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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
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Mark One Annual Report Pursuant to Section 13 or 15(d) of the
[ X ] Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2000
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 0-19349
SOFTWARE SPECTRUM, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1878002
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2140 MERRITT DRIVE,
GARLAND, TEXAS
75041
(Address of principal executive offices)
(Zip Code)
972-840-6600
(Registrant's telephone number, including area code)
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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 $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (l) 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ( Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value on July 14, 2000 of the Registrant's voting
securities held by non-affiliates was $50,544,384.
At July 14, 2000, the Registrant had outstanding 3,678,381 share of Common
Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on
Form 10-K certain of the information contained in the registrant's proxy
statement for its annual meeting of shareholders to be held September 21, 2000,
which will be filed by the registrant within 120 days after April 30, 2000.
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PART I
ITEM 1. BUSINESS
Software Spectrum ("the Company") is a global business-to-business software
services provider that delivers comprehensive information technology solutions
to organizations throughout North America, Europe and Asia/Pacific. The Company
sells personal computer ("PC") software through volume licensing and maintenance
("VLM") agreements, or right-to-copy arrangements, and full-packaged PC software
products and provides technical support services to software publishers,
Internet service providers and other organizations. The Company has established
supply arrangements with major personal computer software publishers, including
Microsoft, IBM/Lotus, Novell, Attachmate, Symantec and Adobe Systems. The
Company markets software titles for IBM, IBM-compatible and Macintosh personal
computers, including software for all major operating systems such as Windows
95, Windows 98, Windows 2000, Linux and Novell Netware.
The Company was incorporated under the laws of the State of Texas in April
1983. The Company's principal facilities and its executive offices are located
at 2140 Merritt Drive, Garland, Texas 75041, and its telephone number at that
location is (972) 840-6600. Except where the context otherwise requires, the
term "Company" as used herein includes Software Spectrum, Inc. and its
subsidiaries.
FORWARD-LOOKING INFORMATION
The Company, or its representatives, from time to time may make or may have
made certain forward-looking statements, whether orally or in writing, including
without limitation any such statements made or to be made in the Management's
Discussion and Analysis of Financial Condition and Results of Operations, press
releases and other information contained in its various filings with the
Securities and Exchange Commission. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements, so as to ensure
to the fullest extent possible the protections of the safe harbor established in
the Private Securities Litigation Reform Act of 1995. Accordingly, such
statements are qualified in their entirety by reference to, and are accompanied
by, the following discussion of certain important factors that could cause
actual results to differ materially from those projected in such forward-looking
statements. The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in rapidly changing businesses, 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.
Reliance on Financial Incentives, Volume Discounts and Marketing Funds
As part of its supply agreements with certain publishers and distributors,
the Company receives substantial incentives in the form of rebates, volume
purchase discounts, cooperative advertising funds and market development funds.
A change, reduction or discontinuance of these incentives, discounts or
advertising allowances could have a material adverse effect on the Company's
business and financial results.
Dependence on Vendors
A large percentage of the Company's sales are represented by popular
personal computer business software products from a small number of vendors. For
the year ended April 30, 2000, approximately 78% of the Company's net software
sales were derived from products published by Microsoft and IBM/Lotus. Most of
the Company's contracts with vendors are terminable by either party, without
cause, upon 30 to 60 days notice. The loss or significant change in the
Company's relationship with these vendors could have a material adverse effect
on the Company's business and financial results. Although the Company believes
the software products would be available from other parties, the Company may
have to obtain such products on terms that would likely adversely affect its
financial results.
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Volume Licensing and Maintenance Agreements
The Company serves as a designated services provider for VLM agreements
between many of its customers and major publishers of personal computer
software. VLM agreements are typically used by customers seeking to standardize
desktop software applications and, consequently, typically involve significant
quantities of unit sales for each customer. Although unit volume sales are
increased by the use of VLM agreements, generally lower gross margins are
realized on such sales as compared to sales of full-packaged software products.
The Company continues to experience an increase in the percentage of sales made
pursuant to VLM agreements and, consequently, overall gross margin percentages
on the sale of software products may continue to decline. In addition, the
trend toward use of enterprise-wide licensing agreements, which typically have
lower gross margins and administrative costs than other VLM programs, has
resulted in further decreases in the Company's product gross margins.
Economic Conditions and Geographic Expansion
The Company's business is sensitive to the spending patterns of its
customers, which in turn are subject to prevailing economic and business
conditions. Further, sales to large corporations have been important to the
Company's growth, and its ability to continue its historic rate of growth is
dependent on its continued success in such market. The Company's operations and
geographic expansion outside the United States involve currency exchange risks,
political risks and other risks of conducting business abroad.
Highly Competitive Environment; Pricing Competition
The desktop technology marketplace is intensely competitive. The Company
faces competition from a wide variety of sources, including other software
suppliers, hardware manufacturers and resellers, support service providers,
personal computer retail stores (including superstores), mail order, Internet
and other discount business suppliers and software publishers. Many of the
Company's competitors, particularly software publishers, have substantially
greater financial resources than the Company. Because of the intense competition
within the personal computer software channel, companies that compete in this
market, including the Company, are characterized by low gross and operating
margins. Consequently, the Company's profitability is highly dependent upon
effective cost and management controls.
New Developments and Rapid Technological Change; Retention of Qualified
Personnel
The market for the Company's products and services is characterized by
rapidly changing technology, evolving industry standards and frequent
introductions of new products and services. The Company's future success will
depend in part on its ability to enhance existing services, to continue to
invest in rapidly changing technology and to offer new services on a timely
basis. Additionally, the Company's business results can be adversely affected by
disruptions in customer ordering patterns and the impact of new product
releases.
The growth and success of the Company's support services business depends
largely upon its ability to attract, develop, motivate and retain highly-skilled
technical employees in an industry characterized by high employee turnover. If
the Company is unable to attract and retain sufficient numbers of highly-skilled
technical employees, the Company's support services business could be adversely
affected.
Changing Methods of Software Distribution
The manner in which personal computer software products are distributed and
sold is continually changing, and new methods of distribution may emerge or
expand. Software publishers may intensify their efforts to sell their products
directly to end-users, including current and potential customers of the Company.
Other products and methodologies for distributing software to users may be
introduced by publishers, present competitors or other third parties. If
personal computer software suppliers' participation in these programs is reduced
or eliminated, or if other methods of distribution of software, which exclude
the personal computer software resale channel, become common, the Company's
business and financial results could be materially adversely affected.
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Telephone Support Services Agreements
Most of the Company's key technical support contracts generate revenues
based upon the number of support requests received by the Company or the time
spent on such requests. Consequently, the amount of revenues generated is
dependent upon the support needs of end-users. With respect to agreements that
provide for pricing on a per-call basis, the Company's profitability may be
adversely affected if the Company receives fewer support requests than expected
or the time spent in resolving inquiries is greater than anticipated.
In general, the Company's support contracts provide that the contract may
be terminated in whole or in part on short notice, in some cases for
convenience, or if the Company fails to meet specified performance criteria. The
Company's technical support business is currently concentrated among two key
customers. Accordingly, cancellation of, or a significant decrease in, the
services provided under the contracts with either of these customers could have
an adverse effect on the Company's profitability. In addition, the Company may
be required to expand its support operations to meet the demands of its
customers or obtain new business. Rapid changes to the size of the Company's
support operations and employee base could involve significant costs, including
costs associated with employee hiring and training, the purchase of additional
workstations, equipment and technology and the establishment of additional call
center facilities. Likewise, due to the lead time involved in procuring and
preparing additional capacity, it may be necessary for the Company to commit to
expansion facilities prior to obtaining the corresponding new business.
COMPANY OVERVIEW
The Company is a global business-to-business software services provider
that delivers comprehensive information technology solutions to organizations
throughout North America, Europe and Asia/Pacific. The Company sells personal
computer software through volume licensing and maintenance agreements, or
right-to-copy arrangements, and full-packaged PC software products and provides
technical support services to software publishers, Internet service providers
and other organizations. The Company's strategy is to leverage its global
infrastructure to provide a high level of customer service, to maintain a
cost-efficient operating structure and to grow its product and support services
businesses. The Company controls its costs by centralizing its administrative,
customer service and technical support operations while utilizing a
geographically dispersed field sales force strategically located in major
business markets worldwide. The majority of the Company's revenues are derived
from sales to large organizations, including Fortune 500 and Global 500
companies, as well as thousands of mid-sized customers from every industry,
including the government and academic market segments.
The Company derives revenues from two primary business lines, which consist
of product services and support services. For financial information concerning
the Company's two business segments and the Company's foreign and domestic
operations, see Notes to Consolidated Financial Statements, Note I - Business
Segments and Foreign Operations.
The largest component of the Company's business is providing third-party
personal computer software, licenses and related services to large organizations
with over 1,000 desktop computers, including companies in the Fortune 500 and
Global 500. The Company concentrates on building and expanding these
relationships through personal sales contacts made throughout major global
computing markets. The Company maintains a sales force which focuses on the
software licensing and distribution needs of its larger customers and serves
mid-sized customers through a combined field sales and outbound calling sales
effort. Through its strategically located, centralized operations centers in
North America, Europe and Asia/Pacific, the Company supports the global
marketing efforts of its sales forces.
The Company's Internet Web site, www.softwarespectrum.com, includes an
electronic catalog which can be used by customers to obtain pricing information.
The Web site also includes an online customer resource center ("Customer
Resource Center") which allows customers to check order status, run purchase
activity reports and purchase products based upon customer-specific catalogs
which contain products, prices and other information unique to each customer.
The Customer Resource Center also provides customers the option of receiving
their software electronically. In conjunction with this electronic
business-to-business Web tool, the Company maintains headquarters-based sales
representatives to facilitate purchases and self-help services by the Company's
customers over the Internet. See "Sales and Marketing."
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Software Spectrum provides technical support services through its support
centers located in North America and Europe. These services are utilized by
software publishers, Internet service providers and other businesses that desire
to outsource their technology support services, as well as organizations that
choose to outsource their internal help desk function. The Company employed over
1,200 technical support analysts and support personnel as of April 30, 2000,
including a dedicated sales force.
The Company adapts its product-related services to specific customer
requests, consults with customers on developing strategies to efficiently
acquire and manage the customer's investment in distributed computing software
and hardware and manages the accurate and timely delivery of products. The
Company provides its customers with information, advice and assistance through
its marketing, sales and technical staff on the wide range of software
procurement choices available. For customers electing to standardize desktop
software applications or otherwise take advantage of right-to-copy arrangements,
the Company provides volume licensing and maintenance agreement services and
support. Under VLM agreements, the Company acts as a designated service provider
to sell software licensing rights that permit customers to make copies of a
publisher's software program from a master disk and distribute this software
within a customer's organization for a fee per copy made. Maintenance agreements
entitle customers to all upgrades of certain products during a specified period
of time, typically two years following the software purchase. By utilizing VLM
agreements, customers are able to consolidate their worldwide purchases and
acquire software under a single master agreement for a given publisher from a
global supplier such as the Company. A recent trend with respect to VLM
agreements involves enterprise-wide licensing agreements which give the customer
the right to use an entire suite of products offered by a publisher on all
desktops across its enterprise. The Company's licensing consultants can assist
customers in selecting the most advantageous form of licensing available based
on specific needs or constraints. Among its other services, the Company offers
on-site consultants for large corporations, software selection assistance,
software asset management, technical support and determination of price and
availability of hard-to-find software products.
The Company serves an important role in the software industry by providing
a service-oriented and cost-effective means for personal computer software
publishers to market, sell, distribute and provide support for their products.
The services provided by the Company assist publishers by building product
awareness, marketing products directly on behalf of publishers to businesses and
other organizations, and providing additional technical support related to those
software products. The Company is also instrumental in the selection, design and
implementation of VLM programs for its customers. The Company believes that
maintaining its relationships with major publishers is important to the
Company's future growth and profitability. The Company will often coordinate
product introductions and marketing programs with publishers, which may involve
joint regional product seminars and cross-selling of selected complementary
products. Due to its volume of purchases, the Company believes it is able to
obtain favorable pricing, avail itself of marketing funds provided by major
publishers and work closely with publisher personnel on various marketing and
selling matters such as the introduction of new products, programs and related
service opportunities.
The Company has continued to experience significant growth in the sale of
software to its customers through VLM agreements. For the year ended April 30,
2000 ("fiscal 2000"), sales through VLM agreements represented approximately 87%
of software sales of the Company, compared to 83% and 77% of software sales for
the years ended April 30, 1999 ("fiscal 1999") and April 30, 1998 ("fiscal
1998"), respectively. Since individual software packages and documentation may
not be provided to each user, and due to volume pricing incentives and lower
distribution costs, customers utilizing VLM agreements can purchase licenses for
software at a lower cost than by purchasing individual shrink-wrapped software
packages. In general, the Company receives lower gross margins, as a percent of
sales, on sales made through VLM agreements. Lower gross margins are partially
offset by lower operating costs associated with such agreements.
In May 2000, the Company announced a plan to exit the professional
services business. In accordance with this plan, 10 of the 16 professional
services sites were closed effective May 31, 2000 and the Company is actively
negotiating the sale of its remaining 6 sites.
GLOBAL OPERATIONS
Under VLM agreements, multinational customers can consolidate their
worldwide volume software purchases under a single master agreement for a given
publisher. The Company's ability to sell software globally through these
programs is a key factor in its global expansion, which began in fiscal 1993.
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The Company's North American operations are based in Dallas, Texas. The
Company has major product and technical support call centers located in Dallas,
Texas and Spokane, Washington and an additional technical support call center in
Tampa, Florida, which was added in 1999. The Company has announced its intent to
open another technical support call center in the Dallas/Forth Worth metroplex
in fiscal 2001. The Company's European sales headquarters is located in The
Hague, The Netherlands and its operations center is located in Dublin, Ireland.
