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, 2005
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 (IRS Employer Identification Number)
incorporation)
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ x ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ x ]
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 a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Act). Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer
[X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). 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, 2005, the last business day of the
Registrant's most recently completed second fiscal quarter, as reported on The
NASDAQ Capital Market, was approximately $33,398,000. (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 8, 2006 was 4,143,262 shares.
Documents Incorporated by Reference: Portions of the Registrant's
definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be
filed on or before April 30, 2006 are incorporated by reference into Part III of
this Report.
Page 1 of 22
PART I
Item 1 Business
General
Programmer's Paradise, Inc. (the "Company") is a 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 Captial Market under the symbol "PROG". Our
main Web site addresses are www.programmersparadise.com and
www.lifeboatdistribution.com. 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 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.
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
Page 2 of 22
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,
Macrovision, 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 2005 and
2004, hardware and peripherals represented 5% and 6%, respectively, of our
overall revenue. In 2003 these sales represented 7% 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 publishers whose products we market. In 2005, the Company's
cooperative and fee-based advertising reimbursements as a percentage of sales
decreased to 3.5% from 4% in 2004.
One customer, CDW Corporation, accounted for 14.2%, 12.7%, and 11.8% of
consolidated net sales in 2005, 2004, and 2003, respectively, and 7.2% of
accounts receivable as of December 31, 2005. Our top five customers accounted
for 27%, 22%, and 22% of consolidated net sales in 2005, 2004, and 2003,
respectively. The Company generally ships products within 48 hours of confirming
a customer's order. This allows for minimum backlog in the business.
Page 3 of 22
Canadian sales represented 12% of consolidated revenues in 2005 as compared
to 11% in 2004, and 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, 2005, Ingram
Micro and VMware were the only individual vendors from whom our purchases
exceeded 10% of total purchases. For the year ended December 31, 2005, 2004, and
2003, Ingram Micro accounted for 17.5%, 25.0%, and 27.7%, respectively of total
purchases. VMware accounted for 35.1%, 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 2005, the Company purchased approximately 79% of its purchases directly
from manufacturers and publishers and the balance from multiple distributors, as
compared to 72% in 2004, and 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 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,
Page 4 of 22
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, 2005, Programmer's Paradise, Inc. and its
subsidiaries had 115 full-time and 1 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.
Executive Officers of the Company
Set forth below are the name, age, present title, principal occupation and
certain biographical information for our executive officers as of February 1,
2006, all of whom have been appointed by and serve at the discretion of our
board of directors. The company's former President and CEO resigned in January
2006 see Note 8 for additional details.
Name Age Position
- ---------------------------------------------------------------
Simon F. Nynens 34 President and Chief Executive Officer
Jeffrey C. Largiader 49 Vice President - Sales & Marketing
Daniel T. Jamieson 48 Vice President and General Manager-Lifeboat
Steven R. McNamara 47 Vice President and General Manager - Canada
Vito Legrottaglie 42 Vice President - Information Systems
Kevin T. Scull 40 Vice President and Chief Accounting Officer
Simon F. Nynens was appointed President and Chief Executive Officer in January
2006. Mr. Nynens also serves on the Board of Directors. He previously held the
position of Executive Vice president and Chief Financial Officer since June
2004. Previously, Mr. Nynens served as Vice President and chief financial
officer since January 2002. Prior to that appointment, he served as the vice
president and chief operating officer of the company's European operations.
Jeffrey C. Largiader was appointed Vice President-Sales and Marketing in
April 2003. Mr. Largiader has served as the Vice-President - Marketing since
1989.
Page 5 of 22
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.
Kevin T. Scull was appointed Vice President and Chief Accounting Officer in
January 2006. He previously held the position as Corporate Controller of the
company since January 2003. Prior to joining Programmer's Paradise, Inc., Mr.
Scull previously worked for Niksun Inc. as Accounting Manager since January 2001
and prior to that he worked for Telcordia Inc. since December 2000 as Manager of
Accounting Policies.
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 100 F Street, N.E., 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.
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 Accounting Officer or Controller on our investor
relations web site.
Item 1A. Risk Factors
Changes in the information technology industry and/or economic environment
may reduce demand for the products and services we sell. Our results of
operations are influenced by a variety of factors, including the condition of
the IT industry, general economic conditions, shifts in demand for, or
availability of, computer products and software and IT services and industry
introductions of new products, upgrades or methods of distribution. Net sales
can be dependent on demand for specific product categories, and any change in
demand for or supply of such products could have a material adverse effect on
our net sales,
Page 6 of 22
and/or cause us to record write-downs of obsolete inventory, if we fail to react
in a timely manner to such changes.
We rely on our suppliers for product availability, marketing funds,
purchasing incentives and competitive products to sell. We acquire products for
resale both directly from manufacturers and indirectly through distributors. The
loss of a supplier could cause a disruption in the availability of products.
Additionally, there is no assurance that as manufacturers continue to sell
directly to end users and through the distribution channel, they will not limit
or curtail the availability of their product to resellers like us. Our inability
to obtain a sufficient quantity of product, or an allocation of products from a
manufacturer in a way that favors one of our competitors relative to us, could
cause us to be unable to fill clients' orders in a timely manner, or at all,
which could have a material adverse effect on our business, results of
operations and financial condition.
