UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-26408
---------
Programmer's Paradise, Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3136104
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
----------------------------------------------------
(Address of principal executive offices)
Registrant's Telephone Number (732) 389-8950
--------------
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 and Exchange Act
of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
There were 3,990,535 outstanding shares of Common Stock, par value $.01 per
share, as of April 26, 2005, not including 1,293,965 shares classified as
treasury stock.
PART I - FINANCIAL INFORMATION
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2005 2004
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 5,107 $ 4,888
Marketable Securities 6,820 6,595
Accounts receivable, net 14,196 14,173
Inventory - finished goods 1,283 1,423
Prepaid expenses and other current assets 590 673
Deferred income taxes, current 1,365 1,423
------------- -----------
Total current assets 29,361 29,175
Equipment and leasehold improvements, net 497 303
Other assets 639 581
Deferred income taxes, net of current 2,913 2,855
------------- -----------
Total assets $ 33,410 $ 32,914
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 16,021 $ 15,994
Dividend payable 474 425
------------- -----------
Total current liabilities 16,495 16,419
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; authorized, 10,000,000
shares; issued 5,284,500 shares 53 53
Additional paid-in capital 32,426 32,642
Treasury stock, at cost, 1,331,465 shares and 1,418,090
shares, respectively (3,784) (4,130)
Accumulated deficit (11,923) (12,223)
Accumulated other comprehensive income 143 153
------------- -----------
Total stockholders' equity 16,915 16,495
------------- -----------
Total liabilities and stockholders' equity $ 33,410 $ 32,914
============= ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three months ended
March 31,
---------
2005 2004
---- ----
Net sales $ 30,169 $ 20,679
Cost of sales 26,740 18,078
---------- -----------
Gross profit 3,429 2,601
Selling, general and administrative expenses 2,985 2,222
---------- -----------
Income from operations 444 379
Interest income, net 67 39
Realized foreign exchange loss (11) (21)
---------- -----------
Income before income tax provision 500 397
Provision for income taxes 200 35
---------- -----------
Net income $ 300 $ 362
========== ===========
Net income per common share - Basic $ 0.08 $ 0.10
========== ===========
Net income per common share - Diluted $ 0.07 $ 0.09
========== ===========
Weighted average common shares outstanding-Basic 3,922 3,797
========== ===========
Weighted average common shares outstanding-Diluted 4,445 4,084
========== ===========
Reconciliation to comprehensive income:
Net Income $ 300 $ 362
---------- -----------
Other comprehensive income(loss), net of tax:
Unrealized gain (loss) on marketable securities - 10
Foreign currency translation adjustments (10) (38)
---------- -----------
Total comprehensive income $ 290 $ 334
========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except share amounts)
Accumulated
Common Stock Additional other
----------------------- Paid-In Treasury Accumulated comprehensive
Shares Amount Capital Stock Deficit Income Total
-----------------------------------------------------------------------------------------------
Balance at January 1, 2005 5,284,500 $53 $32,642 $(4,130) $(12,223) $153 $16,495
Net income 300 300
Other comprehensive income:
Exercise of stock options 346 346
Dividend declared payable (474) (474)
Translation adjustment (10) (10)
Tax Benefit from exercises of
non-qualified stock options 258 258
-----------------------------------------------------------------------------------------------
Balance at March 31, 2005 5,284,500 $53 $32,426 $(3,784) $(11,923) $143 $16,915
===============================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three months Ended
March 31,
---------
2005 2004
--------- ---------
Cash flows from operating activities
Net income $ 300 $ 362
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 57 52
Allowance for doubtful accounts 27 15
Accretion of marketable securities - 10
Tax benefit from exercise of stock options 258 -
Changes in operating assets and liabilities:
Accounts receivable (111) (1,515)
Inventory 140 (138)
Prepaid expenses and other current assets 83 (214)
Accounts payable and accrued expenses 27 1,179
Net change in other assets and liabilities - (3)
-------- ---------
Net cash provided by (used in) operating activities 781 (252)
-------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities (4,225) (3,550)
Redemptions of available-for-sale securities 4,000 1,000
Capital expenditures (248) (30)
-------- ---------
Net cash used in investing activities (473) (2,580)