The Company also has sales representatives in Belgium, Italy, Sweden, the
United Kingdom, France and Germany. The Company's Asia/Pacific headquarters is
located in Sydney, Australia. The Company also has sales offices in Australia,
New Zealand, Singapore and Hong Kong.
The Company participates in a joint venture in Japan, named
Uchida-Spectrum, Inc., with Uchida-Yoko Co., Ltd. and Microsoft, Inc. Through
this joint venture, in which the Company owns a 43% equity interest, the
Company sells software products and provides technology services to customers in
Japan.
With centralized operations centers in North America, Europe and
Asia/Pacific, the Company is able to serve the major computing technology
markets around the world. Today, Software Spectrum provides software or
fulfillment services to customers located in over 100 countries, provides
technical support services in ten languages, invoices customers in many local
currencies and provides consolidated worldwide reporting to customers.
SUPPORT SERVICES
The Company provides fee-based telephone and Internet technical support
services on behalf of software publishers, Internet service providers and other
organizations and to end-users of business customers that choose to fully or
partially outsource their internal help desk function. The Company's services
cover a number of technologies, including desktop applications and operating
systems and network operating systems. The staff in the Company's support
centers are experienced in over 150 major personal computer software
applications and can provide support for software products running on most major
personal computer operating systems and environments, including Windows 2000,
Windows 98, Windows 95, Macintosh, Microsoft Windows NT, Novell NetWare and
other network operating systems. The Company is designated as a Microsoft
Certified Support Center (one of nine in the United States), a Lotus Premium
Business Partner and a Novell Authorized Service Center. The support centers
include large capacity file servers, multiple CD ROM databases and other
resources that enable the Company's support personnel to recreate a customer's
individual problem, develop a solution and guide the customer through the
solution on a step-by-step basis. Customers increasingly utilize the Internet as
an electronic means to forward support questions and receive answers from the
Company.
The Company's support business grew rapidly in fiscal 2000 and 1999. The
growth has been primarily in providing support services under contracts with
software publishers and Internet service providers. The Company maintains
support facilities in Dallas, Texas; Spokane, Washington; Tampa, Florida and
Dublin, Ireland and plans to open an additional technical support facility in
the Dallas/Fort Worth metroplex in fiscal 2001.
PRODUCT SERVICES
Licensing, Procurement and Deployment Services
The Company's customers can purchase software applications in a number of
different ways. VLM agreements, or right-to-copy agreements, allow a customer
either to purchase a license for each user in a transaction-based process or
track and periodically report its software copies, paying a license fee for each
copy made. The Company sells, supports and services the various VLM arrangements
currently utilized by software publishers. For customers, the overall cost of
using one of these methods of acquiring personal computer software may be
substantially less than purchasing shrink-wrapped full-packaged software
products.
Since each software publisher has chosen a different set of procedures
for implementing VLM agreements, businesses are faced with a significant
challenge to sort through all the alternatives and procedures to ensure that
they are utilizing the appropriate agreements, complying with the publishers'
licensing terms and properly reporting and paying for their software licenses.
Certain publishers have recently introduced licensing programs that reduce the
reporting burden of customers and the Company by requiring annual payments over
a two to three year term, provided
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the customer agrees to standardize certain applications within its organization.
In order to address the wide range of procurement choices available to its
customers, the Company provides information, analysis, advice and assistance to
its customers relating to their procurement decisions and negotiations through
its team of licensing consultants as well as by means of the Company's marketing
and sales staff and through its publications. See "Publications" and "Sales and
Marketing."
Increasingly, large corporate customers are electing to standardize desktop
applications and coordinate their enterprise-wide personal computer management
responsibilities. In response to this trend, publishers have developed
enterprise-wide VLM agreements, which simplify the terms, conditions and
administration of VLM arrangements and provide the customer with more
predictable annual costs. The Company works closely with its customers to
educate them regarding the opportunities available under VLM agreements and has
developed the systems needed to provide the global integration and reporting
required under these programs.
The Company's licensing consultants are software managers certified by the
Software and Information Industry Association, that are trained to provide
customers with advice in the evaluation of the various VLM programs offered by
publishers. In addition to the Company's extensive experience in dealing with
VLM agreements, it has continued to invest in technology-based systems to
support the special requirements necessary to service VLM agreements for its
customers. The Company has developed a custom, client/server-based system which
provides individualized customer contract management data, assists customers in
complying with VLM agreements and provides customers with necessary reporting
mechanisms.
To help customers develop or improve their personal computer software
management programs, the Company developed a software management process and
corresponding implementation services that allow customers to effectively
utilize the benefits associated with VLM programs. The Company provides its
customers with a methodology for evaluating the individual customer's personal
computer software management process and analyzing issues in implementing the
VLM programs offered by various publishers. The service options available from
the Company are designed to assist the customer in implementing its software
management plan, including internal distribution services, communicating with
end-users, reporting and compliance under VLM agreements and telephone support.
Most of the Company's products are ordered by the customer's procurement or
information systems department and may be billed to the department of the
end-user, which may be located at a different site than the procurement or
information systems department. The Company provides customers, upon request,
open-order status and purchase activity reports formatted to each customer's
specifications. The Company has also enabled its customers to obtain this
information directly from the Company's Web site. The majority of the Company's
customers now status their orders via this Internet tool. Also, customers can
submit orders or other data to the Company from their computer systems via the
Company's electronic data interchange ("EDI") capabilities. EDI and online Web
order placement improve order accuracy and reduce administrative costs for
corporate customers and the Company.
Maintenance and Upgrade Services
A number of customers who have elected to purchase software licenses
through VLM agreements have also purchased software maintenance, which allows
customers to receive new versions, upgrades or updates of software products
released during the maintenance period in exchange for a specified annual fee,
which may be paid in monthly, quarterly or annual installments. Upgrades and
updates are revisions to previously published software that improve or enhance
certain features of the software and correct errors found in previous versions.
Customers that have elected not to purchase maintenance agreements are still
able to upgrade multiple units of specific products through the Company for a
separate fee.
Electronic Distribution
The Company offers a number of services and is, on an ongoing basis,
implementing new and enhanced systems to support its customers' migration toward
electronic commerce and electronic software distribution ("ESD").
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ESD takes two forms; the first is distributing software within an
organization, via a company's internal network. ESD technology within a large
organization is a means to permit an organization to reduce the total cost of
ownership of desktop computing assets. ESD can provide hardware and software
asset management, remote desktop support and automatic installation of packaged
and custom software to the desktop.
The second form of ESD is between businesses via electronic links such as
the Internet. This form of ESD supports the fast, convenient delivery of
software products. The Company currently delivers a limited amount of software
in this manner and intends to continue to participate in this method of
distribution as demand for this service by large organizations emerges and as
communication technology improvements enable this form of ESD to become more
widely used.
E-procurement
The Company participates in the electronic procurement arena in two primary
ways: through the maintenance of the online Customer Resource Center; and
through its Electronic Business-to-Business Partner Program ("e-B2B Partner
Program") in which the Company partners with e-procurement providers, such as
Ariba, Commerce One, and Intelisys.
The Company's online Customer Resource Center contains an Internet-based
suite of tools which enables customers to manage their software procurement. For
most of its larger customers, the Company creates customized electronic product
catalogs containing product information and pricing. These catalogs are accessed
through search engine functionality, which enables customers to quickly locate
products they need. Customers are also able to status open orders and obtain
certain real-time standard reports online. The Customer Resource Center also
provides tools which allow customers to restrict purchasing only to pre-approved
products or allow an administrator at a customer location to give users within
that organization access to the Resource Center, but restrict the level of their
activity and the features and options available to them. These e-procurement
tools help customers control costs and potentially eliminate the need for
enterprise-wide e-procurement systems.
Publications
The Company prepares and distributes an annual publication which includes
in-depth analysis of various product offerings called the Licensing and Software
Management Guide. This publication provides comprehensive information on the
many facets of software licensing. The Licensing and Software Management Guide
provides the purchasing requirements and qualification restrictions of the
numerous VLM publisher programs. Issues such as concurrent licensing and copying
software on home or portable computers are identified. Because of the potential
savings a corporation can realize by utilizing alternative procurement methods,
customers have expressed a significant amount of interest in this publication
and it has been made available online. In addition, the Software and Information
Industry Association utilizes this publication in connection with its certified
software manager course curriculum.
The Company's online customer magazine, In Touch, provides new product
information and case studies from existing customers who are implementing the
latest products and technologies from the leading software publishers worldwide
and offers the latest news and commentary on industry trends and Company
sponsored workshops, seminars and other technology-related events.
The Company's online Customer Resource Center contains company news and
information designed to educate customers about the Company's areas of
expertise, its products (including third-party reviews) and services, the
publishers represented by the Company and the latest trends in the industry. The
Company also provides information through various Company publications. A
portion of the marketing funds provided to the Company by publishers is used to
offset the Company's cost of producing these publications. The Company publishes
newsletters, service and product brochures and product catalogs and also
provides other timely information coincident with major product releases.
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SALES AND MARKETING
The Company sells and markets its product and support services to existing
and potential large customers through its account executives, customer service
representatives and its marketing and support staff, as well as its Internet
site. The Company organizes account management teams to serve and support each
of its customers' needs. Generally, each team consists of one account executive,
supported by technical, marketing, customer service and sales support personnel
at the Company's operations centers, as well as Web-based self-service
capabilities.
In its product business, the Company assigns to account executives specific
accounts and/or a specific territory, which generally includes major
metropolitan areas in one or more countries, states or provinces. Account
executives market the overall services and advantages of using the Company as
the customer's preferred software and services supplier, and they concentrate on
generating new customer relationships, maintaining and improving existing
customer relationships and increasing the volume of software and services
provided to corporate customers. For national and global accounts, several
account executives may work with the customer in different parts of North
America, Europe and Asia/Pacific, coordinated by a designated national or global
account manager. The number of accounts handled by each account executive
depends on the relative size of the accounts and the level of service required
by each customer within the assigned territory.
Account executives work directly with senior and mid-level procurement
managers, IT managers and computer support managers of existing and potential
customers to identify the specific needs of each customer and to facilitate the
purchase of software products and services by the customer's organization.
Account executives maintain close contact with customers in order to provide
them with timely communications and assistance with any special or strategic
requests. Account executives are responsible for providing customers with useful
and relevant product information to assist the customer in its selection of
software available for the desired application, providing customers with
information and guidance on software procurement options including VLM
agreements, implementation and deployment of software under VLM agreements and
planning product presentations and seminars by representatives of the Company
and publishers.
The Company's licensing consultants work with its customers to provide
advice and consultation on VLM programs and to produce detailed customer account
analysis and reporting. The Company also assigns a team of customer service
representatives to each product account. Customer service representatives, who
are based primarily at the Company's operations centers, handle all aspects of
the day-to-day customer account servicing, including common presale technical
questions, customer order placement, order status inquiries, requests for a
demonstration product for evaluation and searches for hard-to-find products.
They also help customers perform many of these functions directly by guiding
them through the variety of options available on the Company's Web site. This
structure enables customer service representatives to develop close
relationships with individuals within the customer's organization and to better
serve them by being familiar with their account. By assigning a specific team of
customer service representatives to specific customers, the Company adds
additional direct contacts that reinforce customer relationships.
To solicit software business from mid-sized organizations, the Company
utilizes a coordinated effort from field sales and outbound calling team
members. While product price and delivery terms are key factors in mid-sized
organizations, the Company also provides a broad range of VLM agreement support
and services to this category of customers. Initial contact and sales are made
typically through field sales or telephone inquiries. The Company interfaces
with smaller customers via outbound telephone inquiries as well as Web-based
self-service offerings.
In fiscal 2000, the Company established relationships with many of the
leading electronic procurement companies including Ariba, Commerce One,
Intelisys and Right Works. These e-procurement companies serve a broad base of
businesses in many markets and allow the Company to expand its customer base by
opening new customer relationships with little added expense.
The Company sells its telephone and Internet-based technical support
services through a dedicated sales force which focuses on the types of
organizations who most often require such services. Software publishers
typically outsource some or all of their telephone support on significant
products, which allows the Company to leverage its existing relationship with
major publishers. The Company also solicits large organizations who may desire
to outsource all, or a portion of, their internal help desk function. The
Company's market for support services also
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extends to a number of other technology-related organizations, including
Internet service providers and hardware manufacturers and resellers.
SUPPORT SYSTEMS
The Company has developed certain proprietary support systems that
facilitate the delivery of products and services to its customers and has
invested in technology-based systems to support the special requirements
necessary to service VLM agreements for its customers. SOLO, a custom,
client/server-based system, provides individualized contract management data,
assists customers in complying with the terms of their VLM agreements and
provides customers with necessary reporting mechanisms. Using individualized
data in SOLO, in conjunction with the Company's contract management database,
the Company's representatives can guide a customer through the various
purchasing options and assist in administering VLM agreements. SOLO also
provides the Company's customer service representatives with a customer profile,
account status, order status and product pricing and availability details.
PRODUCTS AND DISTRIBUTION
The software products offered by the Company include major business
programs such as spreadsheet, word processing, electronic mail, groupware,
database, and graphics, as well as operating systems, utilities and languages.
For the fiscal year ended April 30, 2000, the top 20 software titles sold by the
Company represented approximately 70% of the Company's net software sales.
In April 1999, the Company adopted a virtual warehouse model for the
distribution of shrink-wrapped software in North America, an approach that has
been used in Europe since 1993. The model was facilitated through an agreement
with Ingram Micro, a leading technology distributor, to provide distribution
capability for product purchased from Ingram Micro as well as product purchased
elsewhere. A three-year agreement with Ingram Micro was signed December 24,
1998, and the Company's former distribution facility in Louisville, Kentucky was
closed in April 1999. The virtual warehouse model was extended into
Asia/Pacific, and the Company's distribution facility in Sydney, Australia was
closed in April 2000.
