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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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<Table>
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Commission Only (as permitted by
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[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
</Table>
Software Spectrum, Inc.
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(Name of Registrant as Specified In Its Charter)
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NOTICE OF ANNUAL MEETING
ON SEPTEMBER 20, 2001
AND PROXY STATEMENT
[COMPANY LOGO]
SOFTWARE SPECTRUM, INC.
2140 MERRITT DRIVE
GARLAND, TEXAS 75041
AUGUST 15, 2001
Dear Shareholder:
We invite you to attend our Annual Meeting of Shareholders on Thursday,
September 20, 2001, at 10:00 a.m. Central time in Garland, Texas. At the
meeting, you will hear a report on our operations and have the opportunity to
meet a number of our directors and officers.
This booklet includes the formal notice of the Annual Meeting and the
Proxy Statement. The Proxy Statement tells you about the agenda and procedures
for the meeting. It also describes how the Board operates, gives personal
information about our directors, and provides other information about Software
Spectrum.
Even if you own only a few shares, we want your shares to be
represented at the meeting. I urge you to complete, sign, date, and return your
proxy card promptly in the enclosed envelope, even if you plan to attend the
meeting.
Sincerely,
Judy C. Odom
Chairman & Chief Executive Officer
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OF SOFTWARE SPECTRUM, INC.
Date:
Thursday, September 20, 2001
Time:
10:00 a.m., Central Time
Place:
Software Spectrum, Inc.
2140 Merritt Drive
Garland, Texas 75041
Purpose:
o To elect two Class A directors;
o To approve the adoption of Amendment No. 2 to Software
Spectrum's 1998 Long-Term Incentive Plan; and
o To conduct other business that may properly be raised.
Only shareholders of record on August 3, 2001 may vote at the
meeting.
WE CORDIALLY INVITE YOU TO ATTEND THE MEETING IN PERSON. EVEN IF
YOU DO NOT PLAN TO ATTEND THE MEETING, YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE, AND RETURN YOUR PROXY CARD PROMPTLY
IN THE ENCLOSED ENVELOPE. IF YOU RETURN YOUR PROXY AND LATER
DECIDE THAT YOU WISH TO ATTEND THE MEETING AND VOTE IN PERSON,
YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
Sincerely,
Robert D. Graham
Secretary
Garland, Texas
August 15, 2001
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<Table>
<Caption>
TABLE OF CONTENTS PAGE
- ----------------- ----
GENERAL QUESTIONS AND ANSWERS 1
STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS 2
STOCK OWNERSHIP OF MANAGEMENT 3
PROPOSAL ONE - ELECTION OF DIRECTORS 4
Nominees for Class A Directors (Terms expiring in 2001) 4
Continuing Class B Directors (Terms expiring in 2002) 5
Continuing Class C Directors (Terms expiring in 2003) 5
Meetings of the Board and its Committees 5
PROPOSAL TWO - ADOPTION OF AMENDMENT NO. 2 TO THE 1998 LONG-TERM INCENTIVE PLAN 6
EXECUTIVE COMPENSATION TABLES 10
Summary Executive Compensation Tables 10
Option Grants in Last Fiscal Year 11
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values 11
Management Continuity Agreements 11
Compensation of Directors 12
Compensation Committee Interlocks and Insider Participation 13
Compliance with Section 16(a) of the Securities Exchange Act of 1934 13
AUDIT COMMITTEE REPORT 13
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION 14
STOCK PERFORMANCE GRAPH 16
ADDITIONAL INFORMATION 17
APPENDIX A - SOFTWARE SPECTRUM, INC. AUDIT COMMITTEE CHARTER
APPENDIX B - AMENDMENT NO. 2 TO THE SOFTWARE SPECTRUM, INC. 1998 LONG-TERM INCENTIVE PLAN
</Table>
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GENERAL QUESTIONS AND ANSWERS
Q: WHO IS ENTITLED TO VOTE?
A: Software Spectrum shareholders of record at the close of business on August
3, 2001 (the record date) may vote.
Q: WHY AM I RECEIVING THIS PROXY STATEMENT?
A: Our Board of Directors is furnishing this proxy statement to our shareholders
in connection with the solicitation of proxies to be voted at our annual meeting
of shareholders, or at any adjournment of the meeting, for the purposes set
forth in the Notice of Annual Meeting at the beginning of this booklet.
Q: HOW DO I VOTE?
A: You may vote by signing, dating, and completing the enclosed proxy card and
returning it in the enclosed self-addressed envelope by mail or by attending the
meeting and voting in person. We recommend you vote by proxy even if you plan to
attend the meeting; you can always change your vote at the meeting if you
desire.
Q: HOW DO PROXIES WORK?
A: The Board of Directors of Software Spectrum is asking for your proxy. The
proxy solicitation may be in person or by mail, telephone, or telegram by
directors, officers, employees, or other authorized designees of Software
Spectrum. Giving your proxy to the persons named by us means you authorize them
to vote your shares at the meeting in the manner you direct.
If you sign and return the enclosed proxy card but do not specify how to vote,
your shares will be voted FOR the election of all of our director candidates,
FOR the adoption of Amendment No. 2 to the 1998 Long-Term Incentive Plan, and in
the transaction of any other business that properly comes before the meeting or
any adjournment(s).
You may receive more than one proxy or voting card depending on how you hold
your shares. Shares registered in your name are covered by one card. If you also
hold shares through a broker or someone else, you may also get material from
them asking how you want to vote. Please respond to all of these requests.
Q: HOW WILL VOTING ON OTHER BUSINESS BE CONDUCTED?
A: Our bylaws require a shareholder who desires to bring business before an
annual meeting to give our Secretary written notice not less than sixty nor more
than ninety days prior to the anniversary date of the prior annual meeting, and
our Secretary has not received any such notice. Our Board knows of no business
that will be presented for consideration at the meeting, other than the matters
listed in the Notice of Annual Meeting of Shareholders. If any other matters are
properly brought before the meeting, the persons named as proxies will vote in
accordance with their judgment.
Q: HOW CAN I REVOKE OR CHANGE MY VOTE?
A: You may change or revoke your proxy before it is voted by submitting a new
proxy with a later date, voting in person at the meeting, or delivering to our
Secretary a written notice of your change or revocation at the address listed
under QUESTIONS on page 17 of this proxy statement.
Q: WHAT IS A "QUORUM"?
A: In order to carry on the business of the meeting, we must have a "quorum," or
a majority of our outstanding shares represented at the meeting. The person with
the right to vote the shares must be present at the meeting or represented by
proxy. Shares owned by Software Spectrum (treasury shares) are not voted and do
not count for this purpose.
