UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________ to _______________
Commission file number: 000-26408
PROGRAMMER'S PARADISE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3136104
(State or other jurisdiction of incorporation) (IRS Employer Identification Number)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 389-8950
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock,
par value $0.01 per share
(Title Of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No [X]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant computed by reference to the closing sale price for the
Registrant's Common Stock as of June 30, 2004, the last business day of the
Registrant's most recently completed second fiscal quarter, as reported on The
NASDAQ SmallCap Market, was approximately $24,236,000. (In determining the
market value of the Common Stock held by any non-affiliates, shares of Common
Stock of the Registrant beneficially owned by directors, officers and holders of
more than 10% of the outstanding shares of Common Stock of the Registrant have
been excluded. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.)
The number of shares outstanding of the Registrant's Common Stock as of
March 7, 2005 was 3,954,335 shares.
Documents Incorporated by Reference: Portions of the Registrant's
definitive Proxy Statement for its 2004 Annual Meeting of Stockholders to be
filed on or before April 30, 2005 are incorporated by reference into Part III of
this Report.
Page 1 of 21
PART I
Item 1 Business
General
Programmer's Paradise, Inc. (the "Company") is a recognized marketer of
software in the United States and Canada targeting software development and
information technology professionals within enterprise organizations.
Programmer's Paradise, Inc. was incorporated in Delaware in 1982. Our
Common Stock is listed on The NASDAQ Smallcap Market under the symbol "PROG".
Our main Web site addresses are www.programmersparadise.com and
www.programmersparadise.ca. Information on our Web sites should not be
considered filed with the Securities and Exchange Commission. Information
contained on our Web sites is not, and should not be deemed to be, a part of
this report.
The Company operates in one primary business segment: the marketing of
technical software 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 from a broad range of publishers and
manufacturers. We market these products through our well-known catalogs, direct
mail programs, advertisements in trade magazines, as well as through Internet
and e-mail promotions. Through our wholly owned subsidiary, Lifeboat
Distribution Inc., we distribute products to dealers and resellers in the United
States and Canada.
The Company's catalogs are full color "magalogs" and offer some of the most
complete collections of microcomputer technical software, including programming
languages, tools, utilities, libraries, development systems, interfaces and
communication products.
Competition
The software distribution market is highly competitive. Pricing is very
aggressive and the Company expects pricing pressure to continue. The Company
faces competition from a wide variety of sources including: vendors who sell
direct to customers; software resellers; superstores; catalogers; Web sites; and
other direct marketers of software products. Some of our competitors are
significantly larger and have substantially greater resources than the Company.
Many of our competitors compete principally on the basis of price, product
availability, customer service and technical support. The market for developer
software products is characterized by rapid changes in technology, user
requirements, and customer specifications. The Company competes in acquiring
prospective buyers and in sourcing new products from software developers and
publishers, as well as in marketing its current product line to its customers.
There can be no assurance that the Company can compete effectively
against existing competitors or new competitors that may enter the market and
generate profit margins which represent a fair return to the Company. In
addition, price is an important competitive factor in the personal computer
software market and there can be no assurance that the Company will not be
subject to increased price competition. An increase in the amount of competition
faced by the Company, or its failure to compete effectively against its
competitors, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Page 2 of 21
The Company believes that its ability to offer software developers and
information technology (IT) professionals a wide selection of products at low
prices with prompt delivery and high customer service levels, along with its
good relationships with vendors and suppliers, allow it to compete effectively.
The Company competes to gain distribution rights for new products primarily on
the basis of its reputation and its relationships with software publishers.
The manner in which software products are distributed and sold is
changing, and new methods of distribution and sale may emerge or expand.
Software developers and publishers have sold, and may intensify their efforts to
sell, their products directly to end-users. The evolution of the Internet as a
viable platform in which to conduct e-commerce business transactions has both
lowered the barriers for competition and broadened customer access to products
and information. From time to time certain software developers and publishers
have instituted programs for the direct sale of large order quantities of
software to certain major corporate accounts. These types of programs may
continue to be developed and used by various developers and publishers. While
Microsoft and other vendors currently sell new releases or upgrades directly to
end users, they have not attempted to completely bypass the reseller channel.
Future efforts by such entities to bypass third-party sales channels could
materially and adversely affect the Company's result of operations.
In addition, resellers and publishers may attempt to increase the
volume of software products distributed electronically through ESD (Electronic
Software Distribution) technology, through subscription services, and through
on-line shopping services. Any of these competitive programs, if successful,
could have a material adverse effect on the Company's result of operations.
Products
The Company offers a wide variety of products from a broad range of
publishers and manufacturers, including Microsoft, Computer Associates, IBM,
VMware, Borland, Quest software, Compuware, Infragistics, ComponentOne,
Installshield and Adobe. On a continuous basis, new products are screened for
inclusion in our catalogs and Web sites based on their features, quality, price,
profit margins and warranties, as well as on current sales trends. In 2004 and
2003, hardware and peripherals represented 6% and 7%, respectively, of our
overall revenue. In 2002 these sales represented less than 5% of our overall
revenue.
Marketing and Distribution
We market products through creative marketing communications, our
catalogs, our Web sites, industry magazines, and national trade shows. We also
use direct e-mail and printed material to introduce new products and upgrades,
to cross-sell products to current customers, and to educate and inform. We
believe that our catalogs are important marketing vehicles for software
publishers and manufacturers. These catalogs provide a cost-effective and
service-oriented means to market, sell and fulfill software products. The
Company has two primary catalogs: Programmer's Paradise, targeting software
developers; and Corporate Developer's Paradise, targeting information technology
professionals working in large corporations. These catalogs are full color
"magalogs" that combine traditional catalog sales offerings with detailed
product descriptions and announcements, and which contain cooperative vendor
advertising.
The Company offers additional catalogs aimed at specific audiences.
Significant increases in postal or shipping rates and in paper costs could have
a material adverse effect on the Company. We continually attract new customers
through advertisements in trade magazines, as well as through selectively
mailing catalogs and other direct mail material. Prospect names are also
provided to us by
Page 3 of 21
publishers whose products we market. In 2004, the Company's cooperative and
fee-based advertising reimbursements as a percentage of sales decreased to 4%
from 6% in 2003.
One customer, CDW Corporation, accounted for 12.7% and 11.8% of
consolidated net sales in 2004 and 2003, respectively, and 3.3% and 7.0% of
accounts receivable as of December 31, 2004 and 2003, respectively. Our top five
customers accounted for 22% of consolidated net sales in 2004 and 2003. The
Company generally ships products within 48 hours of confirming a customer's
order. This allows for minimum backlog in the business.
Canadian sales represented 11% of consolidated revenues in 2004 as
compared to 15% in 2003, (for geographic financial information, please refer to
Note Nine to our Notes to Consolidated Financial Statements).
Customer Support
We believe that providing a high level of customer service is necessary
to compete effectively and is essential to continued sales and revenue growth.
Our account representatives assist our customers with all aspects of purchasing
decisions; process products ordered and respond to customer inquiries on order
status, product pricing and availability. The account representatives are
trained to answer all basic questions about the features and functionality of
products. For technical issues we have an in-house technical support staff.
Purchasing and Fulfillment
The Company's success is dependent, in part, upon the ability of its
suppliers to develop and market products that meet the changing requirements of
the marketplace. The Company believes it enjoys good relationships with its
vendors. The Company and its principal vendors have cooperated frequently in
product introductions and in other marketing programs. As is customary in the
industry, the Company has no long-term supply contracts with any of its
suppliers. Substantially all the Company's contracts with its vendors are
terminable upon 30 days' notice or less. The manner in which software products
are distributed and sold is changing, and new methods of distribution and sale
may emerge or expand. Software publishers have sold, and may intensify their
efforts to sell, their products directly to end-users. The Company's business
and results of operations may be adversely affected if the terms and conditions
of the Company's authorizations with its vendors were to be significantly
modified or if certain products become unavailable to the Company.
We believe that effective purchasing from a diverse vendor base is a
key element of our business strategy. For the year ended December 31, 2004,
Ingram Micro and VMWare were the only individual vendors from whom our purchases
exceeded 10% of total purchases. For the year ended December 31, 2004 and 2003,
these two vendors accounted for 25.0% and 27.7%, respectively, and 22.9% and
13.8%, respectively, of total purchases. The loss of these vendors, or any other
key vendor, could have an adverse effect on the Company.
In 2004, the Company purchased approximately 72% of its purchases
directly from manufacturers and publishers and the balance from multiple
distributors, as compared to 69% in 2003. Most suppliers or distributors will
"drop ship" products directly to the customers, which reduces physical handling
by the Company. These inventory management techniques allow the Company to offer
a greater range of products without increased inventory requirements.