Generally, the Company uses the services of distributors or publishers to
ship shrink-wrapped products directly to its customers, both in the U.S. and
other countries, usually the same day the Company receives the order. As of
April 30, 2000, the Company did not have a significant order backlog.
CUSTOMERS
In fiscal 2000, the Company handled more than 7,000 active customer
accounts. The Company's customer base includes corporations, government
agencies, educational institutions, non-profit organizations and other business
entities. Sales contracts with large customers for the procurement of products
generally cover a one to three year period subject to the customers' rights to
terminate the contract upon notice. These contracts usually include provisions
regarding price, availability, payment terms and return policy. Standard payment
terms with the Company's customers are net 30 days from the date of invoice or
net 10 days in the case of summary periodic billings to customers. In fiscal
2000, no single customer represented more than 5% of the Company's revenues, and
the Company's customer base included 286 of the 1999 Fortune 500 companies and
232 of the Fortune Global 500 companies. The Company does not believe that the
loss of any single customer would have a material adverse effect on its
business.
VENDORS
The Company's sales from software are derived from products purchased from
publishers and distributors. The decision whether to buy products directly from
publishers or through distributors is determined on a vendor-by-vendor basis
based on publisher requirements, cost, availability, return privileges and
demand for a particular product. For fiscal 2000, approximately 90% of the
Company's sales represented products purchased from its ten largest publishers.
For the fiscal years ended April 30, 2000 and 1999, products from Microsoft
accounted for approximately 66% and 65% of net software sales, respectively, and
products from IBM/Lotus accounted for approximately 12% and 8% of net software
sales, respectively.
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The Company has contractual relationships with all its major vendors
covering price, payment terms and return privileges. These contracts are
non-exclusive and non-territorial and are generally terminable by either party
without cause upon 30 to 60 days notice. The Company's contracts with its major
vendors are generally for one or two year terms, and the majority contain no
provision for automatic renewal.
Publisher contracts generally permit the Company to submit adjustment
reports for licensing and maintenance transactions within a certain time period
after the transaction is reported. Such contracts do not typically require the
Company to ensure end-user compliance with its publishers' licensing and
copyright or patent right protection provisions. Certain of the Company's
contracts with vendors provide for early payment discounts. Under the terms of
its vendor contracts, the Company is not generally required to meet any minimum
purchase or sales requirements, except to the extent that the Company's level of
purchases or sales may affect the amount or availability of financial
incentives, advertising allowances and marketing funds. The reduction in amount,
discontinuance of or the Company's inability to meet requirements established by
vendors for achieving financial incentives, advertising allowances and marketing
funds could have an adverse effect on the Company's business and financial
results.
COMPETITION
The personal computer software market is intensely competitive. The Company
faces competition from a wide variety of sources, including "software-only"
resellers, hardware resellers and manufacturers and large systems integrators.
Current competitors from the software reseller category would include Corporate
Software and Technology, Inc., ASAP Corporate Express, Softmart and
Softwarehouse International. The Company believes that it possesses significant
differentiating features from this group. These features include the Company's
global presence and capabilities, VLM expertise, services and systems that
support the Company's business, including Internet services, and knowledgeable,
industry-experienced personnel.
Competitors also include hardware resellers and manufacturers. These
companies compete in the large organization market with marketing efforts to
provide customers with software and hardware services. Such competitors include
Dell Computer Corporation and Compaq Computer Corporation, hardware
manufacturers that also sell software, and systems integrators such as Compucom
Systems, Inc. Many of these companies do have a global presence. The Company
believes its VLM expertise and services, software-focused solutions, custom
computing systems specifically designed to support the Company's business and
knowledgeable industry-experienced personnel are differentiating factors in this
group of competitors.
In the global technical support services market, the Company competes with
a variety of companies including Keane, Inc., Stream International, Inc., Sykes
Enterprises Incorporated and DecisionOne Corporation. The Company competes in
this market based primarily on the quality of services provided and cost. Many
of the Company's competitors have significantly greater financial resources than
the Company. However, the Company believes that its emphasis on training and
quality programs, and its focus on high customer satisfaction at a reasonable
cost, allows the Company to compete effectively in this highly competitive
market.
The manner in which personal computer software products are distributed and
sold is continually changing and new methods of distribution may emerge or
expand. Software publishers may intensify their efforts to sell their products
directly to end-users, including current and potential customers of the Company.
In the past, direct sales from software publishers to end-users have not been
significant, although end-users have traditionally been able to purchase
upgrades directly from publishers. From time to time, some publishers have
instituted programs for the direct sale of single large order quantities of
software to major corporate accounts, and the Company anticipates that these
types of transactions will continue to be used by various publishers in the
future. The Company could be adversely affected if major software publishers
successfully implement programs for the direct sale of software through volume
purchase agreements or other arrangements intended to exclude the resale
channel. The Company believes that the total range of services it provides to
its customers cannot be easily substituted by publishers, particularly because
publishers do not offer the scope of services or product offerings required by
most of the Company's customers. However, there can be no assurance that
publishers will not increase their efforts to sell substantial quantities of
software directly to end-users. In addition, the acceptance of VLM agreements by
organizations as a method to purchase software has continued to
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expand over the past year. Should publishers permit others to sell VLM
agreements, or should additional competitors develop the capabilities required
to service and support large licensing programs, the Company's competitive
advantage could be negatively impacted. If the resale channel's participation in
VLM agreements is reduced or eliminated, or if other methods of distribution of
software become common, the Company's business and financial results could be
materially adversely affected. The Company currently delivers a limited amount
of software through electronic software distribution and intends to continue to
participate in this method of software distribution as demand for this service
by large organizations emerges and as communications technology improvements
permit electronic software distribution to be made securely and efficiently. The
Company's continuing investment in electronic software distribution and
electronic commerce reflects the Company's commitment to meeting the changing
needs of its customers. Sales of personal computers to homes and small
businesses with many popular software application programs bundled with the
hardware have continued to increase. If bundling of software with hardware
becomes accepted by large corporate customers in the future, such bundling could
have an adverse effect on the Company's business.
EMPLOYEES
As of April 30, 2000, the Company had approximately 2,500 employees in
North America, Europe and Asia/Pacific, including approximately 400 employees in
the Company's discontinued professional services business. The Company has
entered into non-competition agreements and/or non-solicitation agreements with
substantially all of its sales personnel. None of the Company's employees are
represented by a union.
ITEM 2. PROPERTIES
The Company currently leases approximately 184,000 square feet of space in
Garland, Texas (a suburb in the Dallas/Forth Worth metroplex) which houses its
corporate headquarters, along with call centers for technical support and
product services. The Garland leases have aggregate current monthly payments of
approximately $109,000 and remaining terms of five to seven years. The Company
leases approximately 108,000 square feet of office space in Spokane, Washington
with current aggregate monthly payments of approximately $78,000. As of April
30, 2000, the Spokane leases had remaining terms of five years. The Company also
has a support services center in Tampa, Florida. This facility consists of
approximately 98,500 square feet of space which is leased for approximately
$118,000 per month. The remaining term of the lease is approximately four years.
In April 2000, the Company entered into an agreement to lease approximately
73,000 square feet of space for an additional support services center in North
Richland Hills, Texas (a suburb in the Dallas/Fort Worth metroplex.) The lease
provides for current monthly rental payments of approximately $58,000 and has a
remaining term of approximately seven years.
With respect to its European-based operations, the Company currently leases
space for its operations center in Dublin, Ireland and its sales headquarters in
The Hague, The Netherlands. In Asia/Pacific, the Company leases space for its
Asia/Pacific headquarters in Sydney, Australia and maintains sales offices in 7
other markets.
ITEM 3. LEGAL PROCEEDINGS
In March 2000, the Company received notice from the Internal Revenue
Service ("IRS") alleging a tax deficiency for the year ended March 31, 1996. The
IRS has challenged the deductibility of certain expenses related to services
provided by the Company's foreign affiliates to the Company's United States
multinational customers. The Company has filed a petition contesting the
deficiency with the United States Tax Court. The amount of the income adjustment
asserted in the notice is approximately $1.3 million. The Company believes that
the IRS' position with respect to this matter is without merit and intends to
contest vigorously any attempt by the IRS to assert a tax deficiency for the
period in question. The Company does not believe that the resolution of this
matter will have a material effect on its results of operations, financial
position or cash flows.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The ultimate disposition of these matters will not
have a material adverse effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended April 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's common stock is traded over the counter and is listed on The
NASDAQ Stock Market under the symbol SSPE. The following table sets forth the
range of high and low last reported sales prices for the Company's common stock
for the last eight fiscal quarters.
High Low
------- -------
Fiscal Year 2000 Quarter Ended:
July 31 $ 19.00 $ 11.94
October 31 18.50 10.06
January 31 19.44 8.81
April 30 34.00 15.63
Fiscal Year 1999 Quarter Ended:
July 31 $ 21.88 $ 17.13
October 31 18.50 12.00
January 31 18.19 14.13
April 30 15.88 10.88
On July 14, 2000, the last reported sales price of the Company's common
stock as reported on The NASDAQ Stock Market was $15.50 per share. On July 14,
2000 there were 706 holders of record (representing approximately 2,000
beneficial owners) of the Company's common stock. The Company has never paid
cash dividends on its common stock. The Board of Directors presently intends to
retain all earnings for use in the Company's business and does not anticipate
paying cash dividends in the near term.
On September 2, 1999 the Company issued 16,904 shares of the Company's
common stock in connection with the acquisition of Comptroller Technology, Inc.,
d/b/a Quinn, Reeder and Associates. The shares of common stock were issued to
the stockholders of Quinn, Reeder and Associates in a transaction that was
exempt from registration under section 4(2) of the Securities Act of 1933, as
amended, and the regulations promulgated thereunder.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is qualified
by reference to, and should be read in conjunction with, the Company's
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this document.
STATEMENT OF OPERATIONS DATA
(In thousands, except per share amounts)
Year Ended Year Ended
April 30, March 31, (1)
-------------------------------------------------- -------------
2000 1999 (2) 1998(2) 1997(2) 1996 (2)
----------- ----------- ----------- ----------- -----------
Net sales $ 1,005,578 $ 887,307 $ 846,991 $ 771,693 $ 387,950
Gross margin 98,217 94,403 84,217 83,124 48,751
Operating income 13,988 18,782 12,461 6,688 9,802
Income from continuing operations 6,686 10,754 5,205 1,820 7,070
Income per share from continuing operations
Basic 1.70 2.53 1.21 .42 1.68
Diluted 1.69 2.52 1.20 .41 1.66
Weighted average shares outstanding
Basic 3,934 4,244 4,318 4,314 4,196
Diluted 3,963 4,273 4,351 4,415 4,260
BALANCE SHEET DATA
(In thousands)
April 30, March 31, (1)
-------------------------------------------------- -------------
2000 1999 (2) 1998(2) 1997(2) 1996 (2)
----------- ----------- ----------- ----------- -----------
Working capital $ 9,468 $ 22,249 $ 18,526 $ 39,068 $ 61,105
Total assets 232,854 232,414 255,725 267,008 148,254
Total debt 7,863 8,626 8,206 37,370 --
Shareholders' equity 64,979 78,925 76,270 73,939 73,363
(1) In fiscal 1997, the Company changed its fiscal year-end from March 31 to
April 30.
(2) Amounts have been reclassified to reflect the decision to discontinue the
Company's professional services operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Software Spectrum ("the Company") is a global business-to-business
software services provider that delivers comprehensive information technology
solutions to organizations throughout North America, Europe and Asia/Pacific.
The Company sells personal computer ("PC") software through volume licensing and
maintenance ("VLM") agreements, or right-to-copy arrangements, and full-packaged
PC software products. In addition, the Company provides technical support
services to software publishers, Internet service providers and other
organizations. Sales have increased each year since the Company's inception in
1983. Increases in sales of PC software and
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support services have resulted from the Company's market share growth,
geographic expansion and strategic acquisitions. Sales increases also reflect
overall growth in the PC software and technology services industries.
DISCONTINUED OPERATIONS
In May 2000, the Company announced a plan to exit the professional services
business. In accordance with this plan, 10 of the Company's 16 professional
services sites were closed effective May 31, 2000. The Company has signed a
non-binding letter of intent to sell its three Asia/Pacific offices and is
actively negotiating the sale of its three remaining North American sites. The
Company expects to complete its plan of disposition during the second quarter of
fiscal 2001. The Company has recorded an estimated loss of $8.0 million on the
disposition of the professional services business, including related tax
benefits of $3.2 million.
The financial data related to the professional services business is
classified as discontinued operations for all periods presented.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth certain items from the Company's
Consolidated Statements of Operations expressed as a percentage of net sales:
Percentage of Net Sales
For Year Ended April 30,
---------------------------------------
2000 1999 1998
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.2 89.4 90.1
----- ----- -----
Gross margin 9.8 10.6 9.9
Selling, general and administrative expenses 7.1 7.5 7.5
Write-off of Asia/Pacific goodwill .3 -- --
Depreciation and amortization 1.0 1.0 .9
----- ----- -----
Operating income 1.4 2.1 1.5
Interest expense, net .1 .2 .4
----- ----- -----
Income before income taxes 1.3 1.9 1.1
Income tax expense .6 .7 .5
----- ----- -----
Income from continuing operations .7% 1.2% .6%
===== ===== =====
Fluctuations in foreign currencies against the U.S. dollar did not have a
significant effect on the Company's operating results for the periods presented.