If we do not have a quorum at the meeting, shareholders entitled to vote have
the power to adjourn the meeting without notice, other than an announcement at
the meeting, until a quorum is represented. Abstentions and broker non-votes are
counted for purposes of determining if a quorum is represented for the
transaction of business. A broker non-vote occurs when a broker holding shares
for clients in street name is not permitted to vote on certain matters without
the client's instructions. Abstentions and broker non-votes are not counted in
the election of directors and will have no effect on the election of directors
except to the extent that they affect the total votes received by a candidate.
On matters other than the election of directors, abstentions will be counted as
votes cast, which will have the same effect as a negative vote on the matter.
Q: WHO CAN ATTEND THE MEETING IN PERSON?
A: Only shareholders as of August 3, 2001, their proxy holders, and invited
guests may attend. If you wish to vote in person and your shares are held by a
stockbroker, you need to obtain a proxy from the broker authorizing you to vote
your shares held in the broker's name.
Q: HOW MANY SHARES ARE OUTSTANDING AND HOW MANY SHARES CAN I VOTE?
A: As of the close of business on August 3, 2001, 3,210,088 shares of common
stock were issued and outstanding. Every shareholder is entitled to one (1) vote
for each share of common stock held.
Q: WHEN WAS THIS PROXY STATEMENT MAILED?
A: This proxy statement was first mailed to shareholders on or about August 15,
2001.
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STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS
In the table below, we show you how much of our common stock was beneficially
owned on July 16, 2001 by each person we know to beneficially own more than 5%
of our common stock.
<Table>
<Caption>
Name and Address Shares Percent
of Beneficial Owner Beneficially Owned(1) of Class
- ------------------- ---------------------- --------
Judy C. Odom(2) 222,114(5) 6.81%
Private Capital Management, Inc. 836,386(6) 26.05
and Bruce S. Sherman(3)
Dimensional Fund Advisors(4) 267,800(7) 8.34
</Table>
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(1) Unless otherwise indicated, to our knowledge, the owner of all shares
reflected in the table above owns her or its shares directly and has sole
voting and investment power with respect to the shares.
(2) Ms. Odom's address is 2140 Merritt Drive, Garland, Texas 75041.
(3) The address of Private Capital Management, Inc. and Mr. Sherman is 3003
Tamiami Trail North, Naples, Florida 33940.
(4) The address of Dimensional Fund Advisors is 1299 Ocean Avenue, 11th Floor,
Santa Monica, California 90401.
(5) Includes 51,000 shares that are subject to options exercisable within 60
days of July 16, 2001.
(6) This information is based on a Schedule 13G/A of Private Capital
Management, Inc., SPS Partners, L.P., Bruce S. Sherman and certain other
persons, dated February 15, 2001. Mr. Sherman is president of Private
Capital Management and managing general partner of SPS Partners. He
exercises shared dispositive power with each such entity.
(7) This information is based on a Schedule 13G of Dimensional Fund Advisors,
dated February 2, 2001. Dimensional Fund Advisors is an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940 and
disclaims beneficial ownership of the shares.
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STOCK OWNERSHIP OF MANAGEMENT
In the table below, we show you how much of our common stock was beneficially
owned on July 16, 2001 by each director and nominee and each of the chief
executive officer and the four other most highly paid executive officers of
Software Spectrum, and by all directors and executive officers as a group.
<Table>
<Caption>
Name of Beneficial Owner Shares Beneficially Owned(1) Percent of Class
- ------------------------ ---------------------------- ----------------
Judy C. Odom, Chairman and 222,114(2) 6.81%
and Chief Executive Officer
Mellon C. Baird, Director 11,110(3) *
Brian N. Dickie, Director 6,500(4) *
Frank Tindle, Director 100,427(5) 3.12
Robert P. Lee, Director 5,000 *
Keith R. Coogan, President, 45,011(6) 1.39
Chief Operating Officer and Director
Roger J. King, Executive Vice 36,419(7) 1.12
President and President of Product
Services
Robert D. Graham, Vice President 26,660(8) *
Strategic Relationships, General
Counsel and Secretary
James W. Brown, Vice President 11,867(9) *
and Chief Financial Officer
All directors and executive officers 518,711(10) 16.16
as a group (16 persons)
</Table>
- ----------
* Indicates less than one percent.
(1) Unless otherwise indicated, to our knowledge, the owner of all shares
reflected in the table above owns his or her shares directly and has sole
voting and investment power with respect to the shares.
(2) Includes 51,000 shares that are subject to options exercisable within 60
days of July 16, 2001.
(3) Includes 10,000 shares that are subject to options exercisable within 60
days of July 16, 2001.
(4) Includes 4,000 shares that are subject to options exercisable within 60
days of July 16, 2001.
(5) Mr. Tindle and his spouse, as tenants-in-common, jointly hold all of these
shares, and Mr. Tindle has shared investment and voting power for these
shares. Includes 10,000 shares that are subject to options exercisable
within 60 days of July 16, 2001.
(6) Includes 39,000 shares that are subject to options exercisable within 60
days of July 16, 2001.
(7) Includes 31,000 shares that are subject to options exercisable within 60
days of July 16, 2001.
(8) Includes 25,000 shares that are subject to options exercisable within 60
days of July 16, 2001.
(9) Includes 10,600 shares that are subject to options exercisable within 60
days of July 16, 2001.
(10) Includes 229,900 shares that are subject to options exercisable within 60
days of July 16, 2001.
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PROPOSAL ONE
ELECTION OF DIRECTORS
The Board of Directors of Software Spectrum has nominated the two director
candidates named below.
The role of the Board of Directors is to oversee the management of Software
Spectrum on your behalf. The Board reviews Software Spectrum's long-term
strategic plans and exercises direct decision-making authority on key issues.
Just as important, the Board chooses our officers, sets the scope of their
authority to manage our daily operations, and evaluates their performance.
Four of Software Spectrum's six directors, including one of our two nominees,
are Independent Directors. "Independent Directors" are not officers or employees
of Software Spectrum or any of its affiliates.
Our charter and bylaws provide for three classes of directors. The directors in
each class serve staggered three-year terms that expire at the annual meeting of
shareholders three years following their election.
The Software Spectrum Board has nominated for re-election the two persons
currently serving as Class A directors. If elected, these two people will serve
until the Annual Meeting of Shareholders in 2004. Personal information on these
nominees, and on each of our other directors, is given on the following pages.
We encourage you to cast a vote on each of the two nominees. You may vote for
all, some, or none of our director candidates. You may not vote your proxy for
more than two nominees.
