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 September 30, 2004
[ ] 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 3,834,785 outstanding shares of Common Stock, par value $.01
per share, as of October 20, 2004, not including 1,449,715 shares classified as
treasury stock.
Page 1
PART I - FINANCIAL INFORMATION
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2004 2003
---- ----
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 4,785 $ 5,878
Marketable Securities 7,022 5,033
Accounts receivable, net 11,354 7,634
Inventory - finished goods 1,487 1,119
Prepaid expenses and other current assets 572 333
------------- ---------------
Total current assets 25,220 19,997
Equipment and leasehold improvements, net 220 292
Other assets 453 200
------------- ---------------
Total assets $ 25,893 $ 20,489
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 13,711 $ 8,919
Dividend payable 421 375
----------- ---------------
Total current liabilities 14,132 9,294
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 32,874 34,099
Treasury stock, at cost, 1,449,715 shares and 1,533,970 shares,
respectively (4,214) (4,490)
Retained earnings (17,034) (18,545)
Accumulated other comprehensive income 82 78
------------- ---------------
Total stockholders' equity 11,761 11,195
------------- ---------------
Total liabilities and stockholders' equity $ 25,893 $ 20,489
============= ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 2
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 72,560 $ 49,604 $ 26,788 $ 18,355
Cost of sales 63,677 43,199 23,574 16,061
----------- ----------- ----------- ----------
Gross profit 8,883 6,405 3,214 2,294
Selling, general and administrative expenses 7,359 5,940 2,607 2,001
----------- ----------- ----------- ----------
Income from operations 1,524 465 607 293
Interest income, net 87 93 34 43
Realized foreign exchange gain/(loss) 4 71 32 (9)
----------- ----------- ----------- ----------
Income before income tax provision 1,615 629 673 327
Provision (benefit) for income taxes 104 52 47 (6)
----------- ----------- ----------- ----------
Net income $ 1,511 $ 577 $ 626 $ 333
=========== =========== =========== ==========
Net income per common share - Basic $ 0.40 $ 0.16 $ 0.16 $ 0.09
=========== =========== =========== ==========
Net income per common share - Diluted $ 0.37 $ 0.15 $ 0.15 $ 0.09
=========== =========== =========== ==========
Weighted average common shares outstanding-Basic 3,819 3,722 3,834 3,694
=========== =========== =========== ==========
Weighted average common shares outstanding-Diluted 4,071 3,816 4,189 3,788
=========== =========== =========== ==========
Reconciliation to comprehensive income:
- --------------------------------------
Net Income $ 1,511 $ 577 $ 626 $ 333
----------- ----------- ----------- ----------
Other comprehensive income(loss), net of tax:
Unrealized gain (loss) on marketable securities (22) 16 14 2
Foreign currency translation adjustments 26 200 76 (10)
---------- ---------- ---------- ----------
Total comprehensive income $ 1,515 $ 793 $ 716 $ 325
=========== =========== =========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except share amounts)
Common Stock Additional Retained Accumulated other
--------------------- Paid-In Treasury Earnings / comprehensive
Shares Amount Capital Stock (Deficit) Income (loss) Total
----------------------------------------------------------------------------------------------
Balance at January 1, 2004 5,284,500 $53 $34,099 $(4,490) $(18,545) $78 $11,195
----------------------------------------------------------------------------------------------
Net income 1,511 1,511
Other comprehensive income:
Exercise of stock options 276 276
Dividend paid (804) (804)
----
Dividend declared payable (421) (421)
Unrealized gain(loss)on
marketable securities (22) (22)
Translation adjustment 26 26
--
Comprehensive Income 4
----------------------------------------------------------------------------------------------
Balance at September 30, 2004 5,284,500 $53 $32,874 $(4,214) $(17,034) $82 $11,761
==============================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine months Ended
September 30,
2004 2003
---- ----
Cash flows from operating activities
Net income $ 1,511 $ 577
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 143 249
Allowance for doubtful accounts (65) 12
Attrition of marketable securities (22) -
Changes in operating assets and liabilities:
Accounts receivable (3,655) (90)
Inventory (368) 389
Prepaid expenses and other current assets (239) (84)
Accounts payable and accrued expenses 4,792 422
Net change in other assets and liabilities (262) (4)
---------- ---------
Net cash provided by operating activities 1,835 1,471
---------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities (3,489) (3,309)
Redemptions of available-for-sale securities 1,500 2,000
Capital expenditures (62) (96)
---------- ---------
Net cash used for investing activities (2,051) (1,405)
---------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 46
Dividend paid (1,179) (744)
Proceeds from exercise of stock options 276 -
Purchase of treasury stock - (377)
---------- ---------
Net cash used for financing activities (903) (1,075)
---------- ---------
Effect of foreign exchange rate on cash 26 200
---------- ---------
Net decrease in cash and cash equivalents (1,093) (809)
Cash and cash equivalents at beginning of period 5,878 6,072
---------- ---------
Cash and cash equivalents at end of period $ 4,785 $ 5,263
========== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2004
(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,
restructuring and contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. In the opinion of 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, 2003.
