UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-26408
Programmer's Paradise, Inc.(Exact name of registrant as specified in its charter)
Delaware
13-3136104
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
Registrant's Telephone Number (732) 389-8950
Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.Yes [ ] No [X]
There were 3,991,935 outstanding shares of Common Stock, par value $.01 per share, as of July 29, 2005, not including 1,292,565 shares classified as treasury stock.
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PART I - FINANCIAL INFORMATION
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)
June 30,2005(Unaudited)
December 31,2004
ASSETS
Current assets
Cash and cash equivalents
$
3,147
4,888
Marketable securities
7,797
6,595
Accounts receivable, net
11,558
14,173
Inventory - finished goods
1,297
1,423
Prepaid expenses and other current assets
229
673
Deferred income taxes, current
1,365
Total current assets
25,393
29,175
Equipment and leasehold improvements, net
490
303
Other assets
610
581
Deferred income taxes, net of current
2,743
2,855
Total assets
29,236
32,914
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses
11,999
15,994
Dividend payable
479
425
Total current liabilities
12,478
16,419
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; authorized, 10,000,000
shares; issued 5,284,500 shares
53
Additional paid-in capital
31,947
32,642
Treasury stock, at cost, 1,292,965 shares and 1,418,090
shares, respectively
(3,630)
(4,130)
Accumulated deficit
(11,738)
(12,223)
Accumulated other comprehensive income
126
153
Total stockholders' equity
16,758
16,495
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(Unaudited)(In thousands, except per share data)
Six months ended
Three months ended
June 30,
2005
2004
Net sales
60,221
45,772
30,052
25,093
Cost of sales
53,422
40,103
26,682
22,025
Gross profit
6,799
5,669
3,370
3,068
Selling, general and administrative expenses
6,108
4,753
3,123
2,531
Income from operations
691
916
247
537
Interest income, net
140
54
73
15
Realized foreign exchange loss
(25)
(27)
(14)
(6)
Income before income tax provision
806
943
306
546
Provision for income taxes
321
58
121
23
Net income
485
885
185
523
Net income per common share - Basic
0.12
0.23
0.05
0.14
Net income per common share - Diluted
0.11
0.22
0.04
0.13
Weighted average common shares
outstanding-Basic
3,957
3,812
3,991
3,826
outstanding-Diluted
4,413
4,103
4,364
4,118
Reconciliation to comprehensive income:
Other comprehensive income(loss), net of tax:
Unrealized gain (loss) on marketable securities
6
(36)
(46)
Foreign currency translation adjustments
(33)
(50)
(23)
(12)
Total comprehensive income
458
799
168
465
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PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY(Unaudited)(In thousands, except share amounts)
Accumulated
Additional
other
Common Stock
Paid-In
Treasury
comprehensive
Shares
Amount
Capital
Stock
Deficit
Income
Total
Balance at January 1, 2005
5,284,500
$53
$32,642
$(4,130)
$(12,223)
$153
$16,495
Other comprehensive income:
Exercise of stock options
500
Dividend paid
(474)
Dividend declared payable
(479)
Translation adjustment
Unrealized gain on available-
for sale securities
Tax benefit from exercises of
non-qualified stock options
258
Balance at June 30, 2005
$31,947
$(3,630)
$(11,738)
$126
$16,758
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PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In thousands)
Six months Ended
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
124
105
Allowance for doubtful accounts
266
(4)
Accretion of marketable securities
Tax benefit from exercise of stock options
-
Provision for deferred income taxes
170
Changes in operating assets and liabilities:
Accounts receivable
2,315
(2,592)
Inventory
(388)
444
(211)
(3,994)
2,619
Net change in other assets and liabilities
(1)
(8)
Net cash provided by operating activities
199
370
Cash flows from investing activities:
Purchases of available-for-sale securities
(8,201)
(3,475)
Redemptions of available-for-sale securities
7,000
1,000
Capital expenditures
(306)
(57)
Net cash used in investing activities
(1,507)
(2,532)
Cash flows from financing activities:
(900)
(757)
Proceeds from exercise of stock options
260
Net cash used in financing activities
(400)
(497)
Effect of foreign exchange rate on cash
Net increase (decrease) in cash and cash equivalents
(1,741)
(2,709)
Cash and cash equivalents at beginning of period
5,878
Cash and cash equivalents at end of period
3,169
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PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTSJune 30, 2005(Unaudited)
1.
