Climb Global Solutions, Inc. - Quarter Report: 2010 June (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                     

 

Commission File No. 000-26408

 

Wayside Technology Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

1157 Shrewsbury Avenue, Shrewsbury, New Jersey 07702

(Address of principal executive offices)

 

(732) 389-8950

Registrant’s Telephone Number

 

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 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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Check One:

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

There were 4,756,158 outstanding shares of Common Stock, par value $.01 per share, as of August 6, 2010, not including 498,342 shares classified as treasury stock.

 

 

 

PART I — FINANCIAL INFORMATION

WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

		June 30,			December 31,
		2010			2009
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	9,611		$	8,560
Marketable securities		7,832			7,571
Accounts receivable, net of allowances of $1,291 and $1,097, respectively		31,791			27,040
Inventory, net		1,316			967
Prepaid expenses and other current assets		1,160			998
Deferred income taxes		611			677
Total current assets		52,321			45,813
Equipment and leasehold improvements, net		412			432
Accounts receivable-long-term		4,493			6,901
Other assets		39			38
Deferred income taxes		345			483
Total assets		$	57,610		$	53,667
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses		$	32,752		$	29,230
Other liabilities		—			78
Total liabilities		32,752			29,308
Commitments and contingencies
Stockholders’ equity
Common stock, $.01 par value; 10,000,000 shares authorized, 5,284,500 shares issued; 4,795,057 and 4,688,844 shares outstanding, respectively		53			53
Additional paid-in capital		24,839			24,826
Treasury stock, at cost, 489,443 and 595,656 shares, respectively		(3,315		)	(3,555		)
Retained earnings		2,985			2,727
Accumulated other comprehensive income		296			308
Total stockholders’ equity		24,858			24,359
Total liabilities and stockholders’ equity		$	57,610		$	53,667

 

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

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands, except per share data)

 

		Six months ended						Three months ended
		June 30,						June 30,
		2010			2009			2010			2009
Net sales		$	88,800		$	68,782		$	48,442		$	37,032
Cost of sales		80,147			61,234			43,757			32,951
Gross profit		8,653			7,548			4,685			4,081
Selling, general and administrative expenses		6,190			5,562			3,160			2,911
Income from operations		2,463			1,986			1,525			1,170
Interest income, net		212			274			104			126
Realized foreign exchange gain (loss)		3			(1		)	2			—
Income before income tax provision		2,678			2,259			1,631			1,296
Provision for income taxes		1,000			891			576			506
Net income		$	1,678		$	1,368		$	1,055		$	790
Net income per common share - Basic		$	0.38		$	0.31		$	0.24		$	0.18
Net income per common share – Diluted		$	0.38		$	0.31		$	0.23		$	0.18
Weighted average common shares outstanding-Basic		4,376			4,392			4,380			4,400
Weighted average common shares outstanding-Diluted		4,461			4,419			4,493			4,426
Dividends paid per common share		$	0.30		$	0.30		$	0.15		$	0.15

 

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

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except share amounts)

 

		Common Stock					Additional Paid-In			Treasury					Retained			Accumulated Other Comprehensive
		Shares		Amount			Capital			Shares		Amount			Earnings			Income (loss)			Total
Balance at January 1, 2010		5,284,500		$	53		$	24,826		595,656		$	(3,555	)	$	2,727		$	308		$	24,359
Net Income															1,678						1,678
Other comprehensive income :
Translation adjustment																		(6		)	(6		)
Unrealized loss on available-for-sale securities																		(6		)	(6		)
Comprehensive income																					1,666
Dividends paid															(1,420		)				(1,420		)
Share-based compensation expense							596														596
Tax benefit from share-based compensation							11														11
Restricted stock grants, net of forfeitures							(594		)	(144,975	)	594									—
Treasury shares repurchased										38,762		(354		)							(354		)
Balance at June 30, 2010		5,284,500		$	53		$	24,839		489,443		$	(3,315	)	$	2,985		$	296		$	24,858

 