The Board has no reason to believe that the nominees will be unable or unwilling
to serve if re-elected, but if a nominee becomes unavailable to serve, your
proxy card authorizes the named proxies to vote for a replacement nominee if the
Board names one.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a plurality of the shares entitled to vote on this
proposal and represented in person or by proxy is required for approval.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF EACH OF
THE FOLLOWING NOMINEES FOR CLASS A DIRECTORS.
NOMINEES FOR CLASS A DIRECTORS (TERMS EXPIRING IN 2001)
MELLON C. BAIRD Mr. Baird has been a director of Software Spectrum
Age 70 since June 1991. He has been President and Chief
Executive Officer of Titan Systems Corporation, a
wholly owned subsidiary of Titan Corporation, since
its merger with Delfin Systems in September 1998.
Titan is a developer and supplier of information and
communication systems, products, and services for
government and commercial markets. Prior to the
merger, Mr. Baird had served as President and Chief
Executive Officer of Delfin Systems since November
1990 and as Chairman of the Board since April 1991.
He also serves as a director of EDO Corporation and
of Hawker Pacific Aerospace. From September 1986 to
December 1987, Mr. Baird served as President, Chief
Operating Officer, and a director of Tracor, Inc.
From January 1988, after Tracor, Inc. became a
subsidiary of privately-held Westmark Systems, Inc.,
until December 1989, he served as President and Chief
Executive Officer of this diversified technological
products and services company. Mr. Baird served as
President of the Defense and Electronics Group of
Eaton Corporation from 1982 to September 1986.
KEITH R. COOGAN Mr. Coogan has been a director of Software Spectrum
Age 49 since August 1998. He was named President in May 1998
and has been Chief Operating Officer since April
1996. Mr. Coogan served as Executive Vice President
from April 1996 to May 1998 and has been a Vice
President since October 1990. He served as Secretary
from May 1991 to July 1992 and as Treasurer from
October 1990 to March 1992. From May 1989 until
joining Software Spectrum, 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.
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CONTINUING CLASS B DIRECTORS (TERMS EXPIRING IN 2002)
BRIAN N. DICKIE Mr. Dickie has been a director of Software Spectrum
Age 46 since June 1999. He is President of TXU Energy, the
unregulated U.S. energy and telecommunications
businesses of TXU Corp., a global energy services
company. He is also responsible for TXU Australia and
is a member of the parent policy committee. Prior to
joining TXU in early 1999, Mr. Dickie served as Chief
Operating Officer of Booz Allen & Hamilton Inc., a
global management and technology consulting firm. He
joined Booz Allen in 1982 and held various management
positions, including Chief Operating Officer from
1997 to 1999; President, Worldwide Commercial
Business from 1993 to 1997; and Managing Partner of
the firm's Asia/Pacific practice from 1988 to 1993.
From 1982 to 1988, he consulted with clients in the
U.S., Canada, the United Kingdom, and Asia/Pacific.
ROBERT P. LEE Mr. Lee was elected by the Board of Directors to fill
Age 47 a vacancy in this class of directors in August 2001.
He is a Managing Member of Sheffield Merchant Banking
Group, an operating group of CRT Capital Group LLC.
Prior to joining CRT in May 2000, Mr. Lee served as a
Managing Director in the Merger, Acquisition and
Restructuring Department of Morgan Stanley Dean
Witter. He joined Morgan Stanley in 1997 as a result
of a merger between Morgan Stanley and Dean Witter.
From 1984 through 1997, Mr. Lee served as Head of the
Mergers and Acquisitions, Private Financing and
Restructuring Department of Dean Witter, and from
1984 to 1986, he served as co-head of Dean Witter's
Chicago Corporate Finance Office. From 1977 through
1984, Mr. Lee was an Investment Banker with Warburg
Paribas Becker.
CONTINUING CLASS C DIRECTORS (TERMS EXPIRING IN 2003)
JUDY C. ODOM Ms. Odom is a co-founder of Software Spectrum and has
Age 48 been a director since its inception in 1983. She
served as Treasurer from 1983 to October 1990, as
Vice President from April 1987 to April 1988, and has
served as Chief Executive Officer since April 1988
and Chairman of the Board since July 1992. From April
1996 to May 1998, Ms. Odom also served as our
President. From 1977 to 1985, Ms. Odom was employed
by the national accounting firm of Grant Thornton
LLP, where she last served as an audit partner. Ms.
Odom is a Certified Public Accountant.
FRANK TINDLE Mr. Tindle is a co-founder of Software Spectrum and
Age 49 has been a director since 1983. From 1983 to April
1992, he served as Vice President. From 1980 to 1983,
Mr. Tindle was the principal accounting officer of
Southmark Corporation, and prior to joining
Southmark, he was employed by the national accounting
firms of Grant Thornton LLP and Ernst & Young LLP.
Mr. Tindle is a Certified Public Accountant.
MEETINGS OF THE BOARD AND ITS COMMITTEES
Software Spectrum's Board of Directors held seven meetings during fiscal year
2001 and acted by written consent on two occasions. The Board appoints
committees to help carry out its duties. In particular, Board committees work on
key issues in greater detail than would be practicable at a full Board meeting.
Each committee reviews the results of its meetings with the full Board.
Audit Committee. The Board of Directors of Software Spectrum has an Audit
Committee that is currently composed of Mellon C. Baird, Brian N. Dickie, and
Frank Tindle, none of whom is an employee or officer of Software Spectrum. The
Board of Directors has adopted a written Audit Committee Charter, a copy of
which is attached to this proxy statement as Appendix A. The Audit Committee
held three meetings during fiscal 2001. The functions performed by the Audit
Committee include:
o making recommendations concerning our company's independent public
accountants, including reviewing the relationships that may affect
their independence;
o reviewing and approving the scope of our company's annual audit plan;
o reviewing any of our company's major internal control or accounting
issues;
o reviewing and discussing with management and the outside auditors the
annual audited financial statements included in our Form 10-K as well
as our interim financial statements;
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o reviewing internal audit controls, risk management, and the
effectiveness of our company's programs for implementing audit
recommendations; and
o periodically interviewing our company's independent public accountants
in order to analyze the strengths and weaknesses of our financial staff
and systems and the adequacy of our internal controls.
Compensation Committee. The Board of Directors of Software Spectrum has a
Compensation Committee that is currently composed of Mellon C. Baird, Brian N.
Dickie, and Frank Tindle. The Compensation Committee held four meetings during
fiscal year 2001. The functions performed by the Compensation Committee include:
o periodically establishing the compensation paid to our officers and
reporting its determinations to the Board of Directors concerning
compensation;
o developing and implementing retention and performance-based incentive
programs for key management; and
o administering our 1993 Long Term Incentive Plan and 1998 Long-Term
Incentive Plan.