The accompanying unaudited condensed consolidated financial statements of Programmer's Paradise, Inc. and its subsidiaries (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In the opinion of the Company's management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation, have been included. Actual results may differ from these estimates under different assumptions or conditions . The unaudited condensed consolidated statements of operations for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K filed with the Securities Exchange Commission for the year ended December 31, 2004.
2.
Assets and liabilities of the Company's Canadian subsidiary have been translated at current exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the period. The revenue from our Canadian operations in the first six months of 2005 increased by $1.9 million to $7.3 million as compared to the first six months of 2004. The revenue from our Canadian operations increased by $0.9 million to $3.4 million in the second quarter of 2005 as compared to our second quarter of 2004.
3.
Cumulative translation adjustments and unrealized gains (losses) on available-for-sale securities have been classified within other comprehensive income, which is a separate component of stockholders' equity in accordance with FASB Statement No. 130, "Reporting Comprehensive Income".
4.
The Company records revenues from sales transactions when title to products sold passes to the customer. The Company's shipping terms dictate that the passage of title occurs upon receipt of products by the customer. The majority of the Company's revenues relates to physical products and is recognized on a gross basis with the selling price to the customer recorded as net sales with the acquisition cost of the product to the Company recorded as cost of sales. At the time of sale, the Company also records an estimate for sales returns based on historical experience. Certain software maintenance products, third party services and extended warranties sold by the Company (for which the Company is not the primary obligor) are recognized on a net basis in accordance with SAB 101, "Revenue Recognition" and EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent". Accordingly, such revenues are recognized in net sales either at the time of sale or over the contract period, based on the nature of the contract, at the net amount retained by the Company, with no cost of goods sold. In accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", the Company records freight billed to its customers as net sales and the related freight costs as a cost of sales.
In accordance with EITF 02-16, "Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor's Products)," consideration from vendors, such as advertising support funds, are accounted for as a reduction to cost of sales unless certain requirements are met showing that the
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5.
Investments in available-for-sale securities at June 30, 2005 were (in thousands):
Cost
Market value
Unrealized Gain (loss)
U.S. Government Securities
$ 6,760
$ 6,762
2
Corporate Bonds
$ 1,053
$ 1,035
(18)
Total Marketable Securities
$ 7,813
$ 7,797
(16)
The cost and market value of the Company's investments at June 30, 2005 by contractual maturity were (in thousands):
Estimated
Fair value
Due in one year or less
$7,813
$7,797
6.
Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed considering the potentially dilutive effect of outstanding stock options. A reconciliation of the numerator and denominators of the basic and diluted per share computations follows (in thousands, except per share data):
Numerator:
$485
$885
Denominator:
Weighted average shares (Basic)
Dilutive effect of outstanding options
456
291
Weighted average shares including assumed conversions (Diluted)
Basic net income per share
$0.12
$0.23
Diluted net income per share
$0.11
$0.22
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Changes during 2005 in options outstanding for the combined plans were as follows:
Number of Options
Weighted Average Exercise Price
Outstanding at January 1, 2005
967,220
$5.71
Granted in 2005
60,640
12.85
Canceled in 2005
(6,545)
3.36
Exercised in 2005
(125,125)
4.00
Outstanding at June 30, 2005
896,190
6.45
Exercisable at June 30, 2005
886,364
6.49
On April 21, 2005, the Company granted 60,640 options at an option price of $12.85 to officers and directors of the Company. The options granted vested immediately. The Company granted options to purchase 14,320 shares to William H. Willett, the Company's President and Chief Executive Officer; options to purchase 14,320 shares to Simon Nynens, the Company's Executive Vice President and Chief Financial Officer; options to purchase 5,000 shares to Jeffrey Largiader, the Company's Vice President Sales and Marketing, options to purchase 5,000 shares to Vito Legrottaglie, the Company's Vice President and Chief Information Officer, options to purchase 5,000 shares to Dan Jamieson, Vice President and General Manager of the Company's Lifeboat division, and options to purchase 5,000 shares to Steve McNamara, the Vice President and General Manager of Programmer's Paradise Canada. Each director of the Company received options to purchase 3,000 shares of the Company's Common Stock at an option price of $12.85 per share.