Fiscal 2000 Compared to Fiscal 1999
Net sales from continuing operations increased approximately 13% in fiscal
2000 compared to fiscal 1999. Software sales for the year ended April 30, 2000
increased 12% over those for the year ended April 30, 1999, primarily due to
increased VLM sales in North America. The Company serves as a designated service
provider for VLM agreements which are frequently used by organizations seeking
to standardize desktop software applications and, consequently, may involve
significant quantities of unit sales for each customer at lower per-unit prices
than full-packaged software products. Sales of software through VLM agreements
represented approximately 87% of software sales for the year ended April 30,
2000 compared to 83% for the year ended April 30, 1999. The Company generally
realizes lower gross margins as a percentage of net sales on sales of software
through VLM agreements, as compared to sales of full-packaged software products.
Certain publishers offer enterprise-wide licensing arrangements which simplify
the administration of VLM agreements for customers who elect to standardize
desktop applications across their organizations. These programs typically have
lower gross margins and administrative costs than traditional VLM arrangements.
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Revenues derived from support services increased by 30% during fiscal 2000
compared to fiscal 1999. The increase was primarily attributable to increased
business in the Company's Tampa call center, which opened in June 1999, as well
as support services provided under a large support contract that began in the
July 1998 quarter. Although support services represented approximately 7% of the
Company's overall sales for the year ended April 30, 2000, and 6% of overall
sales for the year ended April 30, 1999, such revenue generated approximately
16% and 17%, respectively, of the Company's gross margin dollars. The Company
expects that the percentage of gross margin dollars provided by support services
will increase as the Company continues to develop and expand this aspect of its
business.
For the year ended April 30, 2000, sales outside of North America increased
7% to $118 million, compared to sales of $109 million for the year ended April
30, 1999. Sales in Europe increased 7% to $70 million while sales in
Asia/Pacific increased 8% to $48 million for the year ended April 30, 2000.
These increases over 1999 were primarily due to increased sales of software
under VLM agreements, including enterprise-wide licensing arrangements. Growing
European licensing revenues have been subject to margin pressures similar to
those experienced in North America.
Overall gross margin as a percentage of net sales was 9.8% and 10.6% for
the years ended April 30, 2000 and 1999, respectively. Gross margins have
decreased in both of the Company's business segments.
For the year ended April 30, 2000, gross margin on the sale of PC software
declined to 8.8% as compared to 9.3% for the year ended April 30, 1999,
primarily due to price competition and the increasing percentage of sales of
software through high-volume VLM agreements. Gross margin percentages on sales
of support services were 22% and 31% for the years ended April 30, 2000 and
1999, respectively. In July 1998, the Company began providing support services
under a large contract with a software publisher involving the introduction of a
new product. Initial high call volumes and customer incentives caused gross
margins on this contract to be uncharacteristically high during fiscal 1999.
The Company believes that gross margin percentages on sales of software may
continue to decline if the volume of software product sales by the Company
through VLM agreements, particularly enterprise-wide agreements, continues or if
publishers respond to continued market pressures by reducing financial
incentives to resellers. However, this potential decrease in product gross
margin percentages may be offset by anticipated increases in gross margin
dollars generated by support services.
Selling, general and administrative ("SG&A") expenses include the costs of
the Company's sales and marketing organization as well as purchasing,
distribution and administration costs. For the year ended April 30, 2000, SG&A
expenses, as a percentage of net sales, decreased to 7.1% as compared to 7.5%
for the year ended April 30, 1999. The decrease is due to operating efficiencies
realized in the product services area due to increased sales and more frequent
use of the Company's electronic offerings. The Company remains focused on
controlling operating costs in both of its business lines.
The Company periodically evaluates the carrying value of its long-lived
assets when events and circumstances warrant such review. The Company's
Asia/Pacific operations have not performed as expected, primarily in New
Zealand, and, anticipating the planned exit of the Company's professional
services operations in the region, the Company has determined that the
anticipated future undiscounted cash flows from these operations do not support
the carrying value of the related assets. Accordingly, a nondeductible charge
of approximately $2.6 million was recorded against income from continuing
operations in the fourth quarter of fiscal 2000 to write off goodwill
associated with continuing operations in the region.
Depreciation and amortization for the year ended April 30, 2000 increased
to $10.3 million compared to $9.0 million for the year ended April 30, 1999. The
increase reflects additional depreciation on the higher level of fixed assets
utilized in the Company's support services business in fiscal 2000.
Operating income for the year ended April 30, 2000 was $14.0 million, compared
to $18.8 million in fiscal 1999. Excluding the aforementioned $2.6 million
write-off of goodwill, the remaining decrease of $2.2 million is
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wholly attributable to the uncharacteristically high margin achieved in support
services during fiscal 1999. Operating income for support services for fiscal
1999 was $6.6 million, exceeding fiscal 2000 by $3.2 million.
The Company's effective tax rate for the year ended April 30, 2000 was
approximately 50% as compared to approximately 38% for the year ended April 30,
1999. The increase in the Company's effective tax rate reflects the impact of
international operations, including the nondeductible write-off of goodwill in
Asia/Pacific.
Fiscal 1999 Compared to Fiscal 1998
Net sales increased approximately 5% in fiscal 1999 compared to fiscal
1998. Software sales for the year ended April 30, 1999 were comparable to those
for the year ended April 30, 1998. Sales of software through VLM agreements
represented approximately 83% of software sales for the year ended April 30,
1999 compared to 77% for the year ended April 30, 1998.
Revenues derived from support services increased by 231% during fiscal 1999
compared to fiscal 1998, primarily due to a large technical support contract
that began in the July 1998 quarter. Support services represented 6% and 2% of
the Company's overall sales in fiscal 1999 and 1998, respectively; however, such
revenue generated approximately 17% and 6% of the Company's gross margin
dollars.
For fiscal 1999 and 1998, sales outside of the United States totaled $151
million and $120 million, respectively. Sales in Europe increased 24% to $65
million while sales in Asia/Pacific increased 14% to $44 million for the year
ended April 30, 1999. These increases over 1998 were primarily due to increased
sales of software under VLM agreements, including enterprise-wide licensing
arrangements. In fiscal 1999, the Company's operating loss from continuing
operations in Asia/Pacific was approximately $327,000, a significant reduction
from the $2.2 million operating loss from continuing operations reported in the
prior year. The reduction was due to increased sales, including several large
enterprise-wide licensing arrangements, and changes to the Company's business
model implemented in fiscal 1998.
Overall gross margin as a percentage of net sales was 10.6% and 9.9% for
the years ended April 30, 1999 and 1998, respectively. The increase in overall
gross margin as a percentage of net sales was primarily due to the increased
percentage of gross margin provided by support services, which have higher gross
margins as a percentage of net sales than sales of software.
For the year ended April 30, 1999, gross margin on the sale of PC software
declined to 9.3% as compared to 9.5% for the year ended April 30, 1998,
reflecting the increasing percentage of sales of software through high-volume
VLM agreements. The decline in software gross margin percentages for the year
ended April 30, 1999 was offset by an increase in gross margin dollars from
support services. Gross margin percentages on sales of support services were 31%
for both the years ended April 30, 1999 and 1998.
SG&A expenses, as a percentage of net sales, were 7.5% for both the years
ended April 30, 1999 and 1998. SG&A expenses, as a percentage of net sales,
declined in both of the Company's operating segments in fiscal 1999. However,
the decline was offset by the growth in the support services business, which has
a higher percentage of SG&A expenses, as a percentage of net sales, than the
Company's product business.
Depreciation and amortization for the year ended April 30, 1999 increased
to $9.0 million compared to $8.1 million for the year ended April 30, 1998. The
increase reflects additional depreciation on the higher level of fixed assets
utilized in the Company's support services business in 1999.
Operating income for the year ended April 30, 1999 was $18.8 million,
compared to $12.5 million in fiscal 1998. The increase is primarily due to the
increased sales and uncharacteristically high margins achieved in the support
services business during fiscal 1999 and the improved operating results in the
Asia/Pacific region.
The Company's effective tax rate for the year ended April 30, 1999 was
approximately 38% as compared to approximately 45% for the year ended April 30,
1998. The decline in the Company's effective tax rate reflects the impact of
improved international operations.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has a revolving credit facility (the "Facility") which permits
the Company to borrow up to $100 million, subject to availability under its
borrowing base. At April 30, 2000, $85 million was available under the Facility.
The Facility, which expires in March 2002, bears interest at a variable rate
(7.43% at April 30, 2000) and provides for an annual commitment fee equal to a
variable percentage of the unused line of credit. The Facility, which is secured
by accounts receivable, inventory and a pledge of the stock of certain of the
Company's subsidiaries, requires the Company to maintain certain financial
covenants and ratios and places limitations on dividend payments, capital
expenditures and certain other borrowings. Due to the estimated loss on
disposition of the discontinued professional services business, the Company was
not in compliance with the Facility's financial covenants for net worth, net
income or interest coverage at April 30, 2000. The lender has waived these
covenants for the quarters ended April 30, 2000 and July 31, 2000 and amended
the Facility to revise the future requirements and to permit the Company to sell
its remaining professional services sites. The Company believes it will be in
compliance with these covenants following July 31, 2000 and that no further
waivers or amendments will be necessary.
Certain of the Company's foreign subsidiaries have revolving credit
facilities with local banks totaling $8 million. Borrowings bear interest at
floating rates (approximately 6.39% at April 30, 2000) and are secured by
letters of credit issued by the Company. The facilities expire in February and
March 2001. Annual maturities of long-term debt are $63,000 and $7.8 million for
the years ending April 30, 2001 and 2002, respectively.
In 1997, the Company implemented a stock repurchase program which allows
for the purchase of the Company's common stock from time to time in the open
market or through privately negotiated transactions. The Company funds such
purchases with cash or borrowings under the Company's credit facility. As of
June 30, 2000 the Company had repurchased 851,700 shares of common stock, for a
total of $13.2 million, under the stock repurchase program and has been
authorized by its Board of Directors to repurchase up to an additional $1.8
million of its common stock.
The increase in trade accounts receivable and trade accounts payable from
April 30, 1999 to April 30, 2000 is due to increased sales and the timing of
collections of accounts receivable and payments to the Company's vendors. At
April 30, 2000 and 1999, accounts receivable represented approximately 48 and 55
days of historical sales, respectively. The increase in other current
liabilities from April 30, 1999 to April 30, 2000 is primarily due to the
estimated loss recorded in connection with the disposition of the Company's
professional services business.
Net cash provided by continuing operations was $8.2 million in fiscal 2000,
as compared to $28.1 million of cash provided by continuing operations in fiscal
1999. The decrease in cash provided by continuing operations is primarily due to
the timing of collections of accounts receivable and payments to the Company's
vendors. During fiscal 1998, $39.6 million of cash was provided by continuing
operations.
The increase in furniture, equipment and leasehold improvements in fiscal
2000 reflects approximately $10.7 million of capital expenditures relating to
the ongoing upgrade of the Company's computer systems and expansion of its
support center in Tampa, Florida. The increase in furniture, equipment and
leasehold improvements in fiscal 1999 reflects approximately $8.3 million of
capital expenditures relating to the ongoing upgrade of the Company's computer
systems and expansion of its support centers in Dallas, Texas; Spokane,
Washington and Tampa, Florida. The Company's capital expenditures for fiscal
2001 are expected to be approximately $10 million, including expenditures to
further upgrade the Company's computer systems and to expand its U.S. support
services facilities.
The Company expects that its cash requirements for fiscal 2001 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
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MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financial activities. The Company does
not use derivative financial instruments for speculative or trading purposes.
The Company conducts business in many foreign currencies and is subject to
foreign currency exchange rate risk on cash flows related to sales, expenses and
financing transactions. The impacts of fluctuations in foreign currency exchange
rates on the Company's geographically diverse operations are often varied and at
times offsetting. The Company occasionally uses forward-exchange contracts to
hedge these exposures. In addition, the Company issues intercompany advances to
its foreign subsidiaries denominated in U.S. dollars, which expose the foreign
subsidiaries to the effect of changes in spot exchange rates of their local
currencies relative to the U.S. dollar. Based on the Company's foreign currency
exchange rate exposure for intercompany borrowings of approximately $20 million
at April 30, 2000, the maximum impact of a 10% adverse change in currency rates
would be a $2 million reduction to net income.
The Company's credit arrangements expose it to fluctuations in interest
rates. At April 30, 2000, certain of the Company's subsidiaries had $7.8 million
outstanding under revolving credit facilities, which provide for interest to be
paid based on variable rates. Thus, interest rate changes would result in a
change in the amount of interest to be paid. Based upon the interest rates and
borrowings at April 30, 2000, a 10% increase in interest rates would not
materially affect the Company's financial position, results of operations or
cash flows.
YEAR 2000
In preparation for the transition into the Year 2000, the Company developed
and implemented a plan to ensure the ongoing operation of the Company's business
through the turn of the century and beyond. The Company did not experience any
material disruptions in its operations resulting from the transition into the
Year 2000.
The total cost of the Company's Year 2000 project was less than $1 million
and was expensed as incurred. The majority of the costs involved reallocation of
existing resources rather than incremental costs. This reallocation of resources
did not have a material impact on the implementation of any significant internal
systems projects.
In general, as a reseller of software products, the Company only passes
through to its customers the applicable vendors' warranties. The Company's
operating results could be materially adversely affected, however, if it were
held liable for the failure of software products resold by the Company to be
Year 2000 compliant despite its disclaimer of software product warranties. With
respect to the Company's professional services, the failure of client systems or
processes could subject the Company to claims. Such claims, or the defense
thereof, could have a material adverse effect on the Company's operating
results. No such claims have been asserted against the Company with respect to
software products or professional services.