Attendance at Meetings. During the year, each director attended at least 75% of
the aggregate of:
o The total number of meetings held by the Board; and
o The total number of meetings held by all committees on which he served.
PROPOSAL TWO
ADOPTION OF AMENDMENT NO. 2 TO THE 1998 LONG-TERM INCENTIVE PLAN
In 1993, we adopted the 1993 Long Term Incentive Plan, which provides for the
grant of stock options, restricted shares of common stock, performance units,
and stock appreciation rights to our key employees. The 1993 plan also provides
for grants of options to purchase 2,000 shares of common stock to non-employee
directors at the commencement of their service on the Board of Directors and
annually thereafter. Originally, the maximum number of shares of common stock
with respect to which we could grant options, restricted shares, performance
units, and stock appreciation rights under the 1993 plan was 300,000. In 1995,
we amended the 1993 plan to increase this number to 600,000 shares of common
stock.
In 1998, we adopted the 1998 Long-Term Incentive Plan, which also provides for
the grant of stock options, restricted shares of common stock, performance
units, and stock appreciation rights to our key employees. Originally, the
maximum number of shares of common stock with respect to which we could grant
options, restricted shares, performance units, and stock appreciation rights
under the 1998 plan was 200,000. In 1999, we amended the 1998 plan to increase
this number to 400,000 shares of common stock.
On June 28, 2001, the Compensation Committee of the Board of Directors granted
options for 172,000 shares of common stock to certain key employees under the
1993 plan, thereby reducing the available shares of common stock for future
grant. As a result, at June 30, 2001, we had allocated 552,820 shares under the
1993 plan and 313,500 shares under the 1998 plan. Thus, we have only 133,680
shares of common stock available for future grant under our option plans.
On June 28, 2001, the Board of Directors unanimously approved and recommended
for shareholder approval an Amendment No. 2 to the 1998 plan. The amendment
would increase the number of shares of common stock reserved for issuance under
the 1998 plan by 150,000. In addition, the amendment would provide for a grant
of 3,000 non-qualified stock options to non-employee directors at the
commencement of their service on the Board of Directors and annually thereafter.
If our shareholders approve Amendment No. 2 to the 1998 plan, all grants of
stock options to non-employee directors will be made under the 1998 plan, and no
further stock option grants to non-employee directors will occur under the 1993
plan. The Board believes that the use of long-term incentives based on the value
of our common stock is necessary to attract and retain key employees, to
motivate key employees to achieve long-range goals, to provide compensation
opportunities that are competitive with those offered by other corporations, and
to attract and retain well-qualified individuals to serve as members of Software
Spectrum's Board of Directors. The Board has proposed that you adopt the
amendment in order to enable us to continue to provide stock-based incentives to
members of the Board of Directors and key employees. The amendment will become
effective upon shareholder approval. A copy of the amendment is attached to this
proxy statement as Appendix B.
A summary of the 1998 plan, as amended, is set forth below. This summary is
qualified in its entirety by reference to the full text of the 1998 plan, as
amended, which we have previously filed with the Securities and Exchange
Commission.
DESCRIPTION OF THE 1998 PLAN
Scope. The 1998 plan, as amended, authorizes the grant of up to 550,000
incentive stock options and non-qualified stock options to purchase common
stock, stock appreciation rights, restricted stock, and performance units to our
key
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employees. The purpose of the 1998 plan is to attract and retain skilled,
qualified executives, directors, and key employees in order to motivate them to
achieve long-range goals and to further identify their interests with those of
our other shareholders. If an award under the 1998 plan expires, terminates or
is forfeited or settled in cash, without issuance of shares of common stock
covered by the award, the unpurchased shares will be available for future awards
under the 1998 plan. The 1998 plan will terminate on July 31, 2008.
Administration. The 1998 plan is administered by the Board of Directors or, if
directed by the Board of Directors, the Compensation Committee. Currently, the
Compensation Committee administers the plan. Subject to the provisions of the
1998 plan, the Compensation Committee has authority to select employees to
receive awards, to determine the time or times of receipt, to determine the
types of awards and the number of shares covered by the awards, to establish the
terms, conditions, and provisions of the awards, to determine the value of
performance units, and to accelerate or extend the exercisability of outstanding
awards. In making award determinations, the Compensation Committee may take into
account the nature of services rendered by the employee, his or her present and
potential contribution to our growth and success, and any other factors as the
Compensation Committee deems relevant.
The Compensation Committee is authorized to interpret the 1998 plan; to
establish, amend, and rescind any rules and regulations relating to the 1998
plan; to determine the terms and provisions of any agreements made pursuant to
the 1998 plan; and to make all other determinations that may be necessary or
advisable for the administration of the 1998 plan.
Eligibility. Executives, directors, and other key full-time employees of
Software Spectrum and our subsidiaries may be selected by the Compensation
Committee to receive awards under the 1998 plan. All of our officers, directors
and full-time employees, consisting of approximately 2,150 persons as of June
30, 2001, are eligible to receive awards under the 1998 plan. During any year,
not more than 50,000 shares of stock may be subject to awards granted to any one
employee. The Compensation Committee has the discretion to grant an eligible
employee an award in the form of a stock option, stock appreciation right,
restricted stock award, or performance unit or any combination thereof, and may
grant more than one award to an eligible employee.
The 1998 plan, as amended, provides for an automatic grant of 3,000
non-qualified stock options to non-employee directors at the commencement of
their service as a director and annually thereafter. Non-employee directors are
not eligible to receive grants of incentive stock options, restricted stock,
performance units, or stock appreciation rights. There are currently four
non-employee directors eligible to receive grants of non-qualified stock options
under the 1998 plan.
Stock Options. The 1998 plan authorizes the award of both incentive stock
options and non-qualified stock options. Under the 1998 plan, an option may be
exercised at any time during the exercise period established by the Compensation
Committee, except that: (i) non-employee directors have the ability to exercise
non-qualified stock options for up to three months following the termination of
their services as a director; (ii) other than non-employee director options, no
option may be exercised after employment with Software Spectrum and its
subsidiaries terminates by reason other than death or disability; and (iii) no
option may be exercised more than 12 months after employment with Software
Spectrum and its subsidiaries terminates by reason of death or disability. The
aggregate fair market value (determined at the time of the award) of the common
stock with respect to which incentive stock options are exercisable for the
first time by any holder during any calendar year may not exceed $100,000. The
term of each option is determined by the Compensation Committee, and the term
may be extended by the Compensation Committee; provided that the term may not
exceed ten years from the date of grant. The exercise price of options is
determined by the Compensation Committee, but the exercise price cannot be less
than the fair market value of the common stock on the date of the grant. The
exercise price of options may be paid in cash or, unless restricted by the
Compensation Committee, in shares of common stock. In addition, the exercise
price of non-qualified options may be paid, unless restricted by the
Compensation Committee, by Software Spectrum withholding shares of common stock
that would otherwise be issuable upon the exercise of the options. Grants of
options do not entitle any holder to any rights as a shareholder. Rights as a
shareholder accrue only when a holder exercises an option and actually purchases
shares.