Inventory levels may vary from period to period, due in part to
increases or decreases in sales levels, the Company's practice of making
large-volume purchases when it deems the terms of such purchases to be
attractive, and the addition of new suppliers and products. Moreover, the
Company's order fulfillment and inventory control allow the Company to order
Page 4 of 21
certain products just in time for next day shipping. The Company promotes the
use of electronic data interchange ("EDI") with its suppliers, which helps
reduce overhead and the use of paper in the ordering process. Although brand
names and individual products are important to our business, we believe that
competitive sources of supply are available for substantially all product
categories we carry.
The Company operates distribution facilities in Shrewsbury, New Jersey
and Mississauga, Canada.
Management Information Systems
The Company operates management information systems on Windows NT and
MPE platforms that allow for centralized management of key functions, including
inventory, accounts receivable, purchasing, sales and distribution. We are
dependent on the accuracy and proper utilization of our information technology
systems, including our telephone, Web sites, e-mail and fax systems.
The management information systems allow the Company to monitor sales
trends, provide product availability and order status information, track direct
marketing campaign performance and to make marketing event driven purchasing
decisions. In addition to the main system, the Company has systems of networked
personal computers, as well as microcomputer-based desktop publishing systems,
which facilitate data sharing and provide an automated office environment.
The Company recognizes the need to continually upgrade its management
information systems to most effectively manage its operations and customer
database. In that regard, the Company anticipates that it will, from time to
time, require software and hardware upgrades for its present management
information systems.
Trademarks
The Company conducts its business under the various trademarks and
service marks of Programmer's Paradise, the "Island Man" cartoon character logo,
and Lifeboat. The Company protects these trademarks and service marks and
believes that they have significant value and are important factors in its
marketing programs.
Employees
As of December 31, 2004, Programmer's Paradise, Inc. and its
subsidiaries had 115 full-time and 2 part-time employees. The Company is not a
party to any collective bargaining agreements with its employees, has
experienced no work stoppages and considers its relationships with its employees
to be satisfactory.
Page 5 of 21
Executive Officers of the Company
The executive officers of the Company are as follows:
Name Age Position
- --------------------------------------------------------------------------------------------
William H. Willett 68 President, Chief Executive Officer and
Chairman of the Board
Simon F. Nynens 33 Executive Vice President and Chief
Financial Officer
Jeffrey C. Largiader 48 Vice President - Sales & Marketing
Daniel T. Jamieson 47 Vice President and General Manager-Lifeboat
Steven R. McNamara 46 Vice President and General Manager - Canada
Vito Legrottaglie 41 Vice President - Information Systems
William H. Willett has served as a director of the Company since 1996.
In July 1998, Mr. Willett was appointed to the position of Chairman, President
and Chief Executive Officer.
Simon F. Nynens was appointed Executive Vice President and Chief
Financial Officer in June 2004. Prior to this he has served as Vice-President
and Chief Financial Officer from January 2002 through June 2004. Between
February 2001 and January 2002, he served as Vice President. Prior to that, Mr.
Nynens served as the Vice-President and Chief Operating Officer of the Company's
European operations from November 2000 through January 2001, and prior to that,
he was European Controller and Corporate Controller of the Company.
Jeffrey C. Largiader was appointed Vice President-Sales and Marketing
in April 2003. Mr. Largiader has served as the Vice-President - Marketing since
1989.
Daniel T. Jamieson was appointed Vice President and General Manager of
Lifeboat in April 2003. Prior to that, and since 1992, Mr. Jamieson held various
sales and marketing management positions with the company.
Steven R. McNamara has served as Vice President and General Manager -
Canada since June 1997.
Vito Legrottaglie was appointed to the position of Vice President of
Information Systems in June 2003, after rejoining the Company in February 2003.
Mr. Legrottaglie had previously served as Vice President of Information Systems
from 1999 to 2000 and had been with the Company since 1996. Mr. Legrottaglie has
also held the positions of Chief Technology Officer at Swell Commerce
Incorporated, Vice President of Operations for The Wine Enthusiast Companies and
Director of Information Systems at Barnes & Noble.
Available Information
Under the Securities Exchange Act of 1934, the Company is required to
file annual, quarterly and current reports, proxy and information statements and
other information with the SEC. You may read and copy any document we file with
the SEC at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference room. The SEC maintains a web site at
http: www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
Company files electronically with the SEC. The Company makes available, free of
charge, through its internet web site its reports on Forms 10-K, 10-Q and 8-K,
and amendments to those reports, as soon as reasonably practicable after they
are filed with the SEC. The following address for the Company's web site
includes a hyperlink to those Reports: http://www.programmersparadise.com/
company/overview.pasp. The information contained on our website is not part of,
and is not incorporated in, this or any other report we file with or furnish to
the SEC.
Page 6 of 21
In January 2004, we adopted a Code of Ethical Conduct. The full text of
the Code of Ethical Conduct, which applies to all employees, officers and
directors of the Company, including our Chief Executive Officer, Chief Financial
Officer and Controller is available at web site,
http://www.programmersparadise.com/company/overview.pasp. The Company intends to
disclose any amendment to, or waiver from, a provision of the Code of Ethical
Conduct that applies to our Chief Executive Officer, Chief Financial Officer or
Controller on our investor relations web site.
Item 2 Properties
The Company leases 25,250 square feet of space in Shrewsbury, New
Jersey for its corporate headquarters and warehouse under a ten-year lease
expiring in June 2007. Total annual rent expense for these premises is
approximately $280,000. Additionally, the Company leases two buildings with
approximately 3,600 and 3,700 square feet of office and warehouse space in
Mississauga, Canada, under leases, which expire July 31, 2007 and November 30,
2007, respectively. Total annual rent expense for these premises is
approximately $65,000. In addition, the Company leases approximately 1,200
square feet of office space in Mount Laurel, New Jersey for a satellite sales
office under a lease expiring in October 2005. Total annual rent expense for the
satellite sales office amounts to approximately $30,000.
In addition the Company entered into a lease in January 2005, for a
satellite sales office in Hauppauge, New York. Total annual rent expense for
this office is approximately $70,000. This lease expires in April 2010. For a
further discussion regarding lease obligations see Note 8 to the Consolidated
Financial Statements, Part II, Item 8.
Item 3 Legal Proceedings
There are no legal proceedings pending against the Company or any of its
subsidiaries.
Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of 2004 to a vote of
security holders.
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Programmer's Paradise, Inc. Common Stock, par value $0.01, began
trading on The NASDAQ SmallCap Market on June 9, 2003 under the symbol "PROG".
Our Common Stock previously traded on The NASDAQ National Market under the
symbol "PROG". Following is the range of low and high closing prices for our
Common Stock as reported on The NASDAQ SmallCap Market, or The NASDAQ National
Market, as applicable, for the quarters indicated.
High Low
2003
First Quarter 2.320 1.960
Second Quarter 2.949 2.160
Third Quarter 4.230 2.810
Fourth Quarter 7.240 3.980
2004
First Quarter 8.060 6.130
Second Quarter 8.680 6.720
Third Quarter 10.990 7.740
Fourth Quarter 14.780 9.950
Paeg 7 of 21
In 2004, we declared quarterly dividends totaling $0.43 per share on
our Common Stock. In 2003 we had paid cash dividends totaling $0.40 per share on
our Common Stock. The 2004 cash dividend distribution paid to shareholders
should be treated as 56.4% as a return of capital and 43.6% as a taxable
dividend. The dividends declared in 2003 are a return of capital. These
dividends are reflected in the financial statements as a reduction in additional
paid in capital. The closing sales price of our Common Stock on The NASDAQ
SmallCap Market on March 7, 2005, was $15.48 On March 7, 2005 3,954,335 shares
of the Company's Common Stock were outstanding. On such date, there were
approximately 46 holders of record.
During 2004, we issued 115,880 shares of our Common Stock from treasury
stock to employees and former employees, pursuant to the exercise of incentive
stock options granted to them prior to 2004 under the Company's stock option
plans.
During 2003, we issued 54,250 shares of our Common Stock to employees
and former employees, pursuant to the exercise of incentive stock options
granted to them prior to 2003 under the Company's stock option plans.
Item 6 Selected Financial Data
The following tables set forth, for the periods indicated, selected
consolidated financial and other data for Programmer's Paradise, Inc. and its
subsidiaries. You should read the selected consolidated financial and other data
below in conjunction with our consolidated financial statements and the related
notes and with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K.