7.
On June 14, 2005 our Board of Directors declared a quarterly dividend of $.12 per share on our common stock payable July 22, 2005 to shareholders of record on July 1, 2005. Our Board intends to periodically review the amount and frequency of future payments, if any, in light of the Company's operations and need for capital. The dividend is reflected as a reduction of Additional Paid in Capital.
8.
The Company had one major customer that accounted for 13.5% of total net sales during the six months ended June 30, 2005, and 5.3% of total net accounts receivable as of June 30, 2005. The Company had two major vendors that accounted for 20.8% and 30.8% of total purchases, respectively, during the six months ended June 30, 2005. The Company had one major customer that accounted for 13.9% of total net sales during the six months ended June 30, 2004, and 5.1% of total net accounts receivable as of June 30, 2004. The Company had two major vendors that accounted for 28.3% and 17.1% of total purchases, respectively, during the six months ended June 30, 2004.
9.
For the quarter ended June 30, 2005, the Company recorded a provision for income taxes of $121,000, which consists of a provision of $170,000 for deferred income taxes as well as a $14,000 provision for U.S. state taxes offset by a benefit of $63,000 for Canadian taxes. For the quarter ended June 30, 2004, the Company recorded a provision of $23,000 which consist of a provision for Canadian income taxes of $28,000 for Canadian taxes as well as a $5,000 benefit for U.S. taxes. For the six months ended June 30, 2005 the Company recorded a provision for income taxes of $321,000, which consists of a provision of $210,000 for U.S income taxes as well as a provision of $170,000 for deferred income taxes and a $34,000 provision for state income taxes offset by a benefit of $93,000 for Canadian taxes. For the six month period ended June 30, 2004, the Company recorded a provision for income taxes of $58,000, which consists of a provision of $63,000 for Canadian income taxes as well as a $5,000 benefit for U.S. taxes.
As of June 30, 2005, the Company had a U.S. deferred tax asset of approximately $5.0 million reflecting, in part, a benefit of $2.6 million in U.S. federal and state tax loss carry forwards, which will expire in varying amounts between 2005 and 2024. The full realization of the tax benefit associated with the carry forward depends predominantly upon the Company's ability to generate taxable income during the carry forward period. The Company believes that uncertainty still exists regarding the realization of certain deferred tax assets, and accordingly, continues to maintain a $0.9 million valuation allowance, based on management's estimates against these specific deferred tax assets. The valuation allowance will be
Page 8
The Company receives a tax deduction from the gains realized by employees on the exercise of certain non-qualified stock options for which the benefits is recognized as a component of stockholders' equity. The tax benefit of deductions related to stock options exceeds the amount expensed, $0, for financial and are accounted for as a credit to additional paid-in capital rather than a reduction of the tax provision.
10.
The Company accounts for stock option plans under the recognition and measurement principles of Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.
In accordance with SFAS No. 148, the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation is as follows:
Net income - as reported
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
(290)
(1,113)
(1,095)
Pro forma net income (loss)
195
(228)
(105)
(572)
Net income (loss) per share:
Basic earnings (loss) per share - as reported
Basic earnings (loss) per share - pro forma
(0.06)
(0.03)
(0.15)
Net income per share:
Diluted earnings (loss) per share - as reported
Diluted earnings (loss) per share - pro forma
(0.02)
(0.14)
11.