-------- ---------
Cash flows from financing activities:
Dividend paid (425) (375)
Proceeds from exercise of stock options 346 190
-------- ---------
Net cash used in financing activities (79) (185)
-------- ---------
Effect of foreign exchange rate on cash (10) (38)
-------- ---------
Net decrease in cash and cash equivalents 219 (3,055)
Cash and cash equivalents at beginning of period 4,888 5,878
-------- ---------
Cash and cash equivalents at end of period $ 5,107 $ 2,823
======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements of
Programmer's Paradise, Inc. and its subsidiaries (collectively, the
"Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates, including those related to product returns, bad debts,
inventories, investments, intangible assets, income taxes, and contingencies
and litigation. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. In the opinion of the Company's management, all
adjustments that are of a normal recurring nature, considered necessary for
fair presentation, have been included. Actual results may differ from these
estimates under different assumptions or conditions. The unaudited condensed
consolidated statements of operations for the interim periods are not
necessarily indicative of results for the full year. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K filed with the
Securities Exchange Commission for the year ended December 31. 2004.
2. Assets and liabilities of the Company's Canadian subsidiary have been
translated at current exchange rates, and related revenues and expenses have
been translated at average rates of exchange in effect during the year. The
revenue from our Canadian operations in the first three months of 2005
increased by $1.0 million to $3.9 million as compared to the first three
months of 2004.
3. Cumulative translation adjustments and unrealized gains (losses) on
available-for-sale securities have been classified within other
comprehensive income, which is a separate component of stockholders' equity
in accordance with FASB Statement No. 115, "Reporting Comprehensive Income".
4. 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. Certain 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.
In accordance with EITF 02-16, "Accounting for Consideration Received from a
Vendor by a Customer (Including a Reseller of the Vendor's Products),"
consideration from vendors, such as advertising support funds, are accounted
for as a reduction to cost of sales unless certain requirements are met
showing that the
6
vendor receives an identifiable fair value in exchange for the
consideration. If these specific requirements related to individual vendors
are met, the consideration is accounted for as revenue.
5. Investments in available-for-sale securities at March 31, 2005 were (in
thousands):
Cost Market value Unrealized Gain (loss)
U.S. Government Securities $ 4,778 $ 4,776 $ (2)
Corporate Bonds $ 2,064 $ 2,044 $ (20)
------- ------- -----
Total Marketable Securities $ 6,842 $ 6,820 $ (22)
======= ======= =====
The cost and market value of the Company's investments at March 31, 2005 by
contractual maturity were (in thousands):
Estimated
Cost Fair Value
Due in one year or less $5,833 $5,832
Due in greater than one year 1,009 988
Total investments $6,842 $6,820
6. Basic EPS is computed by dividing net earnings (loss) by the weighted
average number of shares outstanding during the period. Diluted EPS is
computed considering the potentially dilutive effect of outstanding stock
options. A reconciliation of the numerator and denominators of the basic and
diluted per share computations follows (in thousands, except per share
data):
Three months ended
March 31,
---------
2005 2004
---- ----
Numerator:
Net Income $300 $362
Denominator:
Weighted average shares (Basic) 3,922 3,797
Dilutive effect of outstanding options 523 287
----- -----
Weighted average shares including assumed conversions (Diluted) 4,445 4,084
Basic net income per share $0.08 $0.10
Diluted net income per share $0.07 $0.09
7
Changes during 2005 in options outstanding for the combined plans were as
follows:
Weighted Average
Number of Options Exercise Price
-------------------------------------
Outstanding at January 1, 2005 967,220 $5.71
Granted in 2005 - -
Canceled in 2005 (6,545) 3.36
Exercised in 2005 (86,625) 3.99
----------------------
Outstanding at March 31, 2005 874,050 5.90
======================
Exercisable at March 31, 2005 862,610 5.94
======================
7. On February 17, 2005 our Board of Directors declared a quarterly dividend of
$.12 per share on our common stock payable April 22, 2005 to shareholders of
record on April 4, 2005. Our Board intends to periodically review the amount
and frequency of future payments, if any, in light of the Company's
operations and need for capital. The dividend is reflected as a reduction of
Additional Paid in Capital.
