UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission File No. 000-26408
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Programmer's Paradise, Inc.
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(Name of issuer in its charter)
Delaware 13-3136104
- ---------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
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(Address of principal executive offices)
Issuer's Telephone Number (732) 389-8950
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Check whether the issuer (1) 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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
There were 4,837,590 outstanding shares of Common Stock, par value $.01
per share, as of April 22, 2002, not including 392,660 shares classified as
Treasury Stock.
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PART I - FINANCIAL INFORMATION
PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
March 31, December 31,
2002 2001
---- ----
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 10,928 $ 11,425
Cash held in escrow 2,291 2,335
Accounts receivable, net 8,586 8,449
Inventory - finished goods 1,234 686
Prepaid expenses and other current assets 407 471
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Total current assets 23,446 23,366
Equipment and leasehold improvements, net 548 634
Other assets 51 57
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Total assets $ 24,045 $ 24,057
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 9,742 $ 9,649
Other current liabilities 350 350
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Total current liabilities 10,092 9,999
Commitments and contingencies
Stockholders' equity
Common stock 53 53
Additional paid-in capital 35,483 35,483
Treasury stock (1,633) (1,473)
Retained earnings (19,441) (19,539)
Accumulated other comprehensive loss (509) (466)
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Total stockholders' equity 13,953 14,058
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Total liabilities and stockholders' equity $ 24,045 $ 24,057
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The accompanying notes are an integral part of these consolidated financial statements.
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PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
(In thousands, except per share data)
Three months ended
March 31,
---------
2002 2001
---- ----
Net sales $ 17,445 $ 24,164
Cost of sales 15,173 21,627
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Gross profit 2,272 2,537
Selling, general and administrative expenses 2,168 2,898
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Income (loss) from operations 104 (361)
Interest income, net 52 98
Unrealized foreign exchange gain/(loss) (10) 16
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Income (loss) before income tax provision 146 (247)
Provision (benefit) for income taxes 48 (91)
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Net income (loss) $ 98 $ (156)
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Net income (loss) per common share-Basic $ 0.02 $ (0.03)
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Net income (loss) per common share-Diluted $ 0.02 $ (0.03)
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Weighted average common shares outstanding-Basic 4,919 4,986
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Weighted average common shares outstanding-Diluted 4,928 4,986
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Reconciliation to comprehensive income (loss):
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Net Income (loss) $ 98 $ (156)
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Other comprehensive loss, net of tax:
Foreign currency translation adjustments $ (43) $ (252)
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Total comprehensive income (loss) $ 55 $ (408)
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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PROGRAMMER'S PARADISE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
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2002 2001
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Cash flows from operating activities
Net income (loss) $ 98 $ (156)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Deferred income taxes - (138)
Depreciation and amortization 104 193
Changes in operating assets and liabilities:
Accounts receivable (137) 794
Inventory (548) 457
Prepaid expenses and other current assets 65 1,368
Accounts payable and accrued expenses 94 (2,584)
Net change in other assets and liabilities (2) (147)
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Net cash used for operating activities (326) (1,801)
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Cash flows from investing activities:
Change in net assets held for sale - 12,163
Increase (decrease) in cash held in escrow 43 (2,878)
Capital expenditures (10) (58)
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Net cash provided by investing activities 33 9,227
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Cash flows from financing activities:
Net proceeds from issuance of common stock - 2
Purchase of treasury stock (161) -
Borrowings (repayments) under lines of credit - 1,065
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Net cash provided by (used for) financing activities (161) 1,067
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Effect of foreign exchange rate on cash (43) (251)
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Net increase (decrease) in cash and cash equivalents (497) 8,242
Cash and cash equivalents at beginning of period 11,425 2,091
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Cash and cash equivalents at end of period $ 10,928 $ 10,333
======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
PROGRAMMER'S PARADISE, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2002
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles 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 generally
accepted accounting principles for complete financial statements.
The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to product returns,
bad debts, inventories, investments, intangible assets, income taxes,
restructuring and contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. In the opinion of 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. Operating results for the
three months ended March 31, 2002, are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002.