The IT products and services industry is intensely competitive and actions
of competitors, including manufacturers of products we sell, can negatively
affect our business. Competition has been based primarily on price, product
availability, speed of delivery, credit availability and quality and breadth of
product lines and, increasingly, is also based on the ability to tailor specific
solutions to client needs. We compete with manufacturers, including
manufacturers of products we sell, as well as a large number and wide variety of
marketers and resellers of IT products and services. In addition, manufacturers
are increasing the volume of software products distributed electronically
directly to end-users and in the future will likely pay lower referral fees for
sales of certain software licensing agreements sold by us. Generally, pricing is
very aggressive in the industry, and we expect pricing pressures to continue.
There can be no assurance that we will be able to negotiate prices as favorable
as those negotiated by our competitors or that we will be able to offset the
effects of price reductions with an increase in the number of clients, higher
net sales, cost reductions, greater sales of services, which are typically at
higher gross margins, or otherwise. Price reductions by our competitors that we
either cannot or choose not to match could result in an erosion of our market
share and/or reduced sales or, to the extent we match such reductions, could
result in reduced operating margins, any of which could have a material adverse
effect on our business, results of operations and financial condition.
Disruptions in our information technology and voice and data networks could
affect our ability to service our clients and cause us to incur additional
expenses. We believe that our success to date has been, and future results of
operations will be, dependent in large part upon our ability to provide prompt
and efficient service to clients. Our ability to provide such services is
largely dependent on the accuracy, quality and utilization of the information
generated by our IT systems, which affect our ability to manage our sales,
client service, distribution, inventories and accounting systems and the
reliability of our voice and data networks.
We depend on certain key personnel. Our future success will be largely
dependent on the efforts of key management personnel. We also believe that our
future success will be largely dependent on our continued ability to attract and
retain highly qualified management, sales, service and technical personnel. We
cannot assure you that we will be able to attract and retain such personnel.
Further, we make a significant investment in the training of our sales account
executives. Our inability to retain such personnel or to train them either
rapidly enough to meet our expanding needs or in an effective manner for quickly
changing market conditions could cause a decrease in the overall quality and
efficiency of our sales staff, which could have a material adverse effect on our
business, results of operations and financial condition.
Risks Related to Our Common Stock. The exercise of outstanding options may
dilute your ownership of our common stock. Our common stock is thinly traded. As
a result of the thin trading market for our stock, its market price may
fluctuate significantly more than the stock market as a whole or the stock
prices of similar companies. Without a larger float, our common stock will be
less liquid than the stock of
Page 7 of 22
companies with broader public ownership, and, as a result, the trading prices
for our common stock may be more volatile. Among other things, trading of a
relatively small volume of our common stock may have a greater impact on the
trading price for our stock than would be the case if our public float were
larger.
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. The Company leases approximately 4,000 square feet of office space in
Hauppauge, New York for a satellite sales office under a lease expiring in April
2010. Total annual rent expense amount to approximately $70,000. 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 March
2006. Total annual rent expense for the satellite sales office amounts to
approximately $30,000. We believe that each of the properties is in good
operating condition and such properties are adequate for the operation of the
Company's business as currently conducted.
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 2005 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, trades on The
NASDAQ Capital Market under the symbol "PROG". Following is the range of low and
high closing prices for our Common Stock as reported on The NASDAQ Capital
Market. High Low 2005 First Quarter $14.790 $11.250 Second Quarter 12.600 8.210
Third Quarter 11.160 8.820 Fourth Quarter 12.670 9.300
High Low
2005
First Quarter $14.790 $11.250
Second Quarter 12.600 8.210
Third Quarter 11.160 8.820
Fourth Quarter 12.670 9.300
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
In 2005, we declared quarterly dividends totaling $0.49 per share on our
Common Stock. These dividends are reflected in the financial statements as a
reduction in additional paid in capital.
Page 8 of 22
During 2005, we issued 128,425 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 2005 under the Company's stock option
plans.
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.
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)
- -------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005
- -------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data:
Net sales $89,536 $65,157 $69,569 $103,582 $137,655
Cost of sales 80,656 56,540 60,609 91,243 122,685
- -------------------------------------------------------------------------------------------------------------------
Gross profit 8,880 8,617 8,960 12,339 14,970
Selling, general and
administrative expenses 13,020 8,926 8,143 10,173 12,203
Amortization of goodwill 25 - - -
Impairment of goodwill 230 - - - -
Cost of restructuring 362 - - - -
Settlement of escrow - 348 - - -
-----------------------------------------------------------------------
Income (loss) from operations (4,757) (657) 817 2,166 2,767
Other income, net 318 415 230 112 300
-----------------------------------------------------------------------
Income (loss) before income taxes (4,439) (242) 1,047 2,278 3,067
Income tax provision (benefit) 83 (270) 81 4,044) 414
-----------------------------------------------------------------------
Net income (loss) $(4,522) $28 $966 $6,322 $2,653
=======================================================================
Net income (loss) per share:
Basic $(0.91) $0.01 $0.26 $1.65 $0.67
=======================================================================
Diluted $(0.91) $0.01 $0.25 $1.51 $0.61
=======================================================================
Weighted average common
shares outstanding:
Basic 4,987 4,459 3,724 3,828 3,976
=======================================================================
Diluted 4,987 4,480 3,900 4,180 4,384
=======================================================================
December 31,
- -------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005
- -------------------------------------------------------------------------------------------------------------------
Balance Sheet Data(1):
Cash and cash equivalents $11,425 $6,072 $5,878 $4,888 $7,369
Marketable securities - 5,110 5,033 6,595 7,884
Page 9 of 22
Working capital 13,367 11,167 10,703 12,756 14,595
Total assets 24,057 19,468 20,489 32,914 44,268
Total stockholders' equity 14,058 11,696 11,195 16,495 17,998
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 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. 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
Page 10 of 22
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 $2.7 million for the year 2005, as compared to
a net income of $6.3 million in 2004. The decrease in net income of $3.6 million
was mainly due to a $4.1 million reversal of our deferred tax valuation
allowance in December 2004. For 2005, we reversed the remaining $0.9 million
balance of our deferred tax valuation allowance, resulting in a net 2005
provision for income taxes of $0.4 million. Both reversals were due to our
positive outlook regarding our expected profitability in the coming years. The
2005 reversal was also caused by the change in New Jersey tax law that allows a
full deduction for net operating loss carryovers beginning in 2006.