Under the 1998 plan, a holder of non-qualified stock options is permitted to
make gifts or other non-compensated transfers of options and rights among a
limited class of permitted transferees, consisting of family members or trusts
or partnerships for family members.
Stock Appreciation Rights. The 1998 plan authorizes the grant of stock
appreciation rights in tandem with options. These rights entitle the holder to
receive an amount equal to the difference between the fair market value of a
share of common stock at the time of exercise of the right and the option price,
multiplied by the number of shares of common stock subject to the option as to
which the right is being exercised (subject to the terms and conditions of the
option). Stock appreciation rights may be exercised at any time when the option
to which the rights relate may be exercised and will terminate no later than the
date on which the right to exercise the tandem option terminates. The holder has
the discretion to determine whether the exercise of stock appreciation rights
will be settled in cash, in common stock (valued at its fair market value at the
time of exercise) or in a combination of the two. The exercise of a stock
appreciation right requires the surrender of the tandem option, and the exercise
of a stock option requires the surrender of the tandem stock appreciation right,
if any.
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If a stock appreciation right, or the corresponding option with which the stock
appreciation right was awarded, is not exercised prior to the date that it
ceases to be exercisable, then the stock appreciation right generally will be
deemed exercised as of that date and will be paid to the holder in cash.
Restricted Stock. Restricted stock awards are grants of common stock made to
eligible employees that are subject to a required period of employment, or
restricted period, following the award and any other conditions established by
the Compensation Committee. A participant will become the holder of shares of
restricted stock, free of all restrictions, if he or she completes the
restricted period and satisfies any other conditions; otherwise, he or she will
forfeit the shares. Under the 1998 plan, the restricted period may not be more
than ten years. The holder will have the right to vote the shares of restricted
stock and, unless the Compensation Committee determines otherwise, will have the
right to receive dividends on the shares during the restricted period. The
holder may not sell, pledge, or otherwise encumber or dispose of restricted
stock until the conditions imposed by the Compensation Committee have been met.
The Compensation Committee may accelerate the termination of the restricted
period or waive any other conditions for any restricted stock; however, the
restricted period cannot be less than one year.
Performance Units. Performance units are awards that entitle the holder to
receive a specified value for the units at the end of a performance period
established by the Compensation Committee if performance measures set by the
Committee at the beginning of the performance period are met. Although the
performance measures and performance period will be determined by the
Compensation Committee at the time of the award of performance units, they may
be subject to later revision as the Committee deems appropriate to reflect
significant events or changes. If the holder's employment with Software Spectrum
or a subsidiary terminates by reason of death, disability, or retirement, we
will pay the holder or his or her beneficiary or estate the amount of the
performance unit earned as of the date of termination. If the holder's
employment with Software Spectrum or a subsidiary terminates for any other
reason, the holder automatically forfeits the performance units.
Adjustments. In the event of any change in the outstanding shares of common
stock by reason of any stock dividend, split, spinoff, recapitalization, merger,
consolidation, combination, exchange of shares, or other similar change, the
Compensation Committee may, at its sole discretion, equitably adjust the
aggregate number of shares with respect to which awards may be made under the
1998 plan and the terms and the number of shares of any outstanding option,
stock appreciation right, performance unit, or restricted stock.
Business Combinations. In addition to the rights and obligations of the
Compensation Committee to modify, adjust, or accelerate exercisability of
outstanding awards, in the event that any of the following occur while any
awards are outstanding under the 1998 plan: (a) a merger or consolidation of
Software Spectrum with or into another corporation in which Software Spectrum is
not the surviving corporation; (b) a dissolution of Software Spectrum; or (c) a
transfer of all or substantially all of the assets or shares of stock of
Software Spectrum in one transaction or a series of related transactions to one
or more other persons or entities, then, for each award outstanding immediately
prior to the consummation of the transaction and without the necessity of any
action by the Compensation Committee:
(i) if provision is made in writing in connection with the transaction for the
continuance and/or assumption of the awards granted under the 1998 plan, or the
substitution for those awards of new options, rights, restricted shares, and
performance units, with appropriate adjustment for the number and kind of shares
or other securities deliverable with respect thereto, the awards granted under
the 1998 plan, or the new options, rights, restricted shares, and performance
units, substituted for the awards, will continue, subject to any adjustment(s),
in the manner and under the terms provided in the respective agreements; or
(ii) in the event provision is not made in connection with the transaction for
the continuance and/or assumption of the awards granted under the 1998 plan, or
for the substitution of equivalent awards, rights, restricted shares, and
performance units, then each holder of an outstanding award will be entitled,
immediately prior to the effective date of the transaction, to purchase the full
number of shares that he or she would otherwise have been entitled to purchase
during the entire remaining term of the option, the holder of any right will be
entitled to exercise the right to the extent the related option becomes
exercisable, all restrictions on restricted stock will lapse, and all
performance units will be payable in full.
Termination and Amendment. The Board of Directors may suspend, terminate, or
amend the 1998 plan; provided that no amendment of the 1998 plan and no action
by the Board shall, without further approval of our shareholders, increase the
total number of shares of common stock with respect to which awards may be made
under the 1998 plan, materially increase the benefits to participants under the
1998 plan, or materially modify the eligibility requirements for participation
in the 1998 plan, if shareholder approval of the amendment is a condition of
Securities and Exchange Commission Rule 16b-3, the Internal Revenue Code or the
Nasdaq rules at the time the amendment is adopted. No amendment, suspension, or
termination of the 1998 plan will alter or impair any option, stock appreciation
right, share of restricted stock, or performance unit previously awarded under
the 1998 plan without the consent of the holder thereof.
Federal Income Tax Consequences. The following summary of the federal income tax
consequences of the 1998 plan is not comprehensive and is based on current
income tax laws, regulations and rulings.