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123 (R) is similar to the approach described in Statement 123. However, Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. This revised standard will be effective for our reporting period beginning January 1, 2006.
12.
The company incurred a charge of $0.3 million related to the accounts receivable from Amherst Technologies, LLC. On July 28, 2005 we determined that these accounts receivable are substantially impaired after Amherst Technologies, LLC filed for bankruptcy protection on July 20, 2005. The company intends to pursue all potential recovery options.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the
Page 9
heading "Certain Factors Affecting Operating Results" and elsewhere in this report. The following discussion should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2004.
Overview
Programmer's Paradise, Inc. operates in one primary business segment: the marketing of technical software and hardware for microcomputers, servers and networks in the United States and Canada.
We offer a wide variety of technical and general business application software and PC hardware and components from a broad range of publishers and manufacturers. We market our products through our catalogs, direct mail programs and advertisements in trade magazines as well as through Internet and e-mail promotions. Through our wholly owned subsidiary, Lifeboat Distribution Inc., we distribute marketed products to dealers and resellers in the United States and Canada.
The Company's sales and results of operations have fluctuated and are expected to continue to fluctuate on a quarterly basis as a result of a number of factors, including: the condition of the software industry in general; shifts in demand for software products; industry shipments of new software products or upgrades; the timing of new merchandise and catalog offerings; fluctuations in response rates; fluctuations in postage, paper, shipping and printing costs and in merchandise returns; adverse weather conditions that affect response, distribution or shipping; shifts in the timing of holidays; and changes in the Company's product offerings. The Company's operating expenditures are based on sales forecasts. If revenues do not meet expectations in any given quarter, operating results may be materially adversely affected.
Results of Operations
The following table sets forth for the periods indicated certain financial information derived from the Company's condensed consolidated statement of operations expressed as a percentage of net sales. This comparison of financial results is not necessarily indicative of future results:
100.0%
88.7
87.6
88.8
87.8
11.3
12.4
11.2
12.2
10.2
10.4
10.1
1.1
2.0
0.8
2.1
0.2
0.1
Realized foreign exchange gain(loss)
0.0
(0.1)
Income before income taxes
1.3
1.0
2.2
0.5
0.4
0.8%
1.9%
0.6%
2.1%
Net Sales
Net sales in the second quarter of 2005 increased 20% or $5.0 million to $30.1 million compared to $25.1 million for the same period in 2004. For the six month period ended June 30, 2005, net sales increased by $14.4 million or 32%
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compared to the six month period ended June 30 2,004. We attribute this growth in net sales primarily to a more favorable IT spending environment and continued expansion of our account executive team in the second quarter of 2005. We plan to continue to invest in our sales force.
Gross Profit
Gross profit as a percentage of net sales was 11.2% for the quarter ended June 30, 2005, compared to 12.2% for the same period in 2004. Since revenue increased by 20%, gross profit in absolute dollars increased $0.3 million to $3.4 million as compared to $3.1 million in the second quarter of 2004. For the six month period ended June 30, 2005, gross profit in absolute dollars increased $1.1 million to $6.8 million compared to $5.7 million in the same period in 2004.
The increase in gross profit dollars and the decrease in gross profit margins as a percentage of net sales reflects a shift in the product mix of sales and the competitive nature of our business. We have won many bids based on our aggressive pricing and we plan to continue to do so.