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

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Six months ended
		June 30,
		2010			2009
Net income		$	1,678		$	1,368
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		151			146
Bad debt expense		—			82
Deferred income taxes		204			191
Share-based compensation expense		596			420
Reversal of uncertain tax position liability		(78		)	—
Changes in operating assets and liabilities:
Accounts receivable		(2,364		)	(4,128		)
Inventory		(349		)	121
Prepaid expenses and other current assets		(162		)	(162		)
Accounts payable and accrued expenses		3,545			1,255
Net change in other assets and liabilities		(2		)	24
Net cash provided by (used) in operating activities		3,219			(683		)
Cash flows from investing activities:
Purchases of available-for-sale securities		(4,509		)	(5,636		)
Redemptions of available-for-sale securities		4,242			5,990
Capital expenditures		(131		)	(133		)
Net cash provided by (used in) provided by investing activities		(398		)	221
Cash flows from financing activities:
Dividend paid		(1,420		)	(1,400		)
Treasury stock repurchased		(354		)	(68		)
Tax benefit (expense) from share-based compensation		11			(32		)
Net cash used in financing activities		(1,763		)	(1,500		)
Effect of foreign exchange rate on cash		(7		)	75
Net increase (decrease) in cash and cash equivalents		1,051			(1,887		)
Cash and cash equivalents at beginning of period		8,560			9,349
Cash and cash equivalents at end of period		$	9,611		$	7,462
Supplementary disclosure of cash flow information:
Income taxes paid		$	814		$	1,161

 

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

 

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WAYSIDE TECHNOLOGY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

June 30, 2010

 

1.             The accompanying unaudited condensed consolidated financial statements of Wayside Technology Group, Inc. and its Subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, stock-based compensation and costs associated with exit or disposal activities, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In the opinion of the Company’s management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation, have been included. Actual results may differ from these estimates under different assumptions or conditions. The unaudited condensed consolidated statements of earnings for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities Exchange Commission for the year ended December 31, 2009.

 

2.                 In January 2010, the FASB issued  Accounting  Standards  Update (ASU) 2010-06,  “Fair Value  Measurements  and  Disclosures:  Improving  Disclosures  About Fair Value Measurements.”  This FASB requires additional disclosures about the fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments.  For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements should be presented separately.  ASU 2010-06 is effective for interim and annual financial periods beginning after December 15, 2009, and did not have a material impact on the Company’s financial statements.

 

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASC 2010-20”). The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how allowances for credit losses are developed and how credit exposure is managed. ASC 2010-20 is effective for interim periods and fiscal years ending after December 15, 2010.

 

3.             Assets and liabilities of the Company’s Canadian subsidiary have been translated at current exchange rates, and related sales and expenses have been translated at average rates of exchange in effect during the period. The sales from our Canadian operations in the first six months of 2010 were $7.1 million as compared to $5.9 million for the first six months of 2009. The sales from our Canadian operations for the second quarter of 2010 were $3.7 million as compared to $3.3 million for the second quarter of 2009.

 

4.             Cumulative translation adjustments and unrealized gains (losses) on available-for-sale securities have been classified within accumulated other comprehensive income, which is a separate component of stockholders’ equity in accordance with now codified FASB ASC Topic 220, “Comprehensive Income.”

 

5.             The Company records revenues from sales transactions when title to products sold passes to the customer. Usual sales terms are FOB shipping point, at which time title and risk of loss has passed to the customer and delivery has occurred.  Revenue is recognized in accordance with ASC Topic 985-605 “ Software Revenue Recognition” and  ASC Topic 605-10-S99, and ASC Topic 605 -45, “Reporting Revenue Gross as a Principal versus Net as an Agent”. The majority of the Company’s revenues relates to physical products and is recognized on a gross basis with the

 

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selling price to the customer recorded as net sales and 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. 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.

 

6.             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 in which the related advertising expenditure is incurred. Cooperative reimbursements are recorded as reduction in cost of sales in accordance with ASC Topic 605-50 “Accounting by a Customer (including reseller) for Certain Consideration Received from a Vendor.”

 

7.             The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated fair value at June 30, 2010 and December 31, 2009, because of the relative short maturity of these instruments.

 

Investments in available-for-sale securities at June 30, 2010 were (in thousands):

 

		Cost			Market value			Unrealized Gain (loss)
U.S. Government Securities		$	3,027		$	3,028		$	1
Certificates of deposit		4,821			4,804			$	(17	)
Total Marketable securities		$	7,848		$	7,832		$	(16	)

 

The cost and market value of the Company’s investments at June 30, 2010 determined by contractual maturity were (in thousands):

 

					Estimated
		Cost			Fair Value
Due in one year or less		$	6,839		$	6,822
Due in 1-2 years		$	1,009		$	1,010

 

 

Investments in available-for-sale securities at December 31, 2009 were (in thousands):

 

		Cost			Market value			Unrealized Gain (loss)
U.S. Government Securities		$	4,064		$	4,064		$	—
Certificates of deposit		3,517			3,507			$	(10	)
Total Marketable securities		$	7,581		$	7,571		$	(10	)