8. The Company had one major customer that accounted for 12.3% of total net
sales during the quarter ended March 31, 2005, and 3.8% of total net
accounts receivable as of March 31, 2005. The Company had two major vendors
that accounted for 25.1% and 28.5% of total purchases, respectively, during
the quarter ended March 31, 2005. The Company had one major customer that
accounted for 13.9% of total net sales during the quarter ended March 31,
2004, and 5.8% of total net accounts receivable as of March 31, 2004. The
Company had two major vendors that accounted for 24.0% and 14.2% of total
purchases, respectively, during the quarter ended March 31, 2004.
9. For the quarter ended March 31, 2005, the Company recorded a provision for
income taxes of $200,000, which consists of a provision of $210,000 for U.S.
federal income taxes as well as a $20,000 provision for U.S. state taxes
offset by a benefit of $30,000 for Canadian taxes. For the quarter ended
March 31, 2004, the Company recorded a provision of $35,000 which consists
of a provision for Canadian income taxes.
As of March 31, 2005, the Company had a U.S. deferred tax asset of
approximately $5.1 million reflecting, in part, a benefit of $2.7 million in
U.S. federal and state tax loss carry forwards, which will expire in varying
amounts between 2005 and 2024. 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
Company believes that uncertainty still exists regarding the realization of
certain deferred tax assets, and accordingly, has established a $0.9 million
valuation allowance, based on management's estimates against these specific
deferred tax assets. 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 receives a tax deduction from the gains realized by employees on
the exercise of certain non-qualified stock options for which the benefits
is recognized as a component of stockholders' equity. The tax benefit of
deductions related to stock options exceeds the amount expensed, $0, for
financial reporting and are accounted for as a credit to additional paid-in
capital rather than a reduction of the income tax provision.
8
10. The Company accounts for stock option plans under the recognition and
measurement principles of Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant.
In accordance with SFAS No. 148, the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation is as follows:
Three months ended
March 31,
---------
2005 2004
----------- ------------
Net income - as reported $ 300 $ 362
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects - (18)
----------- ------------
Pro forma net income $ 300 $ 344
=========== ============
Net income per share:
Basic earnings per share - as reported $ 0.08 $ 0.10
=========== ============
Basic earnings per share - pro forma $ 0.08 $ 0.09
=========== ============
Net income per share:
Diluted earnings per share - as reported $ 0.07 $ 0.09
=========== ============
Diluted earnings per share - pro forma $ 0.07 $ 0.08
=========== ============
There were no options granted for the three month period ended March 31,
2005.
11. In December 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123 (R) is similar to the approach
described in Statement 123. However, Statement 123 (R) requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. This revised
standard will be effective for our reporting period beginning January 1,
2006.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under the heading "Certain Factors Affecting Operating Results"
and elsewhere in this report. The following discussion should be read in
conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 2004.
Overview
Programmer's Paradise, Inc. operates in one primary business segment: the
marketing of technical software and hardware for microcomputers, servers and
networks in the United States and Canada.
We offer a wide variety of technical and general business application software
and PC hardware and components from a broad range of publishers and
manufacturers. We market our products through our catalogs, direct mail programs
and advertisements in trade magazines as well as through Internet and e-mail
promotions.
Through our wholly owned subsidiary, Lifeboat Distribution Inc., we distribute
marketed products to dealers and resellers in the United States and Canada.
