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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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-26408
---------
Programmer's Paradise, Inc.
-------------------------------
(Name of issuer in its charter)
Delaware 13-3136104
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
- ----------------------------------------------------
(Address of principal executive offices)
Issuer's Telephone Number (732) 389-8950
--------------
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 3,965,314 outstanding shares of Common Stock, par value $.01
per share, as of November 11, 2002, not including 1,264,936 shares classified as
Treasury Stock.
PART I - FINANCIAL INFORMATION
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
September 30, December 31,
2002 2001
---- ----
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 4,451 $ 11,425
Marketable Securities 5,151 -
Cash held in escrow 562 2,335
Accounts receivable, net 5,953 8,449
Inventory - finished goods 787 686
Refundable Income taxes 334 -
Prepaid expenses and other current assets 400 471
--------- -----------
Total current assets 17,638 23,366
Equipment and leasehold improvements, net 493 634
Other assets 40 57
--------- -----------
Total assets $ 18,171 $ 24,057
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 5,109 $ 9,649
Other current liabilities 698 350
--------- -----------
Total current liabilities 5,807 9,999
Commitments and contingencies
Stockholders' equity
Common stock 53 53
Additional paid-in capital 35,483 35,483
Treasury stock (3,928) (1,473)
Retained earnings (19,220) (19,539)
Accumulated other comprehensive loss (24) (466)
--------- -----------
Total stockholders' equity 12,364 14,058
--------- -----------
Total liabilities and stockholders' equity $ 18,171 $ 24,057
========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 2
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 50,271 $ 72,468 $ 15,798 $ 24,177
Cost of sales 43,735 65,161 13,782 21,859
------------ ----------- ----------- -----------
Gross profit 6,536 7,307 2,016 2,318
Selling, general and administrative expenses 6,453 8,735 2,087 2,890
Settlement of escrow 348 - 348 -
------------ ----------- ----------- -----------
Loss from operations (265) (1,428) (419) (572)
Realized gain on sale of available-for-sale securities 141 - 141 -
Interest income, net 195 300 66 106
Unrealized foreign exchange gain (loss) (9) 45 (2) 36
------------ ----------- ----------- -----------
Income (loss) before taxes 62 (1,083) (214) (430)
Provision (benefit) for taxes (257) 63 (4) (2)
------------ ----------- ----------- ----------
Net income (loss) $ 319 $ (1,146) $ (210) $ (428)
============ =========== =========== ==========
Earnings (loss) per share-Basic and Diluted $ 0.07 $ (0.23) $ (0.05) $ (0.09)
============ =========== =========== ==========
Weighted average number of common shares outstanding
Basic 4,639 4,992 4,213 4,995
============ ============ =========== ==========
Diluted 4,654 4,992 4,213 4,995
============ ============ =========== ==========
Reconciliation of net income (loss) to comprehensive income
- -----------------------------------------------------------
(loss):
- ------
Net income (loss) $ 319 $ (1,146) $ (210) $ (428)
------------ ----------- ----------- ----------
Other comprehensive income (loss), net of tax:
Reclassification adjustment for gain realized on
sale of available-for-sale securities (78) - (78) -
Unrealized gain on available-for-sale securities 173 - 73 -
Foreign currency translation gain (loss) 347 (207) (47) 39
------------ ----------- ----------- ----------
Comprehensive income (loss) $ 761 $ (1,353) $ (262) $ (389)
============ =========== =========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
Cash flows from operating activities
Net income (loss) $ 319 $ (1,146)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Allowance for doubtful accounts 334 432
Depreciation and amortization 301 535
Changes in operating assets and liabilities:
Accounts receivable 2,161 (1,408)
Inventory (101) 1,540
Prepaid expenses and other current assets 72 1,515
Refundable income taxes (334) -
Accounts payable and accrued expenses (4,192) (1,090)
Net change in other assets and liabilities (5) (86)
-------- --------
Net cash provided by (used for) operating activities (1,445) 292
-------- --------
Cash flows from investing activities:
Change in net assets held for sale - 12,163
Purchases of available-for-sale securities (8,099) -
Sales of available-for-sale securities 3,043 -
(Increase) decrease in cash held in escrow 1,773 (3,048)
Capital expenditures (137) (207)
-------- --------
Net cash provided by (used for) investing activities (3,420) 8,908
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of Common Stock - 6
Purchase of treasury shares (2,456) (126)
-------- --------
Net cash used for financing activities (2,456) (120)
-------- --------
Effect of foreign exchange rate on cash 347 (169)
-------- --------
Net increase (decrease) in cash and cash equivalents (6,974) 8,911
Cash and cash equivalents - beginning of period 11,425 2,091
-------- --------
Cash and cash equivalents - end of period $ 4,451 $11,002
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
PROGRAMMER'S PARADISE, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2002
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to product returns,
bad debts, inventories, investments, intangible assets, income taxes,
restructuring and contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. In the opinion of Management all adjustments that are of a
normal recurring nature, considered necessary for fair presentation,
have been included. Actual results may differ from these estimates
under different assumptions or conditions. The unaudited condensed
consolidated statements of income for the interim periods are not
necessarily indicative of results for the full year. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2001.