 

The cost and market value of the Company’s investments at December 31, 2009 determined by contractual maturity were (in thousands):

 

					Estimated
		Cost			Fair Value
Due in one year or less		$	7,581		$	7,571

 

8.             Effective January 1, 2008, the Company adopted FASB ASC Topic 820 “Fair Value Measurement and Disclosure”, which establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. The Company uses the following methods for determining fair value in accordance with ASC Topic 820. For assets and liabilities that are measured using quoted prices in active markets for the identical asset or liability, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs (Level 1). Assets and liabilities that are measured using significant other observable inputs are valued by reference to similar assets or liabilities, such as

 

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quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data (Level 2). For all remaining assets and liabilities for which there are no significant observable inputs, fair value is derived using an assessment of various discount rates, default risk, credit quality and the overall capital market liquidity (Level 3).

 

The following table summarizes the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheet:

 

					Fair Value Measurements at June 30, 2010 Using
(In thousands) Description		Balance June 30, 2010			Quoted Prices in Active Markets for Identical Items (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
U.S. Government Securities		$	3,028		$	3,028		$	—		$	—
Certificates of deposit		$	4,804		$	—		$	4,804		$	—

 

					Fair Value Measurements at December 31, 2009 Using
(In thousands) Description		Balance at December 31, 2009			Quoted Prices in Active Markets for Identical Items (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
U.S. Government Securities		$	4,064		$	4,064		$	—		$	—
Certificates of deposit		$	3,507		$	—		$	3,507		$	—

 

U.S. Government Securities - U.S. government securities are valued using quoted market prices.  Accordingly, U.S. government securities are categorized in Level 1 of the fair value hierarchy.

 

Certificates of deposit- The fair value of certificates of deposit is estimated using third-party quotations.  These deposits are categorized in Level 2 of the fair value hierarchy.

 

9.             Balance Sheet Detail — (in thousands):

 

Equipment and leasehold improvements consist of the following as of June 30, 2010 and December 31, 2009:

 

		June 30,  2010			December 31, 2009
Equipment		$	2,650		$	2,528
Leasehold improvements		548			549
		3,198			3,077
Less accumulated depreciation and amortization		(2,786		)	(2,645		)
		$	412		$	432

 

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Accounts payable and accrued expenses consist of the following as of June 30, 2010 and December 31, 2009:

 

		June 30, 2010			December 31,  2009
Trade accounts payable		$	30,929		$	27,552
Other accrued expenses		1,823			1,678
		32,752			$	29,230

 

Accumulated other comprehensive income consists of the following as of June 30, 2010 and December 31, 2009:

 

		June 30, 2010			December 31, 2009
Foreign currency translation adjustments		$	312		$	318
Unrealized gain (loss) on marketable securities		(16		)	(10		)
		$	296		$	308

 

10.   Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed considering the potentially dilutive effect of outstanding stock options and nonvested shares of restricted stock. A reconciliation of the numerators and denominators of the basic and diluted per share computations follows (in thousands, except share and per share data):

 

		Six months ended						Three months ended
		June 30,						June 30,
		2010			2009			2010			2009
Numerator:
Net income		$	1,678		$	1,368		$	1,055		$	790
Denominator:
Weighted average shares (Basic)		4,376			4,392			4,380			4,400
Dilutive effect of outstanding options and nonvested shares of restricted stock		85			27			113			26
Weighted average shares including assumed conversions (Diluted)		4,461			4,419			4,493			4,426
Basic net income per share		$	0.38		$	0.31		$	0.24		$	0.18
Diluted net income per share		$	0.38		$	0.31		$	0.23		$	0.18

 

11.           The Company had no major vendors that accounted for more than 10% of total purchases for the six and three months ended June 30, 2010. The Company had one major vendor that accounted for 14.0% and 14.1% of total purchases during the six and three months, respectively, that ended June 30, 2009. The Company had two major customers that accounted for 19.1% and 10.0% of total net sales during the three months ended June 30, 2010, and 18.2% and 9.7% for the six months then ended. These same customers accounted for 19.9% and 4.1% of total net accounts receivable as of June 30, 2010. The Company had two major customers that accounted for 10.6% and 9.8% of total net sales during the six months ended June 30, 2009, and 10.3% and 10.2%, for the three months then ended.