Year Ended December 31,
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- ----------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data (1):
Net sales $216,543 $89,536 $65,157 $69,569 $103,582
Cost of sales 194,964 80,656 56,540 60,609 91,243
--------------------------------------------------------------------
Gross profit 21,579 8,880 8,617 8,960 12,339
Selling, general and
administrative expenses 25,648 13,020 8,926 8,143 10,173
Amortization of goodwill 1,385 25 - -
Impairment of goodwill 7,000 230 - - -
Cost of restructuring - 362 - - -
Impairment of investment 590 - - - -
Settlement of escrow - - 348 -
Loss on Sale of European subsidiaries 2,081 - - - -
--------------------------------------------------------------------
Income (loss) from operations (15,125) (4,757) (657) 817 2,166
Other income, net 134 318 415 230 112
--------------------------------------------------------------------
Income (loss) before income taxes (14,991) (4,439) (242) 1,047 2,278
Income tax provision (benefit) 2,483 83 (270) 81 (4,044)
--------------------------------------------------------------------
Net income (loss) $(17,474) $(4,522) $28 $ 966 $ 6,322
====================================================================
Net income (loss) per share:
Basic $ (3.51) $ (0.91) $ 0.01 $ 0.26 $ 1.65
====================================================================
Diluted $ (3.51) $ (0.91) $ 0.01 $ 0.25 $ 1.51
====================================================================
Weighted average common
shares outstanding:
Basic 4,983 4,987 4,459 3,724 3,828
====================================================================
Diluted 4,983 4,987 4,480 3,900 4,180
====================================================================
Page 8 of 21
December 31,
- ----------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- -------------------------------------------------- ------------- ------------ ------------ ------------- -------------
Balance Sheet Data(1):
Cash and cash equivalents $ 2,091 $11,425 $ 6,072 $ 5,878 $ 4,888
Marketable securities - - 5,110 5,033 6,595
Working capital 17,326 13,367 11,167 10,703 12,756
Total assets 33,855 24,057 19,468 20,489 32,914
Notes payable - current - - - - -
Notes payable - long term - - - - -
Total stockholders' equity $ 18,906 $14,058 $11,696 $11,195 $ 16,495
(1) Comparability of the Consolidated Statement of Operations and Balance Sheet
Data is affected by the sale of our European Operations on January 9, 2001.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis of the Company's
financial condition and results of operations should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto.
Overview
Programmer's Paradise, Inc. is a recognized marketer of software in the
United States and Canada targeting software development and information
technology professionals within enterprise organizations. The Company 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 from a broad range of publishers and manufacturers. We market these
products through our well-known catalogs, direct mail programs, advertisements
in trade magazines, as well as through Internet and e-mail promotions. Through
our wholly owned subsidiary, Lifeboat Distribution Inc., we distribute products
to dealers and resellers in the United States and Canada.
Forward-looking Statements
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.
Page 9 of 21
We strongly urge current and prospective investors to carefully consider the
cautionary statements and risks contained in this report. Such risks include,
but not are not limited to, the continued acceptance of the Company's
distribution channel by vendors and customers, the timely availability and
acceptance of new products, contribution of key vendor relationships and support
programs, as well as factors that affect the software industry generally.
The Company operates in a rapidly changing business, and new risk
factors emerge from time to time. Management cannot predict every risk factor,
nor can it assess the impact, if any, of all such risk factors on the Company's
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those projected in any forward-looking
statements.
Accordingly, forward-looking statements should not be relied upon as a
prediction of actual results and readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The statements concerning future sales, future gross profit margin and
future selling and administrative expenses 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.
Financial Overview
We reported a net income of $6.3 million for the year 2004, as compared
to a net income of $1.0 million in 2003. This improvement primarily resulted
from an increase in gross profit of $3.4 million offset by a $2.0 million
increase in Selling, General and Administrative (SG&A) expenses in 2004 as
compared to 2003. Furthermore the Company recorded a tax benefit of $4.0 million
in 2004 as a result of the reversal of the valuation allowance. Gross margin as
a percentage of net sales decreased from 12.9% in 2003 to 11.9% in 2004. Net
sales increased $34.0 million or 49% in 2004 as compared to 2003.
The Company's sales, gross profit and results of operations have
fluctuated and are expected to continue to fluctuate on a quarterly basis as a
result of a number of factors, including: the condition of the software industry
in general; shifts in demand for software products; industry shipments of new
software products or upgrades; the timing of new merchandise and catalog
offerings; fluctuations in response rates; fluctuations in postage, paper,
shipping and printing costs and in merchandise returns; adverse weather
conditions that affect response, distribution or shipping; shifts in the timing
of holidays; and changes in the Company's product offerings. The Company's
operating expenditures are based on sales forecasts. If revenues do not meet
expectations in any given quarter, operating results may be materially adversely
affected.
Page 10 of 21
Results of Operations
The following table sets forth for the years indicated the percentage
of net sales represented by selected items reflected in the Company's
Consolidated Statements of Operations. The year-to-year comparison of financial
results is not necessarily indicative of future results:
Years ended December 31,
2002 2003 2004
----------------- ----------------- ----------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 86.8% 87.1% 88.1%
----------------- ----------------- ----------------
Gross profit 13.2% 12.9% 11.9%
Selling, general and administrative expenses 13.7% 11.7% 9.8%
Settlement of escrow 0.5% - -
----------------- ----------------- ----------------
Income (loss) from operations (1.0)% 1.2% 2.1%
Other income, net 0.6% 0.3% 0.1%
----------------- ----------------- ----------------
Income (loss) before income taxes (0.4)% 1.5% 2.2%
Income tax provision (benefit) (0.4)% 0.1% (3.9)%
----------------- ----------------- ----------------
Net Income (loss) 0.0% 1.4% 6.1%
================= ================= ================
Year ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Sales
Net sales in 2004 increased by 49% or $34.0 million to $103.6 million
compared to $69.6 million in 2003. On a quarterly basis, net sales have
increased from $20.7 million in the first quarter of 2004 to $31.0 million in
the fourth quarter of 2004 and from $15.2 million in the first quarter of 2003
to $20.0 million in the fourth quarter of 2003. We attribute this growth in net
sales on a yearly and quarterly basis primarily to the improved productivity and
expansion of our account executive team and a more favorable IT spending
environment in 2004.
On a forward-looking basis, the overall market demand for the software
we sell continues to be volatile.
Gross Profit
Gross profit in absolute dollars for the year ended December 31, 2004
was $12.3 million as compared to $9.0 million in 2003. Gross profit as a
percentage of net sales decreased to 11.9% in 2004, compared to 12.9% in 2003.
The increase in gross profit dollars and the decrease in gross profit margin as
a percentage of net sales reflect a shift in the product mix of sales. Gross
margin as a percentage of net sales has consistently decreased in the last 2
years.
On a forward-looking basis, gross profit margin in future periods may
be less than the 11.9% achieved in 2004. We foresee possible pressure on gross
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 margins below those realized in 2004.
page 11 of 21
Selling, General and Administrative Expenses
SG&A expenses for 2004 were $10.1 million as compared to $8.1 million
for 2003, an increase of $2.0 million or 25.0%. The primary drivers in selling,
general and administrative expenses were payroll and employee related costs.
Payroll costs increased by $0.5 million as a result of the expansion of the
sales account executive team. Employee-related costs (which includes items such
as profit sharing, incentive awards and insurance) increased $0.9 million.
Commission costs increased $0.4 million due to the increase in sales. Selling
and marketing expenses increased by $0.2 million of which $0.1 million was for
credit card processing fees due to higher level of sales. The remaining $0.1
million was mainly related to marketing related activities.
In light of current business conditions, we will continue to invest in
our sales force. We will open a satellite sales office in Hauppauge, New York.
These factors, combined with increased legal requirements including the
Sarbanes-Oxley Act of 2002, will most likely result in higher SG&A expenses in
2005.
Income Taxes
For the year ended December 31, 2004, the Company recorded a benefit
for income taxes of approximately $4.0 million which primarily consists of a
deferred income tax benefit of $4.1 offset by the current provision of $0.1
million.
As discussed in the Company's previously filed Form 10-Q for the period
ended September 30, 2004, the Company had net deferred tax assets totaling
approximately $5.7 million, all of which were offset by a valuation allowance.
The Company also noted that its assessment of the requirement for the valuation
allowance could change in the future based upon its level of pre-tax income.
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS No. 109), requires the Company to record a valuation
allowance when it is "more likely than not that some portion or all of the
deferred tax assets will not be realized." Since December 31, 2000, the Company
has maintained a 100% valuation allowance equal to the net deferred tax assets.
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 has reduced its valuation allowance
which was provided for in prior years. The Company believes that uncertainty
still exists regarding the realizability 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.
As a result, in accordance with SFAS No. 109, the Company recorded a
net deferred tax benefit (including the net change in valuation allowance) in
the amount of $4.1 million.
Year ended December 31, 2003 Compared to Year Ended December 31, 2002
Net Sales
Net sales in 2003 increased by 7% or $4.4 million to $69.6 million
compared to $65.2 million in 2002. On a quarterly basis, net sales have
increased from $15.2 million in the first quarter of 2003 to
Page 12 of 21
$20.0 million in the fourth quarter of 2003. We attribute this growth in net
sales on a yearly and quarterly basis primarily to the improved productivity of
our account executive team and a more favorable IT spending environment in 2003.