For further information, refer to the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 2001.
2. Assets and liabilities of the Company's Canadian Subsidiary have been
translated at current exchange rates, and related revenues and expenses
have been translated at average rates of exchange in effect during the
year. 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".
3. In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no
Notes to Condensed Consolidated Financial Statements (continued)
longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful
lives. The Company expects the adoption of FAS No. 142 to have no
impact on the Company's operating results and financial position.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of", effective for fiscal years beginning after December
15, 2001. SFAS No. 144 supercedes SFAS No. 121, removes goodwill from
its scope and identifies the methods to be used in determining fair
value. The Company expects the adoption of SFAS No. 144 to have no
impact on the Company's operating results and financial position.
4. Pursuant to an Agreement, dated December 1, 2000 ("Stock Sale
Agreement"), between the Company and PC-Ware Information Technologies
AG, a German corporation ("PC-Ware"), on January 9, 2001 the Company
sold all of the shares of its European subsidiaries for 14,500,000
Euros, subject to post-closing adjustments, including finalization of
the closing balance sheet, in accordance with the Stock Sale Agreement
Page 5
between the Company and PC Ware, which remains to be resolved between
the parties. As security for any claim of PC-Ware arising from alleged
breaches of representations by the Company under the Stock Sale
Agreement, 3,275,000 Euros are being held in a 240-day escrow. Such
claims are subject to a 300,000 Euro de minimus amount and a 7,500,000
Euro maximum amount. In September 2001, PC-Ware made claims aggregating
2,190,127.16 Euros (plus interest) (the equivalent of approximately
$1,997,000) against the escrow.
On October 19, 2001, 735,789 Euros (the equivalent of approximately
$654,373) were distributed from the escrow account to the Company. The
Company believes that PC-Ware's remaining claims are without merit and
intends to vigorously dispute each in the arbitration proceedings,
which will resolve the disputed claims.
5. Basic EPS is computed by dividing net earnings (loss) by the weighted
average number of shares outstanding during the period. Diluted EPS is
computed considering the potentially dilutive effect of outstanding
stock options. A reconciliation of the numerator and denominators of
the basic and diluted per share computations follows (in thousands,
except per share data):
Three months ended
March 31,
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2002 2001
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Numerator:
Net Income (loss) $ 98 $ (156)
Denominator:
Weighted average shares (Basic) 4,919 4,986
Dilutive effect of outstanding options 9 0
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Weighted average shares including assumed conversions (Diluted) 4,928 4,986
Basic net income (loss) per share $ 0.02 $ (0.03)
Diluted net income (loss) per share $ 0.02 $ (0.03)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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
well-known catalogs, direct mail programs and advertisements in trade magazines
as well as through Internet and e-mail promotions. Through our wholly owned
subsidiary, Lifeboat Distribution Inc., we distribute marketed products to
dealers and resellers in the United States and Canada.
Page 6
The Company's sales and results of operations have fluctuated and are expected
to continue to fluctuate on a quarterly basis as a result of a number of
factors, including: the condition of the software industry in general; shifts in
demand for software products; industry shipments of new software products or
upgrades; the timing of new merchandise and catalog offerings; fluctuations in
response rates; fluctuations in postage, paper, shipping and printing costs and
in merchandise returns; adverse weather conditions that affect response,
distribution or shipping; shifts in the timing of holidays; and changes in the
Company's product offerings. The Company's operating expenditures are based on
sales forecasts. If revenues do not meet expectations in any given quarter,
operating results may be materially adversely affected.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statement of operations
expressed as a percentage of net sales.
