UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________ to _______________
Commission file number: 33-92810
PROGRAMMER'S PARADISE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3136104
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 389-8950
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: Common Stock,
par value $0.01 per share
(Title Of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
The aggregate market value of the common stock held by non-affiliates of
the Registrant computed by reference to the closing sale price for the
Registrant's Common Stock as of June 28, 2002, the last day of the Registrant's
most recently completed second fiscal quarter, as reported on the NASDAQ
National Market, was approximately $5,569,000. (In determining the market value
of the common stock held by any non-affiliates, shares of Common Stock of the
Registrant beneficially owned by directors, officers and holders of more than
10% of the outstanding shares of Common Stock of the Registrant have been
excluded. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.)
The number of shares outstanding of the Registrant's Common Stock as of
March 18, 2003 was 3,763,943 shares.
Documents Incorporated by Reference: Portions of the Registrant's
definitive Proxy Statement for its 2003 Annual Meeting of Stockholders to be
filed on or before April 30, 2003 are incorporated by reference into Part III of
this Report.
Page 1 of 24 Pages
PART I
Item 1 Business
General
Programmer's Paradise, Inc. (the "Company") is a recognized marketer of
software in the United States and Canada targeting software development and
information technology professionals within enterprise organizations.
Programmer's Paradise, Inc. was incorporated in Delaware in 1982. Our
common stock is listed on the NASDAQ National Market under the symbol "PROG".
Our Web site addresses are www.programmersparadise.com and
www.programmersparadise.ca. Information on our Web sites should not be
considered filed with the Securities and Exchange Commission. Information
contained on our Web sites is not, and should not be deemed to be, a part of
this report.
The Company operates in one primary business segment: the marketing of
technical software for microcomputers, servers and networks in the United States
and Canada. We offer a wide variety of technical and general business
application software from a broad range of publishers and manufacturers. We
market these products through our well-known catalogs, direct mail programs,
advertisements in trade magazines, as well as through Internet and e-mail
promotions. Through our wholly owned subsidiary, Lifeboat Distribution Inc., we
distribute products to dealers and resellers in the United States and Canada.
The Company's catalogs are full color "magalogs" and offer some of the most
complete collections of microcomputer technical software, including programming
languages, tools, utilities, libraries, development systems, interfaces and
communication products. The Company believes that it has created a niche for
hard-to-source technical software programs.
Pursuant to an Agreement, dated December 1, 2000, the Company sold all of
the shares of its European subsidiaries to PC-Ware Information Technologies AG,
a German corporation ("PC-Ware"), on January 9, 2001. For more information
regarding this sale, reference is made to Management Discussion and Analysis of
Financial Condition and Results of Operations, Part I, Item 7, and to Note
Twelve to the Consolidated Financial Statements, Part II, Item 8.
Competition
The software distribution market is highly competitive. Pricing is very
aggressive and the Company expects pricing pressure to continue. The Company
faces competition from a wide variety of sources including: vendors who sell
direct to customers; software resellers; superstores; catalogers; Web sites; and
other direct marketers of software products. Some of our competitors are
significantly larger and have substantially greater resources than the Company.
Many of our competitors compete principally on the basis of price, product
availability, customer service and technical support. The market for developer
software products is characterized by rapid changes in technology, user
requirements, and customer specifications. The Company competes in acquiring
prospective buyers and in sourcing new products from software developers and
publishers, as well as in marketing its current product line to its customers.
There can be no assurance that the Company can compete effectively against
existing competitors or new competitors that may enter the market and generate
profit margins which represent a fair return to the Company. In addition, price
is an important competitive factor in the personal computer software market and
Page 2 of 24 Pages
there can be no assurance that the Company will not be subject to increased
price competition. An increase in the amount of competition faced by the
Company, or its failure to compete effectively against its competitors, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes that its ability to offer software developers and IT
professionals a wide selection of products at low prices with prompt delivery
and high customer service levels, along with its good relationships with vendors
and suppliers, allow it to compete effectively. The Company competes to gain
distribution rights for new products primarily on the basis of its reputation
and its relationships with software publishers.
The manner in which software products are distributed and sold is changing,
and new methods of distribution and sale may emerge or expand. Software
developers and publishers have sold, and may intensify their efforts to sell,
their products directly to end-users. The evolution of the Internet as a viable
platform in which to conduct e-commerce business transactions has both lowered
the barriers for competition and broadened customer access to products and
information. From time to time certain software developers and publishers have
instituted programs for the direct sale of large order quantities of software to
certain major corporate accounts. These types of programs may continue to be
developed and used by various developers and publishers. While Microsoft and
other vendors currently sell new releases or upgrades directly to end users,
they have not attempted to completely bypass the reseller channel. Future
efforts by such entities to bypass third-party sales channels could materially
and adversely affect the Company's result of operations.
In addition, resellers and publishers may attempt to increase the volume of
software products distributed electronically through ESD (Electronic Software
Distribution) technology, through subscription services, and through on-line
shopping services. Any of these competitive programs, if successful, could have
a material adverse effect on the Company's result of operations.
Products
The Company offers a wide variety of products from a broad range of
publishers and manufacturers, including Microsoft, Computer Associates, IBM,
VMware, Borland, Sitraka, Compuware, Infragistics, ComponentOne, Installshield
and Adobe. On a continuous basis, new products are screened for inclusion in our
catalogs and Web sites based on their features, quality, price, profit margins
and warranties, as well as on current sales trends. In 2002, 2001 and 2000,
Hardware and Peripherals as a percentage of sales were less than 5%.
Marketing and Distribution
We market our products through creative marketing communications, our
catalogs, our Web site, industry magazines, and national trade shows. We also
use direct e-mail and printed material to introduce new products and upgrades,
to cross-sell products to current customers, and to educate and inform.
We believe that our catalogs are important marketing vehicles for software
publishers and manufacturers. These catalogs provide a cost-effective and
service-oriented means to market, sell and fulfill software products.
The Company has two primary catalogs: Programmer's Paradise, targeting
software developers; and Corporate Developer's Paradise, targeting information
technology professionals working in large corporations. These catalogs are full
color "magalogs" that combine traditional catalog sales offerings with detailed
product descriptions and announcements, and which contain cooperative vendor
advertising.
Page 3 of 24 Pages
The Company offers additional catalogs aimed at specific audiences.
Significant increases in postal or shipping rates and in paper costs could have
a material adverse effect on the Company. We continually attract new customers
through advertisements in trade magazines, as well as through selectively
mailing catalogs and other direct mail material. Prospect names are also
provided to us by publishers whose products we market. In 2002, the Company's
cooperative and fee-based advertising reimbursements as a percentage of sales
increased to 7% from 5% in 2001.
No customer accounted for more than 10% of consolidated net sales in 2000,
2001, or 2002. No material part of the business is dependent upon a single
customer or a few customers. The Company generally ships product within 48 hours
of confirming a customer's order. This allows for minimum backlog in the
business.
Canadian sales increased to 15% of consolidated revenues in 2002 compared
to 9% of consolidated revenues in 2001 (for geographic financial information,
please refer to Note Nine to our Notes to Consolidated Financial Statements).
Customer Support
We believe that providing a high level of customer service is necessary to
compete effectively and is essential to continued sales and revenue growth. Our
account representatives assist our customers with all aspects of purchasing
decisions; process products ordered and respond to customer inquiries on order
status, product pricing and availability. The account representatives are
trained to answer all basic questions about the features and functionality of
products. On technical issues, there is an in-house technical support staff.
Purchasing and Fulfillment
The Company's success is dependent, in part, upon the ability of its
suppliers to develop and market products that meet the changing requirements of
the marketplace. The Company believes it enjoys good relationships with its
vendors. The Company and its principal vendors have cooperated frequently in
product introductions and in other marketing programs. As is customary in the
industry, the Company has no long-term supply contracts with any of its
suppliers. Substantially all the Company's contracts with its vendors are
terminable upon 30 days' notice or less. The manner in which software products
are distributed and sold is changing, and new methods of distribution and sale
may emerge or expand. Software publishers have sold, and may intensify their
efforts to sell, their products directly to end-users. The Company's business
and results of operations may be adversely affected if the terms and conditions
of the Company's authorizations with its vendors were to be significantly
modified or if certain products become unavailable to the Company.