2. Assets and liabilities of the Company's Canadian Subsidiary 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 and unrealized gains on
available-for-sale securities 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".
3. In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 provides a single
accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement
provisions of SFAS No. 121, the Statement significantly changes the
criteria that would have to be met to classify an asset as
held-for-sale. Under SFAS No. 144, assets held-for-sale are stated at
the lower of their fair values or carrying amounts and depreciation is
no longer recognized. The Company adopted SFAS No. 144 effective
January 1, 2002. There was no impact on the Company as a result of
adopting SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other things, rescinds SFAS
No. 4, which required all gains and losses from the extinguishment of
debt to be classified as an extraordinary item and amends SFAS No. 13
to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. This statement is not expected
to have an impact on the Company.
Page 5
Notes to Condensed Consolidated Financial Statements (continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
that a liability for the cost associated with an exit or disposal
activity be recognized when the liability is incurred. SFAS No. 146
also established that fair value is the objective for initial
measurement of the liability. The provisions of this Statement are
effective for exit or disposal activities that are initiated after
December 31, 2002.
4. 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 for 14,500,000
Euros, subject to post-closing adjustments, including finalization of
the closing balance sheet, in accordance with the Stock Sale Agreement
between the Company and PC-Ware. As security for any claim of PC-Ware
arising from alleged breaches of representations by the Company under
the Stock Sale Agreement, 2,665,836 Euros (the equivalent of
$2,628,514) were being held in an escrow account as per September 30,
2002. In September 2001, PC-Ware made claims aggregating 2,490,127
Euros against the escrow.
On October 1, 2002, the claims brought against the Company by PC-Ware
were settled for 435,000 Euros (the equivalent of $428,910). Associated
fees, comprising of counsel fees, expert witness fees, arbitration
fees, consultancy fees paid to the Company's previous Chief Financial
Officer, and travel and related expenses, amounted to $269,000. This
settlement amount and associated fees amounted to $698,000 in the third
quarter of 2002. Since the Company had established reserves of $350,000
for this claim in the fourth quarter of 2001, the Company reported an
additional $348,000 for this settlement and associated fees in the
third quarter of 2002. A total amount of $698,000 was reported as other
current liabilities as of September 30, 2002.
A total of 570,000 Euros (the equivalent of $562,020) will remain in
the escrow account for the settlement amount and associated fees
incurred in Germany. The remaining balance of the escrow account is no
longer restricted; as a result 2,095,836 Euros (the equivalent of
$2,066,494) were reported as cash and cash equivalents as per September
30, 2002.
5. The Company computes comprehensive income in accordance with Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements. Other comprehensive income, as defined, includes all
changes in equity during a period from non-owner sources, such as
unrealized gains and losses on available-for-sale securities and
foreign currency translation.