The Company's sales and results of operations have fluctuated and are expected
to continue to fluctuate on a quarterly basis as a result of a number of
factors, including: the condition of the software industry in general; shifts in
demand for software products; industry shipments of new software products or
upgrades; the timing of new merchandise and catalog offerings; fluctuations in
response rates; fluctuations in postage, paper, shipping and printing costs and
in merchandise returns; adverse weather conditions that affect response,
distribution or shipping; shifts in the timing of holidays; and changes in the
Company's product offerings. The Company's operating expenditures are based on
sales forecasts. If revenues do not meet expectations in any given quarter,
operating results may be materially adversely affected.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statement of operations
expressed as a percentage of net sales. This comparison of financial results is
not necessarily indicative of future results:
Three months ended
March 31,
---------
2005 2004
---- ----
Net sales 100.0% 100.0%
Cost of sales 88.6 87.4
----- -----
Gross profit 11.4 12.6
Selling, general and administrative expenses 9.9 10.8
----- -----
Income from operations 1.5 1.8
Interest income, net 0.2 0.2
Realized Foreign exchange gain(loss) - (0.1)
----- -----
Income before income taxes 1.7 1.9
Provision for income taxes 0.7 0.1
----- -----
Net income 1.0% 1.8%
----- -----
10
Net Sales
Net sales in the first quarter of 2005 increased 46% or $9.5 million to $30.2
million compared to $20.7 million for the same period in 2004. We attribute this
growth in net sales primarily to a more favorable IT spending environment and
continued expansion of our account executive team in the first quarter of 2005.
We plan to continue to invest in our sales force.
Gross Profit
Gross profit as a percentage of net sales was 11.4% for the quarter ended March
31, 2005, compared to 12.6% for the same period in 2004. Because net sales
increased by 46%, gross profit in absolute dollars increased $0.8 million to
$3.4 million as compared to $2.6 million in the first quarter of 2004.
The increase in gross profit dollars and the decrease in gross profit margins as
a percentage of net sales reflects a shift in the product mix of sales and the
competitive nature of our business. We have won many bids based on our
aggressive pricing and we plan to continue to do so.
On a forward-looking basis, gross profit margin in future periods may be less
than the 11.4% achieved in the first quarter of 2005. Changes in rebate programs
can significantly affect our gross margin percentage. We foresee possible
pressure on profit margins as a result of 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 profit below those realized in the first quarter
of 2005.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expenses for the quarter ended
March 31, 2005 were $3.0 million as compared to $2.2 million for the same period
in 2004, an increase of $0.8 million or 34%.
The primary drivers in SG&A expenses in the first quarter of 2005 were payroll
and employee related costs. Compared to the first quarter of 2004, payroll costs
increased $0.5 million, primarily due to our continued investment in our sales
force. Our sales force consists of account executives as well as vendor
specialists who provide consultation in areas requiring specialized product
expertise. Employee-related costs (which includes items such as commission,
bonuses, fringe benefits, profit sharing and incentive awards) increased $0.2
million, primarily a result of our increase in revenue and gross margin.
On April 11, 2005 we opened a satellite sales office in Hauppauge, New York. An
additional 16 employees were hired, thus increasing our sales force by 21%.
These factors, combined with increased legal requirements, including the
Sarbanes-Oxley Act of 2002, will most likely result in significantly higher SG&A
expenses in 2005.
Foreign Currency Transactions Gain (Loss)
The realized foreign exchange loss for the quarter ended March 31, 2005 was
$11,000 compared to a loss of $21,000 for the same period in 2004. Foreign
exchange gains and losses primarily result from our trade activity with our
Canadian subsidiary. Although the Company does maintain bank accounts in
Canadian currencies to reduce currency exchange fluctuations, the Company is,
nevertheless, subject to risks associated with such fluctuations.