On a forward-looking basis, gross profit margin in future periods may be less than the 11.2% achieved in the second quarter of 2005. Changes in rebate programs can significantly affect our gross margin percentage. The gross profit margin depends on various factors, including vendor incentive and inventory price protection programs, product mix, including third party services, pricing strategies, market conditions, and other factors, any of which could result in changes in gross margins from recent experience.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expenses for the quarter ended June 30, 2005 were $3.1 million as compared to $2.5 million for the same period in 2004, an increase of $0.6 million or 23%. The primary drivers in SG&A expenses in the second quarter of 2005 were payroll and a charge related to accounts receivable. Compared to the second quarter of 2004, payroll costs increased $0.4 million, primarily due to our continued investment in our sales force. Our sales force consists of account executives as well as vendor specialists who provide consultation in areas requiring specialized product expertise. Other SG&A costs increased $0.2 million and included a charge of $0.3 million related to accounts receivable from Amherst Technologies, LLC. On July 28 2005, we determined that these accounts receivable are substantially impaired after Amherst Technologies, LLC filed for bankruptcy protection on July 20, 2005. The company intends to pursue all potential recovery options.
For the six month period ended June 30, 2005 SG&A expenses increased by $ 1.4 million or 29% compared to the same period in 2005. The primary drivers in SG&A expenses in the first six months of 2005 were payroll, employee related costs and a charge related to accounts receivable. Compared to the first six months of 2004, payroll costs increased by $0.8 million and employee related costs increased by $0.2 million. Other SG&A costs increased by $0.4 million of which $0.3 million relates to accounts receivable from Amherst Technologies, LLC. On July 28 2005, we determined that these accounts receivable are substantially impaired after Amherst Technologies, LLC filed for bankruptcy protection on July 20, 2005. The company intends to pursue all potential recovery options.
We plan to continue to invest in our sales force. These factors, combined with increased legal requirements, including the Sarbanes-Oxley Act of 2002, will most likely result in significantly higher SG&A expenses in 2005.
Foreign Currency Transactions Gain (Loss)
The realized foreign exchange loss for the quarter ended June 30, 2005 was $14,000 compared to a loss of $6,000 for the same period in 2004. Foreign exchange gains and losses primarily result from our trade activity with our Canadian subsidiary. Although the Company does maintain bank accounts in Canadian currencies to reduce currency exchange fluctuations, the Company is, nevertheless, subject to risks associated with such fluctuations.
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Income Taxes
For the quarter ended June 30, 2005, the Company recorded a provision for income taxes of $121,000, which consists of a provision of $170,000 for deferred income taxes as well as a $14,000 provision for U.S. state taxes offset by a benefit of $63,000 for Canadian taxes. For the quarter ended June 30, 2004, the Company recorded a provision of $23,000 which consist of a provision for Canadian income taxes of $28,000 for Canadian taxes as well as a $5,000 benefit for U.S. taxes. For the six months ended June 30, 2005 the company recorded a provision for income taxes of $321,000, which consists of a provision of $210,000 for U.S income taxes as well as a provision of $170,000 for deferred income taxes and a $34,000 provision for state income taxes offset by a benefit of $93,000 for Canadian taxes. For the six month period ended June 30, 2004, the Company recorded a provision for income taxes of $58,000, which consists of a provision of $63,000 for Canadian income taxes as well as a $5,000 benefit for U.S. tax.
As of June 30, 2005, the Company had a U.S. deferred tax asset of approximately $5.0 million reflecting, in part, a benefit of $2.6 million in U.S. federal and state tax loss carry forwards, which will expire in varying amounts between 2005 and 2024. The full realization of the tax benefit associated with the carry forward depends predominantly upon the Company's ability to generate taxable income during the carry forward period. The Company believes that uncertainty still exists regarding the realization of certain deferred tax assets, and accordingly continues to maintain a $0.9 million valuation allowance, based on management's estimates against these specific deferred tax assets. The valuation allowance will be evaluated at the end of each reporting period, considering positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evide nce indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required.
Liquidity and Capital Resources
During the first six months of 2005, our cash and cash equivalents decreased by $1.7 million to $3.1 million at June 30, 2005, from $4.9 million at December 31, 2004. Net cash provided by operating activities amounted to $0.2 million; net cash used in investing activities amounted to $1.5 million and net cash used in financing activities amounted to $0.4 million.