Income from operations amounted to $2.8 million in 2005 as compared to $2.2
million in 2004, an increase of $0.6 million or 28% in 2005, as compared to
2004. The 33% increase in sales combined with a 1% point decrease in our gross
margin percentage resulted in an increase in gross profit of $2.6 million. We
invested $2 million in Selling, General and Administrative (SG&A) expenses to
achieve this growth.
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.
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:
Page 11 of 22
Years ended December 31,
2003 2004 2005
-----------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.1% 88.1% 89.1%
----------------------------------------
Gross profit 12.9% 11.9% 10.9%
Selling, general and
administrative expenses 11.7% 9.8% 8.9%
----------------------------------------
Income from operations 1.2% 2.1% 2.0%
Other income, net 0.3% 0.1% 0.2%
---------------------------------------
Income before income taxes 1.5% 2.2% 2.2%
Income tax provision (benefit) 0.1% (3.9)% 0.3%
---------------------------------------
Net Income 1.4% 6.1% 1.9%
=======================================
Year ended December 31, 2005 Compared to Year Ended December 31, 2004
Net Sales
Net sales in 2005 increased by 33% or $34.1 million to $137.7 million
compared to $103.6 million in 2004. On a quarterly basis, net sales have
increased from $30.2 million in the first quarter of 2005 to $42.0 million in
the fourth quarter of 2005 and from $20.7 million in the first quarter of 2004
to $31.0 million in the fourth quarter of 2004. The main factor for our growth
in 2005 on a yearly and quarterly basis was a strong demand for our core
products and increased productivity of our sales representatives in 2005.
On a forward-looking basis, the market and overall demand for the software
we sell continues to be volatile. Furthermore, the fourth quarter of 2005 was
positively impacted by several large deals that we won due to aggressive
pricing. This could have a negative impact on our future revenue growth
percentage.
Gross Profit
Gross profit in absolute dollars for the year ended December 31, 2005 was
$15.0 million as compared to $12.3 million in 2004. Gross profit as a percentage
of net sales decreased to 10.9% in 2005, compared to 11.9% in 2004. 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 several years.
This is a result of the strong demand for our core products that typically have
lower margins.
On a forward-looking basis, gross profit margin in future periods may be
less than that achieved in 2005. We have several initiatives to increase gross
margin percentages, including increased management control over pricing, a focus
on high margin products and/or markets and selling services. However, we do not
expect these initiatives to have an immediate positive impact on our gross
margin percentages. The objective of these initiatives is to slow the decline in
our gross margin percentage. 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 2005.
Selling, General and Administrative Expenses
SG&A expenses for 2005 were $12.2 million as compared to $10.2 million for
2004, an increase of $2.0 million or 20.0%. The primary drivers in selling,
general and administrative expenses were payroll and employee related costs.
Payroll costs increased by $1.2 million as a result of our investment in our
sales account executive team that started towards the end of 2004.
Employee-related costs (which includes items such as profit sharing, incentive
awards and insurance) increased $0.3 million. Facility related expenses
increased by $0.3 million as a result of the opening of the satellite sales
office in Hauppauge, New York.
Page 12 of 22
The remaining $0.2 million was mainly related to a bad debt expense of $302,000
as the result of a bankruptcy filing by Amherst Technologies, LLC.
On a forward looking basis, we do not expect to increase our SG&A expenses
significantly. We have several initiatives in place to actually increase control
over SG&A expenses. Our SG&A expenses have increased over 20% on a yearly basis
for the last two years. The objective of these initiatives is to slow this
continued increase in SG&A expenses. There can be no assurances that these
initiatives will actually result in a slower increase in SG&A expenses in 2006
as compared to 2005.
Income Taxes
For the year ended December 31, 2005, the Company recorded a provision for
income taxes of approximately $414,000 which consists of provision of $257,000
for U.S. Federal taxes and $160,000 for state and local taxes income taxes and
$18,000 for foreign taxes offset by a deferred tax benefit of $21,000. As a
result of the Company's performance in 2005, and the fact that New Jersey law
allows a full deduction for net operating loss carryovers beginning in 2006 the
$900,000 of deferred income tax valuation allowance was reversed in the fourth
quarter of 2005 by reducing the income tax provision.