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Incentive Stock Options. A holder of incentive stock options does not recognize
income on the grant of an incentive stock option. Subject to the effect of the
alternative minimum tax, discussed below, if the holder exercises an incentive
stock option in accordance with the terms of the option and does not dispose of
the shares acquired within two years from the date of the grant of the option
nor within one year from the date of exercise, the holder will not realize any
income by reason of the exercise and we will be allowed no deduction by reason
of the grant or exercise. The holder's basis in the shares acquired upon
exercise will be the amount paid upon exercise. Provided the holder holds the
shares as a capital asset at the time of sale or other disposition of the
shares, his or her gain or loss, if any, recognized on the sale or other
disposition will be capital gain or loss. The amount of his or her gain or loss
will be the difference between the amount realized on the disposition of the
shares and his or her basis in the shares.
If a holder of incentive stock options disposes of the shares within two years
from the date of grant of the option or within one year from the date of
exercise (an "Early Disposition"), the holder will realize ordinary income at
the time of the Early Disposition which will equal the excess, if any, of the
lesser of: (i) the amount realized on the Early Disposition; or (ii) the fair
market value of the shares on the date of exercise, over the holder's basis in
the shares. We will be entitled to a deduction in an amount equal to the income
realized by the holder. The excess, if any, of the amount realized on the Early
Disposition of the shares over the fair market value of the shares on the date
of exercise will be long-term, mid-term or short-term capital gain, depending
upon the holding period of the shares, provided the holder holds the shares as a
capital asset at the time of the Early Disposition. If a holder disposes of the
shares for less than his or her basis in the shares, the difference between the
amount realized and his or her basis will be a long-term or short-term capital
loss, depending upon the holding period of the shares, provided the holder holds
the shares as a capital asset at the time of disposition.
The excess of the fair market value of the shares at the time the incentive
stock option is exercised over the exercise price for the shares is an amount
included in a holder's alternative minimum taxable income (the "Stock Option
Preference").
Non-qualified Stock Options. Non-qualified stock options do not qualify for the
special tax treatment given to incentive stock options under the Internal
Revenue Code. Although a holder of non-qualified stock options does not
recognize income at the time of the grant of the option, he or she recognizes
ordinary income upon the exercise of a non-qualified option in an amount equal
to the difference between the fair market value of the stock on the date of
exercise of the option and the amount of the exercise price.
As a result of the holder's exercise of a non-qualified stock option, we will be
entitled to deduct as compensation an amount equal to the amount included in the
holder's gross income. Our deduction will be taken in Software Spectrum's
taxable year in which the option is exercised.
The excess of the fair market value of the stock on the date of exercise of a
non-qualified stock option over the exercise price is not an item of tax
preference.
Taxation of Preference Items. Section 55 of the Internal Revenue Code imposes an
alternative minimum tax equal to the excess, if any, of: (i) 26% of the option
holder's "alternative minimum taxable income" that does not exceed $175,000,
plus 28% of his or her "alternative minimum taxable income" in excess of
$175,000, over (ii) his or her "regular" federal income tax. Alternative minimum
taxable income is determined by adding the option holder's Stock Option
Preference and any items of tax preference to the option holder's adjusted gross
income and then subtracting certain allowable deductions and an exemption
amount. The exemption amount is $33,750 for single taxpayers, $45,000 for
married taxpayers filing jointly, and $22,500 for married taxpayers filing
separately. However, these exemption amounts are phased out beginning at certain
levels of alternative minimum taxable income.
Stock Appreciation Rights. Recipients of stock appreciation rights do not
recognize income upon the grant of the stock appreciation right. When a holder
of stock appreciation rights elects to receive payment under a stock
appreciation right, he or she recognizes ordinary income in an amount equal to
the cash and/or fair market value of shares received, and we are entitled to a
deduction equal to the amount of income he or she recognizes.
Restricted Stock; Performance Units. Recipients of restricted stock and
performance units do not recognize income at the time of the grant of the stock
or units. However, when shares of restricted stock become free from any
restrictions or when performance units are paid, recipients recognize ordinary
income in an amount equal to the cash and the fair market value of the stock on
the date all restrictions are satisfied. Alternatively, the recipient of
restricted stock may elect to recognize income upon the grant of the stock and
not at the time the restrictions lapse.
Change of Control. If there is an acceleration of the vesting of benefits and/or
an acceleration of the exercisability of stock options upon a change of control
(as defined in the 1998 plan), all or a portion of the accelerated benefits may
constitute "excess parachute payments" under Section 280G of the Internal
Revenue Code. The employee receiving an excess parachute payment incurs an
excise tax of 20% of the amount of the payment in excess of the employee's
average annual compensation over the five calendar years preceding the year of
the Change of Control, and we are not entitled to a deduction for the payment.
We filed a copy of the 1998 plan with the Securities and Exchange Commission in
our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998,
and we filed a copy of Amendment No. 1 to the plan in our Annual
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Report on Form 10-K for the fiscal year ended April 30, 2000.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the shares entitled to vote on this
proposal and represented in person or by proxy is required for approval.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF AMENDMENT
NO. 2 TO THE 1998 PLAN.
EXECUTIVE COMPENSATION TABLES
In the table below, we provide you with information about all cash compensation
we paid to our Chief Executive Officer and our four other most highly paid
executives during the fiscal years ended April 30, 2001, 2000, and 1999.
SUMMARY EXECUTIVE COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ ------------
SECURITIES ALL OTHER
FISCAL UNDERLYING COMPENSATION
NAME AND POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) ($)(2)
----------------- ------ --------- ----------- ---------- ------------
Judy C. Odom 2001 650,000 177,500 30,000 1,466
Chairman of the Board and 2000 610,000 97,500 25,000 1,025
Chief Executive Officer 1999 510,000 299,150 25,000 1,330
Keith R. Coogan 2001 390,000 114,500 25,000 1,831
President and 2000 325,000 85,000 20,000 1,597
Chief Operating Officer 1999 310,000 167,913 20,000 1,330
Roger J. King 2001 270,000 118,998(3) 20,000 1,473
Executive Vice President and President 2000 260,000 69,487 15,000 1,447
of Product Services 1999 240,000 99,975 15,000 1,330
Robert D. Graham 2001 256,000 42,043 10,000 1,341
Vice President Strategic Relationships, 2000 235,000 48,488 10,000 1,678
General Counsel and Secretary 1999 200,000 49,250 10,000 0
James W. Brown 2001 230,000 55,000 7,000 1,351
Vice President and 2000 215,000 43,875 8,000 797
Chief Financial Officer 1999 175,446 52,587 0 0
</Table>
(1) For the 2001 fiscal year, the portion of the bonus payable pursuant to
the annual performance pay plan for all executive officers provided for
a potential payment of $823,000 to all executive officers as a group,
of which $331,000 was paid.
(2) Represents amounts allocated to each officer under Software Spectrum's
Savings and Profit Sharing Plan.
(3) Includes $15,000 of estimated bonuses for the period from November 2000
through April 2001, which will be finalized and paid in August 2001.