EURO CURRENCY ISSUES
On January 1, 1999, 11 of the 15 member countries of the European Union
introduced a common legal currency called the Euro, which is intended to replace
the currently existing currencies of the participating countries by January
2002. The initial introduction of the Euro did not have a significant effect on
the Company's operations or financial results. The Company believes that its
internal systems are Euro capable and does not expect increased use of the Euro
to materially impact its financial condition, operating results or use of
derivative instruments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Other than statements of historical fact, this Management's Discussion and
Analysis of Financial Condition and Results of Operations includes certain
statements of the Company that may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements include future market
18
20
trends, expectations concerning the Company's growth, estimates regarding the
economy and the software industry in general, key performance indicators that
impact the Company, statements regarding market risk and statements included in
the Year 2000 and Euro Currency discussions above. In developing any
forward-looking statements, the Company makes a number of assumptions, including
expectations for continued market growth, supplier relationships, anticipated
revenue and gross margin levels, and cost savings and efficiencies that include
the ability of the Company to develop electronic strategies. Although the
Company believes these assumptions are reasonable, no assurance can be given
that they will prove correct. The Company's ability to continue to grow product
sales, develop its support services business and improve operational
efficiencies will be key to its success in the future. If the industry's or the
Company's performance differs materially from these assumptions or estimates,
Software Spectrum's actual results could vary significantly from the estimated
performance reflected in any forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results. This report on Form 10-K for the Company's fiscal year ended April 30,
2000 contains certain cautionary statements under "Forward-Looking Information"
that identify factors that could cause the Company's actual results to differ
materially from those in the forward-looking statements in this discussion. All
forward-looking statements in this discussion are expressly qualified in their
entirety by the cautionary statements in this paragraph and under
"Forward-Looking Information."
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the current directors of the Company, and the
persons nominated for election as directors of the Company at its Annual Meeting
of Shareholders to be held on September 21, 2000, will appear in the Company's
definitive Proxy Statement relating to the Annual Meeting of Shareholders under
the caption "Election of Directors" to be filed pursuant to Regulation 14A. Such
information is incorporated herein by reference.
EXECUTIVE OFFICERS
Officers are elected annually by the Board of Directors and serve until
their successors are elected and qualified. The current executive officers of
the Company are as follows:
Officer
Name Position Since Age
---- -------- ------- ---
Judy C. Odom Chairman and Chief Executive Officer 1983 47
Keith R. Coogan President and Chief Operating Officer 1990 48
Roger J. King Executive Vice President
and President of Product Services 1990 47
James W. Brown Vice President and Chief Financial Officer 1998 43
Robert D. Graham Vice President of Strategic Relationships 1997 45
and General Counsel, Secretary
Robert B. Mercer Vice President and Chief Information Officer 1994 48
Lisa M. Stewart Vice President of e-Services 1996 38
Lorraine Castorina Vice President of North American Sales 1998 53
Kelli H. Cole Vice President of Human Resources 1998 39
19
21
Judy C. Odom has served as Chief Executive Officer of the Company since
April 1988 and Chairman of the Board since July 1992. Ms. Odom is a co-founder
of the Company and has been a director of the Company since its inception in
1983. Ms. Odom served as Treasurer of the Company from 1983 to October 1990, as
Vice President from April 1987 to April 1988 and as President from April 1996 to
May 1998. Ms. Odom was employed by the national accounting firm of Grant
Thornton LLP from 1977 to 1985, where she last served as an audit partner. Ms.
Odom is a Certified Public Accountant.
Keith R. Coogan was named President in May 1998 and has been Chief
Operating Officer since April 1996. Mr. Coogan has served as a director of the
Company since August 1998. Mr. Coogan served as Executive Vice President of the
Company from April 1996 to May 1998 and had been a Vice President of the Company
since October 1990. Mr. Coogan served as Secretary of the Company from May 1991
through July 1992 and as Treasurer from October 1990 to March 1992. From May
1989 until joining the Company, Mr. Coogan served as Vice President of Finance
for Leather Center Holdings, Inc., a privately-held manufacturer and retailer of
leather furniture. From January 1986 to May 1989, he was Vice President and
Chief Financial Officer of Trinity Texas Corporation and Ward Hunt Investments,
both of which were privately-held real estate sales and development
organizations. Mr. Coogan is a Certified Public Accountant.
Roger J. King was named President of Product Services in July 2000 and has
been Executive Vice President of Sales and Marketing since May 1998. Mr. King
served as Vice President of Sales and Marketing from April 1996 through April
1998 and as Vice President of Sales from September 1990 to March 1996. Mr. King
was employed by Lotus Development Corporation from September 1987 to September
1990, where he last served as Regional Manager for the software business group
and was responsible for product sales in a 14-state region. From July 1985 to
September 1987, Mr. King was a Vice President of the banking software group of
Sterling Software, Inc., a software development company. Prior thereto, he spent
nine years with IBM in various sales and sales management positions.
James W. Brown joined the Company in February 1998 as Vice President and
Chief Financial Officer. From November 1991 until joining the Company, Mr. Brown
served as Vice President of Corporate Accounting for Affiliated Computer
Services, Inc., a publicly-held information technology outsourcing provider. Mr.
Brown is a Certified Public Accountant.
Robert D. Graham has served as Vice President of Strategic Relationships
and General Counsel since January 1997 and Secretary since February 1997. Mr.
Graham served on the Board of Directors of the Company from 1991 until February
1997. From 1980 through January 1997, Mr. Graham was in the private practice of
law with the law firm of Locke Liddell & Sapp LLP and its predecessor, in
Dallas, Texas.
Robert B. Mercer has been a Vice President and the Chief Information
Officer of the Company since January 1994. Mr. Mercer is responsible for
internal software application development and information systems processing for
the Company. From March 1992 until joining the Company, Mr. Mercer was the Vice
President and Chief Information Officer of Lechters, Inc., a publicly-held
specialty retailer. From 1988 to March 1992, he served as Senior Vice President
and Chief Information Officer of KG Men's Store, a privately-held clothing store
chain.
Lisa M. Stewart has been Vice President of e-Services (formerly Customer
Operations) since April 1996. From January 1994 through March 1996, Ms. Stewart
served as Director of Customer Operations for the Company after having served in
various sales, sales management and operations positions. Prior to joining the
Company in 1988, Ms. Stewart was employed by Fox T.V. and Hilton Services
Corporation.
Lorraine Castorina was promoted to Vice President of North American Sales
in May 1998. Ms. Castorina joined the Company in February 1987 and has served in
various sales and sales management positions, most recently as Director of North
American Sales - West.
Kelli H. Cole joined the Company in November 1998 as Vice President of
Human Resources. From September 1995 through July 1998, Ms. Cole served as Vice
President - Global Human Resources Operations for Mary Kay Inc., a
privately-held global cosmetics company. From June 1994 through August 1995, she
served as Vice President - Office of Development for Morgan Stanley Inc. From
December 1990 through June 1994, Ms. Cole was Vice President of Human Resources
for Bankers Trust.
20
22
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on September 21,
2000, under the caption "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on September 21,
2000, under the captions "Stock Ownership of Principal Shareholders" and "Stock
Ownership of Management," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(1) and (2) - Index to Financial Statements and Schedules - The information
required by this portion of Item 14 is set forth in a separate section
following Part IV of this Report.
(3) - The following documents are filed or incorporated by reference as
exhibits to this Report:
3.1(a) Restated Articles of Incorporation of the Company, filed with the
Secretary of State of Texas on May 12, 1989, as amended
(incorporated by reference to the Company's Registration
Statement No. 33-40794 on Form S-1.)
3.1(b) Statement of Designation of Series A Junior Participating
Preferred Stock (incorporated by reference to the Company's
Current Report on Form 8-K dated December 13, 1996.)
3.1(c) Articles of Amendment to Restated Articles of Incorporation,
filed with the Secretary of State of Texas on November 25, 1996
(incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1997.)
3.1(d) Statement of Cancellation of Treasury Shares, filed with the
Secretary of State of Texas on March 21, 1997 (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1997.)
3.2(a) Restated Bylaws of the Company, as amended (incorporated by
reference to the Company's Registration Statement No. 33-40794 on
Form S-1.)
3.2(b) Articles of Amendment to Article 8 of the Company's Amended and
Restated Bylaws effective September 17, 1998 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 1998.)
3.3 Rights Agreement between the Company and KeyCorp Shareholder
Services, Inc., (the "Rights Agreement") dated December 13, 1996,
(incorporated by reference to the Company's Current Report on
Form 8-K dated December 13, 1996.)
3.4 Letter of Substitution of Rights Agent under Rights Agreement,
dated June 7, 1997 (appointing ChaseMellon Shareholders Services,
L.L.C. as successor rights agent) (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year
ended April 30, 1998.)
21
23
10.1 IBM Business Partner Agreement between the Company, IBM
Corporation and Lotus Development Corporation, dated June 30,
1997 (incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1997.)
10.2 Microsoft Large Account Reseller Agreement, dated January 1, 2000
between MSLI, GP and the Company, including Amendment No. 1
thereto, dated July 1, 2000.
10.3 Intentionally omitted.
10.4(a) Commercial Lease Agreement, dated May 1, 1990, between CIIF
Associates II Limited Partnership and the Company (incorporated
by reference to the Company's Registration Statement No. 33-40794
on Form S-1.)
10.4(b) Amendment to Lease Agreement, dated March 31, 1995 between CIIF
Associates II Limited Partnership and the Company (incorporated
by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.)
10.4(c) Third Amendment to Lease Agreement, dated effective as of April
20, 1998 between CIIF Associates II Limited Partnership and the
Company (incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended April 30, 1998.)
10.4(d) Fourth Amendment to Lease Agreement, dated effective as of
October 1, 1998 between CIIF Associates II Limited Partnership
and the Company (incorporated by reference to the Company's
annual Report on Form 10-K for the fiscal year ended April 30,
1999.)
10.5(a) Commercial Lease Agreement, dated as of April 19, 1993, between
Kancro, L.P. and the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.)
10.5(b) Amendment #2 - Expansion Agreement to Lease Agreement, dated as
of June 20, 1994 between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1994.)
10.5(c) Third Amendment to Commercial Lease Agreement, dated effective
April 1, 1995 between Kancro, L.P. and the Company (incorporated
by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.)
10.5(d) Fourth Amendment to Commercial Lease Agreement, dated effective
as of November 25, 1996 between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1997.)
10.5(e) Fifth Amendment to Commercial Lease Agreement, dated effective as
of March 9, 1998 between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1998.)
10.6 Lease Agreement between Spokane Teachers Credit Union and
Spectrum Integrated Services, Inc., d/b/a Software Spectrum,
dated March 10, 2000.
10.7 Lease Agreement, dated April 28, 2000 between Pretty M.T., L.P.
and Spectrum Integrated Services, Inc. d/b/a Software Spectrum.
10.8 Lease Agreement, dated April 26, 1996 by and between
Beneficiaries of American National Bank Trust Number 104601-03
and the Company (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1996.)
10.9 1989 Stock Option Plan of the Company, as amended (incorporated
by reference to the Company's Registration Statement No. 33-40794
on Form S-1.)
10.10 Software Spectrum, Inc. Amended and Restated Employee Stock
Purchase Plan.
10.11 The Software Spectrum, Inc. Amended and Restated 1993 Long Term
Incentive Plan.
22
24
10.12 Intentionally omitted.
10.13 Management Continuity Agreement ("Continuity Agreement") between
the Company and James W. Brown, dated March 1, 1998, together
with schedule identifying additional executive officers that are
parties to Continuity Agreements.
10.14 Non-Employee Directors' Retainer Stock Plan (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995.)
10.15 Third Amended and Restated Limited Waiver Agreement, dated
December 15, 1999 between the Company and Private Capital
Management, Inc.
10.16 Amended and Restated Credit Agreement, dated March 11, 1998 among
the Company, the Chase Manhattan Bank, as Administrative Agent,
Chase Bank of Texas, National Association, as Collateral Agent
and other participating financial institutions (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1998.)
10.17(a) The Software Spectrum, Inc. 1998 Long Term Incentive Plan
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended October 31, 1998.)
10.17(b) Amendment No. 1 to the Software Spectrum, Inc. 1998 Long Term
Incentive Plan.
10.18(a) First Amendment to Amended and Restated Credit Agreement, dated
as of August 15, 1998 among the Company, the Chase Manhattan
Bank, as Administrative Agent, Chase Bank of Texas, National
Association, as Collateral Agent, and other participating
financial institutions (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended October 31, 1998.)
10.18(b) Second Amendment to Amended and Restated Credit Agreement, dated
as of June 23, 1999 among the Company, the Chase Manhattan Bank,
as Administrative Agent, Chase Bank of Texas, National
Association, as Collateral Agent, and other participating
financial institutions (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 2000.)
10.19 Lease Agreement, dated October 19, 1998 between Highwoods/Florida
Holdings, L.P. and the Company, together with First Amendment
thereto, dated April 16, 1999 (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1999.)
10.20 Lease, dated February 28, 2000, between SDS Properties Liberty
Lake L.L.C. and Spectrum Integrated Services, Inc, d/b/a Software
Spectrum.
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP, Independent Accountants
24 Power of Attorney (included on the signature page of this Form
10-K.)
27(a) Financial Data Schedule
27(b) Restated Financial Data Schedule for the fiscal year ended April
30, 1999.
27(c) Restated Financial Data Schedule for the fiscal year ended April
30, 1998.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter ended April 30,
2000.