11
Income Taxes
For the quarter ended March 31, 2005, the Company recorded a provision for
income taxes of $200,000, which consists of a provision of $210,000 for U.S.
federal income taxes as well as a $20,000 provision for U.S. state taxes offset
by a benefit of $30,000 for Canadian taxes. For the quarter ended March 31,
2004, the Company recorded a provision of $35,000 which consists of a provision
for Canadian income taxes
As of March 31, 2005, the Company had a U.S. gross deferred tax asset of
approximately $5.1 million reflecting, in part, a benefit of $2.7 million in
U.S. federal and state tax loss carry forwards, which will expire in varying
amounts between 2005 and 2024. 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 Company
believes that uncertainty still exists regarding the realization of certain
deferred tax assets, and accordingly, has established a $0.9 million valuation
allowance, based on management's estimates against these specific deferred tax
assets. 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.
Liquidity and Capital Resources
During the first three months of 2005, our cash and cash equivalents increased
by $0.2 million to $5.1 million at March 31, 2005, from $4.9 million at December
31. 2004. Net cash provided by operating activities amounted to $0.8 million;
net cash used in investing activities amounted to $0.5 million and net cash used
in financing activities amounted to $0.1 million.
Net cash provided by operating activities in the first three months of 2005 was
$0.8 million and primarily resulted from our income from operations excluding
non-cash charges $0.6 million and a $0.1 million decrease in inventory. This was
partly offset by a $0.1 million increase in accounts receivable. The increase in
accounts receivable relates primarily to our increased revenue. Days sales
outstanding increased to 42 days as per March 31, 2005 as compared to 40 days as
per March 31, 2004.
Net cash used in investing activities in the first three months of 2005 amounted
to $0.5 million. In light of the current low interest rates on our short-term
savings accounts we decided to invest an additional net $0.2 million in U.S.
government securities. These securities are highly rated and highly liquid.
These securities are classified as available-for-sale securities in accordance
with SFAS 115, and as a result unrealized gains and losses are reported as part
of other comprehensive income (loss). The other $0.3 million consisted of
capital expenditures.
Net cash used for financing activities in the first three months of 2005 of $0.1
million consisted of the $0.4 million payment of our declared dividends, which
was partly offset by the proceeds from the exercise of options.
On September 16, 2002, our Board of Directors authorized the purchase of 500,000
shares of our common stock. On October 9, 2002, our Board of Directors
authorized us to purchase an additional 500,000 shares of our common stock.
These two purchase approvals are in addition to authorizations for us to
purchase 490,000 shares (granted in March 2002) and 521,013 shares (granted in
October 1999) in both open market and private transactions, as conditions
warrant.
The repurchase program is expected to remain effective for the remainder of
2005. We intend to hold the repurchased shares in treasury for general corporate
purposes, including issuances under various stock option plans. As of March 31,
2005, we owned 1,331,465 shares of our common stock purchased at an average cost
of $3.18 per share. During the first three months of 2005, we did not repurchase
any shares of our common stock.
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, the
stock buyback program and dividends if declared by the board of directors. Our
business plan furthermore contemplates to continue to use our cash to pay
vendors promptly in order to obtain more favorable conditions.
12
We believe that the funds held in cash and cash equivalents will be sufficient
to fund our working capital and cash requirements for at least the next 12
months. 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 as of March 31, 2005 were summarized as follows:
(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 $1,542 $579 $888 $75 -
Unconditional Purchase Obligations - - - - -
Other Long term Obligations - - - - -
- ------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $1,542 $579 $888 $75 -
==================================================================================================================
Operating leases primarily relates to the lease of the space used for our
operations in Shrewsbury and Mount Larel, New Jersey, Mississauga, Canada and
Hauppauge, New York. The commitments for operating leases include the minimum
rent payments and a proportionate share of operating expenses and property
taxes.
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 parties.
As of March 31, 2005, we did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K.
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.