Gross Profit
Gross profit in absolute dollars for the year ended December 31, 2003
was $9.0 million as compared to $8.6 million in 2002. Gross profit as a
percentage of net sales decreased to 12.9% in 2003, compared to 13.2% in 2002.
The increase in gross profit dollars and the decrease in gross profit margin as
a percentage of net sales reflect a shift in the product mix of sales.
Selling, General and Administrative Expenses
SG&A expenses for 2003 were $8.1 million as compared to $8.9 million
for 2002, a decrease of $0.8 million or 9%. The primary drivers in selling,
general and administrative expenses were consultant fees, payroll costs and cost
containment initiatives and improved cost control policies and procedures.
Consultant fees decreased $0.4 million and were mainly information technology
related fees that will no longer be required due to the upgrade of our staff in
the IT department. Payroll costs decreased $0.2 million. This mainly resulted
from a decrease in support staff, as we continued to invest in our sales force
in 2003. Employee-related costs (which includes items such as profit sharing,
incentive awards and insurance) increased $0.1 million. Remaining costs
decreased by $0.3 million, mainly the result of our cost containment initiatives
and improved cost control policies and procedures.
Other income, net
The main driver in other income was the gain on sale of investments in
2002. As a result of selling available for sales US government securities, we
recorded a gain on sale of investments of $0.2 million in 2002. This did not
occur in 2003.
Income Taxes
For the year ended December 31, 2003, the Company recorded an expense
for income taxes of approximately $81,000, which consists of a tax liability for
Canadian taxes. The loss carry forwards offset the provision for income taxes
for our U.S. operations. As of December 31, 2003, the Company had recorded a
U.S. deferred tax asset of approximately $6.2 million reflecting, in part, a
benefit of $3.0 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. 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.
Page 13 of 21
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003. A public company that does
not have any interests in special purpose entities but does have a variable
interest in a VIE created before February 1, 2003, must apply the provisions of
FIN 46R by the end of the first interim or annual reporting period ending after
March 14, 2004. The Company adopted FIN 46 and FIN 46R during the quarter ended
March 31, 2004. The adoption of FIN 46 had no impact on the financial condition
or results of operations since the Company does not have investments in VIE's.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The
compensation cost will be measured based on the fair value of the equity or
liability instruments issued. The Statement is effective as of the beginning of
the first interim or annual period beginning after June 15, 2005. We have
disclosed the pro forma impact of adopting SFAS No. 123(R) on net income and
earnings per share for the year ended December 31, 2004 and 2003 in Note 1,
which includes all share-based payment transactions to date. We do not yet know
the impact that any future share-based payment transactions will have on our
financial position or results of operations.
Liquidity and Capital Resources
In 2004, our cash and cash equivalents decreased by $1.0 million to
$4.9 million at December 31, 2004, from $5.9 million at December 31, 2003. Net
cash provided by operating activities amounted to $1.9 million; net cash used in
investing activities amounted to $1.7 million, and cash used in financing
activities amounted to $1.2 million. The positive effect of foreign exchange
rate on cash amounted to $0.1 million.
Net cash provided by operating activities in 2004 was $1.9 million. In
2004, cash was mainly provided by $2.5 million from income from operations net
of non-cash charges, and a $7.1 million increase in accounts payable and accrued
expenses, offset by a $7.0 million increase in accounts receivable and a $0.7
million increase in other operating assets. The increase in accounts receivable
relates primarily to our increased revenue. The increase in accounts payable is
primarily due to our increased net sales and our normal cycle of payments.
Cash used in investing activities in 2004 amounted to $1.7 million. As
a result of the current low interest rates on our short-term savings accounts in
2004 we decided to invest in highly rated and highly liquid available-for-sale
securities. The company purchased $7.1 million of these securities during 2004
and redeemed $5.5 million during 2004. These securities are highly rated and
highly liquid. These securities are classified as available-for-sale securities
in accordance with SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities", and as a result unrealized gains and losses are reported as
part of other comprehensive income (loss).
Page 14 of 21
Net cash used in financing activities in 2004 of $1.2 million consisted
of $1.6 million dividends paid on our Common Stock and $0.4 million from
proceeds from the exercise of stock options.
On October 9, 2002, the Company's Board of Directors authorized the
purchase of 500,000 shares of our Common Stock. On September 16, 2002, the
Company's Board of Directors authorized the purchase of 500,000 shares of our
Common Stock. These two purchase approvals are in addition to approval of
490,000 shares in September 2002 and 521,013 shares in October 1999 the company
was authorized to buy back in both open market and private transactions, as
conditions warrant.
The repurchase program is expected to remain effective for the
remainder of 2005. We intend to hold the repurchased shares in treasury for
general corporate purposes, including issuances under various stock option
plans. As of December 31, 2004, we owned 1,418,090 shares of Common Stock at an
average cost of $2.91 per share. As of December 31, 2003, we owned 1,533,970
shares of Common Stock at an average cost of $2.93 per share.
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 repurchase program and dividends, if any, 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.
The Company believes that the cash flows from operations and funds held
in cash and cash equivalents will be sufficient to fund the Company's 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
(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) $1,693 $564 $1,010 $119 -
Unconditional Purchase Obligations - - - - -
Other Long term Obligations - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $1,693 $564 $1,010 $119 -
=============================================================================================================================
(1) Operating leases primarily relates to the lease of the space used for our
operations in Shrewsbury, New Jersey, Mississauga Canada, Mount Laurel, New
Jersey and Hauppauge, New York.
The Company entered into an employment agreement with its chief
executive officer which expires January 15, 2006. The agreement provides for a
base salary and a bonus, if certain targets are met.
In the event that Mr. Willett's employment is terminated without cause
or by the rendering of a non-renewal notification, he is entitled to receive
severance payments equal to twelve months salary and immediate vesting of all
outstanding stock awards. Additionally, in the event that a change of control of
the Company occurs (as described in the employment agreement), Mr. Willett's
outstanding stock awards become immediately vested and he is entitled to the
pro-rata performance bonus based upon stock price at the date of such change in
control.
The Company has entered into letter agreements with Mr. Nynens and Mr.
Legrottaglie. Mr. Nynens is entitled to severance payments for nine months at
the then applicable annual base salary if the Company terminates his employment
for any reason other than for cause. Mr. Legrottaglie is entitled to severance
payments for six months at the then applicable annual base salary if the Company
terminates his employment for any reason other than for cause.
Page 15 of 21
The Company is not committed by lines of credit, standby letters of
credit, has no standby repurchase obligations or other commercial commitments.
Foreign Exchange
The Company's Canadian business is subject to changes in demand or
pricing resulting from fluctuations in currency exchange rates or other factors.
We are subject to fluctuations in the Canadian Dollar-to-U.S. Dollar exchange
rate.
Off- Balance Sheet Arrangements
As of December 31, 2004, we did not have any significant off-balance
sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC 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.
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.
Page 16 of 21
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. However, because of the current and expected future
operating results of the Company, we have concluded that a certain portion of
the valuation allowance against the deferred tax assets is no longer necessary
and have accordingly reduced the allowance against the provision for taxes in
the fiscal year ended December 31, 2004, as further discussed in Note 5.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
In addition to its activities in the United States, 11% of the
Company's 2004 sales were generated in Canada. We are subject to general risks
attendant to the conduct of business in Canada, including economic uncertainties
and foreign government regulations. In addition, the Company's Canadian business
is subject to changes in demand or pricing resulting from fluctuations in
currency exchange rates or other factors.
The Company's $6.6 million investments in marketable securities are
only in highly rated and highly liquid U.S. government securities and corporate
bonds. The remaining cash balance is invested in short-term savings accounts
with our primary bank, The Bank of New York. As such, the risk of significant
changes in the value of our cash invested is minimal.
Item 8 Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements at Item 15(a).
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A 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 December 31, 2004. This evaluation was carried
out under the supervision and with the participation of our management,
including our Company's 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 the Company's Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Page 17 of 21
Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of December 31, 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 December 31, 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
December 31, 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.
Item 9B Other Information
None.
PART III
Item 10 Directors and Executive Officers of the Registrant
This information required hereunder, with the exception of the
information relating to the executive officers of the Registrant that is
presented in Part I under the heading "Executive Officers of the Company," and
the information relating to the Company's Code of Ethical Conduct that is
presented in Part I under the heading "Available Information," is incorporated
by reference herein from our Definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders, to be filed pursuant to Regulation 14A not later than
April 30, 2005 (the "Definitive Proxy Statement") under the sections captioned
"Election of Directors," and "Compliance with Section 16 (a) of the Exchange
Act".
Item 11 Executive Compensation
The information required hereunder is incorporated by reference herein
from the Definitive Proxy Statement under the section captioned "Executive
Compensation".
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required hereunder is incorporated by reference herein
from the Definitive Proxy Statement under the section captioned "Security
Ownership of Certain Beneficial Owners and Management".
