Climb Global Solutions, Inc. - Quarter Report: 2005 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File No. 000-26408

Programmer's Paradise, Inc.
(Exact name of registrant as specified in its charter)

1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
(Address of principal executive offices)

Registrant's Telephone Number (732) 389-8950

Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.
Yes [  ] No [X]

There were 3,991,935 outstanding shares of Common Stock, par value $.01 per share, as of July 29, 2005, not including 1,292,565 shares classified as treasury stock.

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 2

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5

PROGRAMMER'S PARADISE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)

The cost and market value of the Company's investments at June 30, 2005 by contractual maturity were (in thousands):

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the

Page 9

heading "Certain Factors Affecting Operating Results" and elsewhere in this report. The following discussion should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2004.

Programmer's Paradise, Inc. operates in one primary business segment: the marketing of technical software and hardware for microcomputers, servers and networks in the United States and Canada.

We offer a wide variety of technical and general business application software and PC hardware and components from a broad range of publishers and manufacturers. We market our products through our catalogs, direct mail programs and advertisements in trade magazines as well as through Internet and e-mail promotions. Through our wholly owned subsidiary, Lifeboat Distribution Inc., we distribute marketed products to dealers and resellers in the United States and Canada.

The Company's sales and results of operations have fluctuated and are expected to continue to fluctuate on a quarterly basis as a result of a number of factors, including: the condition of the software industry in general; shifts in demand for software products; industry shipments of new software products or upgrades; the timing of new merchandise and catalog offerings; fluctuations in response rates; fluctuations in postage, paper, shipping and printing costs and in merchandise returns; adverse weather conditions that affect response, distribution or shipping; shifts in the timing of holidays; and changes in the Company's product offerings. The Company's operating expenditures are based on sales forecasts. If revenues do not meet expectations in any given quarter, operating results may be materially adversely affected.

The following table sets forth for the periods indicated certain financial information derived from the Company's condensed consolidated statement of operations expressed as a percentage of net sales. This comparison of financial results is not necessarily indicative of future results:

Net sales in the second quarter of 2005 increased 20% or $5.0 million to $30.1 million compared to $25.1 million for the same period in 2004. For the six month period ended June 30, 2005, net sales increased by $14.4 million or 32%

Page 10

compared to the six month period ended June 30 2,004. We attribute this growth in net sales primarily to a more favorable IT spending environment and continued expansion of our account executive team in the second quarter of 2005. We plan to continue to invest in our sales force.

Gross profit as a percentage of net sales was 11.2% for the quarter ended June 30, 2005, compared to 12.2% for the same period in 2004. Since revenue increased by 20%, gross profit in absolute dollars increased $0.3 million to $3.4 million as compared to $3.1 million in the second quarter of 2004. For the six month period ended June 30, 2005, gross profit in absolute dollars increased $1.1 million to $6.8 million compared to $5.7 million in the same period in 2004.

The increase in gross profit dollars and the decrease in gross profit margins as a percentage of net sales reflects a shift in the product mix of sales and the competitive nature of our business. We have won many bids based on our aggressive pricing and we plan to continue to do so.

On a forward-looking basis, gross profit margin in future periods may be less than the 11.2% achieved in the second quarter of 2005. Changes in rebate programs can significantly affect our gross margin percentage. The gross profit margin depends on various factors, including vendor incentive and inventory price protection programs, product mix, including third party services, pricing strategies, market conditions, and other factors, any of which could result in changes in gross margins from recent experience.

Selling, General and Administrative ("SG&A") expenses for the quarter ended June 30, 2005 were $3.1 million as compared to $2.5 million for the same period in 2004, an increase of $0.6 million or 23%. The primary drivers in SG&A expenses in the second quarter of 2005 were payroll and a charge related to accounts receivable. Compared to the second quarter of 2004, payroll costs increased $0.4 million, primarily due to our continued investment in our sales force. Our sales force consists of account executives as well as vendor specialists who provide consultation in areas requiring specialized product expertise. Other SG&A costs increased $0.2 million and included a charge of $0.3 million related to accounts receivable from Amherst Technologies, LLC. On July 28 2005, we determined that these accounts receivable are substantially impaired after Amherst Technologies, LLC filed for bankruptcy protection on July 20, 2005. The company intends to pursue all potential recovery options.

For the six month period ended June 30, 2005 SG&A expenses increased by $ 1.4 million or 29% compared to the same period in 2005. The primary drivers in SG&A expenses in the first six months of 2005 were payroll, employee related costs and a charge related to accounts receivable. Compared to the first six months of 2004, payroll costs increased by $0.8 million and employee related costs increased by $0.2 million. Other SG&A costs increased by $0.4 million of which $0.3 million relates to accounts receivable from Amherst Technologies, LLC. On July 28 2005, we determined that these accounts receivable are substantially impaired after Amherst Technologies, LLC filed for bankruptcy protection on July 20, 2005. The company intends to pursue all potential recovery options.