 

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12.           The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2006. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense when assessed. No liability was recorded for interest or penalties related to uncertain tax positions at June 30, 2010. The Company believes that it has appropriate support for the income tax positions it has taken and expects to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

 

The provision consists of the following (in thousands):

 

		Six months ended						Three months ended
		June 30,						June 30,
		2010			2009			2010			2009
Current:
Federal		$	535		$	512		$	320		$	309
State		179			122			117			74
Canada		82			66			44			45
		796			700			481			428
Deferred tax expense		204			191			95			78
		$	1,000		$	891		$	576		$	506
Effective tax rate		37.3		%	39.4		%	35.3		%	39.0		%

 

The effective tax rate for the six and three months ended June 30, 2010 was impacted by a benefit of $78 related to the reversal of the Company’s liability related to uncertain tax positions.

 

A reconciliation of the beginning and ending amount of net unrecognized tax benefits is as follows (in thousands):

 

		Federal, State and Foreign Tax
Balance at January 1, 2010		$	78
Decrease based on tax positions related to prior years		(78		)
Net Unrecognized Tax Benefit at June 30, 2010		$	—

 

The IRS examination of the Company’s 2006-2007 tax returns were completed as of March 1, 2010, and all uncertain tax positions were resolved at that time.

 

13.           The 2006 Stock-Based Compensation Plan (the “2006 Plan”). The 2006 Plan authorizes the grant of Stock Options, Stock Units, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Bonuses, and other equity-based awards. The total number of shares of Common Stock initially available for award under the 2006 Plan was 800,000. As of June 30, 2010, the number of shares of Common Stock available for future award grants to employees and directors under this 2006 plan is 128,525.

 

During 2006, the Company granted a total of 315,000 shares of Restricted Stock to officers, directors and employees. Included in this grant were 200,000 Restricted Shares granted to the Company’s CEO in accordance with his employment agreement. These 200,000 shares of Restricted Stock vest over 120 months. The remaining grants of Restricted Stock vest over 60 months.

 

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During 2007, the Company granted a total of 30,000 shares of Restricted Stock to officers, directors and employees. These shares vest over 60 months. A total of 12,500 shares of Restricted Stock were forfeited as a result of employees and officers terminating employment with the Company.

 

During 2008, the Company granted a total of 57,500 shares of Restricted Stock to officers and directors. These shares vest over 60 months. A total of 3,500 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

During 2009, the Company granted a total of 140,000 shares of Restricted Stock to officers and employees. These shares vest over 20 equal quarterly installments.

 

In February 2010, the Company granted a total of 150,000 shares of Restricted Stock to officers, directors and employees. These shares vest over 20 equal quarterly installments. A total of 5,025 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

In July 2008, the Company approved the increase of its Common Stock repurchase program by 500,000 shares. The Company expects to purchase shares from time to time in the market or otherwise subject to market conditions.

 

Changes during 2010 in options outstanding under the Company’s the combined plan (i.e., the 2006 Plan, the 1995 Non-Employee Director Plan and the 1995 Stock Option Plan) were as follows:

 

		Number of Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value ($M)(1)
Outstanding at January 1, 2010		392,890		$	8.12
Granted in 2010		—		—
Canceled in 2010		—		—
Exercised in 2010		—		—
Outstanding at June 30, 2010		392,890		$	8.12		3.7		$	0.6
Exercisable at June 30, 2010		392,890		$	8.12		3.7		$	0.6

 

(1) The intrinsic value is calculated as the difference between the market value on the last trading day of the quarter (June 30, 2010) and the exercise price of the options. The market value as of June 30, 2010 was $9.07 per share represented by the closing price as reported by The NASDAQ Global Market on that day.

 

A summary of nonvested shares of Restricted Stock outstanding under the Company’s 2006 Plan as of June 30, 2010, and changes during the six months then ended is as follows:

 

		Shares		Weighted Average  Grant Date Fair Value
Nonvested shares at January 1, 2010		327,250		$	11.03
Granted in 2010		150,000		8.57
Vested in 2010		(56,825	)	10.49
Forfeited in 2010		(5,025	)	10.92
Nonvested shares at June 30, 2010		415,400		$	10.22

 

As of June 30, 2010, there is approximately $4.2 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 4.5 years.

 

For the six months ended June 30, 2010 and 2009, the Company recognized share-based compensation cost of approximately $596,000 and $420,000, respectively, which is included in general and administrative expense.

 

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14.           ASC Topic 280, “Segment Reporting,” requires that public companies report profits and losses and certain other information on their “reportable operating segments” in their annual and interim financial statements. The internal organization used by the Company’s Chief Operating Decision Maker (CODM) to assess performance and allocate resources determines the basis for reportable operating segments. The Company’s CODM is the Chief Executive Officer.