Item 13 Certain Relationships and Related Transactions
The information required hereunder is incorporated by reference herein
from the Definitive Proxy Statement under the section captioned "Executive
Compensation" and "Certain Transactions".
Page 18 of 21
Item 14 Principal Accounting Fees and Services
The information required hereunder is incorporated by reference herein
from the Definitive Proxy Statement under the section captioned " Appointment of
Independent Registered Public Accounting Firm".
PART IV
Item 15 Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements (See Index to Consolidated Financial
Statements on page F-1 of this report);
2. Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements or notes thereto.
3. Exhibits Required by Regulation S-K, Item 601:
Exhibit No. Description of Exhibit
- ---------- ----------------------
2.1 Agreement for the Sale and Purchase of Shares, dated as of January 9,
2001 between the Company and PC-Ware Information Technologies, AG.+
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company.*
3.2 Form of Amended and Restated By-Laws of the Company.*
4.1 Specimen of Common Stock Certificate.*
10.8 Agreement dated as of December 29, 1994, between Lifeboat Publishing
and Software Garden, Inc.; License for Trademark "Dan Bricklin", dated
as of December 29, 1994, between the Company and Daniel Bricklin; First
Amendment to Software License Agreement and Trademark License Agreement
dated March 30, 1995.*
10.17 1986 Stock Option Plan and Form of Employee Stock Option Agreement.*
10.18 1995 Stock Plan, as amended. ***
10.19 1995 Non-Employee Director Plan, as amended. ***
10.20 Form of Officer and Director Indemnification Agreement.*
10.38 Employment Agreement dated July 15, 2002 between William Willett and
the the Company ****
10.39 First Amendment, dated as of December 16, 2003, to Employment Agreement
between William Willett and the Company ****
Page 19 of 21
10.42 Lease dated as of May 14, 1997 between Robert C. Baker, et al as
Landlord and the Company **
21.1 Subsidiaries of the Registrant ++
23.1 Consent of Amper, Politziner & Mattia P.C.
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 Rule 13a-14(b) of the Securities Exchange Act
of 1934 and 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 Rule 13a-14(b) of the Securities Exchange Act
of 1934 and 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.
* Incorporated by reference to exhibits of the same number filed with the
Registrant's Registration Statement on Form S-1 or amendments thereto
(File No. 33-92810).
** Incorporated by reference to Exhibit 10.42 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998 filed on March
31, 1999.
*** Incorporated by reference to Exhibit A and Exhibit B, respectively, to
the Registrant's Definitive Annual Meeting Proxy filed on April 30,
1998.
**** Incorporated by reference to exhibits of the same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2003 filed on March 29, 2004.
+ Incorporated by reference to Annex I to the Registrant's Definitive
Special Meeting Proxy Statement filed on December 1, 2000.
++ Incorporated by reference to Exhibit 21.1 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002 filed on March
20, 2003
(b) The exhibits required by Item 601 of Regulation S-K are reflected above in
Section (a) 3. of this Item.
(c) The financial statement schedule is included as reflected in Section (a) 2.
of this Item.
Page 20 of 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in Shrewsbury, New
Jersey, on March 14, 2005.
PROGRAMMER'S PARADISE, INC.
By: /s/ William H. Willett
-----------------------------------
William H. Willett, President
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature Title Date
President, Chief Executive Officer and March 14, 2005
/s/ William H. Willett Chairman of the Board of Directors
- --------------------------- (Principal Executive Officer)
William H. Willett
Executive Vice President and March 14, 2005
/s/ Simon F. Nynens Chief Financial Officer
- --------------------------- (Principal Financial and Accounting Officer)
Simon F. Nynens
/s/ Mark T. Boyer Director March 14, 2005
- ---------------------------
Mark. T. Boyer
/s/ F. Duffield Meyercord Director March 14, 2005
- --------------------------
F. Duffield Meyercord
/s/ Edwin H. Morgens Director March 14, 2005
- --------------------------
Edwin H. Morgens
/s/ Allan D. Weingarten Director March 14, 2005
- --------------------------
Allan D. Weingarten
Page 21 of 21
Items 8 and 15(a)
Programmer's Paradise, Inc. and Subsidiaries
Index to Consolidated Financial Statements and Schedule
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-22
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Programmer's Paradise, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Programmer's
Paradise, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Programmer's Paradise, Inc. and Subsidiaries as of December 31, 2004 and 2003,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
In connection with our audits of the consolidated financial statements referred
to above, we audited Schedule II - Valuation and Qualifying Accounts. In our
opinion, this financial schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information stated therein.
February 16, 2005
Edison, New Jersey /s/ Amper, Politziner & Mattia P.C.
F-2
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
December 31
2003 2004
-------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,878 $ 4,888
Marketable securities 5,033 6,595
Accounts receivable, net of allowances of $622 and
$755 in 2003 and 2004, respectively 7,634 14,173
Inventory, net of allowances of $132 and $43 in 2003 and 2004, respectively 1,119 1,423
Prepaid expenses and other current assets 333 673
Deferred income taxes, current - 1,423
-------------------------------------
Total current assets 19,997 29,175
Equipment and leasehold improvements, net 292 303
Other assets 200 581
Deferred income taxes, net of current - 2,855
-------------------------------------
$20,489 $32,914
=====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $8,919 $15,994
Dividend payable 375 425
-------------------------------------
Total current liabilities 9,294 16,419
Commitments and Contingencies
Stockholders' equity:
Common Stock $.01 par value: Authorized, 10,000,000 shares, issued
5,284,500 in 2003 and 2004, respectively 53 53
Additional paid-in capital 34,099 32,642
Treasury stock, at cost, 1,533,970 and 1,418,090 shares in 2003 and 2004,
respectively (4,490) (4,130)
Retained earnings (deficit) (18,545) (12,223)
Accumulated other comprehensive gain 78 153
-------------------------------------
Total stockholders' equity 11,195 16,495
-------------------------------------
$20,489 $32,914
=====================================
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Operations
( Dollars in thousands, except per share amounts)
Year ended December 31
2002 2003 2004
-----------------------------------------------------------
Net sales $ 65,157 $ 69,569 $ 103,582
Cost of sales 56,540 60,609 91,243
---------------- ----------- ------------
Gross profit 8,617 8,960 12,339
Selling, general and administrative expenses 8,926 8,143 10,173
Settlement of escrow 348 - -
---------------- ----------- ------------
Income (loss) from operations (657) 817 2,166
Other income (expense):
Interest income 241 133 156
Gain on sale of investments 205 - -
Foreign currency transaction gain (loss) (31) 97 (44)
---------------- ----------- ------------
Income (loss) before provision (benefit) for income taxes (242) 1,047 2,278
Provision (benefit) for income taxes (270) 81 (4,044)
---------------- ----------- ------------
Net income $ 28 $ 966 $ 6,322
================ =========== ============
Basic income per common share $ 0.01 $ 0.26 $ 1.65
================ =========== ============
Diluted income per common share $ 0.01 $ 0.25 $ 1.51
================ =========== ============
Weighted average common shares outstanding-Basic 4,459 3,724 3,828
================ =========== ============
Weighted average common shares outstanding-Diluted 4,480 3,900 4,180
================ =========== ============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(Dollars in thousands, except share amounts)
Accumulated
Common Stock Additional Retained other
--------------- Paid-In Treasury Earnings comprehensive
Shares Amount Capital Stock (Deficit) Income (loss) Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 5,307,938 $53 $35,483 $(1,473) $(19,539) $(466) $14,058
- -----------------------------------------------------------------------------------------------------------------------------
Net income 28 28
Other comprehensive loss:
Reclassification adjustment for
gain realized on sale of
available-for-sale securities (78) (78)
Unrealized gain on
available-for-sale securities 114 114
Translation adjustment 285 285
-------------
Comprehensive Income 349
Purchase of 1,126,169 treasury
stock shares (2,711) (2,711)
Other (77,688) (1) 1
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 5,230,250 $52 $35,484 $(4,184) $(19,511) $(145) $11,696
Net income 966 966
Other comprehensive loss:
Translation adjustment 223 223
-------------
Comprehensive Income 1,189
Dividend paid (1,113) (1,113)
Dividend declared payable (375) (375)
Purchase of 172,394 treasury
stock shares (377) (377)
Exercise of stock options 54,250 1 103 71 175
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 5,284,500 $53 $34,099 $(4,490) $(18,545) $78 $11,195
Net income 6,322 6,322
Other comprehensive loss:
Translation adjustment 97 97
Unrealized loss on available-
for-sale securities (22) (22)
------------
Comprehensive Income 6,397
Dividend paid (1,225) (1,225)
Dividend declared payable (425) (425)
Exercise of stock options 360 360
Tax benefit from exercises of
non-qualified stock options 193 193
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 5,284,500 $53 $32,642 $(4,130) $(12,223) $153 $16,495
=============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands, except share amounts)
Year ended December 31
2002 2003 2004
--------------------------------------------------
Cash flows from operating activities
Net Income $ 28 $ 966 $ 6,322
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation expense 364 291 176
Amortization expense 30 22 15
Gain on sale of investments 205 - -
Provisions for doubtful accounts receivable (63) (106) 133
Benefit for deferred income taxes - - (4,128)
Changes in operating assets and liabilities, net
of assets held for sale:
Accounts receivable 2,170 (1,336) (7,045)
Inventory (465) 32 (304)
Prepaid expenses and other current assets 207 (69) (340)
Accounts payable and accrued expenses (2,227) 1,147 7,118
Net change in other operating assets and liabilities (41) (4) (22)