For the year ended December 31, 2004, the Company recorded a net deferred
tax benefit in the amount of $4.1 million dollars related to a reversal of a
deferred tax asset valuation allowance. The Company believed at that time that
uncertainty still existed regarding the realizability of certain deferred tax
assets and, accordingly, left a $900,000 valuation allowance remaining.
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.
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
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
Page 13 of 22
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.
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.
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 believed 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.
Recent Accounting Pronouncements
During the two years ended December 31, 2005, the Financial Accounting
Standards Board ("FASB") issued several pronouncements of significance to the
Company which are discussed in detail below. In addition, the FASB issued
several other pronouncements, including standards on inventory (SFAS No. 151
"Inventory Costs, an amendment of ARB 43, Chapter 4"), exchanges of nonmonetary
assets (SFAS No. 153 "Exchanges of Nonmonetary Assets"), which we either
currently comply with or are not anticipating to have a significant impact on
our future financial condition or results of operations.
In May 2005 the FASB issued Statement of Financial Accounting Standards No.
154 ("SFAS 154"), "Accounting Changes and Error Corrections," which replaces
Accounting Principles Board No. 20 ("APB 20"), "Accounting Changes," and
Statement of Financial Accounting Standards No. 3, "Reporting Accounting Changes
in Interim Financial Statements." SFAS 154 applies to all voluntary changes in
accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS 154 requires retrospective
application to prior periods' financial statements of a voluntary change in
accounting principle unless it is impracticable. APB 20 previously required that
most voluntary changes in accounting principle be recognized with a cumulative
effect adjustment in net income of the period of the change. SFAS 154 is
effective for accounting changes made in annual periods beginning after December
15, 2005. We are not able to assess at this time the future impact of this
statement on our consolidated financial position or results of operations.
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. In April 2005, the SEC announced that the accounting provisions of SFAS
123(R) are to be applied in the first quarter of the fiscal year beginning after
June 15, 2005. As a result, we are now required to adopt SFAS 123(R) in the
first quarter of fiscal 2006 and will recognize stock-based compensation expense
using
Page 14 of 22
the modified prospective method. We have disclosed the pro forma impact of
adopting SFAS No. 123(R) on net income and earnings per share for the years
ended December 31, 2005 and 2004 in Note 1, which includes all share-based
payment transactions to date. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement
recognition. Under the modified prospective adoption method, the Company will
record expense relating to employee stock-based compensation awards in the
periods subsequent to adoption without restatement of prior periods in the year
of adoption. This expense will be based on all unvested options as of the
adoption date as well as all future stock-based compensation awards. Based on
the current unvested options outstanding of 6,603 shares, the Company's 2006
pretax expense for those options is expected to be approximately $9 thousand.
This amount may increase to the extent that options are granted in 2006.
Liquidity and Capital Resources
In 2005, our cash and cash equivalents increased by $2.5 million to $7.4
million at December 31, 2005, from $4.9 million at December 31, 2004. Net cash
provided by operating activities amounted to $5.5 million; net cash used in
investing activities amounted to $1.6 million, and cash used in financing
activities amounted to $1.3 million.
Net cash provided by operating activities in 2005 was $5.5 million. In
2005, cash was mainly provided by $3.4 million from income from operations net
of non-cash charges, and a $10.0 million increase in accounts payable and
accrued expenses, offset by a $7.4 million increase in accounts receivable and a
$0.5 million increase in other operating assets and liabilities. 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 2005 amounted to $1.6 million. As a
result of the current low interest rates on our short-term savings accounts in
2005 we decided to invest in highly rated and highly liquid available-for-sale
securities. The company purchased $16.1 million of these securities during 2005
and redeemed $14.8 million during 2005. 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). The balance of cash used in investing
activities of $0.4 million consisted of purchases of equipment and leasehold
improvements.
Net cash used in financing activities in 2005 of $1.4 million consisted of
$1.9 million dividends paid on our Common Stock offset by $0.5 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
2006. We intend to hold the repurchased shares in treasury for general corporate
purposes, including issuances under various stock option plans. As of December
31, 2005, we owned 1,289,665 shares of Common Stock at an average cost of $2.81
per share. As of December 31, 2004, we owned 1,418,090 shares of Common Stock at
an average cost of $2.91 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.
Page 15 of 22
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) $1,153 $614 $513 26 -
Unconditional Purchase Obligations - - - - -
Other Long term Obligations - - - - -
- ----------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $1,153 $614 $513 $26 -
===================================================================================================================
(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 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, 2005, we did not have any 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.
Page 16 of 22
On an on-going basis, the Company evaluates its estimates, including those
related to product returns, bad debts, inventories, 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. 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.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
In addition to its activities in the United States, 12% of the Company's
2005 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 $7.9 million investments in marketable securities are only in
highly rated and highly liquid U.S. government securities and corporate bonds
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, 2005. 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
Page 17 of 22
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 Accounting Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Accounting Officer concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2005. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Changes in Internal Control Over Financial Reporting. As required by Rule
13a-15(d) under the Exchange Act, our management, including our Chief Executive
Officer and Chief Accounting Officer, also conducted an evaluation of our
internal control over financial reporting to determine whether any change
occurred during the quarter ended December 31, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. Based on that evaluation during the quarter ended
December 31, 2005 there has been no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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 2005 Annual Meeting of Stockholders,
to be filed pursuant to Regulation 14A not later than April 30, 2006 (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".