6. Investments in available-for-sale securities as per September 30, 2002
were (in thousands):
Cost Market value Unrealized Gain (loss)
U.S.Government Securities $5,056 $5,151 $95
The cost and market value of our investments in U.S. Government
securities at September 30, 2002 by contractual maturity were (in
thousands):
Estimated
Fair Value Cost
Due in one year or less $3,013 $3,007
Due in greater than one year 2,138 2,048
------------- -----------
Total investments in U.S. Government Securities $5,151 $5,055
============= ===========
Page 6
7. At September 30, 2002, the Company had outstanding common shares
totaling approximately 3,965,000. The Company has granted options to
purchase common shares to the directors, officers and key employees of
the Company under several stock option plans. These options have a
dilutive effect on earnings per share. Basic earnings per share is
computed by dividing net earnings (loss) by the weighted average number
of shares outstanding during the period. Diluted earnings per share is
computed considering the potentially dilutive effect of outstanding
stock options. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations
as required by SFAS No. 128, "Earnings per Share."(in thousands, except
per share data):
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net Income (loss) $ 319 ($1,146) ($210) ($428)
Denominator:
Weighted average shares (Basic) 4,639 4,992 4,214 4,990
Dilutive effect of outstanding options 15 - - -
------- -------- -------- --------
Weighted average shares including
assumed conversions (Diluted) 4,654 4,992 4,214 4,990
Basic and Diluted net income (loss) per
share $0.07 ($0.23) ($0.05) ($0.09)
Changes during 2002 in options outstanding for the combined plans were
as follows:
Weighted
Number Average
of Exercise
Options Price
-----------------------------
Outstanding at January 1, 2002 568,966 $5.78
Granted in 2002 435,625 2.13
Canceled in 2002 (371,341) 6.30
Exercised in 2002 0 -
-----------
Outstanding at September 30, 2002 633,250 2.96
===========
Exercisable at September 30, 2002 590,124 2.90
===========
In February 2002, the Board of Directors approved a plan permitting all
option holders under the 1986 Option Plan and the 1995 Stock Plan to
surrender all or any portion of their options on or before March 1,
2002. The Board intends, but is not obligated, to grant such holders
after September 8, 2002 a number of new options equal to the number of
surrendered options at an exercise price of 100% of the then fair
market value (as defined in the plans) of the Company's Common Stock,
provided that the optionee remains employed by the Company as of such
date.
Page 7
The Company believes that by having no legal obligation to grant new
options and by waiting more than six months to issue new options, it
will avoid the adverse accounting treatment that would otherwise be
involved in the repricing of stock options, provided that the
accounting rules are not changed.
By March 1, 2002, a total of 7,875 options to purchase the Company's
Common Stock under the 1986 option plan and 308,550 options to purchase
the Company's Common Stock under the 1995 Stock Plan were surrendered,
of which 305,175 were surrendered by the Company's executive officers.
All of the options surrendered were exercisable in excess of the market
price of the underlying Common Stock as of the dates of surrender.
On September 9, 2002, the Company granted 418,750 options at an option
price of $2.13 per share to Officers and key-employees. The options
granted vested immediately on September 9, 2002. The Company granted
options to purchase 200,000 shares to William H. Willett, the Company's
President and Chief Executive Officer; options to purchase 100,000
shares to Simon Nynens, the Company's Vice President and Chief
Financial Officer; options to purchase 5,000 shares to John Lore, the
Company's Vice President and Chief Information Officer; options to
purchase 55,000 shares to Jeffrey Largiader, the Companys' Vice
President Marketing; and options to purchase 20,000 shares to Steve
McNamara, the Vice President and General Manager of Programmer's
Paradise Canada.
The Company also granted options to purchase 16,875 shares to Directors
on September 9, 2002. Each Director received options to purchase 3,375
shares of the Company's Common Stock at an option price of $2.13 per
share. The options granted to Directors vest in an installment of 20%
of the total option grant one year after the date of the option grant,
and thereafter in equal quarterly installments of 5%, subject to the
terms and conditions set forth in the 1995 Non-Employee Director Plan.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Programmer's Paradise, Inc. operates in one primary business segment: the
marketing of technical software and hardware for microcomputers, servers and
networks in the United States and Canada. We offer a wide variety of technical
and general business application software and PC hardware and components from a
broad range of publishers and manufacturers. We market our products through our
well-known catalogs, direct mail programs and advertisements in trade magazines
as well as through Internet and e-mail promotions.