In 2002 the Company purchased approximately 61% of its products directly
from manufacturers and publishers and the balance from multiple distributors, as
compared to 63% in 2001. Most suppliers or distributors will "drop ship"
products directly to the customers, which reduces physical handling by the
Company. These inventory management techniques allow the Company to offer a
greater range of products without increased inventory requirements.
For the year ended December 31, 2002, Ingram Micro was the only vendor that
exceeded 10% of total purchases. The loss of this vendor, or any other key
vendor, could have an adverse effect on the Company. As from October 1, 2001,
the Company is no longer an authorized Microsoft Select Large Account Reseller
(LAR). For 2001, these sales amounted to approximately $17 million and generated
approximately $0.8 million in Gross Profit Margin, which was insufficient to
cover all related costs. There were no other changes in the reseller agreement
with Microsoft.
Page 4 of 24 Pages
Inventory levels may vary from period to period, due in part to increases
or decreases in sales levels, the Company's practice of making large-volume
purchases when it deems the terms of such purchases to be attractive, and the
addition of new suppliers and products. Moreover, the Company's order
fulfillment and inventory control allow the Company to order certain products
just in time for next day shipping. The Company promotes the use of electronic
data interchange ("EDI") with its suppliers, which helps reduce overhead and the
use of paper in the ordering process. Although brand names and individual
products are important to our business, we believe that competitive sources of
supply are available for substantially all product categories we carry.
The Company operates distribution facilities in Shrewsbury, New Jersey and
Mississauga, Canada.
Management Information Systems
The Company operates management information systems on Windows NT and MPE
platforms that allow for centralized management of key functions, including
inventory, accounts receivable, purchasing, sales and distribution. We are
dependent on the accuracy and proper utilization of our information technology
systems, including our telephone, Web sites, e-mail and fax systems.
The management information systems allow the Company to monitor sales
trends, provide product availability and order status information, track direct
marketing campaign performance and to make marketing event driven purchasing
decisions. In addition to the main system, the Company has systems of networked
personal computers, as well as microcomputer-based desktop publishing systems,
which facilitate data sharing and provide an automated office environment.
The Company recognizes the need to continually upgrade its management
information systems to most effectively manage its operations and customer
database. In that regard, the Company anticipates that it will, from time to
time, require software and hardware upgrades for its present management
information systems.
Trademarks
The Company conducts its business under the various trademarks and service
marks of Programmer's Paradise, the "Island Man" cartoon character logo, and
Lifeboat. The Company protects these trademarks and service marks and believes
that they have significant value and are important factors in its marketing
programs.
Employees
As of December 31, 2002, Programmer's Paradise, Inc. and its subsidiaries
had 84 full-time and 2 part-time employees. The Company is not a party to any
collective bargaining agreements with its employees, has experienced no work
stoppages and considers its relationships with its employees to be satisfactory.
Page 5 of 24 Pages
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
- ---------------------------------------------------------------------------
William H. Willett 66 President, Chief Executive Officer and
Chairman of the Board
Simon F. Nynens 31 Chief Financial Officer and
Vice President
Jeffrey C. Largiader 46 Vice President - Marketing
Steve R. McNamara 44 Vice President and General Manager - Canada
William H. Willett has served as a director of the Company since 1996. In July
1998, Mr. Willett was appointed to the position of Chairman, President and Chief
Executive Officer. Prior to joining the Company and since 1994, Mr. Willett was
the President and Chief Operating Officer of Colorado Prime Foods located in New
York.
Simon F. Nynens has served as Vice-President and Chief Financial Officer since
January 2002. Between February 2001 and January 2002, he served as Vice
President. Prior to that, Mr. Nynens served as the Vice-President and Chief
Operating Officer of the Company's European operations from November 1999
through January 2001, and prior to that, he was European Controller and
Corporate Controller of the Company. Prior to joining Programmer's Paradise,
Inc., Mr. Nynens worked as a Registered Accountant with Ernst & Young in
Amsterdam, The Netherlands.
Jeffrey C. Largiader has served as the Vice-President - Marketing since 1989.
Prior to that and since 1983, he held various sales and product management
positions with the Company and a predecessor, Lifeboat Associates, Inc.
Steve R. McNamara opened the Programmer's Paradise Canadian operations in June
1997. Prior to that, he held marketing, operations, and finance management
positions at Inmac Inc., Locator Group Inc., NCR Canada Ltd., and Tee-Comm
Electronics Inc.
Available Information
Under the Securities Exchange Act of 1934, the Company is required to file
annual, quarterly and special reports, proxy statements and other information
with the SEC. You may read and copy any document we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
room. The SEC maintains a web site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The Company files electronically with the SEC.
The Company makes available, free of charge, through its internet web site its
reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as
reasonably practicable after they are filed with the SEC. The following address
for the Company's web site includes a hyperlink to those Reports:
http://www.programmersparadise.com/company/overview.pasp.
Item 2 Properties
The Company leases 25,250 square feet of space in Shrewsbury, New Jersey
for its corporate headquarters and warehouse under a ten-year lease expiring in
June 2007. Total annual rent expense for these premises is approximately
$280,000. Additionally, the Company leases approximately 3,600 square feet of
office space and warehouse in Mississauga, Canada, under a lease, which expires
Page 6 of 24 Pages
July 31, 2004. Total annual rent expense for these premises is approximately
$23,000. In addition, the Company leases approximately 1,200 square feet of
office space in Mount Laurel, New Jersey for a satellite sales office under a
two-year lease expiring in October 2004. Total annual rent expense for these
premises amount to approximately $30,000. For a further discussion regarding
lease obligations see Note Eight to the Consolidated Financial Statements, Part
II, Item 8.
Item 3 Legal Proceedings
There are no legal proceedings pending against the Company or any of its
subsidiaries.
Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of 2002 to a vote of
security holders.
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
Programmer's Paradise, Inc. Common Stock, par value $0.01, is traded on the
NASDAQ National Market System under the symbol "PROG". Following is the range of
low and high closing prices for our stock as reported on the NASDAQ for the
quarters indicated.
High Low
2001
First Quarter 4.094 2.656
Second Quarter 4.250 3.300
Third Quarter 4.480 3.660
Fourth Quarter 4.150 2.500
2002
First Quarter 2.830 2.200
Second Quarter 2.900 2.260
Third Quarter 2.531 2.010
Fourth Quarter 2.340 1.850
We have never paid cash dividends on our capital stock. The closing sale
price of our stock on the NASDAQ on March 18, 2003, was $2.00. On March 18,
2003, 3,763,943 shares of the Company's Common Stock were outstanding. On such
date, there were approximately 64 holders of record.
During 2002, no shares of the Common Stock were issued to employees and
former employees, pursuant to the exercise of incentive stock options granted to
them prior to such year under the Company's stock option plans.
Item 6 Selected Financial Data
The following tables set forth, for the periods indicated, certain selected
consolidated financial and other data for Programmer's Paradise, Inc. You should
read the selected consolidated financial and other data below in conjunction
with our consolidated financial statements and the related notes and with "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K.
Page 7 of 24 Pages
Year Ended December 31,
-----------------------------------------------------------------------
(In thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
- -------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data (1):
Net sales $234,429 $244,139 $216,543 $89,536 $65,157
Cost of sales 205,241 218,014 194,964 80,656 56,540
--------------------------------------------------------------------
Gross profit 29,188 26,125 21,759 8,880 8,617
Selling, general and
administrative expenses 22,682 24,422 25,648 13,020 8,926
Amortization of goodwill 979 1,795 1,385 25
Impairment of goodwill 7,000 230
Cost of restructuring 362
Impairment of investment 590
Settlement of escrow 348
Loss on Sale of European subsidiaries 2,081
--------------------------------------------------------------------
Income (loss) from operations 5,527 (92) (15,125) (4,757) (657)
Other income, net 356 665 134 318 415
--------------------------------------------------------------------
Income (loss) before income taxes 5,883 573 (14,991) (4,439) (242)
Income tax provision (benefit) 2,441 1,302 2,483 83 (270)
--------------------------------------------------------------------
Net income (loss) $3,442 $(729) $(17,474) $(4,522) 28
====================================================================
Net income (loss) per share
Basic $0.72 $(0.14) $(3.51) $(0.91) $0.01
====================================================================
Diluted $0.66 $(0.14) $(3.51) $(0.91) $0.01
====================================================================
Weighted average common
Shares outstanding
Basic 4,797 5,100 4,983 4,987 4,459
====================================================================
Diluted 5,249 5,100 4,983 4,987 4,480
====================================================================
December 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
- --------------------------------------------------------------------------------------------------------------------
Balance Sheet Data(1):
Cash and cash equivalents $21,167 $17,597 $2,091 $11,425 $6,072
Marketable securities - - - - 5,110
Working capital 17,686 14,806 17,326 13,367 11,167
Total assets 104,877 95,757 33,855 24,057 19,468
Notes payable - current 674 2,628 - - -
Notes payable - long term 1,761 - - - -
Total stockholders' equity $36,241 $34,849 $18,906 $14,058 $11,696
(1) Comparability of the Consolidated Statement of Operations and Balance Sheet
Data is affected by acquisitions occurring throughout the periods presented
as well as by the sale of our European Operations on January 9, 2001.