Three months ended
March 31,
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2002 2001
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Net sales 100.0% 100.0%
Cost of sales 87.0 89.5
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Gross profit 13.0 10.5
Selling, general and administrative expenses 12.4 12.0
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Income (loss) from operations 0.6 (1.5)
Interest income, net 0.3 0.4
Unrealized foreign exchange gain (loss) (0.1) 0.1
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Income (loss) before income taxes 0.8 (1.0)
Income taxes 0.2 0.4
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Net income (loss) 0.6% (0.6)%
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Net Sales
Net sales in the first quarter of 2002 decreased 28% or $6.7 million to $17.5
million compared to $24.2 million for the same period in 2001. The quarter over
quarter revenue decline reflects the continued difficult business environment
and the decision to cease selling Microsoft Select and Enterprise license
agreements. As stipulated in our annual report on Form 10-K, our business plan
contemplates that sales for 2002 will be lower than in recent years, primarily
due to the impact of the change in the reseller agreement with Microsoft.
Gross Profit
Gross profit as a percentage of net sales increased to 13.0% for the quarter
ended March 31, 2002, compared to 10.5% for the same period in 2001. Gross
profit in absolute dollars for the three-month period ended March 31, 2002 was
$2.3 million as compared to $2.5 million in 2000. The increase in Gross Profit
Margin reflects a shift in the mix of sales as a result of the substantial
increase in higher margin sales compared to large revenue and low margin sales
such as Microsoft Select and Enterprise licensing. As stipulated in our annual
report on Form 10-K, our business plan contemplates that our Gross Profit Margin
will increase as compared to recent years, primarily due to the impact of the
change in the reseller agreement with Microsoft.
Page 7
Selling, General and Administrative Expenses
SG&A expenses for the quarter ended March 31, 2002 were $2.2 million as compared
to $2.9 million for the same period in 2001, a decrease of $0.7 million or 25%.
This decrease was primarily due to lower personnel-related expenses, cost
containment initiatives and improved cost control policies and procedures.
Each year SG&A has increased in absolute dollars. As a result of the
restructuring plan described in our annual report on form 10-K, we anticipate
that SG&A in absolute dollars will decline in 2002; however there can be no
assurance that this will actually occur.
Unrealized Foreign Exchange Gain (Loss)
The unrealized foreign exchange loss for the quarter ended March 31, 2002 was
$10,000 compared to a gain of $16,000 for the same period in 2001. The
unrealized loss in the first three months of 2002 is primarily due to the trade
activity with our Canadian subsidiary as well as the impact the lower Euro had
on the 2.5 million Euros (the equivalent of approximately $2.3 million at March
31, 2002) that is being held in escrow related the sale of our European
Operations. The amount is subject to fluctuations in the Euro-to-U.S. dollar
exchange rate and is at risk until converted to U.S. dollars after settlement of
the claims. For more information regarding the sale of our European Operations
and the resulting litigation reference is made to Part II, Item I of this report
under the heading "Legal Proceedings". Although the Company does maintain bank
accounts in local currencies to reduce currency exchange fluctuations, the
Company is, nevertheless, subject to risks associated with such fluctuations.
Income Taxes
For the quarter ended March 31, 2002, the Company recorded a provision for
income taxes of approximately $ 48,000, which consists of a provision for
Canadian taxes.
The loss carry forwards offset the provision for income taxes for our US
operations. As per March 31, 2002, the Company had recorded a US deferred tax
asset of approximately $6.7 million reflecting, in part, a benefit of $3.2
million in federal and state tax loss carry forwards, which will expire in
varying amounts between 2002 and 2021. As of March 31, 2002, there is a 100%
valuation allowance on the deferred tax assets.
Liquidity and Capital Resources
Our cash and cash equivalents decreased by $0.5 million to $10.9 million at
March 31, 2002, from $11.4 million at December 31, 2001. Net cash used for
operating activities amounted to $0.3 million; net cash used in financing
activities amounted to $0.2 million.
Net cash used for operating activities was $326,000 and primarily resulted from
a $0.5 million increase in inventory and a $137,000 increase in trade
receivables partly offset by our net income in the first quarter of 2002 of
$98,000, a $159,000 decrease in accounts payable and accrued expenses and
prepaid expenses and other current assets. The increase in inventory is
primarily due to higher inventory levels related to the release of Microsoft's
new .NET products.