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 for our Canadian operations in the first nine months
of 2004 increased by $0.5 million to $7.9 million as compared to the
first nine months of 2003. The revenue for our Canadian operations
showed a slight increase of $0.2 million to $2.4 million in the third
quarter of 2004 as compared to the third quarter of 2003.
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. 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.
Page 6
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.
5. Investments in available-for-sale securities at September 30, 2004 were
(in thousands):
Cost Market value Unrealized Gain (loss)
U.S. Government Securities $ 5,030 $ 5,022 $ ( 8)
Corporate Bonds $ 2,014 $ 2,000 $ (14)
------- ------- ------
Total Marketable Securities $ 7,044 $ 7,022 $ (22)
========= ======= ======
The cost and market value of the Company's investments at September 30,
2004 by contractual maturity were (in thousands):
Estimated
Cost Fair Value
Due in one year or less $6,036 $6,023
Due in greater than one year 1,008 999
------ ------
Total investments $7,044 $7,022
====== ======
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):
Nine months ended Three months ended
September 30, September 30
2004 2003 2004 2003
---- ---- ---- ----
Numerator:
Net Income $ 1,511 $ 577 $ 626 $ 333
Denominator:
Weighted average shares (Basic) 3,819 3,722 3,834 3,694
Dilutive effect of outstanding options 252 94 355 94
--------- --------- --------- ---------
Weighted average shares including assumed conversions (Diluted) 4,071 3,816 4,189 3,788
Basic net income per share $ 0.40 $ 0.16 $ 0.16 $ 0.09
Diluted net income per share $ 0.37 $ 0.15 $ 0.15 $ 0.09
Changes during 2004 in options outstanding for the combined plans were
as follows:
Number of Weighted Average
Options Exercise Price
------------------------------
Outstanding at January 1, 2004 577,475 $3.19
Granted in 2004 495,000 8.03
Canceled in 2004 - -
Exercised in 2004 84,255 3.30
------------------------------
Outstanding at September 30, 2004 988,220 5.60
==============================
Exercisable at September 30, 2004 962,969 5.67
==============================
Page 7
On June 10, 2004, the Company granted 495,000 options at an option
price of $8.03 per share to officers and key-employees of the Company.
The options granted vested immediately on June 10, 2004. The Company
granted options to purchase 125,000 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 Executive Vice President
and Chief Financial Officer; options to purchase 40,000 shares to
Jeffrey Largiader, the Company's Vice President Sales & Marketing,
options to purchase 40,000 shares to Vito Legrottaglie, the Company's
Vice President and Chief Information Officer, options to purchase
40,000 shares to Dan Jamieson, General manager of the Company's
Lifeboat division; and options to purchase 25,000 shares to Steve
McNamara, the Vice President and General Manager of Programmer's
Paradise Canada. Each director of the Company received options to
purchase 25,000 shares of the Company's Common Stock at an option price
of $8.03 per share.
7. On August 19, 2004 our Board of Directors declared a quarterly dividend
of $.11 per share on our common stock payable October 22, 2004 to
shareholders of record on October 5, 2004. 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 13.6% and 13.1%
of total net sales during the nine and three month periods ended
September 30, 2004, respectively, and 4.9% of total net accounts
receivable as of September 30, 2004. The Company had two major vendors
that accounted for 26.5% and 20.3% of total purchases during the nine
month period ended September 30, 2004 and 22.3% and 24.5%,
respectively, for the three months then ended. The Company had one
major customer that accounted for 11.0% and 13.6% of total net sales
during the nine and three month periods ended September 30, 2003,
respectively, and 7.0% of total net accounts receivable as of September
30, 2003. The Company had two major vendors that accounted for 27.7%
and 13.6% of total purchases during the nine month period ended
September 30, 2003 and 29.8% and 16.6%, respectively, for the three
months then ended.