We plan to continue to invest in our sales force. These factors, combined with increased legal requirements, including the Sarbanes-Oxley Act of 2002, will most likely result in significantly higher SG&A expenses in 2005.

The realized foreign exchange loss for the quarter ended June 30, 2005 was $14,000 compared to a loss of $6,000 for the same period in 2004. Foreign exchange gains and losses primarily result from our trade activity with our Canadian subsidiary. Although the Company does maintain bank accounts in Canadian currencies to reduce currency exchange fluctuations, the Company is, nevertheless, subject to risks associated with such fluctuations.

Page 11

For the quarter ended June 30, 2005, the Company recorded a provision for income taxes of $121,000, which consists of a provision of $170,000 for deferred income taxes as well as a $14,000 provision for U.S. state taxes offset by a benefit of $63,000 for Canadian taxes. For the quarter ended June 30, 2004, the Company recorded a provision of $23,000 which consist of a provision for Canadian income taxes of $28,000 for Canadian taxes as well as a $5,000 benefit for U.S. taxes. For the six months ended June 30, 2005 the company recorded a provision for income taxes of $321,000, which consists of a provision of $210,000 for U.S income taxes as well as a provision of $170,000 for deferred income taxes and a $34,000 provision for state income taxes offset by a benefit of $93,000 for Canadian taxes. For the six month period ended June 30, 2004, the Company recorded a provision for income taxes of $58,000, which consists of a provision of $63,000 for Canadian income taxes as well as a $5,000 benefit for U.S. tax.

As of June 30, 2005, the Company had a U.S. deferred tax asset of approximately $5.0 million reflecting, in part, a benefit of $2.6 million in U.S. federal and state tax loss carry forwards, which will expire in varying amounts between 2005 and 2024. The full realization of the tax benefit associated with the carry forward depends predominantly upon the Company's ability to generate taxable income during the carry forward period. The Company believes that uncertainty still exists regarding the realization of certain deferred tax assets, and accordingly continues to maintain a $0.9 million valuation allowance, based on management's estimates against these specific deferred tax assets. The valuation allowance will be evaluated at the end of each reporting period, considering positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required.

During the first six months of 2005, our cash and cash equivalents decreased by $1.7 million to $3.1 million at June 30, 2005, from $4.9 million at December 31, 2004. Net cash provided by operating activities amounted to $0.2 million; net cash used in investing activities amounted to $1.5 million and net cash used in financing activities amounted to $0.4 million.

Net cash provided by operating activities in the first six months of 2005 was $0.2 million and primarily resulted from our income from operations excluding non-cash charges of $1.3 million and a $2.3 million decrease in accounts receivable and a decrease of $0.4 million in other current assets. This was partly offset by a $4.0 million decrease in accounts payable and accrued expenses. The decrease in accounts receivable relates primarily to an improved collection cycle. Days sales outstanding decreased to 35 days as per June 30, 2005 as compared to 41 days as per June 30, 2004.

Net cash used in investing activities in the first six months of 2005 amounted to $1.5 million. In light of the current low interest rates on our short-term savings accounts we decided to invest an additional net $1.2 million in U.S. government securities. These securities are highly rated and highly liquid. These securities are classified as available-for-sale securities in accordance with SFAS 115, and as a result unrealized gains and losses are reported as part of other comprehensive income (loss). The other $0.3 million consisted of capital expenditures.

Net cash used for financing activities in the first six months of 2005 of $0.4 million consisted of the $0.9 million payment of our declared dividends, which was partly offset by the proceeds from the exercise of options.

On September 16, 2002, our Board of Directors authorized the purchase of 500,000 shares of our common stock. On October 9, 2002, our Board of Directors authorized us to purchase an additional 500,000 shares of our common stock. These two purchase approvals are in addition to authorizations for us to purchase 490,000 shares (granted in March 2002) and 521,013 shares (granted in October 1999) in both open market and private transactions, as conditions warrant.

The repurchase program is expected to remain effective for the remainder of 2005. We intend to hold the repurchased shares in treasury for general corporate purposes, including issuances under various stock option plans. As of June 30, 2005, we owned 1,292,965 shares of our common stock purchased at an average cost of $3.18 per share. During the first six months of 2005, we did not repurchase any shares of our common stock.

Page 12

We believe that the funds held in cash and cash equivalents will be sufficient to fund our working capital and cash requirements for at least the next 12 months. We currently do not have any credit facility and, in the foreseeable future, we do not plan to enter into an agreement providing for a line of credit.