Page 18 of 22
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".
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 and 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.*
Page 19 of 22
10.38 Employment Agreement dated July 15, 2002 between William Willett and
the Company ****
10.39 First Amendment, dated as of December 16, 2003, to Employment
Agreement between William Willett and the Company ****
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 Simon F. Nynens, 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 Kevin T. Scull, the Chief
Accounting 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 Simon F. Nynens, 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 Kevin T. Scull, the Chief
Accounting 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 22
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 13, 2006.
PROGRAMMER'S PARADISE, INC.
By: /s/ Simon F. Nynens
------------------------------
Simon F. Nynens, President and
Chief Executive Officer
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 and Chief Executive Officer March 13, 2006
/s/ Simon F. Nynens (Principal Executive Officer)
- ---------------------------
Simon F. Nynens
Vice President and Chief Accounting Officer March 13, 2006
/s/ Kevin T. Scull (Principal Financial and Accounting Officer)
- ---------------------------
Kevin T. Scull
/s/ William H. Willett Chairman of the Board of Directors March 13, 2006
- ---------------------------
William H. Willett
/s/ Mark T. Boyer Director March 13, 2006
- -------------------
Mark. T. Boyer
/s/ F. Duffield Meyercord Director March 13, 2006
- ---------------------------
F. Duffield Meyercord
/s/ Edwin H. Morgens Director March 13, 2006
- ---------------------------
Edwin H. Morgens
/s/ Allan D. Weingarten Director March 13, 2006
- ---------------------------
Allan D. Weingarten
Page 21 of 22
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 Earnings F-4
Consolidated Statements of Stockholders' Equity and F-5
Comprehensive Income (Loss)
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-23
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, 2005 and 2004, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2005. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2005 and 2004,
and the results of its earnings and its cash flows for each of the three years
in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited the consolidated financial statement schedule, Schedule II
- - Valuation and Qualifying Accounts, for each of the three years ended December
31, 2005. 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.
January 27, 2006
Edison, New Jersey /s/ Amper, Politziner & Mattia, P.C.
F-2
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Balance Sheets
( Dollars in thousands, except per share amounts)
December 31,
2004 2005
--------------------------------
Assets
Current assets:
Cash and cash equivalents $4,888 $7,369
Marketable securities 6,595 7,884
Accounts receivable, net of allowances of $755 and
$1,231 in 2004 and 2005, respectively 14,173 21,185
Inventory, net of allowances of $43 and $31 in 2004 and 2005,
respectively 1,423 1,956
Prepaid expenses and other current assets 673 688
Deferred income taxes 1,423 1,783
---------------------------------
Total current assets 29,175 40,865
Equipment and leasehold improvements, net 303 434
Other assets 581 453
Deferred income taxes 2,855 2,516
---------------------------------
$32,914 $44,268
=================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $15,994 $25,751
Dividend payable 425 519
---------------------------------
Total current liabilities 16,419 26,270
---------------------------------
Commitments and Contingencies
Stockholders' equity:
Common Stock $.01 par value: Authorized, 10,000,000 shares,
issued 5,284,500 53 53
Additional paid-in capital 32,642 30,948
Treasury stock, at cost, 1,418,090 and 1,289,665 shares in 2004 and
2005, respectively (4,130) (3,620)
Accumulated deficit (12,223) (9,570)
Accumulated other comprehensive income 153 187
---------------------------------
Total stockholders' equity 16,495 17,998
---------------------------------
$32,914 $44,268
=================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Earnings
( Dollars in thousands, except per share amounts)
Year ended December 31
2003 2004 2005
------------------------------------------------
Net sales $69,569 $103,582 $137,655
Cost of sales 60,609 91,243 122,685
------------------------------------------------
Gross profit 8,960 12,339 14,970
Selling, general and administrative expenses 8,143 10,173 12,203
------------------------------------------------
Income from operations 817 2,166 2,767
Other income (expense):
Interest income 133 156 313
Foreign currency transaction gain (loss) 97 (44) (13)
------------------------------------------------
Income before provision (benefit) for income taxes 1,047 2,278 3,067
Provision (benefit) for income taxes 81 (4,044) 414
------------------------------------------------
Net income $966 $6,322 $2,653
================================================
Income per common share-Basic $0.26 $1.65 $0.67
================================================
Income per common share-Diluted $0.25 $1.51 $0.61
================================================
Weighted average common shares outstanding-Basic 3,724 3,828 3,976
================================================
Weighted average common shares outstanding-Diluted 3,900 4,180 4,384
================================================
F-4
The accompanying notes are an integral part of the consolidated financial
statements.