Net cash provided by operating activities in the first six months of 2005 was $0.2 million and primarily resulted from our income from operations excluding non-cash charges of $1.3 million and a $2.3 million decrease in accounts receivable and a decrease of $0.4 million in other current assets. This was partly offset by a $4.0 million decrease in accounts payable and accrued expenses. The decrease in accounts receivable relates primarily to an improved collection cycle. Days sales outstanding decreased to 35 days as per June 30, 2005 as compared to 41 days as per June 30, 2004.
Net cash used in investing activities in the first six months of 2005 amounted to $1.5 million. In light of the current low interest rates on our short-term savings accounts we decided to invest an additional net $1.2 million in U.S. government securities. These securities are highly rated and highly liquid. These securities are classified as available-for-sale securities in accordance with SFAS 115, and as a result unrealized gains and losses are reported as part of other comprehensive income (loss). The other $0.3 million consisted of capital expenditures.
Net cash used for financing activities in the first six months of 2005 of $0.4 million consisted of the $0.9 million payment of our declared dividends, which was partly offset by the proceeds from the exercise of options.
On September 16, 2002, our Board of Directors authorized the purchase of 500,000 shares of our common stock. On October 9, 2002, our Board of Directors authorized us to purchase an additional 500,000 shares of our common stock. These two purchase approvals are in addition to authorizations for us to purchase 490,000 shares (granted in March 2002) and 521,013 shares (granted in October 1999) in both open market and private transactions, as conditions warrant.
The repurchase program is expected to remain effective for the remainder of 2005. We intend to hold the repurchased shares in treasury for general corporate purposes, including issuances under various stock option plans. As of June 30, 2005, we owned 1,292,965 shares of our common stock purchased at an average cost of $3.18 per share. During the first six months of 2005, we did not repurchase any shares of our common stock.
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The Company's current and anticipated use of its cash and cash equivalents is, and will continue to be, to fund working capital, operational expenditures, the stock buyback program and dividends if declared by the board of directors. Our business plan furthermore contemplates to continue to use our cash to pay vendors promptly in order to obtain more favorable conditions.
We believe that the funds held in cash and cash equivalents will be sufficient to fund our working capital and cash requirements for at least the next 12 months. We currently do not have any credit facility and, in the foreseeable future, we do not plan to enter into an agreement providing for a line of credit.
Contractual Obligations as of June 30, 2005 were summarized as follows:(Dollars in thousands)
Payment due by Period
Less than 1 year
1-3 years
4-5 years
After 5 years
Long-term debt
Capital Lease Obligations
Operating Leases
$1,408
$582
$766
$60
Purchase Obligations
Other Long term Obligations
Total Contractual Obligations
Operating leases primarily 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 Company is not committed by lines of credit, standby letters of credit, has no standby repurchase obligations or other commercial commitments. The Company is not engaged in any transactions with related parties.
As of June 30, 2005, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company recognizes revenue from the sale of software and hardware for microcomputers, servers and networks upon shipment or upon electronic delivery of the product. The Company expenses the advertising costs associated with producing its catalogs. The costs of these catalogs are expensed in the same month the catalogs are mailed.
On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, restructuring and contingencies and litigation.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company records revenues from sales transactions when title to products sold passes to the customer. The Company's shipping terms dictate that the passage of title occurs upon receipt of products by the customer. The majority of the Company's revenues relates to physical products and is recognized on a gross basis with the selling price to the customer recorded as net sales with the acquisition cost of the product to the Company recorded as cost of
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sales. At the time of sale, the Company also records an estimate for sales returns based on historical experience. Certain software maintenance products, third party services and extended warranties sold by the Company (for which the Company is not the primary obligor) are recognized on a net basis in accordance with SAB 101, "Revenue Recognition" and EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent". Accordingly, such revenues are recognized in net sales either at the time of sale or over the contract period, based on the nature of the contract, at the net amount retained by the Company, with no cost of goods sold. In accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", the Company records freight billed to its customers as net sales and the related freight costs as a cost of sales.