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OPTION GRANTS IN LAST FISCAL YEAR
In the table below, we provide you with information about stock option grants we
made during the last fiscal year to our Chief Executive Officer and our four
other most highly paid executives.
<Table>
<Caption>
Potential Realized
Individual Grants Value at Assumed
---------------------------------------------------------------- Annual Rates of Stock
Price Appreciation
for Option Term
% of Total Options ---------------------
Options Granted to Employees Exercise Price Expiration
Name Granted(#) in Fiscal Year ($/share) Date 5%($) 10%($)
- ---------------- ---------- -------------------- -------------- ----------- --------- --------
Judy C. Odom 30,000 13.00% $15.44 6/22/10 291,257 738,102
Keith R. Coogan 25,000 11.00% $15.44 6/22/10 242,714 615,085
Roger J. King 20,000 9.00% $15.44 6/22/10 194,171 492,068
Robert D. Graham 10,000 4.00% $15.44 6/22/10 97,086 246,034
James W. Brown 7,000 3.00% $15.44 6/22/10 67,960 172,224
</Table>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
In the table below, we provide you with information about stock options
exercised during the last fiscal year, and the estimated values of unexercised
options held at fiscal year-end, by our Chief Executive Officer and our four
other most highly paid executives.
<Table>
<Caption>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End(#) At Fiscal Year-End($)
Shares ----------------------------- ---------------------------
Acquired on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ----------- ----------- ----------- ------------- ----------- -------------
Judy C. Odom 0 0 55,000 70,000 0 0
Keith R. Coogan 0 0 34,000 57,000 0 0
Roger J. King 0 0 29,400 43,600 0 0
Robert D. Graham 0 0 16,400 26,600 0 0
James W. Brown 0 0 7,600 17,400 0 0
</Table>
MANAGEMENT CONTINUITY AGREEMENTS
We have entered into Management Continuity Agreements with each of our executive
officers. The purpose of these agreements is to serve the best interests of
Software Spectrum and our shareholders by providing incentives for an executive
to render impartial advice and services during a pending takeover, and to be
available and render services during at least a crucial four-month transition
period following a change of control.
The agreements are entered into prior to a change of control of Software
Spectrum, but the terms do not become effective until this change occurs. The
agreements provide continued employment for a two-year term equivalent to the
terms of employment that existed immediately before the change of control. The
terms of employment include position, location, responsibilities, compensation,
and benefits.
The executive would become entitled to a specific severance payment if
employment is prematurely terminated:
o by us without "cause";
o by the executive during the term of the agreement for "good reason"; or
o without any reason during a 60-day "window period" after the first four
months.
The agreements renew annually, but before a change of control occurs or is
contemplated, we have the ability to terminate the agreements once each year by
giving at least 60-days advance written notice to the executive.
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The agreements, subject to certain exceptions, define a change of control to
include any of the following events:
o the acquisition of 50% or more of our stock by a person or group;
o a change in a majority of our Board of Directors (other than a change
approved by the incumbent board);
o approval by our shareholders of a reorganization, merger, or
consolidation; or
o approval by our shareholders of a liquidation or dissolution or sale of
all or substantially all of our assets.
Exceptions to the change of control definition include, but are not limited to:
o acquisitions of our stock by us or by employee benefit plans;
o acquisitions of our stock directly from us; and
o transactions in which our existing shareholders maintain effective
control.
The management continuity agreements permit an executive to collect severance
benefits following a change of control, if the executive terminates employment:
o for good reason;
o without any reason, but during a 60-day window period beginning four
months after a change of control; or
o if employment of the executive is terminated by the employer without
cause.
Good reason is defined in the agreements generally to include reductions in
compensation or benefits, reduction of duties, and any material relocation.
Cause is defined as a material breach of obligations of employment not cured
after notice has been provided or a conviction for a felony involving moral
turpitude.
Additionally, the agreements provide incentive for an executive to remain with
Software Spectrum for a full year after a change of control through a special
bonus provision. Because of our quarterly bonus system, the agreements provide
that periodic quarterly bonuses will be defined as part of the executive's base
salary as if all requirements for earning the bonus had been met.
The executive will receive 1.5 times his or her annual base salary and bonus if:
o the executive remains employed with Software Spectrum for four months
after a change of control and then chooses to leave during a 60-day
window period;
o the executive is terminated other than for cause during a period of two
years after a change of control; or
o the executive leaves for good reason (such as a reduction in salary or
position) during the period of two years after a change of control.
If the executive stays employed by Software Spectrum through the first
anniversary of a change of control (with continued employment agreement
protection for one additional year), the executive would receive a financial
bonus equal to the executive's annual base salary and bonus (payable whether or
not employment is later terminated).
If the executive is terminated because of a disability during a period of two
years after a change of control, the executive would receive the greater of:
o 1.5 times the executive's annual base salary and bonus; or
o any disability benefits then provided by Software Spectrum.
If the executive dies during employment during a period of two years after a
change of control, the executive's estate would receive the greater of:
o 1.5 times the executive's annual base salary and bonus; or
o any death benefits then provided by Software Spectrum.
The executive would receive no severance benefits if the executive were
terminated by Software Spectrum for cause during a period of two years after a
change of control. The agreements provide that an executive will be reimbursed
for any legal expenses incurred in litigating rights under the agreements
regardless of whether the litigation is successful.
COMPENSATION OF DIRECTORS
We pay each outside director an annual retainer of $20,000, payable in quarterly
installments, for service as a member of our Board of Directors. Under the
Non-Employee Directors' Retainer Stock Plan, the outside directors may choose to
receive all or part of their annual retainer fees in the form of our common
stock or defer receipt of part of their fees and have the deferred amounts
treated as if invested in our common stock.
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We pay each outside director a fee of $1,000 for each Board Meeting they attend,
and $800 for each committee meeting attended, and we reimburse our outside
directors for travel expenses they incur to attend meetings.
In addition, each year we have granted our outside directors options to purchase
2,000 shares of our common stock. These options are exercisable at the fair
market value of our common stock on the date of grant and have been granted
under the 1993 Long Term Incentive Plan. If our shareholders approve Amendment
No. 2 to the 1998 Long-Term Incentive Plan, set forth as Proposal 2 in this
Proxy Statement, commencing in 2001 each of our outside directors instead will
receive options to purchase 3,000 shares of our common stock for each year of
service. These options will be exercisable at the fair market value of our
common stock on the date of grant and will be granted under the 1998 plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Frank Tindle, who serves as a member of the Compensation Committee of our Board
of Directors, served as Vice President of Software Spectrum from 1983 through
April 1, 1992.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Under Section 16(a) of the Securities Exchange Act of 1934, our directors,
executive officers, and persons who own more than 10% of our stock are required
to file reports of ownership and changes in ownership with the SEC. Executive
officers, directors, and greater than 10% shareholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
After review of the copies of these reports furnished to us and written
representations that no other reports were required, we believe that all of our
executive officers, directors, and greater than 10% beneficial owners observed
all Section 16(a) filing requirements applicable to them during the fiscal year
ended April 30, 2001, except that a Form 3 for Carrie C. Adams, Vice President
of Human Resources, was filed late.