9. For the quarter ended September 30, 2004, the Company recorded a
provision of $47,000, which consists of a provision of $26,000 for
Canadian income taxes as well as a $21,000 provision for U.S. state
taxes. For the quarter ended September 30, 2003, the Company recorded a
benefit for income taxes of $6,000 for Canadian income taxes. The loss
carry forwards offset the provision for income taxes for our U.S.
operations. For the nine month period ended September 30, 2004, the
Company recorded a provision for income taxes of $104,000, which
consists of a provision of $13,000 for U.S. federal taxes, $63,000 for
New Jersey state taxes, and $28,000 for foreign taxes (net of a $58,000
refund in European taxes resulting from the sale of our European
operations in 2001). For the nine months period ended September 30,
2003, the Company recorded a provision for income taxes of
approximately $52,000 for the nine month period ended September 30,
2003. This provision is for Canadian income taxes. The loss carry
forwards offset the provision for income taxes for our U.S. operations.
As of September 30, 2004, the Company had a U.S. deferred tax asset of
approximately $5.7 million reflecting, in part, a benefit of $2.7
million in federal and state tax loss carry forwards, which will expire
in varying amounts between 2004 and 2023. 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.
Page 8
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.
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:
Nine months ended Three months ended
September 30, September 30,
2004 2003 2004 2003
----------- ------------ ------------- ------------
Net income - as reported $1,511 $577 $626 $333
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (1,113) (31) 0 (10)
----------- ------------ ------------- ------------
Pro forma net income $398 $546 $626 $323
=========== ============ ============= ============
Net income per share:
Basic earnings per share - as reported $ 0.40 $ 0.16 $ 0.16 $ 0.09
=========== ============ ============= ============
Basic earnings per share - pro forma $ 0.10 $ 0.15 $ 0.16 $ 0.09
=========== ============ ============= ============
Net income per share:
Diluted earnings per share - as reported $ 0.37 $ 0.15 $ 0.15 $ 0.09
=========== ============ ============= ============
Diluted earnings per share - pro forma $ 0.10 $ 0.14 $ 0.15 $ 0.09
=========== ============ ============= ============
11. Certain reclassifications have been made to the prior year financial
statements in order to conform to the current year presentation.
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, 2003.
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.
Page 9
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:
Nine months Three months
ended ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.8 87.1 88.0 87.5
---- ---- ---- ----
Gross profit 12.2 12.9 12.0 12.5
Selling, general and administrative expenses 10.1 11.9 9.7 10.9
---- ---- --- ----
Income from operations 2.1 1.0 2.3 1.6
Interest income, net 0.1 0.2 0.1 0.2
Realized Foreign exchange gain(loss) - 0.1 0.1 -
---- --- --- ----
Income before income taxes 2.2 1.3 2.5 1.8
Provision for income taxes 0.1 0.1 0.2 -
--- --- --- ----
Net income 2.1% 1.2% 2.3% 1.8%
---- ---- ---- ----
Net Sales
Net sales in the third quarter of 2004 increased 46% or $8.4 million to $26.8
million compared to $18.4 million for the same period in 2003. For the nine
month period ended September 30, 2004, net sales increased by $22.9 million or
46% compared to same period in 2003. We attribute this growth in net sales
primarily to a more favorable IT spending environment, improved productivity and
continued expansion of our account executive team in the third quarter of 2004,
consistent with the previous four quarters. We plan to continue to expand our
account executive team in the fourth quarter of 2004.
Gross Profit
Gross profit as a percentage of net sales was 12.0% for the quarter ended
September 30, 2004, compared to 12.5% for the same period in 2003. Since revenue
increased by 46%, gross profit in absolute dollars increased $.9 million to $3.2
million as compared to $2.3 million in the third quarter of 2003. For the nine
month period ended September 30, 2004, gross profit in absolute dollars
increased $2.5 million to $8.9 million as compared to $6.4 million in the same
period in 2003.
Page 10
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.
Our gross profit as a percentage of net sales has declined in the second and
third quarters of this year. Various factors impact our gross margins, including
our product mix, the continued participation by vendors in rebate programs, our
pricing strategies, market conditions and other factors, any of which could
result in a reduction of gross profit, below that realized in the third quarter
of 2004.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expenses for the quarter ended
September 30, 2004 were $2.6 million as compared to $2.0 million for the same
period in 2003, an increase of $0.6 million or 30%. For the nine month period
ended September 30, 2004, SG&A expenses increased by $1.4 million or 24%.
The primary drivers in SG&A expenses in the third quarter of 2004 were payroll
costs and employee related costs. Compared to the third quarter of 2003, payroll
costs increased $0.2 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 $0.4
million, primarily a result of our increase in revenue and gross margin.