Cash used for financing activities of $161,000 consisted primarily of the
purchase of our own stock under the buyback program discussed below.
Page 8
In October 1999, the Company's Board of Directors authorized the purchase of up
to 521,013 shares of its common stock, approximately 10% of its total
outstanding shares in October of 1999, in both open market and private
transactions, as conditions warrant. The repurchase program is expected to
remain effective for 2002. We intend to hold the repurchased shares in treasury
for general corporate purposes, including issuances under various stock option
plans. As per March 31, 2001, we had repurchased approximately 323,000 shares.
The Company's current and anticipated use of its cash and cash equivalents is,
and will continue to be, to fund working capital and operational expenditures,
and for the stock buyback program. Our business plan furthermore contemplates
the use of cash to pay vendors promptly in order to obtain more favorable
conditions.
The Company believes that the funds held in cash and cash equivalents will be
sufficient to fund the Company's working capital and cash requirements at least
through December 31, 2002. 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.
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. 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 capitalizes the advertising
costs associated with producing its catalogs. The costs of these catalogs are
amortized over the estimated shelf life of the catalogs, generally 3 months. 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 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.
Page 9
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 not are not limited to, the continued acceptance of the
Company's distribution channel by vendors and customers, the timely availability
and acceptance of new products, contribution of key vendor relationships and
support programs, as well as factors that affect the software industry
generally.
The Company operates in a rapidly changing business, and new risk factors emerge
from time to time. Management cannot predict every risk factor, nor can it
assess the impact, if any, of all such risk factors on the Company's business or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those projected in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results and readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The statement concerning future sales and future Gross Profit Margin are forward
looking statements involving certain risks and uncertainties such as
availability of products, product mix, market conditions and other factors,
which could result in a fluctuation of sales below recent experience.
Stock Volatility. The technology sector of the United States stock markets has
experienced substantial volatility in recent periods. Numerous conditions, which
impact the technology sector or the stock market in general or the Company in
particular, whether or not such events relate to or reflect upon the Company's
operating performance, could adversely affect the market price of the Company's
Common Stock. Furthermore, fluctuations in the Company's operating results,
announcements regarding litigation, the loss of a significant vendor, increased
competition, reduced vendor incentives and trade credit, higher postage and
operating expenses, and other developments, could have a significant impact on
the market price of the Company's Common Stock.
Page 10
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.
In the quarter ended March 31, 2002, the Company did not invest in marketable
securities. Cash 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.
Information regarding quantitative and qualitative market risks related to Euro
2.5 million that is being held in escrow is set forth in Part II, Item I of this
Report under the heading "Legal Proceedings".
Page 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Pursuant to an Agreement, dated December 1, 2000 ("Stock Sale Agreement"),
between the Company and PC-Ware Information Technologies AG, a German
corporation ("PC-Ware"), on January 9, 2001 the Company sold all of the shares
of its European subsidiaries for 14,500,000 Euros, subject to post-closing
adjustments, including finalization of the closing balance sheet, in accordance
with the Stock Sale Agreement between the Company and PC Ware, which remains to
be resolved between the parties. As security for any claim of PC-Ware arising
from alleged breaches of representations by the Company under the Stock Sale
Agreement, 3,275,000 Euros are being held in a 240-day escrow. Such claims are
subject to a 300,000 Euro de minimus amount and a 7,500,000 Euro maximum amount.
In September 2001, PC-Ware made claims aggregating 2,190,127.16 Euros (plus
interest) (the equivalent of approximately $1,997,000) against the escrow. On
October 19, 2001, 735,789 Euros (the equivalent of approximately $654,373) were
distributed from the escrow account to the Company.
The Company believes that PC-Ware's remaining claims are without merit and
intends to vigorously dispute each in the arbitration proceedings, which will
resolve the disputed claims.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The Company filed a current report on Form 8-K on April 19, 2002
relating to a Change in Registrant's Certifying Accountant.
Page 12
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.
April 30, 2002 By: /s/ Simon F. Nynens
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Date Simon F. Nynens, Chief Financial
Officer and Vice President
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