23
25
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Certified Public Accountants F - 1
Financial Statements (Item 14(a) (1))
Consolidated Balance Sheets as of April 30, 2000 and 1999 F - 2
Consolidated Statements of Operations for the three years ended April 30, 2000 F - 3
Consolidated Statements of Shareholders' Equity for the three years ended April 30, 2000 F - 4
Consolidated Statements of Cash Flows for the three years ended April 30, 2000 F - 5
Consolidated Statements of Comprehensive Income (Loss) for the three years ended April 30, 2000 F - 6
Notes to Consolidated Financial Statements F - 7
Financial Statement Schedule (Item 14 (a) (2))
Report of Independent Certified Public Accountants on Schedules S - 1
Schedule II - Valuation and Qualifying Accounts for the three years ended April 30, 2000 S - 2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required or are inapplicable and therefore have been omitted. Individual
financial statements of Software Spectrum, Inc. have been omitted since
consolidated financial statements are being filed and no significant amount of
the assets of the subsidiaries included in the consolidated financial statements
being filed are restricted as to transfer to Software Spectrum, Inc.
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Software Spectrum, Inc.
We have audited the accompanying consolidated balance sheets of Software
Spectrum, Inc. and subsidiaries as of April 30, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, cash flows and
comprehensive income (loss) for each of the three years in the period ended
April 30, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Software Spectrum,
Inc. and subsidiaries as of April 30, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended April 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
- ----------------------------
Grant Thornton LLP
Dallas, Texas
June 14, 2000 (except Note D, as to which
the date is July 31, 2000)
F-1
27
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
April 30,
----------------------------
2000 1999
------------ ------------
Current assets
Cash and cash equivalents $ 5,652 $ 20,084
Trade accounts receivable, net of allowance for doubtful
accounts of $2,767 in 2000 and $2,408 in 1999 145,954 129,869
Prepaid expenses 1,031 1,476
Net assets of discontinued operations 12,037 15,463
Other current assets 4,869 983
------------ ------------
Total current assets 169,543 167,875
Furniture, equipment and leasehold improvements, at cost 48,108 38,077
Less accumulated depreciation and amortization 27,301 20,408
------------ ------------
20,807 17,669
Other assets, consisting primarily of goodwill, net of accumulated
amortization of $9,819 in 2000 and $7,878 in 1999 42,504 46,870
------------ ------------
$ 232,854 $ 232,414
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 63 $ 763
Trade accounts payable 135,410 134,041
Other current liabilities 24,602 10,822
------------ ------------
Total current liabilities 160,075 145,626
Long-term debt, less current maturities 7,800 7,863
Shareholders' equity
Preferred stock, par value $.01; authorized, 1,000,000 shares;
issued and outstanding, none -- --
Common stock, par value $.01; authorized, 20,000,000 shares;
issued, 4,585,140 shares in 2000 and 4,491,542 shares in 1999 46 45
Additional paid-in capital 42,292 40,833
Retained earnings 39,897 46,896
Currency translation adjustments (4,267) (3,092)
------------ ------------
77,968 84,682
Less treasury stock at cost - 841,201 shares in 2000
and 384,901 shares in 1999 12,989 5,757
------------ ------------
Total shareholders' equity 64,979 78,925
------------ ------------
$ 232,854 $ 232,414
============ ============
See notes to consolidated financial statements.
F-2
28
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended April 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Net sales
Software services $ 935,873 $ 833,667 $ 830,792
Support services 69,705 53,640 16,199
----------- ----------- -----------
1,005,578 887,307 846,991
Cost of sales
Software services 853,110 755,758 751,581
Support services 54,251 37,146 11,193
----------- ----------- -----------
907,361 792,904 762,774
----------- ----------- -----------
Gross margin 98,217 94,403 84,217
Selling, general and administrative expenses 71,386 66,604 63,680
Write-off of Asia/Pacific goodwill 2,557 -- --
Depreciation and amortization 10,286 9,017 8,076
----------- ----------- -----------
Operating income 13,988 18,782 12,461
Interest expense (income)
Interest expense 1,438 1,956 3,279
Interest income (716) (519) (332)
----------- ----------- -----------
722 1,437 2,947
----------- ----------- -----------
Income before income taxes 13,266 17,345 9,514
Income tax expense 6,580 6,591 4,309
----------- ----------- -----------
Income from continuing operations 6,686 10,754 5,205
Discontinued operations
Loss from operations of discontinued professional
services business (net of applicable tax benefit) 5,729 4,623 718
Loss on disposition of professional services business,
including provision for operating losses during
phase-out period (net of applicable tax benefit) 7,956 -- --
----------- ----------- -----------
Loss from discontinued operations 13,685 4,623 718
----------- ----------- -----------
Net income (loss) $ (6,999) $ 6,131 $ 4,487
=========== =========== ===========
Earnings (loss) per share - basic
Income from continuing operations $ 1.70 $ 2.53 $ 1.21
=========== =========== ===========
Net income (loss) $ (1.78) $ 1.44 $ 1.04
=========== =========== ===========
Earnings (loss) per share - diluted
Income from continuing operations $ 1.69 $ 2.52 $ 1.20
=========== =========== ===========
Net income (loss) $ (1.77) $ 1.43 $ 1.03
=========== =========== ===========
Weighted average shares outstanding
Basic 3,934 4,244 4,318
=========== =========== ===========
Diluted 3,963 4,273 4,351
=========== =========== ===========
See notes to consolidated financial statements.
F-3
29
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except number of shares)
Common Stock Additional
--------------------------- Paid-in Retained
Shares Amount Capital Earnings
------------ ------------ ------------ ------------
Balances at May 1, 1997 4,363,523 $ 44 $ 39,040 $ 36,278
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $5 34,155 -- 456 --
Purchase of treasury stock -- -- -- --
Net income -- -- -- 4,487
Currency translation adjustments -- -- -- --
------------ ------------ ------------ ------------
Balances at April 30, 1998 4,397,678 44 39,496 40,765
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $105 93,864 1 1,337 --
Purchase of treasury stock -- -- -- --
Net income -- -- -- 6,131
Currency translation adjustments -- -- -- --
------------ ------------ ------------ ------------
Balances at April 30, 1999 4,491,542 45 40,833 46,896
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $95 76,694 1 1,159 --
Stock issued in connection with acquisition
of Comptroller Technology, Inc. 16,904 -- 300 --
Purchase of treasury stock -- -- -- --
Net loss -- -- -- (6,999)
Currency translation adjustments -- -- -- --
------------ ------------ ------------ ------------
Balances at April 30, 2000 4,585,140 $ 46 $ 42,292 $ 39,897
============ ============ ============ ============
Currency Treasury Stock
Translation ----------------------------
Adjustments Shares Amount Total
------------ ------------ ------------ ------------
Balances at May 1, 1997 $ (877) (34,311) $ (546) $ 73,939
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $5 -- -- -- 456
Purchase of treasury stock -- (57,800) (862) (862)
Net income -- -- -- 4,487
Currency translation adjustments (1,750) -- -- (1,750)
------------ ------------ ------------ ------------
Balances at April 30, 1998 (2,627) (92,111) (1,408) 76,270
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $105 -- -- -- 1,338
Purchase of treasury stock -- (292,790) (4,349) (4,349)
Net income -- -- -- 6,131
Currency translation adjustments (465) -- -- (465)
------------ ------------ ------------ ------------
Balances at April 30, 1999 (3,092) (384,901) (5,757) 78,925
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $95 -- -- -- 1,160
Stock issued in connection with acquisition
of Comptroller Technology, Inc. -- -- -- 300
Purchase of treasury stock -- (456,300) (7,232) (7,232)
Net loss -- -- -- (6,999)
Currency translation adjustments (1,175) -- -- (1,175)
------------ ------------ ------------ ------------
Balances at April 30, 2000 $ (4,267) (841,201) $ (12,989) $ 64,979
============ ============ ============ ============
See notes to consolidated financial statements.
F-4
30
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended April 30,
------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Operating activities
Income from continuing operations $ 6,686 $ 10,754 $ 5,205
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities
Provision for bad debts 1,604 1,324 1,691
Depreciation and amortization 10,286 9,017 8,076
Write-off of Asia/Pacific goodwill 2,557 -- --
Deferred income taxes (29) 1,244 (190)
Changes in operating assets and liabilities
Trade accounts receivable (19,891) 27,717 (9,758)
Inventories (367) 4,183 13,705
Prepaid expenses and other assets 959 1,074 4,690
Trade accounts payable and other
current liabilities 6,405 (27,249) 16,210
---------- ---------- ----------
Net cash provided by operating activities 8,210 28,064 39,629
---------- ---------- ----------
Investing activities
Purchase of furniture, equipment and
leasehold improvements (10,701) (8,250) (7,296)
Purchase of subsidiary, net of cash acquired (1,916) -- --
---------- ---------- ----------
Net cash used in investing activities (12,617) (8,250) (7,296)
---------- ---------- ----------
Financing activities
Borrowings on long-term debt 169,315 205,366 266,381
Repayments of long-term debt (170,192) (204,898) (295,663)
Proceeds from stock issuance, including tax benefit
related to stock options exercised 1,160 1,338 456
Purchase of treasury stock (7,232) (4,349) (862)
---------- ---------- ----------
Net cash used in financing activities (6,949) (2,543) (29,688)
---------- ---------- ----------
Effect of exchange rate changes on cash (722) (499) (382)
---------- ---------- ----------
Net cash provided by (used in) continuing operations (12,078) 16,772 2,263
Net cash used in discontinued operations (2,354) (3,817) (2,574)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (14,432) 12,955 (311)
Cash and cash equivalents at beginning of year 20,084 7,129 7,440
---------- ---------- ----------
Cash and cash equivalents at end of year $ 5,652 $ 20,084 $ 7,129
========== ========== ==========
Supplemental disclosure of cash paid during the year
Income taxes $ 1,853 $ 5,070 $ 2,004
Interest 1,132 1,673 3,730
See notes to consolidated financial statements.
F-5
31
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended April 30,
------------------------------------------
2000 1999 1998
-------- -------- --------
Net income (loss) $ (6,999) $ 6,131 $ 4,487
Currency translation adjustments (1,175) (465) (1,750)
-------- -------- --------
Comprehensive income (loss) $ (8,174) $ 5,666 $ 2,737
======== ======== ========
See notes to consolidated financial statements.
F-6
32
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a global business-to-business software services provider
that delivers comprehensive information technology solutions to organizations
throughout North America, Europe and Asia/Pacific. The Company sells personal
computer ("PC") software through volume licensing and maintenance ("VLM")
agreements, or right-to-copy arrangements, and full-packaged PC software
products and provides technical support services to software publishers,
Internet service providers and other organizations.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform to the current period presentation.
Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Cash and Cash Equivalents
The Company considers all investments with maturities of three months or
less when purchased to be cash equivalents.
Credit Risk
Trade accounts receivable are generally due from a diverse group of
companies and, accordingly, do not include any specific concentrations of credit
risk.
Financial Instruments
The fair values of the Company's financial instruments, consisting of cash
and cash equivalents, accounts receivable, accounts payable and long-term debt,
approximate their carrying values.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation of furniture and equipment is provided primarily on the
straight-line method over the estimated useful lives ranging from 2 to 10 years.
Amortization of leasehold improvements is provided on the straight-line method
over the shorter of the useful lives of the assets or the terms of the
corresponding leases.
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of
the net assets of businesses purchased and is amortized on the straight-line
method over periods of up to 20 years.
F-7
33
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Valuation of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets,
including goodwill, whenever events or changes in circumstances indicate that
the carrying amount may not be fully recoverable. If the total of the expected
future undiscounted cash flows is less than the carrying amount of the asset, a
loss is recognized based on the amount by which the carrying value exceeds the
asset's fair market value.
Internal-Use Software
Effective May 1, 1999, the Company adopted the provisions of Statement of
Position 98-1 (SOP 98-1), Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which revised the accounting for
software development costs. Based on this accounting standard, certain
internal-use software costs that were previously expensed are now capitalized
when specific criteria are met. These costs are amortized on the straight-line
method over the estimated useful lives of the software developed, up to five
years. Adoption of this statement did not have a material impact on the
Company's financial statements.
Foreign Currency Translation
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. Assets and liabilities of the foreign subsidiaries
are translated to U.S. dollars at year-end exchange rates. Income and expense
items are translated at the rates of exchange prevailing during the year. The
adjustments resulting from translating the financial statements of foreign
subsidiaries are reflected in shareholders' equity. Gains and losses on foreign
currency transactions are included in the consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue from software sales at the time of product
shipment, or in accordance with terms of licensing contracts. Revenue from
maintenance contracts is recognized when invoiced, as the Company has no
material costs associated with future performance under these contracts.
Service revenue is recognized as the services are provided. Advance
billings are recorded as deferred revenue.
Stock-Based Compensation
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for employee stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of grant over the exercise price.
Earnings Per Share
The Company computes basic earnings per share based on the weighted average
number of common shares outstanding. Diluted earnings per share is computed
based on the weighted average number of shares outstanding, plus the number of
additional common shares that would have been outstanding if dilutive potential
common shares had been issued.
F-8
34
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. This standard, which is effective for fiscal
years beginning after June 15, 2000, requires that all derivatives be recognized
as either assets or liabilities at estimated fair value. The adoption of SFAS
133 is not expected to have a material effect on the Company's financial
position or results of operations.
NOTE B - DISCONTINUED OPERATIONS
In May 2000, the Company announced a plan to exit the professional services
business. In accordance with this plan, 10 of the Company's 16 professional
services sites were closed effective May 31, 2000. The Company has signed a
non-binding letter of intent to sell its three Asia/Pacific offices and is
actively negotiating the sale of its three remaining North American sites. The
Company expects to complete its plan of disposition during the second quarter of
fiscal 2001. The Company has recorded an estimated loss of $8.0 million on the
disposition of the professional services business, including related tax
benefits of $3.2 million. The pretax loss accrual and the related accrued tax
benefit have been classified with other current liabilities and other current
assets, respectively, in the Company's consolidated balance sheet.