 

The Company is organized into two reportable operating segments — the “Programmer’s Paradise” segment, which sells technical software, hardware and services directly to end-users (such as individual programmers, corporations, government agencies, and educational institutions) and the “Lifeboat” segment, which distributes technical software to corporate resellers, VARs, consultants and systems integrators.

 

As permitted by ASC Topic 280, the Company has utilized the aggregation criteria in combining its operations in Canada with the domestic segments as they provide the same products and services to similar clients and are considered together when the CODM decides how to allocate resources.

 

Segment income is based on segment revenue less the respective segment’s cost of revenues as well as segment direct costs (including such items as payroll costs and payroll related costs, such as profit sharing, incentive awards and insurance) and excluding general and administrative expenses not attributed to a business unit. The Company only identifies accounts receivable and inventory by segment as shown below as “Selected Assets” it does not allocate its other assets, including capital expenditures by segment.

 

The following segment reporting information of the Company is provided (in thousands):

 

		Six months ended						Three months ended
		June 30						June 30,
		2010			2009			2010			2009
Revenue:
Programmer’s Paradise		$	23,873		$	23,495		$	12,632		$	11,988
Lifeboat		64,927			45,287			35,810			25,044
		88,800			68,782			48,442			37,032
Gross Profit:
Programmer’s Paradise		$	2,657		$	3,018		$	1,334		$	1,550
Lifeboat		5,996			4,530			3,351			2,531
		8,653			7,548			4,685			4,081
Direct Costs:
Programmer’s Paradise		$	1,394		$	1,375		$	683		$	705
Lifeboat		1,806			1,335			968			683
		3,200			2,710			1,651			1,388
Segment Income:
Programmer’s Paradise		$	1,263		$	1,643		$	651		$	845
Lifeboat		4,190			3,195			2,383			1,848
Segment Income		5,453			4,838			3,034			2,693
Corporate general and administrative expenses		$	2,990		$	2,852		$	1,509		$	1,523
Interest income		212			274			104			126
Foreign currency translation gain (loss)		3			(1		)	2			—
Income before taxes		$	2,678		$	2,259		$	1,631		$	1,296
Selected Assets By Segment:
Programmer’s Paradise		$	18,095		$	11,447
Lifeboat		19,504			12,274
Corporate assets		20,011			25,464
Segment Selected Assets		$	57,610		$	49,185

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, 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 risk and uncertainties, including those set forth under the heading “Certain Factors Affecting Results of Operations and Stock Price” and elsewhere in this report and those set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included in this report and the consolidated financial statements and related notes included in our 2009 Annual Report on Form 10-K.

 

Overview

 

The Company is organized into two reportable operating segments — the “Programmer’s Paradise” segment, which sells technical software, hardware and services directly to end-users (such as individual programmers, corporations, government agencies, and educational institutions and the “Lifeboat” segment, which distributes technical software to  end-users through corporate resellers,  value added resellers, (VARs), consultants and systems integrators.

 

We believe that the ongoing general economic downturn is causing our current and potential customers to delay or reduce technology purchases, resulting in longer sales cycles, slower adoption of new technologies and increased price competition. The increase in price competition has led to lower gross profit margins as a percentage of sales. For more details on the possible impact of conditions in the financial markets and the economic downturn on us, see “—Liquidity and Capital Resources” below.

 

More generally, 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 but not limited to: the loss of any major vendor; condition of the software industry in general; shifts in demand for software products;  our customers’ ability to meet their payment obligations in a timely manner; industry shipments of new software products or upgrades; the timing of new merchandise and catalog offerings; fluctuations in response rates; fluctuations in postage, paper, shipping and printing costs and in merchandise returns; adverse weather conditions that affect response, distribution or shipping; shifts in the timing of holidays; and changes in the Company’s product offerings. The Company’s operating expenditures are based on sales forecasts. If revenues do not meet expectations in any given quarter, operating results may be materially adversely affected.

 

Results of Operations

 

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

 

		Six months ended				Three months ended
		June 30,				June 30,
		2010		2009		2010		2009
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales		90.3		89.0		90.3		89.0
Gross profit		9.7		11.0		9.7		11.0
Selling, general and administrative expenses		6.9		8.1		6.5		7.9
Income from operations		2.8		2.9		3.2		3.1
Interest income, net		.2		0.4		0.2		0.4
Realized foreign currency exchange gain(loss)		—		—		—		—
Income before income taxes		3.0		3.3		3.4		3.5
Provision for income taxes		1.1		1.3		1.2		1.4
Net income		1.9	%	2.0	%	2.2	%	2.1	%

 

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