--------------------------------------------------
Net cash provided by operating activities 208 943 1,925
Cash flows from investing activities
Purchase of equipment, leasehold improvements and other (191) (122) (187)
Change in cash held in escrow 2,335 - -
Purchases of available-for-sale securities (10,219) (5,473) (7,084)
Sales of available-for-sale securities 4,904 - -
Redemptions of available-for-sale securities - 5,550 5,500
--------------------------------------------------
Net cash provided by (used in) investing activities (3,171) (45) (1,771)
Cash flows from financing activities
Purchase of treasury stock (2,711) (377) -
Proceeds from stock option exercise - 71 359
Dividends paid - (1,113) (1,600)
Net proceeds from issuance of Common Stock - 104 -
--------------------------------------------------
Net cash used in financing activities (2,711) (1,315) (1,241)
--------------------------------------------------
Effect of foreign exchange rate on cash 321 223 97
--------------------------------------------------
Net (decrease) in cash and cash equivalents (5,353) (194) (990)
Cash and cash equivalents at beginning of year 11,425 6,072 5,878
--------------------------------------------------
Cash and cash equivalents at end of year $ 6,072 $ 5,878 $ 4,888
==================================================
Supplementary disclosure of cash flow information:
Income taxes paid $ - $ 73 $ 38
Interest paid $ - $ 26 $ 19
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note 1. Description of Business
Programmer's Paradise, Inc. operates in one primary business segment: the
marketing of technical software and hardware for microcomputers, servers and
networks in the United States and Canada. We offer a wide variety of technical
and general business application software from a broad range of publishers and
manufacturers. We market our products through our well-known catalogs, direct
mail programs, advertisements in trade magazines as well as through Internet and
e-mail promotions. Through our wholly owned subsidiary, Lifeboat Distribution
Inc., we distribute marketed products to dealers and resellers in the United
States and Canada.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of Programmer's
Paradise, Inc. and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make extensive use of certain estimates and assumptions
which affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
Net Income Per Common Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Basic
earnings or loss per share is calculated by dividing net income (loss)
attributable to common stockholders by the weighted average number of shares of
Common Stock outstanding during the period. Diluted earnings or loss per share
is calculated by dividing net income (loss) attributable to common stockholders
by the weighted average number of common shares outstanding, adjusted for
potentially dilutive securities. As of December 31, 2004 and 2003, there were 0
and 174,500, respectively, equivalent number of common shares assuming the
related securities that were outstanding for each of the periods had been
converted, but not included in the calculation of diluted income (loss) per
share because such shares are antidilutive.
Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents.
F-7
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
Accounts Receivable
Accounts receivable principally represents amounts collectible from our
customers. The Company performs ongoing credit evaluations of its customers but
generally does not require collateral to support any outstanding obligation.
Allowances for potential uncollectible amounts are estimated and deducted from
total accounts receivable.
Allowance for Doubtful Accounts Receivable
We provide allowances for doubtful accounts related to accounts receivable for
estimated losses resulting from the inability of our customers to make required
payments. We take into consideration the overall quality and aging of the
receivable portfolio along with specifically identified customer risks. If
actual customer payment performance were to deteriorate to an extent not
expected, additional allowances may be required.
Foreign Currency Translation
Assets and liabilities of the foreign subsidiary in Canada have been translated
at current exchange rates, and related revenues and expenses have been
translated at average rates of exchange in effect during the year. Cumulative
translation adjustments have been classified within other comprehensive income
(loss), which is a separate component of stockholders' equity in accordance with
FASB Statement No. 130, "Reporting Comprehensive Income".
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations in
credit risk consist of cash, cash equivalents, and marketable securities. The
Company's $6.6 million investments in marketable securities are only in highly
rated and highly liquid U.S. government securities and corporate bonds.
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.
The Company's cash and cash equivalents, at times, may exceed federally insured
limits. The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
F-8
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
Investments in Securities
The Company accounts for investments in securities pursuant to the SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Under this
statement, the Company's securities with a readily determinable fair value have
been classified as available for sale and are carried at fair value with an
offsetting adjustment to Stockholder's Equity. Net unrealized gains and losses
on marketable securities are credited or charged to accumulated other
comprehensive income.
Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 2004, because of the relative short maturity of these
instruments.
Inventory
Inventory, consisting primarily of finished products held for resale, is stated
at the lower of cost (weighted average) or market.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are calculated using the straight-line method over three to five
years. Leasehold improvements are amortized over the estimated useful lives of
the assets or the related lease terms, whichever is shorter.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income or loss for the period, the
impact of unrealized foreign currency translation adjustments and unrealized
gains or losses on investments.
Revenue Recognition
The Company records revenues from sales transactions when title to products sold
passes to the customer. The Company's shipping terms dictate that the passage of
title occurs upon receipt of products by the customer. The majority of the
Company's revenues relates to physical products and is recognized on a gross
basis with the selling price to the customer recorded as net sales with the
acquisition cost of the product to the Company recorded as cost of sales. At the
time of sale, the Company also records an estimate for sales returns based on
historical experience. 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 Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition" and Emerging Issues
Task Force (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.
F-9
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
In accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and
Costs", the Company records freight billed to its customers as net sales and the
related freight costs as a cost of sales. Vendor rebates and price protection
are recorded when earned as a reduction to cost of sales or merchandise
inventory, as applicable. Cooperative reimbursements from vendors, which are
earned and available, are recorded in the period the related advertising
expenditure is incurred. Cooperative reimbursements are recorded as net sales in
accordance with EITF 02-16.
Stock-Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
In December 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123", which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition,
SFAS No. 148 mandates certain new disclosures that are incremental to those
required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No.25.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Year ended December 31
----------------------------------------
2002 2003 2004
----------------------------------------
Net income as reported $28 $966 $ 6,322
Deduct: Total stock-based employee compensation expense
determined under fair value based method $(463) $(50) $(1,494)
----------------------------------------
Net income (loss) pro forma $(435) $916 $4,828
========================================
Basic net income per share, as reported $0.01 $0.26 $1.65
Diluted net income per share, as reported $0.01 $0.25 $1.51
Basic net income (loss) per share, pro forma $(0.10) $0.25 $1.26
Diluted net income (loss) per share, pro forma $(0.10) $0.23 $1.16
F-10
For the years ended December 31, 2002, 2003 and 2004 there was no compensation
expense recorded under APB No. 25.
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
Under SFAS No. 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Year ended December 31
------------------------------------
2002 2003 2004
- ---------------------------------------------------------------------------
Expected life (in years) 8.3 4.2 4.0
Risk-free interest rate 3.78% 3.38% 3.66%
Volatility 61% 53% 59%
Dividend yield 0% 10% 4%
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. This method also requires a valuation
allowance against net deferred tax asset if, based on the weighted available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. However, because of the current and expected future
results of the Company, we have concluded that a certain portion of the
valuation allowance against the deferred tax assets is no longer necessary and
have accordingly reduced the allowance against the provision for taxes in the
fiscal year ended December 31, 2004, as further discussed in Note 5.
Advertising Costs
Advertising costs are charged to expense in the period incurred. Advertising
costs for 2002, 2003, and 2004 amounted to approximately $2,740, $2,167 and
$2,258, respectively.
Impact of Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities ("VIEs"). FIN No.46 is
applicable immediately for VIEs created after January 31, 2003 and are effective
for reporting periods ending after December 15, 2003, for VIEs created prior to
February 1, 2003. In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and to defer
the effective date of implementation for certain entities. Under the guidance of
FIN 46R, public companies that have interests in VIE's that are commonly
referred to as special purpose entities are required to apply the provisions of
FIN 46R for periods ending after December 15, 2003.