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(Dollars in thousands, except share amounts)
Accumulated
Additional other
Common Stock Paid-In Treasury Accumulated comprehensive
------------------
Shares Amount Capital Stock Deficit Income (loss) Total
--------------------------------------------------------------------------------------
Balance at January 1, 2003 5,230,250 $52 $35,484 $(4,184) $(19,511) $(145) $11,696
Net income 966 966
Other comprehensive income:
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 income:
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
Net income 2,653 2,653
Other comprehensive income:
Translation adjustment 22 22
Unrealized gain on available-
for-sale securities 12 12
Comprehensive Income 2,687
Dividend paid (1,433) (1,433)
Dividend declared payable (519) (519)
Exercise of stock options 510 510
Tax benefit from exercises of
non-qualified stock options 258 258
--------------------------------------------------------------------------------------
Balance at December 31, 2005 5,284,500 $53 $30,948 $(3,620) $(9,570) $187 $17,998
======================================================================================
F-5
Programmer's Paradise, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands, except share amounts)
Year ended December 31
2003 2004 2005
--------------------------------------------------------------
Cash flows from operating activities
Net Income $ 966 $ 6,322 $ 2,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 291 176 236
Amortization expense 22 15 10
Provision for doubtful accounts (106) 133 477
receivable
Benefit for deferred income taxes - (4,128) (21)
Changes in operating assets and liabilities:
Accounts receivable (1,336) (7,045) (7,369)
Inventory 32 (304) (533)
Prepaid expenses and other current assets (69) (340) (15)
Accounts payable and accrued expenses 1,147 7,118 10,015
Net change in other operating assets and (4) (22) (2)
liabilities
===============================================================
Net cash provided by operating activities 943 1,925 5,451
Cash flows used in investing activities
Purchase of equipment and leasehold improvements
(122) (187) (367)
Purchases of available-for-sale securities (5,473) (7,084) (16,077)
Redemptions of available-for-sale securities 5,550 5,500 14,800
--------------------------------------------------------------
Net cash used in investing activities (45) (1,771) (1,644)
Cash flows used in financing activities
Purchase of treasury stock (377) - -
Proceeds from stock option exercise 175 359 510
Dividends paid (1,113) (1,600) (1,858)
--------------------------------------------------------------
Net cash used in financing activities (1,315) (1,241) (1,348)
--------------------------------------------------------------
Effect of foreign exchange rate on cash 223 97 22
--------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (194) (990) 2,481
Cash and cash equivalents at beginning of year 6,072 5,878 4,888
==============================================================
Cash and cash equivalents at end of year $ 5,878 $ 4,888$ 7,369
==============================================================
Supplementary disclosure of cash flow information:
Income taxes paid $ 73 $ 38 $ 170
Interest paid $ 26 $ 19 $ -
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 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.
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. At
December 31, 2005 the Company's $7.9 million investments in marketable
securities are only in highly rated and highly liquid U.S. government securities
and corporate bonds.
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, 2005, 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. Equipment depreciation
is 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 and No. 104, "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 attributable to common
stockholders and earnings 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
------------------------------------
2003 2004 2005
----------------------------------------
----------------------------------------
Net income as reported $966 $6,322 $2,653
Deduct: Total stock-based employee
compensation expense
determined under fair value based method,
net of related tax effect: (50) (896) (174)
----------------------------------------
Net income pro forma $916 $5,426 $2,479
========================================
Basic net income per share, as reported $0.26 $1.65 $0.67
Diluted net income per share, as reported $0.25 $1.51 $0.61
Basic net income per share, pro forma $0.25 $1.42 $0.62
Diluted net income per share, pro forma $0.23 $1.30 $0.57
F-10
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
--------------------------------------
2003 2004 2005
--------------------------------------
- ----------------------------------------------------------------------
Expected life (in years) 4.2 4.0 4.0
Risk-free interest rate 3.38% 3.66% 3.78%
Volatility 53% 59% 59%
Dividend yield 10% 4% 4.2%
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.
Advertising Costs
Advertising costs are charged to expense in the period incurred. Advertising
costs for 2003, 2004, and 2005 amounted to approximately $2,167, $2,258 and
$2,416, respectively.
Impact of Accounting Pronouncements
During the two years ended December 31, 2005, the Financial Accounting Standards
Board ("FASB") issued several pronouncements of significance to the Company
which are discussed in detail below. In addition, the FASB issued several other
pronouncements, including standards on inventory (SFAS No. 151 "Inventory Costs,
an amendment of ARB 43, Chapter 4"), exchanges of nonmonetary assets (SFAS No.
153 "Exchanges of Nonmonetary Assets"), which we either currently comply with or
are not anticipating to have a significant impact on our future financial
condition or results of operations.
F-11
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
In May 2005 the FASB issued Statement of Financial Accounting Standards No. 154
("SFAS 154"), "Accounting Changes and Error Corrections," which replaces
Accounting Principles Board No. 20 ("APB 20"), "Accounting Changes," and
Statement of Financial Accounting Standards No. 3, "Reporting Accounting Changes
in Interim Financial Statements." SFAS 154 applies to all voluntary changes in
accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS 154 requires retrospective
application to prior periods' financial statements of a voluntary change in
accounting principle unless it is impracticable. APB 20 previously required that
most voluntary changes in accounting principle be recognized with a cumulative
effect adjustment in net income of the period of the change. SFAS 154 is
effective for accounting changes made in annual periods beginning after December
15, 2005. We are not able to assess at this time the future impact of this
statement on our consolidated financial position or results of operations.