The financial data related to the professional services business is
classified as discontinued operations for all periods presented.
Operating results from discontinued operations were as follows:
Year Ended
April 30,
------------------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues $ 45,707 $ 42,656 $ 37,096
Loss before income taxes (8,616) (6,775) (1,312)
Income tax benefit 2,887 2,152 594
Loss from discontinued operations (5,729) (4,623) (718)
The net assets of discontinued operations were as follows:
April 30,
-----------------------------
2000 1999
---------- ----------
Accounts receivable, net $ 11,051 $ 12,845
Prepaid expenses and other current assets 317 440
Furniture, equipment and leasehold improvements, net 3,244 4,369
Other assets 201 1,849
Trade accounts payable (187) (312)
Other current liabilities (2,589) (3,728)
---------- ----------
$ 12,037 $ 15,463
========== ==========
F-9
35
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE C - GOODWILL
The Company periodically evaluates the carrying value of its long-lived
assets when events and circumstances warrant such review. The Company's
Asia/Pacific operations have not performed as expected, primarily in New
Zealand, and, anticipating the planned exit of the Company's professional
services operations in the region, the Company has determined that the
anticipated future undiscounted cash flows from these operations do not support
the carrying value of the related assets. Accordingly, a nondeductible charge of
approximately $2.6 million was recorded against income from continuing
operations in the fourth quarter of fiscal 2000 to write off goodwill associated
with continuing operations in the region.
NOTE D - LONG-TERM DEBT
Long-term debt consisted of (in thousands):
April 30,
------------------------
2000 1999
-------- --------
Notes payable to foreign banks $ 7,800 $ 7,800
Other 63 826
-------- --------
7,863 8,626
Less current maturities 63 763
-------- --------
$ 7,800 $ 7,863
======== ========
The Company has a revolving credit facility (the "Facility") which permits
the Company to borrow up to $100 million, subject to availability under its
borrowing base. At April 30, 2000, $85 million was available under the Facility.
The Facility, which expires in March 2002, bears interest at a variable rate
(7.43% at April 30, 2000) and provides for an annual commitment fee equal to a
variable percentage of the unused line of credit. The Facility, which is secured
by accounts receivable, inventory and a pledge of the stock of certain of the
Company's subsidiaries, requires the Company to maintain certain financial
covenants and ratios and places limitations on dividend payments, capital
expenditures and certain other borrowings. Due to the estimated loss on
disposition of the discontinued professional services business, the Company was
not in compliance with Facility's financial covenants for net worth, net income
or interest coverage at April 30, 2000. The lender has waived these covenants
for the quarters ended April 30, 2000 and July 31, 2000 and amended the Facility
to revise the future requirements and to permit the Company to sell its
remaining professional services sites. The Company believes it will be in
compliance with these covenants following July 31, 2000 and that no further
waivers or amendments will be necessary.
Certain of the Company's foreign subsidiaries have revolving credit
facilities with local banks totaling $8 million. Borrowings bear interest at
floating rates (approximately 6.39% at April 30, 2000) and are secured by
letters of credit issued by the Company. The facilities expire in February and
March 2001.
Annual maturities of long-term debt are $63,000 and $7.8 million for the
years ending April 30, 2001 and 2002, respectively.
NOTE E - INCOME TAXES
The Company's provision (benefit) for income taxes is comprised of the
following (in thousands):
Federal Foreign State Total
--------- --------- --------- ---------
Year ended April 30, 2000
Current $ 6,089 $ 90 $ 430 $ 6,609
Deferred (103) 74 -- (29)
--------- --------- --------- ---------
$ 5,986 $ 164 $ 430 $ 6,580
========= ========= ========= =========
Year ended April 30, 1999
Current $ 4,884 $ 170 $ 293 $ 5,347
Deferred 605 639 -- 1,244
--------- --------- --------- ---------
$ 5,489 $ 809 $ 293 $ 6,591
========= ========= ========= =========
Year ended April 30, 1998
Current $ 3,687 $ 400 $ 412 $ 4,499
Deferred (282) 92 -- (190)
--------- --------- --------- ---------
$ 3,405 $ 492 $ 412 $ 4,309
========= ========= ========= =========
F-10
36
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE E - INCOME TAXES (CONTINUED)
A reconciliation of income tax expense from continuing operations using the
statutory federal income tax rate of 34% to the actual income tax expense from
continuing operations follows (in thousands):
Year Ended
April 30,
----------------------------------------
2000 1999 1998
-------- -------- --------
Income tax at statutory rate $ 4,510 $ 5,897 $ 3,235
State and local income
taxes, net of federal benefit 284 193 272
Differences between foreign and U.S. tax rates,
including foreign losses without tax benefits 540 159 474
Nondeductible goodwill amortization and write-off 987 134 165
Other 259 208 163
-------- -------- --------
Income tax expense $ 6,580 $ 6,591 $ 4,309
======== ======== ========
Deferred tax assets and liabilities as of April 30, 2000 and 1999, which
are included in other assets and other current assets, consist of the following
(in thousands):
April 30,
-------------------------
2000 1999
-------- --------
Accounts receivable $ 317 $ 291
Accrued expenses 2,910 524
Foreign net operating loss carryforwards 896 153
Other 42 177
-------- --------
Deferred tax assets 4,165 1,145
-------- --------
Depreciation and amortization (459) (517)
Other (57) (2)
-------- --------
Deferred tax liabilities (516) (519)
-------- --------
Valuation allowance (896) --
-------- --------
$ 2,753 $ 626
======== ========
At April 30, 2000, the Company's foreign subsidiaries had net operating
loss carryforwards of approximately $4.4 million. Utilization of these
carryforwards is limited to income of the respective subsidiaries; accordingly,
a valuation allowance has been provided.
F-11
37
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE F - EMPLOYEE BENEFIT PLANS
In July 1989, the Company adopted the 1989 Stock Option Plan, under which
non-incentive stock options were granted. In August 1993, the shareholders
approved the adoption of the 1993 Long Term Incentive Plan and the Company then
ceased granting new options under the 1989 Stock Option Plan. In September 1998,
the shareholders approved the adoption of the 1998 Long Term Incentive Plan.
Under the terms of the 1998 Long Term Incentive Plan, awards may be granted in
the form of incentive or non-qualified stock options, restricted shares of
common stock, or units valued on the basis of Company performance. Stock options
are granted at the quoted market price of the Company's stock at the date of
grant, become exercisable over periods of up to five years and expire on various
dates from 2000 through 2005. At April 30, 2000, 230,250 and 86,070 shares of
common stock were reserved for future grant under the 1998 and 1993 Long Term
Incentive Plans, respectively.
The Company has adopted only the disclosure provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, for employee stock options and continues to apply Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, for
recording stock options granted. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for options
granted subsequent to March 31, 1995, consistent with the methodology prescribed
by SFAS 123, net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
Year Ended
April 30,
-----------------------------------------------
2000 1999 1998
---------- ---------- ----------
Net income (loss) - as reported $ (6,999) $ 6,131 $ 4,487
Net income (loss) - pro forma (7,654) 5,646 4,069
Earnings (loss) per share - as reported
Basic (1.78) 1.44 1.04
Diluted (1.77) 1.43 1.03
Earnings (loss) per share - pro forma
Basic (1.95) 1.33 .94
Diluted (1.93) 1.32 .94
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before fiscal 1996. The fair value of these options was estimated at
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in fiscal 2000, 1999 and
1998, respectively: dividend yield of 0% for all periods; volatility of 68%, 49%
and 45%; risk-free interest rates of 5.73%, 5.75% and 6.2% and expected lives of
four years for all periods. The weighted average fair values of options granted
were $8.79, $8.34 and $5.76 per share during fiscal 2000, 1999 and 1998,
respectively.
F-12
38
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE F - EMPLOYEE BENEFIT PLANS (CONTINUED)
Option activity for the three years ended April 2000 is summarized as
follows:
Number of Shares Weighted Average
Underlying Options Exercise Price
------------------ ----------------
Outstanding at May 1, 1997 483,540 $ 20.34
Granted 222,000 13.48
Exercised (2,600) 12.34
Canceled/forfeited (220,000) 21.48
--------
Outstanding at April 30, 1998 482,940 16.65
Granted 174,850 18.69
Exercised (53,800) 13.06
Canceled/forfeited (80,900) 18.99
--------
Outstanding at April 30, 1999 523,090 17.28
Granted 195,950 15.70
Exercised (36,460) 14.76
Canceled/forfeited (110,630) 21.68
--------
Outstanding at April 30, 2000 571,950 16.05
========
Exercisable at April 30, 1998 211,650 18.84
========
Exercisable at April 30, 1999 208,430 18.37
========
Exercisable at April 30, 2000 197,590 15.57
========
Further information regarding options outstanding and options exercisable
at April 30, 2000 is summarized below:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of of Remaining Exercise of Exercise
Exercise Prices Shares Life Price Shares Price
---------------------- ----------- ---------------- ----------- ----------- ---------
$ 10.00 to 15.00 162,080 2.82 $ 12.90 96,700 $ 12.75
15.01 to 20.00 308,550 4.08 16.10 74,740 16.93
20.01 to 25.00 95,320 4.08 20.58 20,150 20.82
25.01 to 30.00 6,000 1.37 26.25 6,000 26.25
---------------------- ----------- ----- ----------- ----------- ---------
$ 10.00 to 30.00 571,950 3.69 $ 16.05 197,590 $ 15.57
====================== =========== ===== =========== =========== =========
F-13
39
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE F - EMPLOYEE BENEFIT PLANS (CONTINUED)
In July 1992, the Company approved an Employee Stock Purchase Plan which
allows eligible employees to purchase shares of common stock through payroll
deductions. The shares can be purchased at an amount equal to 85% of the fair
market value of the common stock on the exercise date. The plan provides for a
series of monthly offerings, with an exercise date of the 15th of each month.
Each employee may purchase up to $15,000 of fair market value of common stock
per calendar year, limited to 10% of a participant's compensation. At April 30,
2000, a total of 17,000 shares of common stock were reserved for issuance under
the plan. For the years ended April 30, 2000, 1999 and 1998, 39,088, 40,196 and
30,929 shares, respectively, were issued under the plan.
The Company's employee savings plan covers all employees who are 19
years of age or older and have six months of service with the Company. The plan
allows participants to make voluntary pre-tax contributions, which are partially
matched by the Company, in accordance with the provisions of Section 401(k) of
the Internal Revenue Code. Employer contributions to the plan are at the
discretion of the Board of Directors and are reduced by forfeited contributions.
The Company's contributions to the plan for the years ended April 30, 2000, 1999
and 1998, net of reductions for forfeitures, were $306,000, $320,000 and
$202,000, respectively.
NOTE G - EARNINGS PER SHARE
The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted earnings per share. Outstanding options that
were not included in the computation of diluted earnings per share because their
effect would be antidilutive totaled approximately 293,000, 293,000 and 119,000
shares for the years ended April 30, 2000, 1999 and 1998, respectively.
Year Ended
April 30,
----------------------------------------
2000 1999 1998
-------- -------- --------
Income from continuing operations $ 6,686 $ 10,754 $ 5,205
-------- -------- --------
Loss from discontinued operations $(13,685) $ (4,623) $ (718)
-------- -------- --------
Weighted average shares outstanding (basic) 3,934 4,244 4,318
Effect of dilutive employee and director stock options 29 29 33
-------- -------- --------
Weighted average shares outstanding (diluted) 3,963 4,273 4,351
-------- -------- --------
Earnings per share from continuing operations (basic) $ 1.70 $ 2.53 $ 1.21
======== ======== ========
Earnings per share from continuing operations (diluted) $ 1.69 $ 2.52 $ 1.20
======== ======== ========
Loss per share from discontinued operations (basic) $ (3.48) $ (1.09) $ (.17)
======== ======== ========
Loss per share from discontinued operations (diluted) $ (3.46) $ (1.08) $ (.17)
======== ======== ========
NOTE H - LEASES
The Company leases various office facilities as well as certain office and
computer equipment under leases classified as operating leases. Future minimum
rental payments under all long-term, noncancelable operating leases at April 30,
2000 are as follows (in thousands):
Year Ending April 30:
- ---------------------
2001 $ 4,251
2002 4,856
2003 5,021
2004 5,042
2005 3,685
Thereafter 8,098
---------
30,953
Less sublease receivable 369
---------
$ 30,584
=========
Rent expense for operating leases totaled $3.7 million, $2.6 million and
$2.4 million for fiscal 2000, 1999 and 1998, respectively.
F-14
40
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE I - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company's reportable segments are strategic business units that offer
diverse products and services. The Company has two reportable segments: software
services and support services. The software services segment sells PC software
applications through volume licensing and maintenance agreements and
full-packaged PC software products. The support services segment provides
fee-based telephone and Internet support services to software publishers,
Internet service providers and other organizations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based upon income or loss from operations prior to allocation of
corporate overhead. Unallocated corporate overhead includes the costs of the
Company's corporate functions, such as accounting, human resources, credit and
information systems, as well as the compensation of the Company's officers.
Information for the Company's reportable segments for the years ended April 30,
2000, 1999 and 1998 is presented below (in thousands). Note that the Company
does not allocate expenditures for assets on a segment basis for internal
management reporting and, therefore, such information is not presented.