In accordance with EITF 02-16, "Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor's Products)," consideration from vendors, such as advertising support funds, are accounted for as a reduction to cost of sales unless certain requirements are met showing that the vendor receives an identifiable fair value in exchange for the consideration. If these specific requirements related to individual vendors are met, the consideration is accounted for as revenue.
The Company believes the following critical accounting policies used in the preparation of its consolidated financial statements affect its more significant judgments and estimates. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-offs may be required.
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Based upon the Company's profitable operations since December 31, 2002, and its expected profitability in future years, the Company has concluded that the results of future operations will generate sufficient taxable income to realize certain deferred tax assets. The Company believes that uncertainty still exists regarding the realizability of certain tax assets, and accordingly, continues to maintain a $0.9 million valuation allowance, based on management's estimates, against these specific deferred tax assets. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Certain Factors Affecting Operating Results
This report includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report regarding future events or conditions, including statements regarding industry prospects and the Company's expected financial position, business and financing plans, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We strongly urge current and prospective investors to carefully consider the cautionary statements and risks contained in this report. Such risks include, but are not limited to, the continued acceptance of the Company's distribution channel by vendors and customers, the timely availability and acceptance of new products, contribution of key vendor relationships and support programs, as well as factors that affect the software industry in general. P>
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.
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Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The statement concerning future sales and future gross profit margin are forward looking statements involving certain risks and uncertainties such as availability of products, product mix, market conditions and other factors, which could result in a fluctuation of sales below recent experience.
Stock Volatility.
Furthermore, fluctuations in the Company's operating results, announcements regarding litigation, the loss of a significant vendor, increased competition, reduced vendor incentives and trade credit, higher postage and operating expenses, and other developments, could have a significant impact on the market price of the Company's Common Stock.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In addition to its activities in the United States, the Company also conducts business in Canada. We are subject to general risks attendant to the conduct of business in Canada, including economic uncertainties and foreign government regulations. In addition, the Company's Canadian business is subject to changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors.
The Company's $7.8 million investments in marketable securities are only in highly rated and highly liquid corporate bonds and U.S. government Securities. As such, the risk of significant changes in the value of our cash invested is minimal.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation of the effectiveness of the design and operation of the Company's "disclosure controls and procedures" as of June 30, 2005. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2005. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control Over Financial Reporting.
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internal control over financial reporting to determine whether any change occurred during the quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation during the quarter ended June 30, 2005 there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting") during the fiscal Quarter ended June 30, 2005.
(a) The date of the meeting was June 14, 2005.
(b) At the meeting, the following persons were elected directors of the Company, each receiving the number of votes set forth opposite their names below:
For
Against
Abstain
Broker Non-Votes
William H. Willett
3,723,121
1,815
F. Duffield Meyercord
3,722,121
3,517
Edwin H. Morgens
3,030,905
694,753
Allan D. Weingarten
3,684,553
41,105
Mark T. Boyer
3,685,553
Item 5. Other Information
(a)
On July 28, 2005 the Audit Committee of the Board of Directors of the Company concluded that accounts receivable of the Company from Amherst Technologies, LLC incurred a material charge for impairment. The Company determined that such accounts receivable were substantially impaired after discovering on July 27, 2005 that Amherst Technologies, LLC filed for bankruptcy protection on July 20, 2005. The Company estimates the amount of impairment to accounts receivable is approximately $0.3 million.
Item 6. Exhibits
Exhibits.
31.1
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of William H. Willett, the Chief Executive Officer of the Company.
31.2
Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of Simon F. Nynens, the Chief Financial Officer of the Company.
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of William H. Willett, the Chief Executive Officer of the Company.
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Simon F. Nynens, the Chief Financial Officer of the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PROGRAMMER'S PARADISE, INC.
August 1, 2005
By:
Date
Simon F. Nynens, Executive Vice President
and Chief Financial Officer
William H. Willett, Chairman of the Board,
President and Chief Executive Officer
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