Through our wholly owned subsidiary, Lifeboat Distribution Inc., we distribute
marketed products to dealers and resellers in the United States and Canada. 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.
Page 8
In Item 7 ("Management's Discussion and Analysis of Financial Condition and
Results of Operations") of our Annual Report on Form 10-K for the year ended
December 31, 2001, we included a discussion of the most critical accounting
policies and estimates used in the preparation of our financial statements.
There has been no material change in the policies and estimates used by us in
the preparation of our financial statements since the filing of such Annual
Report.
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,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.0 89.9 87.2 90.4
--------- ---------- -------- --------
Gross profit 13.0 10.1 12.8 9.6
Selling, general and administrative expenses 12.8 12.0 13.2 12.0
Settlement of escrow 0.7 0.0 2.2 0.0
--------- ---------- -------- --------
Loss from operations (0.5) (1.9) (2.6) (2.4)
Realized gain on sale of available-for-sale securities 0.2 0.0 0.9 0.0
Interest income, net 0.4 0.4 0.4 0.5
Unrealized foreign exchange gain (loss) (0.0) 0.0 (0.0) 0.1
--------- ---------- -------- --------
Income (loss) before income taxes 0.1 (1.5) (1.3) (1.8)
Income taxes (benefit) (0.5) 0.1 (0.0) 0.0
--------- ---------- -------- --------
Net income (loss) 0.6% (1.6)% (1.3)% (1.8)%
--------- ---------- -------- --------
Net Sales
Net sales in the third quarter of 2002 decreased 35% or $8.4 million to $15.8
million compared to $24.2 million for the same period in 2001. For the nine
months period ended September 30, 2002, net sales decreased by $22.2 million or
31% over the nine months ended September 30, 2001. The revenue decline mainly
reflects the continued difficult business environment and the decision to cease
selling Microsoft Select and Enterprise license agreements. As stipulated in our
most recent annual report on Form 10-K, our business plan contemplates that
sales for 2002 will be lower than in recent years, primarily due to the impact
of the change in the reseller agreement with Microsoft. Cooperative advertising
reimbursements as a percentage of net sales were 8% of net sales or $1.2 million
in the third quarter of 2002, consistent with the third quarter of 2001. For the
nine months period ended September 30, 2002, cooperative advertising
reimbursements amounted to $3.2 million, consistent with the first nine months
of 2001. Cooperative advertising reimbursements as a percentage of net sales may
decrease in future periods depending on the level of vendor participation and
collection experience.
Gross Profit
Gross profit as a percentage of net sales increased to 12.8% for the quarter
ended September 30, 2002, compared to 9.6% for the same period in 2001. Gross
profit in absolute dollars for the three-month period ended September 30, 2002
was $2.0 million as compared to $2.3 million for the same period in 2001. For
the nine month period ended September 30, 2002, the gross profit decreased by
$771 for the same period in 2001. The decrease in gross profit dollars and the
increase in Gross Profit Margin as a percentage reflects a shift in the mix of
sales as a result of the substantial increase in higher margin sales compared to
Page 9
large revenue and low margin sales such as Microsoft Select and Enterprise
licensing. As stipulated in our annual report on Form 10-K, our business plan
contemplates that our Gross Profit Margin as a percentage will increase as
compared to recent years, primarily due to the impact of the change in the
reseller agreement with Microsoft.
Selling, General and Administrative Expenses
SG&A expenses for the quarter ended September 30, 2002 were $2.1 million as
compared to $2.9 million for the same period in 2001, a decrease of $0.8 million
or 28%. For the nine month period ended September 30, 2002, SG&A expenses
decreased by $2.2 million or 26%. The decrease in SG&A was primarily due to
lower personnel-related expenses, cost containment initiatives and improved cost
control policies and procedures.