Reference is made to the Pro Forma data for our continuing operations, Part
I, Item 7 Management Discussion and Analysis of Financial Condition and
Results of Operations.
Page 8 of 24
Item 7 Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto.
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.
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
Page 9 of 24
postage and operating expenses, and other developments, could have a significant
impact on the market price of the Company's Common Stock.
Financial Overview
We reported a net profit of $28,000 for the year 2002, compared to a net
loss of $4.5 million for the year 2001 and a net loss of $17.5 million in the
year 2000.
The following information is based on the reported Consolidated Financial
Statements for the years 2002 and 2001. In order to reflect and compare the
results from our continuing operations, we included and reflect below the Pro
Forma Statement of Operations for the Year ended December 31, 2000. Our reported
Pro Forma loss in 2000 amounted to $12.4 million. The difference between the
reported net loss of $17.5 million and the Pro Forma reported net loss of $12.4
million primarily relates to the sale of our European Operations. For more
information regarding this sale and the resulting settlement, we refer to Note
Twelve to the Consolidated Financial Statements, Part II, Item 8.
Year Ended December 31,
--------------------------------------------------------------
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------
2000 2001 2002
- ----------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data:
Net sales $88,625 $89,536 $65,157
Cost of sales 77,576 80,656 56,540
-----------------------------------------------------
Gross profit 11,049 8,880 8,617
Selling, general and administrative expenses 12,101 13,020 8,926
Amortization of goodwill 1,302 25 -
Impairment of goodwill 7,000 230 -
Cost of restructuring - 362 -
Settlement of escrow 348
Impairment of investment 590 - -
-----------------------------------------------------
Income (loss) from operations (9,944) (4,757) (657)
Other income, net 359 318 415
-----------------------------------------------------
Loss before income taxes (9,585) (4,439) (242)
Income tax provision (benefit) 2,834 83 (270)
-----------------------------------------------------
Net loss $(12,419) $(4,522) $28
=====================================================
Net profit (loss) per share
Basic $(2.50) $(0.91) $0.01
=====================================================
Diluted $(2.50) $(0.91) $0.01
=====================================================
Weighted average common
Shares outstanding
Basic 4,983 4,987 4,459
=====================================================
Diluted 4,983 4,987 4,480
=====================================================
We reported a net profit of $28,000 for the year 2002, as compared to a net
loss in 2001 of $4.5 million. This improvement primarily resulted from $4.1
million lower SG&A (Selling, General and Administrative) expenses in 2002 as
compared to 2001 and a one-time $270,000 benefit for income taxes. The impact on
Gross Profit from a 27% decrease in sales was partly offset by an increase in
gross margin percentages, as a result Gross Profit in absolute dollars declined
by $263,000.
Page 10 of 24 Pages
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.
Results of Operations
The following table sets forth for the years indicated certain financial
information derived from the Company's Consolidated Pro Forma Statement of
Operations expressed as a percentage of net sales:
Years ended December 31,
2000 2001 2002
----------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.5% 90.1% 86.8%
Gross profit 12.5% 9.9% 13.2%
Selling, general and administrative expenses 13.7% 14.5% 13.7%
Amortization of goodwill 1.5% - -
Impairment of goodwill 7.9% 0.3% -
Cost of restructuring - 0.4% -
Settlement of escrow - - 0.5%
Impairment of investment 0.7% - -
Loss from operations (11.2)% (5.3)% (1.0)%
Other income, net 0.4% 0.3% 0.6%
Loss before income taxes (10.8)% (5.0)% (0.4)%
Income tax provision (benefit) 3.2% (0.1)% 0.4%
Net loss (14.0)% (5.1)% 0.0%
Year ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales
Net sales in 2002 decreased by 27% or $24.3 million to $65.2 million
compared to $89.5 million in 2001. The revenue decline mainly reflects the
continued difficult business environment and the negative impact of the change
in the reseller agreement with Microsoft, as discussed in Part 1, Item 1 of this
report.
On a forward-looking basis, the overall market demand for the software we
sell continues to be volatile with the timing and extent of the market's
recovery remaining uncertain.
Gross Profit
Gross profit in absolute dollars for the year ended December 31, 2002 was
$8.6 million as compared to $8.9 million in 2001. Gross profit as a percentage
of net sales increased to 13.2% in 2002, compared to 9.9% in 2001. The decrease
in gross profit dollars and the increase in Gross Profit Margin as a percentage
reflect a shift in the mix of sales as a result of the substantial increase in
higher margin sales compared to large revenue and low margin sales such as
Microsoft Select and Enterprise licensing.
Page 11 of 24 Pages
On a forward-looking basis, gross profit margin in future periods may be
less than the 13.2% achieved in 2002. Gross profit margin depends on various
factors, including the continued participation by vendors in inventory price
protection and rebate programs, product mix, including software maintenance and
third party services, pricing strategies, market conditions and other factors,
any of which could result in a reduction of gross margins below those realized
in 2002.
Selling, General and Administrative Expenses
SG&A expenses for the year 2002 were $8.9 million as compared to $13.0
million for the year 2001, a decrease of $4.1 million or 31%. The decrease in
SG&A was primarily due to lower personnel-related expenses, cost containment
initiatives and improved cost control policies and procedures.
In light of current business conditions, we will continue to review our
organization and cost structure in an effort to further reduce operating
expenses and improve efficiencies.
Settlement of Escrow
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 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 expenses,
including 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.
Restructuring Cost
In December 2001, we implemented a restructuring plan aimed at improving
productivity per employee, including reductions in marketing, Internet
Development and e-Commerce teams, warehouse and support staff. Our goal was to
significantly reduce annual operating expenses by realigning resources around
our core sales and marketing initiatives. This plan included a restructuring
charge of approximately $0.4 million incurred in 2001.
As a result of this restructuring, we terminated approximately 30
employees, resulting in severance payments and termination benefits of
approximately $0.3 million in December 2001. Remaining costs of approximately
$0.1 million related to abandoned equipment and leasehold improvements.
All costs were incurred and charged to the appropriate accounts in December
2001. At December 31, 2001 the Company had a remaining accrual of $0.2 million
related to severance payments that were paid in 2002.
Page 12 of 24 Pages
Goodwill
During the fourth quarter of 2000, the goodwill from the acquisition of
Software Developers Corporation ("SDC") in June 1996 was evaluated and
determined to be impaired and was adjusted accordingly, as a result of the
Company's ongoing evaluation of the realizability of such goodwill. The goodwill
was the result of excess purchase price over the net assets acquired from SDC.
In 2000, the customer list and catalog production and distribution processes
were evaluated and the Company determined the value previously recognized was
impaired.
During the Fourth Quarter of 2001, due to the continued decline in sales,
the remaining goodwill in the amount of $230,000 was evaluated and determined to
be impaired and was adjusted accordingly, as a result of the Company's ongoing
evaluation of the realization of such goodwill.
Income Taxes
For the year ended December 31, 2002, the Company recorded a benefit for
income taxes of approximately $270,000, which consists of a benefit of $322,000
and a tax liability of $27,000 for Canadian taxes. Additionally, we recorded a
$25,000 tax liability in December 2002 for state taxes due to an audit of
previous years. 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 $322,000.
The loss carry forwards offset the provision for income taxes for our US
operations. As per December 31, 2002, the Company had recorded a US deferred tax
asset of approximately $6.5 million reflecting, in part, a benefit of $3 million
in federal and state tax loss carry forwards, which will expire in varying
amounts between 2003 and 2022. 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.