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 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. Certain software maintenance products, third party
services and extended warranties sold by the Company (for which
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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.
In accordance with EITF 02-16, "Accounting for Consideration Received from a
Vendor by a Customer (Including a Reseller of the Vendor's Products),"
consideration from vendors, such as advertising support funds, are accounted for
as a reduction to cost of sales unless certain requirements are met showing that
the vendor receives an identifiable fair value in exchange for the
consideration. If these specific requirements related to individual vendors are
met, the consideration is accounted for as revenue.
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. Based upon the Company's
profitable operations since December 31, 2002, and its expected profitability in
future years, the Company has concluded that the results of future operations
will generate sufficient taxable income to realize certain deferred tax assets.
The Company believes that uncertainty still exists regarding the realizability
of certain tax assets, and accordingly, has established a $0.9 million valuation
allowance, based on management's estimates, against these specific deferred tax
assets. 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.
Certain Factors Affecting Operating Results
This report includes "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. Statements in this
report regarding future events or conditions, including statements regarding
industry prospects and the Company's expected financial position, business and
financing plans, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. We strongly urge current and prospective investors to carefully
consider the cautionary statements and risks contained in this report. Such
risks include, but 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 in general.
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
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Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The statement concerning future sales and future gross profit margin are forward
looking statements involving certain risks and uncertainties such as
availability of products, product mix, market conditions and other factors,
which could result in a fluctuation of sales below recent experience.
Stock Volatility. The technology sector of the United States stock markets has
experienced substantial volatility in recent periods. Numerous conditions, which
impact the technology sector or the stock market in general or the Company in
particular, whether or not such events relate to or reflect upon the Company's
operating performance, could adversely affect the market price of the Company's
Common Stock.
Furthermore, fluctuations in the Company's operating results, announcements
regarding litigation, the loss of a significant vendor, increased competition,
reduced vendor incentives and trade credit, higher postage and operating
expenses, and other developments, could have a significant impact on the market
price of the Company's Common Stock.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In addition to its activities in the United States, the Company also conducts
business in Canada. We are subject to general risks attendant to the conduct of
business in Canada, including economic uncertainties and foreign government
regulations. In addition, the Company's Canadian business is subject to changes
in demand or pricing resulting from fluctuations in currency exchange rates or
other factors.
The Company's $6.8 million investments in marketable securities are only in
highly rated and highly liquid corporate bonds and U.S. government Securities.
The remaining cash balance is invested in short-term savings accounts with our
primary bank, The Bank of New York. As such, the risk of significant changes in
the value of our cash invested is minimal.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15(b)
under the Exchange Act, our management carried out an evaluation of the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures" as of March 31, 2005. This evaluation was carried out under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. As defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, disclosure controls and procedures are
controls and other procedures of the Company 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 our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of March 31, 2005. 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.
Changes in Internal Control Over Financial Reporting. As required by Rule
13a-15(d) under the Exchange Act, our management, including our Chief Executive
Officer and Chief Financial Officer, also conducted an evaluation of our
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internal control over financial reporting to determine whether any change
occurred during the quarter ended March 31, 2005, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting. Based on that evaluation during the quarter ended March 31,
2005 there has been no change in our internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits.
31.1 Certification pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, of
William H. Willett, the Chief Executive Officer of the
Company.
31.2 Certification pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, of
Simon F. Nynens, the Chief Financial Officer of the
Company.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of William H. Willett, the Chief
Executive Officer of the Company.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of Simon F. Nynens, the Chief Financial
Officer of the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROGRAMMER'S PARADISE, INC.
May 2, 2005 By: /s/ Simon F. Nynens
- ----------------------------- -----------------------------------------
Date Simon F. Nynens, Executive Vice President
and Chief Financial Officer
May 2, 2005 By: /s/ William H. Willett
- ----------------------------- -----------------------------------------
Date William H. Willett, Chairman of the Board,
President and Chief Executive Officer
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