Each year SG&A has increased in absolute dollars. As a result of the
restructuring plan described in our most recent annual report on form 10-K, we
anticipate that SG&A in absolute dollars will decline in 2002; however there can
be no assurance that this will actually occur.
Income Taxes
For the quarter ended September 30, 2002, the Company recorded a benefit for
income taxes of approximately $4,000, which consists of a benefit of $4,000 for
Canadian taxes. For the nine-month period ended September 30, 2002, the Company
recorded a $257,000 income tax benefit compared to a provision for income taxes
of $63,000 for the comparable period in 2001. The Job Creation and Worker
Assistance Act of 2002 (Job Creation Act), enacted March 9, 2002 temporarily
extends the carry back period to five years for losses arising in tax years 2001
and 2002. As a result, the Company filed a carry back claim for a refund in the
amount of approximately $315,000.
The loss carry forwards offset the provision for income taxes for our US
operations. As per September 30, 2002, the Company had recorded a US deferred
tax asset of approximately $6.4 million reflecting, in part, a benefit of $3.2
million in federal and state tax loss carry forwards, which will expire in
varying amounts between 2002 and 2021. As a result of the current uncertainty of
realizing the benefits of the tax loss carry forward, valuation allowances equal
to the tax benefits for the U.S. deferred taxes have been established.
The full realization of the tax benefit associated with the carry forward
depends predominantly upon the Company's ability to generate taxable income
during the carry forward 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
carry forwards 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.
Liquidity and Capital Resources
In the first nine months of 2002, our cash and cash equivalents decreased by
$7.0 million to $4.4 million at September 30, 2002, from $11.4 million at
December 31, 2001. Net cash used for operating activities amounted to $1.4
million; net cash used in investing activities amounted to $3.4 million and cash
used for
Page 10
financing activities amounted to $2.5 million. The effect of foreign exchange
rate on cash amounted to $0.3 million.
Net cash used for operating activities in the first nine months of 2002 was $1.4
million. During the first nine months of 2002, cash was used for a reduction of
accounts payable, partly offset by cash provided by net income and reduced
accounts receivable.
The decrease in accounts payable is primarily due to our decreased revenue as
well as using our cash to pay vendors promptly in order to obtain more favorable
conditions. The decrease in accounts receivable relates primarily to improvement
in collection and the decrease in sales. Days sales outstanding for the nine
month period ended September 30, 2002 were 34 as compared to 53 for the nine
month period ended September 30, 2001.
Cash used for investing activities amounted to $3.4 million. As a result of the
current low interest rates on our short-term savings accounts we decided to
invest in US Government securities. This investment is partly offset by the
decrease in cash held in escrow, which is no longer restricted due to the
settlement of escrow. For more information reference is made to note 4 to the
condensed consolidated financial statements as per September 30, 2002.
Cash used for financing activities in the first nine months of 2002 of $2.5
million consisted of the purchase of approximately 1,002,000 shares of our own
stock under the buyback program discussed below.
On October 9, 2002, the Company's Board of Directors authorized the purchase of
an additional 500,000 shares of our common stock. On September 16, 2002, the
Company's Board of Directors authorized the purchase of an additional 500,000
shares of our common stock. These two purchase approvals are in addition to
approval of 490,000 shares in June 2002 and 521,013 shares in October 1999 the
company was authorized to buy back in both open market and private transactions,
as conditions warrant.
The repurchase program is expected to remain effective for the remainder of 2002
and 2003. We intend to hold the repurchased shares in treasury for general
corporate purposes, including issuances under various stock option plans. As of
September 30, 2002, we owned approximately 1,265,000 shares purchased at an
average cost of $3.11. In the first nine months of 2002, we repurchased
1,004,029 shares of company stock at an average share price of $2.45.