Year ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Sales
Net sales in 2001 slightly increased 1% or $0.9 million to $89.5 million
compared to $88.6 million in 2000. The overall increase in revenues in 2001 was
primarily attributable to increased licensing revenue for certain vendors,
including Microsoft. In the first 9 months of 2001, our revenue increased by
$5.6 million or 8% over the nine months ended September 30, 2000. Primarily due
to a weak demand from our customer base and the negative impact of the change in
the reseller agreement with Microsoft, as discussed in Part 1, Item 1 of this
report, sales in the fourth quarter of 2001 decreased $4.7 million or 21%
compared to the same period in 2000.
Page 13 of 24 Pages
Gross Profit Margin
Gross profit as a percentage of net sales decreased to 9.9% in 2001,
compared to 12.5% in 2000. Gross profit in absolute dollars for the year ended
December 31, 2001 was $8.9 million as compared to $11.0 million in 2000. The
decrease in Gross Profit Margin reflects a shift in the mix of sales as a result
of the substantial increase in lower margin direct sales and Microsoft Select
licensing sales as well as continued pricing pressures.
Selling, General and Administrative Expenses
SG&A expenses for the year ended December 31, 2001 were $13.0 million as
compared to $12.1 million for the same period in 2000, an increase of $0.9
million or 7%. This increase was primarily due to increased legal fees related
to the sale of our European Operations as well as costs related to closing our
credit facility with Hudson United in December 2001.
Loss on Investment
In 1999, the Company acquired an interest in Healy Hudson GmbH ("Healy
Hudson"), a privately held German Internet e-Commerce software company. This
investment was accounted for under the cost method.
During the fourth quarter of 2000, the Company evaluated the carrying value
of Healy Hudson. Based upon the financial market conditions, which make it
difficult to raise additional capital and financial performance including
continuing losses, significant cash burn rate and declining cash balances, the
Company determined a valuation allowance of $590,000 was necessary.
Restructuring Cost
In December 2001, we implemented a restructuring plan aimed at improving
productivity per employee, including reductions in marketing, Internet
Development and e-Commerce teams, warehouse and support staff. Our goal was to
significantly reduce annual operating expenses by realigning resources around
our core sales and marketing initiatives. This plan included a restructuring
charge of approximately $0.4 million incurred in 2001.
As a result of this restructuring, we terminated approximately 30
employees, resulting in severance payments and termination benefits of
approximately $0.3 Million in December 2001. Remaining costs of approximately
$0.1 million related to abandoned equipment and leasehold improvements.
All costs were incurred and charged to the appropriate accounts in December
2001. At December 31, 2001 the Company had a remaining accrual of $0.2 million
related to severance payments that were paid in 2002.
Goodwill
During the fourth quarter of 2000, the goodwill from the acquisition of
Software Developers Corporation ("SDC") in June 1996 was evaluated and
determined to be impaired and was adjusted accordingly, as a result of the
Company's ongoing evaluation of the realizability of such goodwill. The goodwill
was the result of excess purchase price over the net assets acquired from SDC.
In 2000, the customer list and catalog production and distribution processes
were evaluated and the Company determined the value previously recognized was
impaired.
Page 14 of 24 Pages
During the Fourth Quarter of 2001, due to the continued decline in sales,
the remaining goodwill in the amount of $230,000 was evaluated and determined to
be impaired and was adjusted accordingly, as a result of the Company's ongoing
evaluation of the realization of such goodwill.
Income Taxes
Prior to 1995, the Company had accumulated net operating loss carry
forwards and other deductible temporary differences for income tax purposes of
approximately $10.5 million, which could be used to offset taxable income
through the year 2005. The Company's initial public offering triggered an
ownership change, which imposes a limit on the use of these net operating loss
carry forwards. See Note Five to the Consolidated Financial Statements. The
Company had recorded a US deferred tax asset at December 31, 2001 of
approximately $6.7 million reflecting, in part, a benefit of $3.3 million in
federal and state tax loss carry forwards, which will expire in varying amounts
between 2002 and 2021.
Statement of Financial Accounting Standards No. 109 requires that a
valuation allowance be recorded for deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets depends upon the existence of
future taxable income. In following the guidance set forth in FASB 109, the
Company has recorded a valuation allowance for the full amount.
For the year ended December 31, 2001, the Company recorded a provision for
income taxes of $0.1 million that consisted of a benefit of $1.1 million for
federal and state taxes respectively, offset by a deferred tax valuation
allowance of $1.2 million.
Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests. Other intangible assets will continue to be
amortized over their useful lives. The adoption of FAS No.141 and No. 142 had no
impact on the Company's operating results and financial position.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No.
121, removes goodwill from its scope and identifies the methods to be used in
determining fair value. The adoption of SFAS No. 144 had no impact on the
Company's operating results and financial position.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 146, "Accounting for Costs
Associated with Disposal or Exit Activities" ("SFAS 146"). SFAS 146 requires
that liabilities for the costs associated with exit or disposal activities be
recognized when the liabilities are incurred, rather than when an entity commits
to an exit plan. We adopted SFAS 146 on January 1, 2003. The new rules will
change the timing of liability and expense recognition related to exit or
disposal activities, but not the ultimate amount of such expenses.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. FIN 45 also expands the
disclosures required to be made by a guarantor about its obligations under
certain guarantees that it has issued. Initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified. The disclosure requirements are effective immediately and are
provided in Item 8. "Financial Statements and Supplementary Data, Note 8 -
Page 15 of 24 Pages
Commitments". We do not expect FIN 45 to have a material effect on our results
of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148"). SFAS No. 148 amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the prior
disclosure guidance and requires prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
provisions of SFAS No. 148 are generally effective for fiscal years ending after
December 15, 2002. We are currently evaluating the new pronouncement and have
not yet determined what effect, if any, the adoption of SFAS No. 148 will have
on our financial position and results of operations.
In January 2003, the FASB issued Interpretation 46 - "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest in after that date. The related disclosure
requirements are effective immediately. We do not expect FIN 46 to have a
material effect on our results of operations.
Liquidity and Capital Resources
In 2002, our cash and cash equivalents decreased by $5.4 million to $6.1
million at December 31, 2002, from $11.5 million at December 31, 2001. Net cash
provided by operating activities amounted to $0.2 million; net cash used in
investing activities amounted to $3.2 million and cash used for financing
activities amounted to $2.7 million. The positive effect of foreign exchange
rate on cash amounted to $0.3 million.
Net cash provided by operating activities in 2002 was $208,000. In 2002,
cash was mainly provided by a decrease in accounts receivable, partly offset by
a reduction in accounts payable.
The decrease in accounts receivable relates primarily to improvement in
collection and the decrease in sales. 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. Average days sales
outstanding for the year ended December 31, 2002 were 42 as compared to 51 for
2001.
Cash used for investing activities amounted to $3.2 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 Twelve to
the Consolidated Financial Statements, Part II, Item 8.
Cash used for financing activities in 2002 of $2.7 million consisted of the
purchase of approximately 1,126,000 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.
Page 16 of 24 Pages
The repurchase program is expected to remain effective for 2003. We intend
to hold the repurchased shares in treasury for general corporate purposes,
including issuances under various stock option plans. As of December 31, 2002,
we owned approximately 1,390,000 shares purchased at an average cost of $3.01.
In 2002, we repurchased 1,126,169 shares of company stock at an average share
price of $2.40.
The Company's current and anticipated use of its cash and cash equivalents
is, and will continue to be, to fund working capital, 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 December 31, 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.
Contractual Obligations
(Dollars in thousands)
Payment due by Period
Total Less than 1 year 1-3 years 4-5 years After 5 years
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt
Capital Lease Obligations
Operating Leases 2,050 488 913 649 -
Unconditional Purchase Obligations
Other Long term Obligations
- ---------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations 2,050 488 913 649 -
=====================================================================================================================
Operating leases primarily relates to the lease of the space used for our
operations in Shrewsbury, NJ.
The Company is not committed by Lines of Credit, Standby Letters of Credit,
has no standby repurchase obligations or other commercial commitments. The
Company is not engaged in any transactions with related or certain other
parties.
Foreign Exchange
The Company's Canadian business is subject to changes in demand or pricing
resulting from fluctuations in currency exchange rates or other factors. We are
subject to fluctuations in the Canadian Dollar-to-U.S. dollar exchange rate.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements that have been prepared in accordance with accounting principles
generally accepted in the United States of America. 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. The Company recognizes
revenue from the sale of software and hardware for microcomputers, servers and
networks upon shipment or upon electronic delivery of the product. The Company
expenses the advertising costs associated with producing its catalogs. The costs
of these catalogs are expensed in the same month the catalogs are mailed. 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.