Year Ended
April 30,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Net sales
Software services $ 935,873 $ 833,667 $ 830,792
Support services 69,705 53,640 16,199
----------- ----------- -----------
$ 1,005,578 $ 887,307 $ 846,991
=========== =========== ===========
Operating income
Software services $ 50,042 $ 44,855 $ 38,697
Support services 3,374 6,613 1,285
Unallocated corporate overhead (39,428) (32,686) (27,521)
----------- ----------- -----------
$ 13,988 $ 18,782 $ 12,461
=========== =========== ===========
Depreciation and amortization
Software services $ 969 $ 1,078 $ 873
Support services 3,428 2,351 562
Unallocated corporate overhead 5,889 5,588 6,641
----------- ----------- -----------
$ 10,286 $ 9,017 $ 8,076
=========== =========== ===========
Assets
Software services $ 140,705 $ 126,472
Support services 19,766 13,756
Unallocated corporate assets 60,346 76,723
Assets of discontinued operations 12,037 15,463
----------- -----------
$ 232,854 $ 232,414
=========== ===========
F-15
41
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE I - BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
Information regarding foreign operations for the years ended April 30,
2000, 1999 and 1998 follows (in thousands). Sales are attributed to countries
based upon the location of the customer.
Year Ended
April 30,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales
United States $ 832,957 $ 736,583 $ 726,779
Foreign 172,621 150,724 120,212
---------- ---------- ----------
$1,005,578 $ 887,307 $ 846,991
========== ========== ==========
Long-lived assets
United States $ 58,486 $ 54,768
Foreign 3,843 7,425
---------- ----------
$ 62,329 $ 62,193
========== ==========
NOTE J -- CUSTOMER RELATIONSHIP MANAGEMENT BUSINESS
On September 2, 1999, the Company acquired all of the outstanding shares of
common stock of Comptroller Technology, Inc., d/b/a Quinn, Reeder and
Associates, a privately held technology company which specializes in providing
customer relationship management solutions. The purchase price was $2.3 million,
including cash of $2.0 million and the issuance of 16,904 shares of the
Company's common stock. In addition, the purchase agreement provides for the
payment of additional cash consideration during the three years following the
closing date if certain earnings targets are met. The acquisition was accounted
for using the purchase method of accounting. The operating results of the
acquired business have been included in the consolidated statements of
operations from the date of acquisition. Pro forma operating results, giving
effect to the acquisition as though it had occurred at the beginning of fiscal
1998, are not presented because they are not materially different than the
Company's actual results.
NOTE K -- CONTINGENCY
In March 2000, the Company received notice from the Internal Revenue
Service ("IRS") alleging a tax deficiency for the year ended March 31, 1996. The
amount of the income adjustment asserted in the notice is approximately $1.3
million. The Company believes that the IRS' position with respect to this matter
is without merit and intends to contest vigorously any attempt by the IRS to
assert a tax deficiency for the period in question. The Company does not believe
that the resolution of this matter will have a material effect on its results of
operations, financial position or cash flows.
F-16
42
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE L - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited quarterly financial data for
the years ended April 30, 2000 and 1999 (in thousands, except per share
amounts):
Quarter Ended
-------------------------------------------------------------------------------------
Fiscal 2000 Fiscal 1999
----------------------------------------- -----------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
2000(3) 2000 1999 1999 1999 1999 1998 1998
--------- --------- -------- -------- -------- -------- -------- --------
Net sales(1) $247,223 $302,828 $227,124 $228,403 $231,442 $251,378 $189,549 $214,938
Gross margin(1) 22,822 28,878 22,856 23,661 24,380 25,413 22,958 21,652
Income (loss) from continuing
operations(2) (1,109) 4,087 1,775 1,933 2,577 3,638 2,204 2,335
Loss from discontinued
operations (10,196) (1,912) (1,091) (486) (1,145) (1,527) (916) (1,035)
Net income (loss) (11,305) 2,175 684 1,447 1,432 2,111 1,288 1,300
Earnings (loss) per share - basic
Income (loss) from
continuing operations (.30) 1.06 .44 .47 .61 .86 .52 .54
Loss from discontinued
operations (2.72) (.50) (.27) (.12) (.27) (.36) (.22) (.24)
Net income (loss) (3.02) .56 .17 .35 .34 .50 .30 .30
Earnings (loss) per share - diluted
Income (loss) from
continuing operations (.30) 1.02 .44 .47 .61 .85 .52 .54
Loss from discontinued
operations (2.72) (.48) (.27) (.12) (.27) (.36) (.22) (.24)
Net income (loss) (3.02) .54 .17 .35 .34 .49 .30 .30
(1) The net sales and gross margin numbers have been reclassified to reflect
the decision to discontinue the Company's professional services operations.
The reclassification had no impact on net income or earnings per share.
(2) Income (loss) from continuing operations for the quarter ended April 30,
2000 includes a charge of $2.6 million, or $.68 per share, to write off
goodwill related to the Company's Asia/Pacific operations, primarily New
Zealand.
(3) Loss from discontinued operations for the quarter ended April 30, 2000
includes the estimated loss on disposition of the Company's professional
services operations of $8.0 million, or $2.12 per share.
F-17
43
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Software Spectrum, Inc., a
Texas corporation, and the undersigned directors and officers of Software
Spectrum, Inc., hereby constitutes and appoints Judy C. Odom its or his true and
lawful attorney-in-fact and agent, for it or him and in its or his name, place
and stead, in any and all capacities, with full power to act alone, to sign any
and all amendments to this Report, and to file each such amendment to this
Report, with all exhibits thereto, and any and all other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as it or he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
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.
SOFTWARE SPECTRUM, INC.
By: /s/ Judy C. Odom
--------------------------------------
Judy C. Odom, Chairman and
Chief Executive Officer
Date: July 31, 2000
F-18
44
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
--------- ----- ----
/s/ Judy C. Odom Chief Executive Officer and July 31, 2000
- ------------------------------------ Chairman of the Board
Judy C. Odom (Principal Executive Officer)
/s/ Keith R. Coogan President, Chief Operating Officer July 31, 2000
- ------------------------------------ and Director
Keith R. Coogan
/s/ James W. Brown Vice President and Chief Financial Officer July 31, 2000
- ------------------------------------ (Principal Financial Officer and
James W. Brown Principal Accounting Officer)
/s/ Mellon C. Baird Director July 31, 2000
- ------------------------------------
Mellon C. Baird
/s/ Brian N. Dickie Director July 31, 2000
- ------------------------------------
Brian N. Dickie
/s/ Carl S. Ledbetter Director July 31, 2000
- ------------------------------------
Carl S. Ledbetter
/s/ Frank Tindle Director July 31, 2000
- ------------------------------------
Frank Tindle
F-19
45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Shareholders and Board of Directors
Software Spectrum, Inc.
In connection with our audit of the consolidated financial statements of
Software Spectrum, Inc. and subsidiaries referred to in our report dated June
14, 2000, we have also audited Schedule II for each of the three years in the
period ended April 30, 2000. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
- ---------------------------
Grant Thornton LLP
Dallas, Texas
June 14, 2000
S-1
46
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DEDUCTIONS/
BALANCE AT CHARGED TO WRITE-OFFS BALANCE
BEGINNING COSTS AND NET OF AT END
OF YEAR EXPENSES RECOVERIES OF YEAR
----------- ----------- ------------ -----------
Allowance for Doubtful Accounts:
Year ended April 30, 2000: $ 2,408,000 $ 1,604,000 $(1,245,000) $ 2,767,000
Year ended April 30, 1999: 3,009,000 1,324,000 (1,925,000) 2,408,000
Year ended April 30, 1998: 2,318,000 1,691,000 (1,000,000) 3,009,000
Inventory Valuation Account:
Year ended April 30, 2000: $ 36,000 $ 612,000 $ (422,000) $ 226,000
Year ended April 30, 1999: 2,189,000 801,000 (2,954,000) 36,000
Year ended April 30, 1998: 1,903,000 2,158,000 (1,872,000) 2,189,000
S-2
47
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1(a) Restated Articles of Incorporation of the Company, filed with
the Secretary of State of Texas on May 12, 1989, as amended
(incorporated by reference to the Company's Registration
Statement No. 33-40794 on Form S-1.)
3.1(b) Statement of Designation of Series A Junior Participating
Preferred Stock (incorporated by reference to the Company's
Current Report on Form 8-K dated December 13, 1996.)
3.1(c) Articles of Amendment to Restated Articles of Incorporation,
filed with the Secretary of State of Texas on November 25, 1996
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1997.)
3.1(d) Statement of Cancellation of Treasury Shares, filed with the
Secretary of State of Texas on March 21, 1997 (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1997.)
3.2(a) Restated Bylaws of the Company, as amended (incorporated by
reference to the Company's Registration Statement No. 33-40794
on Form S-1.)
3.2(b) Articles of Amendment to Article 8 of the Company's Amended and
Restated Bylaws effective September 17, 1998 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended October 31, 1998.)
3.3 Rights Agreement between the Company and KeyCorp Shareholder
Services, Inc., (the "Rights Agreement") dated December 13,
1996, (incorporated by reference to the Company's Current
Report on Form 8-K dated December 13, 1996.)
3.4 Letter of Substitution of Rights Agent under Rights Agreement,
dated June 7, 1997 (appointing ChaseMellon Shareholders
Services, L.L.C. as successor rights agent) (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1998.)
10.1 IBM Business Partner Agreement between the Company, IBM
Corporation and Lotus Development Corporation, dated June 30,
1997 (incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended April 30, 1997.)
10.2 Microsoft Large Account Reseller Agreement, dated January 1,
2000 between MSLI, GP and the Company, including Amendment No.
1 thereto, dated July 1, 2000.
10.3 Intentionally omitted.
10.4(a) Commercial Lease Agreement, dated May 1, 1990, between CIIF
Associates II Limited Partnership and the Company (incorporated
by reference to the Company's Registration Statement No.
33-40794 on Form S-1.)
10.4(b) Amendment to Lease Agreement, dated March 31, 1995 between CIIF
Associates II Limited Partnership and the Company (incorporated
by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995.)
10.4(c) Third Amendment to Lease Agreement, dated effective as of April
20, 1998 between CIIF Associates II Limited Partnership and the
Company (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 1998.)
48
10.4(d) Fourth Amendment to Lease Agreement, dated effective as of
October 1, 1998 between CIIF Associates II Limited Partnership
and the Company (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended April 30,
1999.)
10.5(a) Commercial Lease Agreement, dated as of April 19, 1993, between
Kancro, L.P. and the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.)
10.5(b) Amendment #2 - Expansion Agreement to Lease Agreement, dated as
of June 20, 1994 between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994.)
10.5(c) Third Amendment to Commercial Lease Agreement, dated effective
April 1, 1995 between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995.)
10.5(d) Fourth Amendment to Commercial Lease Agreement, dated effective
as November 25, 1996 between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1997.)
10.5(e) Fifth Amendment to Commercial Lease Agreement, dated effective
as of March 9, 1998 between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1998.)
10.6 Lease Agreement between Spokane Teachers Credit Union and
Spectrum Integrated Services, Inc. d/b/a Software Spectrum,
dated March 10, 2000.
10.7 Lease Agreement, dated April 28, 2000 between Pretty M.T., L.P.
and Spectrum Integrated Services, Inc. d/b/a Software Spectrum.
10.8 Lease Agreement, dated April 26, 1996 by and between
Beneficiaries of American National Bank Trust Number 104601-03
and the Company (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31,
1996.)
10.9 1989 Stock Option Plan of the Company, as amended (incorporated
by reference to the Company's Registration Statement No.
33-40794 on Form S-1.)
10.10 Software Spectrum, Inc. Amended and Restated Employee Stock
Purchase Plan.
10.11 The Software Spectrum, Inc. Amended and Restated 1993 Long Term
Incentive Plan.
10.12 Intentionally omitted.
10.13 Management Continuity Agreement ("Continuity Agreement")
between the Company and James W. Brown, dated March 1, 1998,
together with schedule identifying additional executive
officers that are parties to Continuity Agreements.
10.14 Non-Employee Directors' Retainer Stock Plan (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995.)
10.15 Third Amended and Restated Limited Waiver Agreement, dated
December 15, 1999 between the Company and Private Capital
Management, Inc.
10.16 Amended and Restated Credit Agreement, dated March 11, 1998
among the Company, the Chase Manhattan Bank, as Administrative
Agent, Chase Bank of Texas, National Association, as Collateral
Agent and other participating financial institutions
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended January 31, 1998.)
10.17(a) The Software Spectrum, Inc. 1998 Long Term Incentive Plan
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended October 31, 1998.)
49
10.17(b) Amendment No. 1 to the Software Spectrum, Inc. 1998 Long Term
Incentive Plan.
10.18(a) First Amendment to Amended and Restated Credit Agreement, dated
as of August 15, 1998 among the Company, the Chase Manhattan
Bank, as Administrative Agent, Chase Bank of Texas, National
Association, as Collateral Agent, and other participating
financial institutions (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended October 31, 1998.)
10.18(b) Second Amendment to Amended and Restated Credit Agreement,
dated as of June 23, 1999 among the Company, the Chase
Manhattan Bank, as Administrative Agent, Chase Bank of Texas,
National Association, as Collateral Agent, and other
participating financial institutions (incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 2000.)
10.19 Lease Agreement, dated October 19, 1998 between
Highwoods/Florida Holdings, L.P. and the Company, together with
First Amendment thereto, dated April 16, 1999 (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1999.)
10.20 Lease, dated February 28, 2000, between SDS Properties Liberty
Lake L.L.C. and Spectrum Integrated Services, Inc. d/b/a
Software Spectrum.
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP, Independent Accountants
24 Power of Attorney (included on the signature page of this Form
10-K.)
27(a) Financial Data Schedule
27(b) Restated Financial Data Schedule for the fiscal year ended
April 30, 1999.
27(c) Restated Financial Data Schedule for the fiscal year ended
April 30, 1998.