolidation of ISC herewith. Selected financial information for each
company, stated separately is shown below:
For the nine months ended For the years ended
December 31, 1995 March 31, March 31,
(Unaudited) 1996 1995
Net Revenues:
SDC $39,961,517 $52,381,889 $39,697,735
ISC 2,395,846 3,724,757 1,151,746 (1)
$42,357,363 $56,106,646 $40,849,481
Net Income (Loss):
SDC (26,022) (240,475) 74,353
ISC 187,982 369,393 121,328 (1)
$ 161,960 $ 128,918 $ 195,681
(1) Reflects ISC's activity from the date of inception (June 15, 1994)
through March 31, 1995.
ISC had prepared financial statements on a calendar year basis. The results
reported for ISC have been restated to conform with the Company's fiscal year.
NOTE J -- SUBSEQUENT EVENT - ASSET SALE
On May 16, 1996 the Company entered into an agreement for the Sale of
Certain Assets (the "Agreement") with Programmer's Paradise, Inc. (the "Buyer").
The Agreement requires the Buyer to pay the Company $11,000,000 in return for
substantially all of the operating assets relating to The Programmer's SuperShop
catalog, its Worldwide Web site, its corporate sales group, its German
subsidiary and its SDC Communications business unit (the "business segment").
This transaction is subject to shareholder consent.
The Agreement contains provisions for a "Break-up Fee," tangible net asset
requirements, and revenue maintenance requirements that could result in a
potential adjustment to the purchase price, based upon the occurrence of certain
events, as defined in the Agreement. The net revenues and net loss from the
business segment that is proposed to be sold were approximately $52,000,000 and
$240,000 respectively for fiscal 1996.
PROGRAMMER'S PARADISE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated statements of
income data is presented as if the Software Developers
Company business was acquired on January 1, 1995 and 1996,
respectively. The unaudited pro forma condensed
consolidated financial data should be read in conjunction
with the Company's consolidated financial statements and the
notes thereto. The pro forma information is not necessarily
indicative of the results that would have been reported had
such events actually occurred on the dates specified, nor is
it indicative of the Company's future results.
Programmer's Paradise, Inc.
Unaudited Pro Forma Condensed Statement of Income
Year ended December 31, 1995
Acquisition
Actual Acquisition(1) Adjustment Pro Forma
Net sales $93,286 $49,556 $142,842
Cost of sales 78,718 40,076 118,794
Gross profit 14,568 9,480 24,048
Selling, general and
administrative expenses 12,342 9,006 (5,096) (2) 16,252
Income from operations 2,226 474 7,796
Interest and other
expenses (income), net (250) 185 (2) (3) (67)
Income before income taxes
and minority interest 2,476 289 7,863
Income tax
(benefit) provision (1,727) 110 1,935 (4) 318
Income from continuing
operations $ 4,203 $ 179 $ 7,545
Income from continuing
operations per
common share $ 1.03 $ 1.84
Average shares outstanding 4,102 4,102
(1) Includes the historical results of operations of
Software Developer's Company business related to The
Programmer's Supershop catalog, inbound and outbound
telemarketing, reseller operations, web site, and SDEV
Germany, for the period from January 1, 1995 to December 31,
1995.
(2) Reflects the anticipated reduction in operating
expenses that would have resulted had the acquisition taken
place on January 1, 1995, offset by the pro forma
amortization of goodwill arising from the acquisition of the
net assets of SDC at that date ($0.6 million). The savings
realized in operating expenses is primarily the result of a
reduced work force of approximately 60 employees ($4.2
million), as well as the consolidation of operating
facilities to New Jersey ($1.5 million).
(3) Reflects the loss of interest income on $11,000,000
acquisition payment at 4% for five months ($183,000), offset
by the elimination of interest expense recorded on the books
of SDC ($185,000).
(4) Reflects additional tax provision, at an effective tax
rate of 38%, on earnings realized from the acquisition
adjustments.
Programmer's Paradise, Inc.
Unaudited Pro Forma Condensed Statement of Income
Six Months ended June 30, 1996
Acquisition
Actual Acquisition(1) Adjustment Pro Forma
Net sales $51,142 $24,355 $75,497
Cost of sales 42,720 20,059 62,779
Gross profit 8,422 4,296 12,718
Selling, general and
administrative expenses 7,790 6,051 (4,074) (2) 9,767
Income from operations 632 (1,755) 2,951
Interest and other
expenses (income), net (287) 71 149 (3) (67)
Income before income taxes
and minority interest 919 (1,826) 3,018
Income tax
(benefit) provision 383 (694) 1,492 (4) 1,181
Income from continuing
operations before
minority operations 536 (1,132) 1,837
Minority interest (233) (233)
Income from continuing
operations $ 769 $(1,132) $ 2,070
Income from continuing
operations per
common share $ .15 $ .40
Average shares outstanding 5,173 5,173
(1) Includes the historical results of operations of
Software Developer's Company business related to The
Programmer's Supershop catalog, inbound and outbound
telemarketing, reseller operations, web site, and SDEV
Germany, for the period from January 1, 1996 to June 30,
1996.
(2) Reflects the anticipated reduction in operating
expenses that would have resulted had the acquisition taken
place on January 1, 1996, offset by the pro forma
amortization of goodwill arising from the acquisition of the
net assets of SDC at that date ($0.3 million). The savings
realized in operating expenses is primarily the result of a
reduced work force of approximately 60 employees ($2.2
million), the consolidation of operating facilities to New
Jersey ($.9 million), and the elimination of expenses
recorded by SDC related to the sale and closing of their
business ($1.3 million).
(3) Reflects the loss of interest income on $11,000,000
acquisition payment at 4% for six months ($220,000), offset
by the elimination of interest expense recorded on the books
of SDC ($71,000).
(4) Reflects additional tax provision, at an effective tax
rate of 38%, on earnings realized from the acquisition
adjustments.
EXHIBIT 7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this filing on Form 8-K of
our report dated May 15, 1996, with respect to the
consolidated financial statements and financial statement
schedules of The Software Developer's Company, Inc. as of
March 31, 1996 and 1995 and for the years ended March 31,
1996, 1995, and 1994.
COOPERS & LYBRAND L.L.P.
Boston, MA
September 13, 1996