Contractual Obligations as of June 30, 2005 were summarized as follows:
(Dollars in thousands)

Operating leases primarily relates to the lease of the space used for our operations in Shrewsbury and Mount Laurel, New Jersey, Mississauga, Canada and Hauppauge, New York. The commitments for operating leases include the minimum rent payments and a proportionate share of operating expenses and property taxes.

The Company is not committed by lines of credit, standby letters of credit, has no standby repurchase obligations or other commercial commitments. The Company is not engaged in any transactions with related parties.

As of June 30, 2005, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company recognizes revenue from the sale of software and hardware for microcomputers, servers and networks upon shipment or upon electronic delivery of the product. The Company expenses the advertising costs associated with producing its catalogs. The costs of these catalogs are expensed in the same month the catalogs are mailed.

On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, restructuring and contingencies and litigation.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company records revenues from sales transactions when title to products sold passes to the customer. The Company's shipping terms dictate that the passage of title occurs upon receipt of products by the customer. The majority of the Company's revenues relates to physical products and is recognized on a gross basis with the selling price to the customer recorded as net sales with the acquisition cost of the product to the Company recorded as cost of

Page 13

 sales. At the time of sale, the Company also records an estimate for sales returns based on historical experience. Certain software maintenance products, third party services and extended warranties sold by the Company (for which the Company is not the primary obligor) are recognized on a net basis in accordance with SAB 101, "Revenue Recognition" and EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent". Accordingly, such revenues are recognized in net sales either at the time of sale or over the contract period, based on the nature of the contract, at the net amount retained by the Company, with no cost of goods sold. In accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs", the Company records freight billed to its customers as net sales and the related freight costs as a cost of sales.

In accordance with EITF 02-16, "Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor's Products)," consideration from vendors, such as advertising support funds, are accounted for as a reduction to cost of sales unless certain requirements are met showing that the vendor receives an identifiable fair value in exchange for the consideration. If these specific requirements related to individual vendors are met, the consideration is accounted for as revenue.

The Company believes the following critical accounting policies used in the preparation of its consolidated financial statements affect its more significant judgments and estimates. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-offs may be required.

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Based upon the Company's profitable operations since December 31, 2002, and its expected profitability in future years, the Company has concluded that the results of future operations will generate sufficient taxable income to realize certain deferred tax assets. The Company believes that uncertainty still exists regarding the realizability of certain tax assets, and accordingly, continues to maintain a $0.9 million valuation allowance, based on management's estimates, against these specific deferred tax assets. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

This report includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report regarding future events or conditions, including statements regarding industry prospects and the Company's expected financial position, business and financing plans, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We strongly urge current and prospective investors to carefully consider the cautionary statements and risks contained in this report. Such risks include, but are not limited to, the continued acceptance of the Company's distribution channel by vendors and customers, the timely availability and acceptance of new products, contribution of key vendor relationships and support programs, as well as factors that affect the software industry in general.

The Company operates in a rapidly changing business, and new risk factors emerge from time to time. Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.

Page 14

Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The statement concerning future sales and future gross profit margin are forward looking statements involving certain risks and uncertainties such as availability of products, product mix, market conditions and other factors, which could result in a fluctuation of sales below recent experience.

Stock Volatility. The technology sector of the United States stock markets has experienced substantial volatility in recent periods. Numerous conditions, which impact the technology sector or the stock market in general or the Company in particular, whether or not such events relate to or reflect upon the Company's operating performance, could adversely affect the market price of the Company's Common Stock.

Furthermore, fluctuations in the Company's operating results, announcements regarding litigation, the loss of a significant vendor, increased competition, reduced vendor incentives and trade credit, higher postage and operating expenses, and other developments, could have a significant impact on the market price of the Company's Common Stock.

In addition to its activities in the United States, the Company also conducts business in Canada. We are subject to general risks attendant to the conduct of business in Canada, including economic uncertainties and foreign government regulations. In addition, the Company's Canadian business is subject to changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors.

The Company's $7.8 million investments in marketable securities are only in highly rated and highly liquid corporate bonds and U.S. government Securities. As such, the risk of significant changes in the value of our cash invested is minimal.

Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation of the effectiveness of the design and operation of the Company's "disclosure controls and procedures" as of June 30, 2005. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2005. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control Over Financial Reporting. As required by Rule 13a-15(d) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our

Page 15

internal control over financial reporting to determine whether any change occurred during the quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation during the quarter ended June 30, 2005 there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Page 16

PART II - OTHER INFORMATION

The Company held its Annual Meeting of Stockholders (the "Meeting") during the fiscal Quarter ended June 30, 2005.

(a) The date of the meeting was June 14, 2005.

(b) At the meeting, the following persons were elected directors of the Company, each receiving the number of votes set forth opposite their names below:

Page 17

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.