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. In April 2005, the SEC announced that the accounting provisions of SFAS
123(R) are to be applied in the first quarter of the fiscal year beginning after
June 15, 2005. As a result, we are now required to adopt SFAS 123(R) in the
first quarter of fiscal 2006 and will recognize stock-based compensation expense
using the modified prospective method. We have disclosed the pro forma impact of
adopting SFAS No. 123(R) on net income and earnings per share for the years
ended December 31, 2005 and 2004 in Note 1, which includes all share-based
payment transactions to date. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement
recognition. Under this adoption method, the Company will record expense
relating to employee stock-based compensation awards in the periods subsequent
to adoption. This expense will be based on all unvested options as of the
adoption date as well as all future stock-based compensation awards. Based on
the current unvested options outstanding of 6,603 shares, the Company's 2006
pretax expense for those options is expected to be approximately $9. This amount
may increase to the extent that options are granted in 2006.
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, 2005 were:
Cost Market value Unrealized loss
U.S. Government Securities $ 6,840 $ 6,840 $ -
Corporate Bonds $ 1,054 $ 1,044 $ (10)
------- ------- ------
Total Marketable securities $ 7,894 $ 7,884 $ (10)
======= ======= ======
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 at December 31, 2005 by contractual
maturity were:
Estimated
Cost Fair Value
Due in one year or less $7,844 $7,834
Due in greater than one year 50 50
------ ------
Total investments $7,894 $7,884
====== ======
Investments in available-for-sale securities at December 31, 2004 were:
Cost Market value Unrealized 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 in U.S. Government securities at
December 31, 2004 by contractual maturity were: Estimated Cost Fair Value
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
====== ======
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:
2004 2005
---------------------------------
Equipment $ 2,210 $ 2,044
Leasehold improvements 293 303
---------------------------------
2,503 2,347
Less accumulated depreciation and
amortization (2,200) (1,913)
---------------------------------
$ 303 $ 434
=================================
F-13
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
Accounts payable and accrued expenses consist of the following as of December
31:
2004 2005
--------------------------------
Trade accounts payable $ 15,056$ 24,258
Other accrued expenses 938 1,493
--------------------------------
$ 15,994$ 25,751
================================
5. Income Taxes
Deferred tax attributes resulting from differences between financial and
accounting amounts and tax basis of assets and liabilities at December 31, 2004
and 2005 are as follows:
December 31
2004 2005
--------------------------------
Current assets and liabilities
Accruals and reserves $ 326 $ 629
Goodwill 271 271
Net operating loss carry forwards 914 883
--------------------------------
Deferred tax assets 1,511 1,783
Valuation allowance (88) -
================================
Net current deferred tax assets $ 1,423 $ 1,783
================================
Non-current assets and liabilities
Accruals and reserves $ 216 $ 76
Depreciation 84
80
Goodwill 1,527 1,252
Net operating loss carry forwards 1,764 1,024
Business credits 35 84
--------------------------------
Deferred tax assets 3,626 2,516
Valuation allowance (771) -
================================
Net non-current deferred tax assets $ 2,855 $ 2,516
================================
The net change in the valuation allowance for the year ended December 31, 2004
and 2005 was ($5,362) and ($859) respectively.
F-14
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
The provision (benefit) for income taxes is as follows:
Year ended December 31
2003 2004 2005
-------------------------------------------------
Current:
Federal $ - $ 19 $ 257
State - 72 160
Canada 81 (7) 18
-------------------------------------------------
81 84 435
Deferred:
Federal - $ (3,676) $ 663
State - (452) (684)
Canada - - -
-------------------------------------------------
- (4,128) (21)
=================================================
$ 81 $ (4,044) $ 414
=================================================
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
2003 2004 2005
--------------------------------
--------------------------------
Statutory rate applied to pretax income $ 356 $ 795 $ 1,042
Federal alternative minimum tax - 19 47
State income taxes, net of benefit
of federal income taxes 46 133 181
Foreign income taxes over U.S.
statutory rate 2 8 3
Net decrease in valuation allowance (323) (5,362) (859)
Other items - 422 -
Settlement of prior year's tax - (59) -
---------------------------------
Income tax expense (benefit) $ 81 $ (4,044) $ 414
=================================
F-15
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
As of December 31, 2005, the Company had approximately $3.8 million in federal
net operating loss carryovers, which expire in varying amounts between 2006 and
2023.
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, 2005. The Company has reduced its
valuation allowance which was provided in prior years.
For the year ended December 31, 2004, the Company recorded a net deferred tax
benefit in the amount of $4.0 million dollars related to a reversal of a
deferred tax asset valuation allowance. The Company believed at that time that
uncertainty still existed regarding the realizability of certain deferred tax
assets and, accordingly, established a $900 thousand dollar valuation allowance.
As a result of the Company's performance in 2005, and the fact that New Jersey
law allows a full deduction for net operating loss carryovers beginning in 2006,
the $900 thousand dollar of deferred income tax valuation allowance was reversed
in the fourth quarter of 2005, by reducing the income tax provision.
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.
For financial reporting purposes, income before income taxes includes the
following components:
Year ended December 31
2003 2004 2005
---------------------------------------
United States $816 $2,147 $3,022
Canada 231 131 45
---------------------------------------
$1,047 $2,278 $3,067
=======================================
During the years ended December 31, 2003, 2004 and 2005, the Company paid
approximately $73, $38 and $ 170, respectively, in income taxes.
F-16
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
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 2005 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.
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 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.
F-17
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
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. 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.
On April 21, 2005, the Company granted 60,640 options at an option price of
$12.85, at market price, 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.