F-11
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
A public company that does not have any interests in special purpose entities
but does have a variable interest in a VIE created before February 1, 2003, must
apply the provisions of FIN 46R by the end of the first interim or annual
reporting period ending after March 14, 2004. The Company adopted FIN 46 and FIN
46R during the quarter ended March 31, 2004. The adoption of FIN 46 had no
impact on the financial condition or results of operations since the Company
does not have investments in VIE's.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after June 15, 2005. We have disclosed the pro forma
impact of adopting SFAS No. 123(R) on net income and earnings per share for the
year ended December 31, 2004 and 2003 in Note 1, which includes all share-based
payment transactions to date. We do not yet know the impact that any future
share-based payment transactions will have on our financial position or results
of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. Marketable securities
Investments in available-for-sale securities at December 31, 2004 were:
Cost Market value Unrealized Gain (loss)
U.S. Government Securities $ 4,608 $ 4,604 $ (4)
Corporate Bonds $ 2,009 $ 1,991 $ (18)
------- ------- ------
Total Marketable securities $ 6,617 $ 6,595 $ (22)
======= ======= ======
The cost and market value of our investments at December 31, 2004 by contractual
maturity were :
Estimated
Cost Fair Value
Due in one year or less $5,614 $5,606
Due in greater than one year 1,003 989
------ ------
Total investments $6,617 $6,595
====== ======
Investments in available-for-sale securities at December 31, 2003 were:
Cost Market value Unrealized Gain (loss)
U.S. Government Securities $ 3,024 $ 3,033 $ 9
Corporate Bonds $ 2,001 $ 2,000 $ (1)
------- ------- ------
Total Marketable securities $ 5,025 $ 5,033 $ 8
======= ======= ======
F-12
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
The cost and market value of our investments in U.S. Government securities at
December 31, 2003 by contractual maturity were:
Estimated
Cost Fair Value
Due in one year or less $3,024 $3,033
Due in greater than one year 2,001 2,000
------ ------
Total investments $5,025 $5,033
====== ======
Estimated fair values of marketable securities are based on quoted market
prices.
4. Balance Sheet Detail
Equipment and leasehold improvements consists of the following as of December
31:
2003 2004
-------------------------
Equipment $ 2,023 $ 2,210
Leasehold improvements 291 293
------------------------
2,314 2,503
Less accumulated depreciation and amortization (2,022) (2,200)
------------------------
$ 292 $ 303
========================
Accounts payable and accrued expenses consist of the following as of December
31:
2003 2004
--------------------------
Trade accounts payable $ 8,014 $ 15,056
Other accrued expenses 905 938
--------------------------
$ 8,919 $ 15,994
==========================
F-13
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
5. Income Taxes
Deferred tax attributes resulting from differences between financial and
accounting amounts and tax basis of assets and liabilities at December 31, 2003
and 2004 are as follows:
December 31
2003 2004
--------------------------------
Current assets and liabilities
Accruals and reserves $ 291 $ 326
Goodwill impairment 271 271
Net operating loss carry forwards 1,404 914
--------------------------------
Deferred tax assets $ 1,966 $ 1,511
Valuation allowance (1,966) (88)
================================
Net current deferred tax assets $ 0 $ 1,423
================================
Non-current assets and liabilities
Accruals and reserves $ 509 $ 216
Depreciation 259 84
Goodwill impairment 1,802 1,527
Net operating loss carry forwards 1,669 1,764
Business credits 16 35
--------------------------------
Deferred tax assets $ 4,255 $ 3,626
Valuation allowance (4,255) (771)
================================
Net non-current deferred tax assets $ 0 $ 2,855
================================
The net change in the valuation allowance for the year ended December 31, 2003
and 2004 was ($323) and ($5,362), respectively.
The provision (benefit) for income taxes is as follows:
Year ended December 31
2002 2003 2004
-------------------------------------------------
Current:
Federal $ (322) $ - $ 19
State 25 - 72
Canada 27 81 (7)
-------------------------------------------------
(270) 81 84
Deferred:
Federal - - $ (3,676)
State - - (452)
Canada - - -
-------------------------------------------------
- - (4,128)
=================================================
$ (270) $ 81 $ (4,044)
=================================================
F-14
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
The reasons for the difference between total tax expense (benefit) and the
amount computed by applying the U.S. statutory federal income tax rate to income
before income taxes are as follows:
Year ended December 31
2002 2003 2004
----------------------------------------
Statutory rate applied to pretax income $ (82) $ 356 $ 795
Federal alternative minimum tax - - 19
State income taxes, net of benefit
of federal income taxes (75) 46 133
Foreign income taxes over U.S.
statutory rate 25 2 8
Net increase(decrease) in valuation allowance (155) (323) (5,362)
Other items - - 422
Settlement of prior year's tax 17 - (59)
----------------------------------------
Income tax expense (benefit) $ (270) $ 81 $ (4,044)
========================================
As of December 31, 2004, the Company had approximately $5.7 million in federal
net operating loss carryovers, which expire in varying amounts between 2005 and
2023 ($0.2 million in 2005, and $5.5 million in 2006 and beyond). Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109),
requires the Company to record a valuation allowance when it is "more likely
than not that some portion or all of the deferred tax assets will not be
realized." Since December 31, 2000 the Company has maintained a 100% valuation
allowance equal to the net deferred tax assets. 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
as of December 31, 2004. The Company has reduced its valuation allowance which
was provided in prior years. 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 tax assets.
As a result, in accordance with SFAS No. 109, the Company recorded a net
deferred tax benefit (including the net change in valuation allowance) in the
amount of $4.1 million, which was recorded as a deferred tax benefit in the
accompanying Consolidated Statements of Operations.
F-15
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
As a result of the reversal of the valuation allowance, beginning with the first
quarter of 2005, the Company expects to begin providing an income tax provision
on income before taxes equal to the combined federal and state effective rates,
currently estimated to be 40% percent.
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.
The Company receives a tax deduction from the gains realized by employees on the
exercise of certain non-qualified stock options for which the benefit 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.
For financial reporting purposes, income (loss) before income taxes includes the
following components:
Year ended December 31
2002 2003 2004
--------------------------------------------
United States $(395) $816 $2,147
Canada 153 231 131
--------------------------------------------
$(242) $1,047 $2,278
============================================
During the years ended December 31, 2002, 2003 and 2004, the Company paid
(received) approximately $(376), $73 and $ 38, respectively, in income taxes.
6. Stockholder's Equity and Stock Option Plans
The Company's 1986 Employee Stock Option Plan ("1986 Plan"), as amended on June
15, 1994, provides for the grant of options to purchase up to 698,133 shares of
the Company's Common Stock to employees, officers and directors of the Company.
The terms of the options are for a maximum of ten years from date of grant and
generally are exercisable at an exercise price equal to but not less than the
fair market value of the Common Stock on the date that the option is granted.
The options generally vest in equal annual installments over five years. There
are no additional options available for grant under the Company's 1986 Plan.
On April 21, 1995, the Board of Directors adopted the Company's 1995 Employee
Stock Plan ("1995 Plan"). The 1995 Plan, as amended on May 7, 1998, provides for
the grant of options to purchase up to 1,137,500 shares of the Company's Common
Stock to officers, directors, employees and consultants of the Company. The 1995
Plan requires that each option shall expire on the date specified by the
Compensation Committee, but not more than ten years from its date of grant in
the case of Incentive Stock Options ("ISO's") and Non-Qualified Options. Options
granted under the plan are exercisable at an exercise price equal to but not
less than the fair market value of the Common Stock on the grant date. ISO's
shall either be fully exercisable on the date of grant or shall become
exercisable thereafter in such installments as the committee may specify. The
options granted in 2004 were fully exercisable on the date of grant.
On April 21, 1995, the Board of Directors adopted the Company's 1995
Non-Employee Director Plan ("1995 Director Plan"). The 1995 Director Plan, as
amended on May 7, 1998, provides for the grant of options to purchase up to
187,500 shares of the Company's Common Stock to persons who are members of the
Company's Board of Directors and not employees or officers of the Company.
F-16
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
The 1995 Director Plan requires that options granted there under will expire ten
years from the date of grant. Each option granted under the 1995 Director Plan
becomes exercisable over a five year period, and vests in an installment of 20%
of the total option grant upon the expiration of one year from the date of the
option grant, and thereafter vests in equal quarterly installments of 5%.
In February 2002, the Board of Directors approved a plan permitting all option
holders under the 1986 Plan and the 1995 Plan to surrender all or any portion of
their options on or before March 1, 2002. By March 1, 2002, a total of 7,875
options to purchase the Company's Common Stock under the 1986 option plan and
303,550 options to purchase the Company's Common Stock under the 1995 Plan were
surrendered, of which 305,175 were surrendered by the Company's executive
officers. All of the options surrendered were exercisable in excess of the
market price of the underlying Common Stock as of the dates of surrender.
On September 9, 2002, the Company granted 418,750 options at an option price of
$2.13 per share to officers and key-employees. The options granted vested
immediately on September 9, 2002. The Company granted options to purchase
200,000 shares to William H. Willett, the Company's President and Chief
Executive Officer; options to purchase 100,000 shares to Simon Nynens, the
Company's Vice President and Chief Financial Officer; options to purchase 55,000
shares to Jeffrey Largiader, the Company's Vice President Marketing; and options
to purchase 15,000 shares to Steven McNamara, the Vice President and General
Manager of Programmer's Paradise Canada. The Company also granted options to
purchase 16,875 shares to Directors on September 9, 2002. Each Director received
options to purchase 3,375 shares of the Company's Common Stock at an option
price of $2.13 per share. The options granted to Directors vest in an
installment of 20% of the total option grant one year after the date of the
option grant, and thereafter in equal quarterly installments of 5%, subject to
the terms and conditions set forth in the 1995 Non-Employee Director Plan.