Page 17 of 24 Pages
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. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies used in the
preparation of its consolidated financial statements affect its more significant
judgments and estimates. The Company maintains allowances for doubtful accounts
for estimated losses resulting from the inability of its customers to make
required payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The Company writes down its inventory for
estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-offs
may be required.
The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
In addition to its activities in the United States, 15% of the Company's
2002 sales were generated 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 $5.1 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 8 Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements at Item 15(a).
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.
Page 18 of 24 Pages
PART III
Item 10 Directors and Executive Officers of the Registrant
This information required hereunder is incorporated be reference herein
from our Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders,
to be filed pursuant to Regulation 14A not later than April 30, 2003 (the
"Definitive Proxy Statement").
Item 11 Executive Compensation
The information required hereunder is incorporated by reference herein from
the Definitive Proxy Statement.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required hereunder is incorporated by reference herein from
the Definitive Proxy Statement.
Item 13 Certain Relationships and Related Transactions
The information required hereunder is incorporated by reference herein from
the Definitive Proxy Statement.
Item 14 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
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. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote. In addition, the Company reviewed
its internal controls, and 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.
Page 19 of 24 Pages
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements (See Index to Consolidated Financial
Statements on page F-1 of this report);
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or notes thereto.
3. Exhibits required Securities and Exchange Commission Regulation S-K, Item
601:
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Agreement for the Sale and Purchase of Shares, dated as of January 9, 2001,
between the Company and PC-Ware Information Technologies, AG.+
3.1 Form of Amended and Restated Certificate of Incorporation of the Company.*
3.2 Form of Amended and Restated By-Laws of the Company.*
4.1 Specimen of Common Stock Certificate.*
10.5 Lease, dated as of August 27, 1987, by and between Robert C. Baker, Robert
C. Baker, Trustee under Trust Agreement dated March 15, 1984 for the
Benefit of Ashley S. Baker, Gerald H. Baker, Harvey B. Oshins, Baker 1985
Family Partnership, Gregory J. Stepic and John G. Orrico ("Landlord") and
Computer Library, Inc., and First Modification of Lease, dated as of April
24, 1991, between Landlord and the Company.*
10.8 Agreement dated as of December 29, 1994, between Lifeboat Publishing and
Software Garden, Inc.; License for Trademark "Dan Bricklin", dated as of
December 29, 1994, between the Company and Daniel Bricklin; First Amendment
to Software License Agreement and Trademark License Agreement dated March
30, 1995.*
10.17 1986 Stock Option Plan and Form of Employee Stock Option Agreement.*
10.18 1995 Stock Plan.*
10.19 1995 Non-Employee Director Plan.*
10.20 Form of Officer and Director Indemnification Agreement.*
10.38 Employment Agreement dated July 14, 1998 between William Willett
and the Company*
10.42 Lease dated as of May 14, 1997 between Robert C. Baker, et al as
Landlord and the Company **
21.1 Subsidiaries of the Registrant.
23.1 Consent of Amper, Politziner & Mattia
23.2 Consent of Ernst & Young.
Page 20 of 24 Pages
* Incorporated by reference to exhibits of the same number filed with
the Registrant's Registration Statement on Form S-1 or amendments
thereto (File No. 33-92810).
** Incorporated by reference to Exhibit 10.42 pf the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998 filed on
March 31, 1999.
+ Incorporated by reference to Annex I to the Registrant's Definitive
Special Meeting Proxy Statement filed on December 1, 2000.
(b) The Company did not file any reports on Form 8-K during the last
quarter of the year ended December 31, 2002.
(c) The exhibits required by Item 601 of Regulation S-K are reflected
above in section (a) 3. of this Item.
(d) The financial statement schedule is included as reflected in
Section (a) 2. of this Item.
Page 21 of 24 Pages
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in Shrewsbury, New
Jersey, on March 20, 2003.
PROGRAMMER'S PARADISE, INC.
By:/s/ William H. Willett
-----------------------------
William H. Willett, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature Title Date
President, Chief Executive
Officer and Chairman of the March 20, 2003
/s/ William H. Willett Board of Directors
- -------------------------
William H. Willett
Vice President, Chief Financial
/s/ Simon F. Nynens and Accounting Officer March 20, 2003
- -------------------------
Simon F. Nynens
/s/ Mark T. Boyer Director March 20, 2003
- -----------------
Mark. T. Boyer
/s/ F. Duffield Meyercord Director March 20, 2003
- -------------------------
F. Duffield Meyercord
/s/ Edwin H. Morgens Director March 20, 2003
- -------------------------
Edwin H. Morgens
/s/ James W. Sight Director March 20, 2003
- -------------------------
James. W. Sight
/s/ Allan D. Weingarten Director March 20, 2003
- -------------------------
Allan D. Weingarten
Page 22 of 24 Pages
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, William H. Willett, President and Chief Executive Officer of Programmer's
Paradise, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Programmer's Paradise,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 20, 2003
/s/ William H. Willett
- ----------------------
William H. Willett
President and Chief Executive Officer
Page 23 of 24 Pages
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Simon F. Nynens, Senior Vice President and Chief Financial Officer of
Programmer's Paradise, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Programmer's Paradise,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 20, 2003
/s/ Simon F. Nynens
- -------------------
Simon F. Nynens
Vice President and Chief Financial Officer
Page 24 of 24 Pages
Items 8 and 15(a)
Programmer's Paradise, Inc. and Subsidiaries
Index to Consolidated Financial Statements and Schedule
Page
----
Reports of Independent Accountants F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts F-20
F-1
Report of Independent Accountants
The Board of Directors and Stockholders
Programmer's Paradise, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Programmer's
Paradise, Inc. and Subsidiaries as of December 31, 2002, and the related
consolidated statement of operations, stockholders' equity, and cash flows for
the year ended December 31, 2002. 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 audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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
Programmer's Paradise, Inc. and Subsidiaries at December 31,2002, and the
consolidated results of their operations and their cash flows for the year ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
We have also audited Schedule II for the year ended December 31, 2002. In our
opinion, this schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information therein.
/s/ Amper, Politziner & Mattia. P.C.