We plan to continue to invest in our sales force while reviewing our
organization and cost structure in an effort to further reduce operating
expenses and improve efficiencies. These factors, combined with increased legal
requirements, including the Sarbanes-Oxley Act of 2002, will likely result in
higher SG&A expenses in 2004.
Foreign Currency Transactions Gain (Loss)
The realized foreign exchange gain for the quarter ended September 30, 2004 was
$32,000 compared to a loss of $9,000 for the same period in 2003. 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.
Income Taxes
For the quarter ended September 30, 2004, the Company recorded a provision of
$47,000, which consists of a provision of $26,000 for Canadian income taxes as
well as a $21,000 provision for U.S. state taxes. For the quarter ended
September 30, 2003, the Company recorded a benefit for income taxes of $6,000
for Canadian income taxes. The loss carry forwards offset the provision for
income taxes for our U.S. operations. For the nine month period ended September
30, 2004, the Company recorded a provision for income taxes of $104,000, which
consists of a provision of $13,000 for U.S. federal taxes, $63,000 for New
Jersey state taxes, and $28,000 for foreign taxes (net of a $58,000 refund in
European taxes resulting from the sale of our European operations in 2001). For
the nine months period ended September 30, 2003, the Company recorded a
provision for income taxes of approximately $52,000 for the nine month period
ended June 30, 2003. This provision is for Canadian income taxes. The loss carry
forwards offset the provision for income taxes for our U.S. operations.
As of September 30, 2004, the Company had a U.S. deferred tax asset of
approximately $5.7 million reflecting, in part, a benefit of $2.7 million in
federal and state tax loss carry forwards, which will expire in varying amounts
between 2004 and 2023. 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
Page 11
elimination of the allowance if positive evidence indicates that the value of
the deferred tax assets is no longer impaired and the allowance is no longer
required. The Company's ability to utilize certain net operating loss carry
forwards is restricted to approximately $1.5 million per year cumulatively, as a
result of an ownership change pursuant to Section 382 of the Internal Revenue
Code.
Liquidity and Capital Resources
During the first nine months of 2004, our cash and cash equivalents decreased by
$1.1 million to $4.8 million at September 30, 2004, from $5.9 million at
December 31, 2003. Net cash provided by operating activities amounted to $1.8
million; net cash used for investing activities amounted to $2.0 million and net
cash used for financing activities amounted to $0.9 million.
Net cash provided by operating activities in the first nine months of 2004 was
$1.8 million and primarily resulted from our net income of $1.5 million and a
$4.8 million increase in accounts payable and accrued expenses. This was partly
offset by a $3.7 million increase in accounts receivable, a $0.4 million
increase in inventory, a $0.2 million increase in prepaid expenses and other
current assets and a $0.3 million increase in other assets. The increase in
accounts receivable relates primarily to our increased revenue. Days sales
outstanding increased to 42 days as per September 30, 2004 as compared to 35
days as per September 30, 2003. The increase in accounts payable is primarily
due to our increased revenue and our normal cycle of payments. For the nine
months ended September 30, 2004, the unrealized loss on our marketable
securities amounted to $22,000.
Net cash used for investing activities in the first nine months of 2004 amounted
to $2.0 million. In light of the current low interest rates on our short-term
savings accounts we decided to invest an additional net $2.0 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).
Net cash used for financing activities in the first nine months of 2004 of $0.9
million consisted of the $1.2 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
2004. We intend to hold the repurchased shares in treasury for general corporate
purposes, including issuances under various stock option plans. As of September
30, 2004, we owned 1,449,715 shares of our common stock purchased at an average
cost of $3.18 per share. During the first nine months of 2004, 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.
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.
Page 12
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 $1,297 $482 $815 - -
Unconditional Purchase Obligations - - - - -
Other Long term Obligations - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $1,297 $482 $815 - -
===============================================================================================================================
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 parties.
As of September 30, 2004, 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. 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.
Page 13
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. 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 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
Page 14
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 $7.0 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 September 30, 2004. 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 September 30, 2004. 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
internal control over financial reporting to determine whether any change
occurred during the quarter ended September 30, 2004, 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
September 30, 2004 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.
Page 15
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.
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.
October 28, 2004 By: /s/ Simon F. Nynens
- --------------------------------------- -----------------------------
Date Simon F. Nynens, Executive
Vice President and Chief
Financial Officer
October 28, 2004 By: /s/ William H. Willett
- --------------------------------------- -----------------------------
Date William H. Willett,
Chairman of the Board,
President and Chief
Executive Officer
Page 16