On March 6, 2003, the Company granted 20,000 options at an option price of $2.01
per share to Vito Legrottaglie the Company's Vice President and Chief
Information Officer. The options granted vested immediately on March 6, 2003.
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
F-17
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
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.
Changes during 2002, 2003 and 2004 in options outstanding for the combined plans
were as follows:
Number Weighted
of Average
Options Exercise Price
--------------------------------
Outstanding at January 1, 2002 584,653 5.75
Granted in 2002 435,625 2.13
Canceled in 2002 (362,241) 6.30
Exercised in 2002 - -
---------------
Outstanding at December 31, 2002 658,037 3.12
Granted in 2003 20,000 2.01
Canceled in 2003 (5,625) 0.67
Exercised in 2003 (83,375) 2.11
---------------
Outstanding at December 31, 2003 589,037 3.24
Granted in 2004 495,000 8.03
Canceled in 2004 (937) 4.00
Exercised in 2004 (115,880) 3.10
---------------
Outstanding at December 31, 2004 967,220 5.71
===============
Exercisable at December 31, 2004 944,685 5.77
===============
The options exercisable at December 31, 2003 and 2004 were 522,965 and 944,685,
respectively.
Stock options outstanding at December 31, 2004 are summarized as follows:
Outstanding Weighted Options
Options Average Weighted Exercisable Weighted
as of Remaining Average as of Average
Range of Exericise December 31, Contractual Exercise December 31, Exercise
Prices 2004 Life Price 2004 Price
- --------------------------------------------------------------------------------------------------------------
2.00 - 2.24 306,532 7.7 2.12 297,247 2.12
2.25 - 3.99 37,188 4.6 3.76 25,938 3.72
4.00 - 5.99 41,000 0.6 4.16 39,000 4.07
6.00 - 7.99 82,500 2.9 6.60 82,500 6.60
8.00 - 8.50 500,000 9.4 8.03 500,000 8.03
-------------- --------------
967,220 944,685
============== ==============
F-18
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
Under the various plans, options that are cancelled can be reissued. At December
31, 2004, 54,095 options were reserved for future issuance. The weighted average
fair value of options granted during 2002, 2003 and 2004 is $2.13, $2.01 and
$8.03 respectively.
7. Defined Contribution Plan
The Company maintains a defined contribution plan covering substantially all
domestic employees. Participating employees may make contributions to the plan,
through payroll deductions. Matching contributions are made by the Company equal
to 50% of the employee's contribution to the extent such employee contribution
did not exceed 6% of their compensation. During the years ended December 31,
2002, 2003 and 2004, the Company expensed approximately $73, $84 and $106
respectively, related to this plan.
8. Commitments
Operating leases relates to the lease of the space used for our operations in
Shrewsbury and Mount Laurel, 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 future
minimum rental payments for the remaining terms of the Company's leases in the
U.S. and Canada are as follows:
2005 564
2006 578
2007 345
2008 87
2009 89
Thereafter 30
---------------
$ 1,693
===============
The Company entered into an employment agreement with its chief executive
officer which expires January 15, 2006. The agreement provides for a base salary
and a bonus, if certain targets are met.
In the event that Mr. Willett's employment is terminated without cause or by the
rendering of a non-renewal notification, he is entitled to receive severance
payments equal to twelve months salary and immediate vesting of all outstanding
stock awards. Additionally, in the event that a change of control of the Company
occurs (as described in the employment agreement), Mr. Willett's outstanding
stock awards become immediately vested and he is entitled to the pro-rata
performance bonus based upon stock price at the date of such change in control.
F-19
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
The Company has entered into letter agreements with Mr. Nynens and Mr.
Legrottaglie. Mr. Nynens is entitled to severance payments for nine months at
the then applicable annual base salary if the Company terminates his employment
for any reason other than for cause. Mr. Legrottaglie is entitled to severance
payments for six months at the then applicable annual base salary if the Company
terminates his employment for any reason other than for cause.
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. Rent expense for the
years ended December 31, 2002, 2003 and 2004 was approximately $488, 483 and
$478 respectively.
9. Industry segment and Geographic information
Programmer's Paradise, Inc. operates in one primary business segment: the
marketing of technical software and hardware for microcomputers, servers and
networks in the United States and Canada.
Geographic revenue and identifiable assets related to operations as of and for
the years ended December 31 2002, 2003 and 2004 were as follows
-------------------------------------------
2002 2003 2004
-------------------------------------------
Net sales to Unaffiliated Customers:
United States $ 55,447 $ 59,366 $ 92,254
Canada 9,710 10,203 11,328
-------------------------------------------
Total $65,157 $69,569 $103,582
===========================================
Identifiable Assets by Geographic Areas:
United States $16,916 17,176 28,230
Canada 2,552 3,313 4,684
-------------------------------------------
Total $19,468 $20,489 $32,914
===========================================
One customer, CDW Corporation, accounted for 12.7% and 11.8% of consolidated net
sales in 2004 and 2003, respectively, and 3.3% and 7.0% of accounts receivable
as of December 31, 2004 and 2003, respectively. Our top five customers accounted
for 22% of consolidated net sales in 2004 and 2003. The Company generally ships
products within 48 hours of confirming a customer's order. This allows for
minimum backlog in the business.
10. Quarterly Results of Operations (Unaudited)
The following table presents summarized quarterly results for 2004:
-----------------------------------------------
First Second Third Fourth
-----------------------------------------------
Net sales $20,679 $25,093 $26,788 $31,022
Gross profit 2,601 3,068 3,214 3,456
Net income 362 523 626 4,811
Basic net income per
common share $0.10 $0.14 $0.16 $1.25
Diluted net income per
common share $0.09 $0.13 $0.15 $1.10
F-20
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
The following table presents summarized quarterly results for 2003:
--------------------------------------------
First Second Third Fourth
--------------------------------------------
Net sales $15,198 $16,051 $18,355 $19,965
Gross profit 1,988 2,123 2,294 2,555
Net income (loss) 41 203 333 389
Basic net income per common
share $0.01 $0.05 $0.09 $0.11
Diluted net income per
common share $0.01 $0.05 $0.09 $0.10
11. Settlement of Escrow (Items in thousands)
Pursuant to an Agreement, dated December 1, 2000 ("Stock Sale Agreement"),
between the Company and PC-Ware Information Technologies AG, a German
corporation ("PC-Ware"), on January 9, 2001 the Company sold all of the shares
of its European subsidiaries for 14,500 Euros, subject to post-closing
adjustments, including finalization of the closing balance sheet, in accordance
with the Stock Sale Agreement. As security for any claim of PC-Ware arising from
alleged breaches of representations by the Company under the Stock Sale
Agreement, 2,666 Euros (the equivalent of $2,629) were being held in an escrow
account as of September 30, 2002. In September 2001, PC-Ware made claims
aggregating 2,490 Euros against the escrow.
On October 1, 2002, the claims brought against the Company by PC-Ware were
settled for 435 Euros (the equivalent as of such date of $429). Associated fees,
comprising of counsel fees, expert witness fees, arbitration fees, consultancy
fees paid to the Company's previous Chief Financial Officer, and travel and
related expenses, amounted to $269. This settlement amount and associated fees
amounted to $698 in the third quarter of 2002. Since the Company had established
reserves of $350 for this claim in the fourth quarter of 2001, the Company
reported an additional $348 for this settlement and associated fees in the third
quarter of 2002.
As of December 31, 2004, there are no legal proceedings pending against the
Company or any of its subsidiaries.
12. Subsequent Events
The company entered into a lease on January 28, 2005 to rent approximately 4,000
square feet of office space in Hauppauge, New York under a five-year lease
expiring in April 2010. Total annual rent expense for these premises is
approximately $70.
F-21
Programmer's Paradise, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In Thousands)
Beginning Charged to Cost Ending
Description Balance and Expense Deductions Balance
- ---------------------------------------------------------------------------------------------------
Year ended December 31, 2002:
Allowances for accounts receivable $791 $662 $725 $728
Reserve for obsolescence $210 $25 $61 $174
Valuation allowance deferred taxes $6,699 $(155) - $6,544
Year ended December 31, 2003:
Allowances for accounts receivable $728 $392 $498 $622
Reserve for obsolescence $174 - $42 $132
Valuation allowance deferred taxes $6,544 $(323) - $6,221
Year ended December 31, 2004:
Allowances for accounts receivable $622 $393 $260 $755
Reserve for obsolescence $132 - $89 $43
Valuation allowance deferred taxes $6,221 $(5,362) - $859
F-22