Changes during 2003, 2004 and 2005 in options outstanding for the combined plans
were as follows:
Weighted
Number Average
of Exercise
Options Price
-----------------------------
Outstanding at January 1, 2003 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
Granted in 2005 60,640 12.85
Canceled in 2005 (6,545) 3.36
Exercised in 2005 (128,425) 3.97
---------------
Outstanding at December 31, 2005 892,890 $6.46
===============
===============
Exercisable at December 31, 2005 886,287 $6.49
===============
F-18
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
The options exercisable at December 31, 2004 and 2005 were 944,685 and 886,287,
respectively. The weighted average fair value of options granted during 2003,
2004 and 2005 is $2.01, $8.03 and $12.85 respectively.
Stock options outstanding at December 31, 2005 are summarized as follows:
Outstanding Weighted Options Exercisable
Options Average Weighted as of Weighted Average
Range of Exercise as of Remaining Average December Exercise
Prices December 31, 2005 Contractual Exercise Price 31, 2005 Price
Life
- --------------------------------------------------------------------------------------------------------------------
$2.00 - $2.24 246,000 6.7 $2.12 241,272 $2.12
2.25 - 3.99 28,750 3.4 3.73 26,875 3.72
4.00 - 5.99 - - - - -
6.00 - 7.99 82,500 1.9 6.60 82,500 6.60
8.00 - 9.99 475,000 8.4 8.03 12.85 475,000 8.03
60,640 9.3 60,640 12.85
10.00-12.99
------------------- ---------------------
892,890 886,287
=================== =====================
Under the various plans, options that are cancelled can be reissued. At
December 31, 2005, no options were reserved for future issuance.
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,
2003, 2004 and 2005, the Company expensed approximately $84, $106 and $121
respectively, related to this plan.
F-19
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
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:
2006 614
2007 364
2008 73
2009 76
2010 26
Thereafter -
---------------
$ 1,153
===============
Rent expense for the years ended December 31, 2003, 2004 and 2005 was
approximately $483, 478 and $606 respectively.
On January 9, 2006, the company appointed Simon Nynens President and Chief
Executive officer and entered into an employment agreement which expires June
30, 2007. The agreement provides for a base salary and a bonus, if certain
targets are met. Additionally, should the stockholders of the company approve a
long-term incentive plan consisting of stock options, restricted stock and/or
other equity-based compensation ( a "LTIP"), Mr. Nynens will be eligible to
participate in the LTIP based upon and consistent with the Company's
participation for a President and Chief Executive Officer.
In the event that Mr. Nynens 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. Nynens 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-20
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
On January 9, 2006, William Willett resigned as President and Chief
Executive Officer. In connection with the resignation the Company has entered
into a Consulting Agreement with Mr. Willett. Under terms of the Consulting
Agreement, Mr. Willett will remain Chairman of the Board until the 2006 Annual
Meeting of Shareholders. Mr. Willett's termination of employment will be treated
as a voluntary termination under the Employment Agreement between Mr. Willett
and the Company dated July 15, 2002 (the "Willett Employment Agreement"). The
Willett Employment Agreement is amended such that only the non-competition
provisions will survive and be extended for a period of time equal to that of
the Consulting Agreement. Mr. Willett will provide consulting services to the
Company for a one-year period beginning in July 2006. The total compensation to
Mr. Willett for these consulting services will be $250,000, and Mr. Willett will
be obligated to perform up to 200 hours to assist the Chief Executive Officer of
the Company.
The Company has entered into a letter agreement with Mr. Legrottaglie, Vice
President of Information Systems. 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.
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, 2003, 2004 and 2005 were as follows
-------------------------------------
2003 2004 2005
-------------------------------------
Net sales to Unaffiliated Customers:
United States $ 59,366 $ 92,254 $ 121,068
Canada 10,203 11,328 16,587
-------------------------------------
Total $69,569 $103,582 $137,655
=====================================
Identifiable Assets by Geographic ------------------------
Areas at December 31, 2004 2005
------------------------
------------------------
United States $ 28,230 $ 37,031
Canada 4,684 7,237
------------------------
Total $32,914 $44,268
========================
F-21
Programmer's Paradise, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
One customer, CDW Corporation, accounted for 14.2%, 12.7%, and 11.8% of
consolidated net sales in 2005, 2004, and 2003, respectively, and 7.2% of
accounts receivable as of December 31, 2005. Our top five customers accounted
for 27%, 22%, and 22% of consolidated net sales in 2005, 2004, and 2003,
respectively. 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 2005:
-------------------------------------------------
First Second Third Fourth
-------------------------------------------------
Net sales $30,170 $30,052 $35,471 $41,962
Gross profit 3,430 3,370 3,877 4,293
Net income 300 185 603 1,565
Basic net income per
common share $0.08 $0.05 $0.15 $0.39
Diluted net income per
common share $0.07 $0.04 $0.14 $0.36
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-22
Programmer's Paradise, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In Thousands)
Charged to
Beginning Costand Ending
Description Balance Expense Deductions Balance
-------------------------------------------------------------------------------------------------
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
Year ended December 31, 2005:
Allowances for accounts receivable $755 $910 $434 $1,231
Reserve for obsolescence $43 - $12 $31
Valuation allowance deferred taxes $859 $(859) - $-
F-23