February 25, 2003
Edison, New Jersey
F-2
Report of Independent Accountants
The Board of Directors and Stockholders
Programmer's Paradise, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Programmer's
Paradise, Inc. and Subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Programmer's
Paradise, Inc. and Subsidiaries at December 31, 2000 and 2001, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 1, 2002
Programmer's Paradise, Inc. and Subsidiaries
F-3
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31
2001 2002
-------------------------------------
Assets
Current assets:
Cash and cash equivalents $11,425 $6,072
Cash held in escrow 2,335 -
Marketable securities - 5,110
Accounts receivable, net of allowances of $791 and
$728 in 2001 and 2002, respectively 8,449 6,342
Inventory, net of allowances of $210 and $174 in 2001 and 2002, 686 1,151
respectively
Prepaid expenses and other current assets 471 264
-------------------------------------
Total current assets 23,366 18,939
Equipment and leasehold improvements, net 634 460
Other assets 57 69
-------------------------------------
$24,057 $19,468
=====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $9,649 $7,772
Other current liabilities 350 -
-------------------------------------
Total current liabilities 9,999 7,772
Stockholders' equity:
Common Stock $.01 par value: Authorized, 10,000,000 shares, issued
5,307,938 and 5,230,250 in 2001 and 2002, respectively 53 52
Additional paid-in capital 35,483 35,484
Treasury stock, at cost, 263,407 and 1,389,576 shares in 2001 and 2002,
respectively (1,473) (4,184)
Retained earnings/(deficit) (19,539) (19,511)
Accumulated other comprehensive loss (466) (145)
-------------------------------------
Total stockholders' equity 14,058 11,696
-------------------------------------
$24,057 $19,468
=====================================
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year ended December 31
2000 2001 2002
---------------------------------------------------------
Net sales $216,543 $89,536 $65,157
Cost of sales 194,964 80,656 56,540
---------------------------------------------------------
Gross profit 21,579 8,880 8,617
Selling, general and administrative expenses 25,648 13,020 8,926
Amortization of goodwill 1,385 25 -
Impairment of goodwill 7,000 230 -
Cost of Restructuring 362 -
Impairment of investment 590 - -
Settlement of escrow - - 348
Loss on sale of European subsidiaries 2,081 - -
---------------------------------------------------------
Loss from operations (15,125) (4,757) (657)
Other (expense) income:
Interest expense (353) (71) -
Interest income 301 389 241
Gain on sale of investments - - 205
Foreign currency transaction gain (loss) 186 - (31)
---------------------------------------------------------
Income (loss) before provision for income taxes (14,991) (4,439) (242)
Provision (benefit) for income taxes 2,483 83 (270)
---------------------------------------------------------
Net income (loss) (17,474) $ (4,522) $ 28
=========================================================
Basic income (loss) per common share $ (3.51) $ (0.91) $ 0.01
=========================================================
Diluted income (loss) per common share $ (3.51) $ (0.91) $ 0.01
=========================================================
Weighted average common shares outstanding-Basic 4,983 4,987 4,459
=========================================================
Weighted average common shares outstanding-Diluted 4,983 4,987 4,480
=========================================================
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
Accumulated
Common Stock Additional Retained other
-------------------- Paid-In Treasury Earnings / comprehensive
Shares Amount Capital Stock (Deficit) Income (loss) Total
-------------------------------------------------------------------------------------
Balance at January 1, 2000 5,280,438 53 35,872 (1,356) 2,457 (2,177) 34,849
Net loss (17,474) (17,474)
Other comprehensive loss:
Translation adjustment (1,164) (1,164)
-------
Comprehensive loss (18,638)
Translation balance included in
net assets held for sale 3,060 3,060
Tax benefit from stock options (365) (365)
Repayment of proceeds from
stock option exercise (35) (35)
Exercise of stock options
7,375 4 31 35
-------------------------------------------------------------------------------------
Balance at December 31, 2000 5,287,813 53 35,476 (1,325) (15,017) (281) 18,906
(4,522) (4,522)
Net loss
Other comprehensive loss: (185) (185)
----
Translation adjustment (4,707)
Comprehensive loss
Purchase of 38,607 treasury (148) (148)
stock shares
Exercise of stock options
20,125 7 7
-------------------------------------------------------------------------------------
Balance at December 31, 2001 5,307,938 $53 $35,483 $(1,473) $(19,539) $(466) $14,058
Net income 28 28
Other comprehensive loss:
Reclassification adjustment for
gain realized on sale of
available-for-sale securities (78) (78)
Unrealized gain on
available-for-sale securities 114 114
Translation adjustment 285 285
---
Comprehensive Income 349
Purchase of 1,126,169 treasury
stock shares (2,711) (2,711)
Other (77,688) (1) 1
-------------------------------------------------------------------------------------
Balance at December 31, 2002 5,230,250 $52 $35,484 $(4,184) $(19,511) $(145) $11,696
=====================================================================================
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31
2000 2001 2002
-------------------------------------------------------
Cash flows from operating activities
Net Income (loss) $ (17,474) $ (4,522) $ 28
Adjustments to reconcile net loss to net cash provided by
operating activities:
Impairment of investment 590 - -
Deferred income taxes 2,834 - -
Depreciation expense 957 501 364
Amortization expense 1,609 303 30
Gain on sale of investments - - 205
Loss on sale of European subsidiaries 2,081 - -
Impairment of goodwill 7,000 230 -
Changes in operating assets and liabilities, net
of assets held for sale:
Accounts receivable (3,027) 4,599 2,107
Inventory 791 1,945 (465)
Prepaid expenses and other current assets 406 1,871 207
Accounts payable and accrued expenses 6,822 (4,950) (2,227)
Net change in other operating assets and liabilities (354) 55 (41)
-------------------------------------------------------
Net cash provided by operating activities 2,235 32 208
Cash flows from investing activities
Purchase of equipment, leasehold improvements and other
(581) (201) (191)
Change in net assets held for sale (14,407) 12,163 -
Change in cash held in escrow - (2,335) 2,335
Purchases of investments - - (10,219)
Proceeds from sales of investments - - 4,904
-------------------------------------------------------
Net cash provided by (used in) investing activities (14,988) 9,627 (3,171)
Cash flows from financing activities
Borrowings (repayments) under lines of credit (2,628) - -
Purchase of treasury stock - (148) (2,711)
Repayment of proceeds from stock option exercise (35)
Net proceeds from issuance of common stock 35 7 -
-------------------------------------------------------
Net cash used in financing activities (2,628) (141) (2,711)
-------------------------------------------------------
Effect of foreign exchange rate on cash (125) (184) 321
-------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (15,506) 9,334 (5,353)
Cash and cash equivalents at beginning of year 17,597 2,091 11,425
-------------------------------------------------------
Cash and cash equivalents at end of year $ 2,091 $ 11,425 $ 6,072
=======================================================
Supplementary disclosure of cash flow information:
Income taxes paid $ 783 $ 125 $ -
Interest paid $ 298 $ 71 $ -
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
Note 1. Description of Business
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, 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.
Prior to January 2001, the Company also had operations in Europe. Pursuant to an
Agreement, dated December 1, 2000, the Company sold all of the shares of its
European subsidiaries to PC-Ware Information Technologies AG, a German
corporation ("PC-Ware"), on January 9, 2001.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of Programmer's
Paradise, Inc. and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make extensive use of certain estimates and assumptions
which affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
Net Income (Loss) Per Common Share
Basic Income (loss) per share is computed using average shares outstanding
during the period. The Company calculates earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). Accordingly, the Company has disclosed earnings per share calculated using
both the basic and diluted methods for all periods presented. A reconciliation
of basic and diluted per-share computations is included in Note 6.
Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents.
Foreign Currency Translation
Assets and liabilities of the foreign subsidiary in Canada have been translated
at current exchange rates, and related revenues and expenses have been
translated at average rates of exchange in effect during the year. Cumulative
translation adjustments have been classified within other comprehensive income
(loss), which is a separate component of stockholders equity in accordance with
FASB Statement No. 130, "Reporting Comprehensive Income".
F-8
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations in
credit risk consist of cash and cash investments. The Company's $5.1 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.
Investments in Securities
The Company accounts for investments in securities pursuant to the Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under this statement, the Company's
securities with a readily determinable fair value have been classified as
available for sale and are carried at fair value with an offsetting adjustment
to Stockholder's Equity. Net unrealized gains and losses on marketable
securities are credited or charged to accumulated other comprehensive income.
Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 2002, because of the relative short maturity of these
instruments.
Inventory
Inventory, consisting primarily of finished products held for resale, is stated
at the lower of cost (weighted average) or market.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are calculated using the straight-line method over three to five
years. Leasehold improvements are amortized over the estimated useful lives of
the assets or the related lease terms, whichever is shorter.
Goodwill
Goodwill represents the excess of costs over fair values of net assets acquired
and is being amortized on a straight-line basis substantially over the estimated
life of 15 years. Intangible assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
During the fourth quarter ended December 31, 2000, the goodwill from the
acquisition of Software Developers Corporation ("SDC") in June 1996 was
determined to be impaired and was adjusted accordingly as a result of the
Company's ongoing evaluation of the realizability of such goodwill. The goodwill
was the result of excess purchase price over assets from SDC.
In 2000, the catalog production and distribution processes were evaluated and it
was determined that the value previously recognized was impaired. The customers
buying patterns were beginning to change based upon increased competition from
F-9
other direct market resellers and the accessibility to procure software products
through competing websites.
During the Fourth Quarter of 2001 the remaining goodwill in the amount of
$230,000 was evaluated and determined to be impaired and was adjusted
accordingly, as a result of the Company's ongoing evaluation of such goodwill.
Comprehensive income (loss)
Comprehensive income (loss) consists of net income or loss for the period, the
impact of unrealized foreign currency translation adjustments and unrealized
gains or losses on investments.
Revenue Recognition
The Company records revenues from sales transactions when title to products sold
passes to the customer. The Company's shipping terms dictate that the passage of
title occurs upon receipt of products by the customer. The majority of the
Company's revenues relates to physical products and is recognized on a gross
basis with the selling price to the customer recorded as net sales with the
acquisition cost of the product to the Company recorded as cost of sales. At the
time of sale, the Company also records an estimate for sales returns based on
historical experience. Software maintenance products, third party services and
extended warranties sold by the Company (for which the Company is not the
primary obligor) are recognized on a net basis in accordance with SAB 101,
"Revenue Recognition" and EITF 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent".