The Company's current and anticipated use of its cash and cash equivalents is,
and will continue to be, to fund working capital and operational expenditures
and the stock buyback program. Our business plan furthermore contemplates to
continue to use our cash to pay vendors promptly in order to obtain more
favorable conditions.
The Company believes that the funds held in cash and cash equivalents will be
sufficient to fund the Company's working capital and cash requirements at least
through September 30, 2003. We currently do not have any credit facility and, in
the foreseeable future, we do not plan to enter into an agreement providing for
a line of credit.
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. We strongly urge current and prospective investors to carefully
consider the cautionary statements and risks contained in this Report. Such
risks include, but not are not limited to, the continued acceptance of the
Company's distribution channel by vendors and customers, the timely availability
and acceptance of new products, contribution of key vendor relationships and
support programs, as well as factors that affect the software industry
generally.
Page 11
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.
The statement concerning future sales and future Gross Profit Margin are forward
looking statements involving certain risks and uncertainties such as
availability of products, product mix, market conditions and other factors,
which could result in a fluctuation of sales below recent experience.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In addition to its activities in the United States, the Company also conducts
business in Canada. We are subject to general risks attendant to the conduct of
business in Canada, including economic uncertainties and foreign government
regulations. In addition, the Company's Canadian business is subject to changes
in demand or pricing resulting from fluctuations in currency exchange rates or
other factors.
The Company's $5.2 million investments in marketable securities are only in
highly rated and highly liquid U.S. government Securities. The remaining cash
balance is invested in short-term savings accounts with our primary bank, The
Bank of New York. As such, the risk of significant changes in the value of our
cash invested is minimal.
Item 4. Controls and Procedures.
As required by Rule 13a-15 under the Exchange Act, within the 90-day period
prior to the filing date of this report, the Company carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation was carried out under the supervision
Page 12
and with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer. Based upon that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect these internal controls subsequent to the date
of their evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 for 14,500,000 Euros, subject to post-closing
adjustments, including finalization of the closing balance sheet, in accordance
with the Stock Sale Agreement between the Company and PC-Ware. As security for
any claim of PC-Ware arising from alleged breaches of representations by the
Company under the Stock Sale Agreement, 2,665,836 Euros (the equivalent of
$2,628,514) were being held in an escrow account as per September 30, 2002. In
September 2001, PC-Ware made claims aggregating 2,490,127 Euros against the
escrow.
On October 1, 2002, the claims brought against the Company by PC-Ware were
settled for 435,000 Euros (the equivalent of $428,910). Associated fees,
comprising of counsel fees, expert witness fees, arbitration fees, consultancy
fees paid to the Company's previous Chief Financial Officer, and travel and
related expenses, amounted to $269,000. This settlement amount and associated
fees amounted to $698,000 in the third quarter of 2002. Since the Company had
established reserves of $350,000 for this claim in the fourth quarter of 2001,
the Company reported an additional $348,000 for this settlement and associated
fees in the third quarter of 2002. A total amount of $698,000 was reported as
other current liabilities as of September 30, 2002.
A total of 570,000 Euros (the equivalent of $562,020) will remain in the escrow
account for the settlement amount and associated fees incurred in Germany. The
remaining balance of the escrow account is no longer restricted; as a result
2,095,836 Euros (the equivalent of $2,066,494) were reported as cash and cash
equivalents as of September 30, 2002.
Page 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 2002.
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 12, 2002 By: /s/ Simon F. Nynens
- ------------------------------- ----------------------
Date Simon F. Nynens, Chief Financial
Officer and Vice President and
Authorized Officer
November 12, 2002 By: /s/ William H. Willett
- ------------------------------- -------------------------
Date William H. Willett, Chairman of the
Board, President and Chief
Executive Officer
Page 14
PROGRAMMER'S PARADISE, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, William H. Willett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Programmer's Paradise,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ William H. Willett
- --------------------------
William H. Willett
Chief Executive Officer
Page 15
CERTIFICATION
I, Simon F. Nynens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Programmer's Paradise,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Simon F. Nynens
- ---------------------------
Simon F. Nynens
Chief Financial Officer
Page 16