Accordingly, such revenues are recognized in net sales either at the time of
sale or over the contract period, based on the nature of the contract, at the
net amount retained by the Company, with no cost of goods sold. In accordance
with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", the
Company records freight billed to its customers as net sales and the related
freight costs as a cost of sales. Vendor rebates and price protection are
recorded when earned as a reduction to cost of sales or merchandise inventory,
as applicable. Cooperative reimbursements from vendors, which are earned and
available, are recorded in the period the related advertising expenditure is
incurred.
Stock-Based Compensation
As permitted by FASB Statement No. 123 "Accounting for Stock-Based Compensation"
(FASB 123), the Company has elected to follow Accounting Principal Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock option plans. Under APB 25,
no compensation expense is recognized at the time of option grant because the
exercise price of the Company's employee stock option equals the fair market
value of the underlying common stock on the date of grant.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. This method also requires a valuation
allowance against net deferred tax asset if, based on the weighted available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
F-10
Advertising Costs
Advertising costs are charged to expense in the period incurred. Advertising
costs for 2000, 2001, and 2002 amounted to approximately $4,391, $4,024 and
$2,740 respectively.
Impact of Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and
Other Intangible Assets", effective for fiscal years beginning after December
15, 2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. The adoption of FAS No.141 and No. 142 had no impact on the
Company's operating results and financial position.
Effective January 1, 2002, the Company adopted he SFAS No. 144, "Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No.
121, removes goodwill from its scope and identifies the methods to be used in
determining fair value. The adoption of SFAS No. 144 had no impact on the
Company's operating results and financial position.
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards 146, "Accounting for Costs Associated with
Disposal or Exit Activities" ("SFAS 146"). SFAS 146 requires that liabilities
for the costs associated with exit or disposal activities be recognized when the
liabilities are incurred, rather than when an entity commits to an exit plan. We
adopted SFAS 146 on January 1, 2003. The new rules will change the timing of
liability and expense recognition related to exit or disposal activities, but
not the ultimate amount of such expenses.
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also expands the disclosures
required to be made by a guarantor about its obligations under certain
guarantees that it has issued. Initial recognition and measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or modified.
The disclosure requirements are effective immediately and are provided in Item
8. "Financial Statements and Supplementary Data, Note 8 - Commitments". We do
not expect FIN 45 to have a material effect on our results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS No. 148"). SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the prior disclosure guidance and
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are generally effective for fiscal years ending after December 15, 2002. SFAS
No. 148 will not impact our financial position and results of operations.
F-11
In January 2003, the FASB issued Interpretation 46 - "Consolidation of Variable
Interest Entities" ("FIN 46"). FIN 46 requires that companies that control
another entity through interests other than voting interests should consolidate
the controlled entity. FIN 46 applies to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest in after that date. The related disclosure requirements are
effective immediately. We do not expect FIN 46 to have a material effect on our
results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. Marketable securities
Investments in available-for-sale securities as per December 31, 2002 were (in
thousands):
Cost Market value Unrealized
Gain (loss)
U.S. Government Securities $ 5,074 $ 5,110 $ 36
The cost and market value of our investments in U.S. Government securities at
December 31, 2002 by contractual maturity were (in thousands):
Estimated
Fair Value Cost
Due in one year or less $3,045 $3,043
Due in greater than one year 2,065 2,031
---------- ---------
Total investments in U.S. Government Securities $5,110 $5,074
========== =========
Estimated fair values of marketable securities are based on quoted market
prices.
4. Balance Sheet Detail
Equipment and leasehold improvements consists of the following as of December
31:
2001 2002
-------------------------------
Equipment $ 1,717 $ 1,916
Leasehold improvements 298 291
-------------------------------
2,015 2,207
Less accumulated depreciation and amortization (1,381) (1,747)
-------------------------------
$ 634 $ 460
===============================
Accounts payable and accrued expenses consist of the following as of December
31:
2001 2002
--------------------------------
Trade accounts payable $ 8,714 $ 6,568
Other accrued expenses 935 1,204
--------------------------------
$ 9,649 $ 7,772
================================
F-12
5. Income Taxes
The provision (benefit) for income taxes is as follows:
Year ended December 31
2000 2001 2002
--------------------------------------------------
Current:
Federal $ - $ 44 $ (322)
State - 39 25
Foreign - - 27
--------------------------------------------------
- 83 (270)
Deferred:
Federal 2,195 - -
State 639 - -
Foreign (351) - -
--------------------------------------------------
2,483 - -
==================================================
$ 2,483 $ 83 $ (270)
==================================================
The reasons for the difference between total tax expense (benefit) and the
amount computed by applying the U.S. statutory federal income tax rate to income
before income taxes are as follows:
Year ended December 31
2000 2001 2002
--------------------------------------------------
Statutory rate applied to pretax income $ (5,247) $ (1,509) $ (82)
Impairment of goodwill 748 - -
Amortization of goodwill 113 - -
State income taxes, net of benefit
of federal income taxes (704) (173) (75)
Foreign income taxes over U.S.
statutory rate 495 56 25
Net increase(decrease) in valuation allowance 7,078 (379) (155)
Loss on sale of foreign subsidiaries - 1,997 -
Other items - 8 -
Settlement of prior year's tax 83 17
--------------------------------------------------
Income tax expense $ 2,483 $ 83 $ (270)
==================================================
Significant components of the Company's deferred tax assets are as follows as
of:
December 31
2001 2002
--------------------------------
Fixed assets $ 200 $ 280
Accruals and reserves 3,196 3,240
Net operating loss carry forwards 3,287 3,008
Credit carry forwards 16 16
--------------------------------
Deferred tax assets $ 6,699 $ 6,544
================================
Valuation allowance (6,699) (6,544)
================================
Deferred tax assets $ 0 $ 0
================================
F-13
As of December 31, 2002, the Company had approximately $8,847 in federal net
operating loss carryovers, which expire in varying amounts between 2003 and 2021
($1,576 in 2003, $1,073 in 2004 and $6,198 in 2005 and beyond). 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.
For financial reporting purposes, income (loss) before income taxes includes the
following components:
Year ended December 31
2000 2001 2002
--------------------------------------------
United States $(12,574) $(4,311) $(395)
Foreign (2,417) (128) 153
--------------------------------------------
$(14,991) $(4,439) $(242)
============================================
During the years ended December 31, 2000, 2001 and 2002, the Company paid
(received) approximately $783, $125 and $(376), respectively, in income taxes.
6. Stockholder's Equity and Stock Option Plans
The Company's 1986 Employee Stock Option Plan, as amended on June 15, 1994,
provides for the grant of options to purchase up to 698,133 shares of the
Company's common stock to employees, officers and directors of the Company. The
terms of the options are for a maximum of ten years from date of grant and
generally are exercisable at an exercise price equal to but not less than the
fair market value of the common stock on the date that the option is granted.
The options generally vest in equal annual installments over five years. There
are no additional options available for grant under the Company's 1986 Employee
Stock Option Plan.
On April 21, 1995, the Board of Directors adopted the Company's 1995 Employee
Stock Plan ("1995 Plan"). The 1995 Plan, as amended on May 7, 1998, provides for
the grant of options to purchase up to 1,137,500 shares of the Company's common
stock to officers, directors, employees and consultants of the Company. The 1995
Plan requires that each option shall expire on the date specified by the
Compensation Committee, but not more than ten years from its date of grant in
the case of ISO's and Non-Qualified Options. Options granted under the plan are
exercisable at an exercise price equal to but not less than the fair market
value of the common stock on the grant date. ISO's shall either be fully
exercisable on the date of grant or shall become exercisable thereafter in such
installments as the committee may specify. The options granted in 2002 were
fully exercisable on the date of grant.
On April 21, 1995, the Board of Directors adopted the Company's 1995
Non-Employee Director Plan ("1995 Director Plan"). The 1995 Director Plan, as
amended on May 7, 1998, provides for the grant of options to purchase up to
F-14
187,500 shares of the Company's common stock to persons who are members of the
Company's Board of Directors and not employees or officers of the Company.
The 1995 Director Plan requires that options granted there under will expire ten
years from the date of grant. Each option granted under the 1995 Director Plan
becomes exercisable over a five year period, and vests in an installment of 20%
of the total option grant upon the expiration of one year from the date of the
option grant, and thereafter vests in equal quarterly installments of 5%.
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.
By March 1, 2002, a total of 7,875 options to purchase the Company's Common
Stock under the 1986 option plan and 303,550 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 55,000
shares to Jeffrey Largiader, the Companys' Vice President Marketing; and options
to purchase 15,000 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.
FASB 123 requires pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 2000, 2001 and 2002,
respectively: risk free interest rates of 4.63%, 4.47% and 3.78%, dividend
yields of 0% in all three periods, volatility factors of the expected market
price of the Company's common stock of .73, .61 and .61, and a weighted-average
expected life of the option of 8.3 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
Year ended December 31
------------------------------------
2000 2001 2002
------------------------------------
Net income (loss) as reported $(17,474) $(4,522) $28
Net income (loss) pro forma $(17,718) $(4,737) $(435)
Basic and diluted net income (loss) per share, as reported $(3.51) $(0.91) $0.01
Basic and diluted net income (loss) per share, pro forma $(3.56) $(0.95) $(0.10)
The weighted average fair value of options granted during 2000, 2001 and 2002 is
$6.23, $2.24 and $2.13 respectively.
F-15
Changes during 2000, 2001 and 2002 in options outstanding for the combined plans
were as follows:
Weighted
Number Average
of Exercise
Options Price
-----------------------------
Outstanding at January 1, 2000 786,239 $6.28
Granted in 2000 162,000 5.45
Canceled in 2000 (181,663) 5.53
Exercised in 2000 (14,475) 2.10
---------------
Outstanding at December 31, 2000 752,101 6.30
Granted in 2001 37,500 3.85
Canceled in 2001 (200,510) 7.94
Exercised in 2001 (20,125) 0.32
---------------
Outstanding at December 31, 2001 568,966 5.78
Granted in 2002 435,625 2.13
Canceled in 2002 (371,341) 6.30
Exercised in 2002 0 -
---------------
Outstanding at December 31, 2002 633,250 2.96
===============
Exercisable at December 31, 2002 592,000 2.91
===============
The options exercisable at December 31, 2001 and 2000 were 457,741 and 564,635
respectively.
Stock options outstanding at December 31, 2002 are summarized as follows:
Outstanding Weighted Options Exercisable
Options Average Weighted as of Weighted Average
Range of Exercise as of Remaining Average December Exercise
Prices December 31, 2002 Contractual Exercise Price 31, 2002 Price
Life
- --------------------------------------------------------------------------------------------------------------------
$0.00 - 1.28 13,125 0.7 $0.67 13,125 $0.67
1.29 - 2.59 435,625 9.7 2.13 435,625 2.13
2.60 - 3.88 62,500 8.0 3.71 21,250 3.69
3.89 - 5.18 37,500 2.3 4.00 37,500 4.00
5.19 - 6.47 65,750 5.2 6.32 65,750 6.32
6.48 - 7.76 18,750 4.0 7.50 18,750 7.50
------------------- ---------------------
633,250 592,000
=================== =====================
Under the various plans, options that are cancelled can be reissued. At December
31, 2002, 666,843 shares were reserved for future issuance.
7. Defined Contribution Plan
The Company maintains a defined contribution plan covering substantially all
domestic employees. Participating employees may make contributions to the plan,
through payroll deductions. Matching contributions are made by the Company equal
to 50% of the employee's contribution to the extent such employee contribution
F-16
did not exceed 6% of their compensation. During the years ended December 31,
2000, 2001 and 2002, the Company expensed approximately $95, $93 and $73
respectively, related to this plan.
8. Commitments
Operating leases relates to the lease of the space used for our operations in
Shrewsbury and Mount Laurel, NJ and Mississauga, Canada and certain equipment
under long-term operating leases that include certain renewal options. The
commitments for operating leases include the minimum rent payments and a
proportionate share of operating expenses and property taxes. The future minimum
rental payments for the US and Canada for the remaining terms of the leases are
as follows:
2003 488
2004 480
2005 433
2006 433
2007 and thereafter 216
---------------
$ 2,050
===============
The Company is not committed by lines of credit, standby letters of credit, has
no standby repurchase obligations or other commercial commitments. The Company
is not engaged in any transactions with related or certain other parties.
Rent expense for the years ended December 31, 2000, 2001 and 2002 was
approximately $1,135, $455 and $488 respectively.
9. Industry segment and Geographic information
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. Prior to January 2001, the Company
also operated in Europe.
Geographic revenue and identifiable assets related to operations as of and for
the years ended December 31 were as follows
---------------------------------
2000 2001 2002
---------------------------------
Net sales to Unaffiliated Customers:
United States $ 81,700 $ 81,339 $ 55,447
Canada 6,925 8,197 9,710
Europe 127,918 - -
---------------------------------
Total $216,543 $ 89,536 $ 65,157
=================================
Identifiable Assets by Geographic Areas:
United States $ 19,918 $ 20,938 $ 16,916
Canada 1,774 3,119 2,552
Europe 12,163 - -
---------------------------------
Total $ 33,855 $ 24,057 $ 19,468
=================================
"Europe" is comprised of Austria, France, Germany, Italy, the Netherlands and
the United Kingdom.
F-17
10. Quarterly Results of Operations (Unaudited)
The following table presents summarized quarterly results for 2002:
-------------------------------------------------
First Second Third Fourth
-------------------------------------------------
Revenues $17,547 $16,926 $15,798 $14,886
Gross profit 2,272 2,248 2,016 2,081
Net income (loss) 98 431 (210) (291)
Basic and dilutive
net income per share $0.02 $0.09 $(0.05) $(0.07)
The net loss for the fourth quarter of 2002 was primarily the result of the
lower sales volume, which was primarily due a decline in demand from our
customer base.
The following table presents summarized quarterly results for 2001:
-------------------------------------------------
First Second Third Fourth
-------------------------------------------------
Revenues $24,164 $24,127 $24,177 $17,068
Gross profit 2,537 2,452 2,318 1,573
Net income/(loss) (156) (562) (428) (3,376)
Basic and dilutive
net loss per share $(0.03) $(0.11) $(0.09) $(0.68)
The net loss for the fourth quarter of 2001 was primarily the result of the
lower sales volume, which was primarily due to the changes in the reseller
agreement with Microsoft, restructuring costs ($362), impairment of goodwill
from the Software Developers Corporation acquisition from June 1996 ($230),
costs related to the cancellation of the credit facility with Hudson United
($170), legal fees incurred due to the sale of our European operations ($250)
and an increase in the allowance for doubtful accounts ($346).
11. Restructuring Cost
In December 2001, we announced and implemented a restructuring plan aimed at
improving productivity per employee, including reductions in marketing, internet
development and e-commerce teams, warehouse and support staff. Our goal was to
significantly reduce annual operating expenses by realigning resources around
our core sales and marketing initiatives. This plan included a restructuring
charge of $0.4 million incurred in the fourth quarter of 2001. As a result of
this restructuring, we terminated approximately 30 employees, resulting in
severance payments and termination benefits of approximately $0.3 million in
December 2001. Remaining costs of approximately $0.1 million related to
abandoned equipment and leasehold improvements. All costs were incurred and
charged to the appropriate accounts in December 2001. At December 31, 2001 the
Company had a remaining accrual of $0.2 million related to severance payments
that were paid in 2002.
F-18
12. Settlement of Escrow
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.
There are no legal proceedings pending against the Company or any of its
subsidiaries.
F-19
Programmer's Paradise, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In Thousands)
Amounts
Charged to transferred
Beginning Cost and to net assets Ending
Description Balance Expense held for sale Deductions Balance
-----------------------------------------------------------------------------------------------------------
Year ended December 31, 2000:
Allowances for accounts receivable $1,430 918 (1,442) 376 $530
Reserve for Obsolescence $387 376 (257) 65 $441
Valuation allowance deferred taxes - 7,078 - - $7,078
Year ended December 31, 2001:
Allowances for accounts receivable $530 1,328 - 1,067 $791
Reserve for Obsolescence $441 345 - 576 $210
Valuation allowance deferred taxes $7,078 (379) - - $6,699
Year ended December 31, 2002:
Allowances for accounts receivable $791 662 725 $728
Reserve for Obsolescence $210 25 61 $174
Valuation allowance deferred taxes $6,699 (155) - - $6,544
F-20