AUDIT COMMITTEE REPORT
Our Audit Committee is comprised of Mellon C. Baird, Brian N. Dickie, and Frank
Tindle. The Board of Directors and the Audit Committee believe that each of the
members of our Audit Committee qualifies as an independent member of the Audit
Committee under Rule 4200(a)(15) of the National Association of Securities
Dealers, Inc.'s listing standards.
The purpose of the Audit Committee is to assist the Board of Directors in
fulfilling its oversight responsibilities with respect to Software Spectrum's
financial reports and other financial information; internal controls regarding
finance and accounting; and auditing, accounting, and financial reporting
processes generally. Our primary duties are to serve as an independent and
objective party to monitor Software Spectrum's financial reporting process and
internal control system, review and appraise the audit activities of Grant
Thornton LLP, our independent auditors and of our internal auditing function,
and provide open communication among Grant Thornton LLP, financial and senior
management, the internal auditors, and the Board of Directors. The Audit
Committee Charter adopted by the Board of Directors is attached hereto as
Appendix A.
Software Spectrum's management has the responsibility for the effectiveness of
Software Spectrum's accounting policies and practices, financial reporting, and
internal controls. Grant Thornton LLP, as our independent audit firm, is
responsible for auditing the financial statements. The activities of the Audit
Committee are in no way designed to supersede or alter those traditional
responsibilities. The Audit Committee's role does not provide any special
assurances with regard to the company's financial statements, nor does it
involve a professional evaluation of the quality of the audits performed by the
independent auditors.
Audit, Financial Information Systems Design and Implementation, and All Other
Fees
During fiscal year 2001, we paid Grant Thornton LLP approximately $143,000 for
professional services rendered for the audit of our annual and quarterly
financial statements, approximately $6,000 for professional services related to
implementation of financial information systems, and approximately $44,000 for
other professional services.
Independence Review
In conjunction with other activities during fiscal year 2001, the Audit
Committee reviewed and discussed Software Spectrum's audited financial
statements with our management. The members of the Audit Committee also
discussed with Grant Thornton LLP the matters required by SAS 61 (Codification
of Statements on Auditing Standards, AU Section 380) and considered the
compatibility of non-audit services with Grant Thornton LLP's independence. The
Audit Committee received from Software Spectrum's independent auditors the
written disclosures and the letter required by the Independence Standards Board
Standard No. 1, and discussed with the independent certified accountants the
independent auditors' independence.
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Based on the foregoing review and discussions, the Audit Committee recommended
to the Board of Directors that the audited financial statements be included in
Software Spectrum's Annual Report on Form 10-K for the fiscal year ended April
30, 2001.
Mellon C. Baird, Brian N. Dickie, and Frank Tindle
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Our Compensation Committee establishes salary levels and performance pay plans
for all executive officers as well as the Chief Executive Officer and reports
its determination to the Board of Directors. Our Compensation Committee also
administers our stock-based incentive plans and determines grants under these
plans for all employees, including executive officers.
Compensation Philosophy
The compensation philosophy for executive officers as well as the Chief
Executive Officer generally conforms to our compensation philosophy for all
management level employees. Our compensation is designed to:
o provide compensation comparable to what is offered by companies with
similar businesses or of similar size, allowing us to successfully
attract and retain the employees we need to achieve long-term success;
o provide compensation that relates to the performance of the individual
and differentiates based upon individual performance;
o provide incentive compensation that varies directly with both our
performance and the individual's contribution to that performance; and
o provide an appropriate connection between compensation and the creation
of shareholder value through awards tied to our performance and through
facilitating employee stock ownership.
The following is a report submitted by our Compensation Committee addressing our
compensation policies as they relate to all executive officers as well as the
Chief Executive Officer for the 2001 fiscal year.
In setting compensation for executive officers as well as the Chief Executive
Officer, we as a committee consider the relationship between executive pay and
enhancing shareholder value, as well as the need to motivate and retain key
employees. We also operate within Software Spectrum's overall philosophy, which
stresses teamwork, fairness, and the overall emphasis on cost control, which
includes compensation expense.
To achieve our basic compensation goals, we set annual compensation for all of
the executive officers, including base salary, quarterly performance pay plans
for all executive officers except for the Chief Executive Officer, and an annual
performance pay plan for all executive officers. As a committee, we receive
recommendations from the Chief Executive Officer on base salary, performance pay
plans, and grants under our stock option plans for all executive officers other
than the Chief Executive Officer.
In setting executive compensation, we consider the salaries and other benefits,
including stock-based incentive grants, of executive officers in similar
companies according to independent market data. As a committee, we believe that
an executive's personal performance should be appropriately weighted with
Software Spectrum's financial performance in determining the executive's
compensation. As a result, annual performance pay plans are significant
components of the overall compensation of each of our executives.
Quarterly Performance Pay Plan
This plan includes all executive officers except the Chief Executive Officer and
measures the executive's ability to achieve certain goals during each quarter of
Software Spectrum's fiscal year. These goals are set and evaluated for each
executive by either the Chief Executive Officer, President, or Executive Vice
President. Additionally, those executives who are responsible for sales and
operating units participate in a quarterly performance pay plan that is based on
attaining specified profitability goals for their specific business segment.
Annual Performance Pay Plan
This plan includes all executive officers as well as the Chief Executive Officer
and consists of the following two components:
o An individual performance component for each officer is weighted
towards a subjective evaluation of each officer's performance. This
evaluation is completed by us as a committee, with input and advice
from the Chief Executive Officer for all executive officers except the
Chief Executive Officer. This component measures various criteria,
including the performance of those departments under the management of
the officer and effective implementation and achievement of strategic
goals.
o An overall financial performance component is calculated by comparing
our financial results for the year with internally established
financial goals.
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As a committee, we set the financial goals by taking into consideration the
following:
o Software Spectrum's prior financial performance;
o current established financial objectives;
o the performance of other companies within Software Spectrum's industry;
o recommendations from the Chief Executive Officer; and
o Software Spectrum's net earnings.
At least 50% of the total incentive compensation available under the annual
performance pay plan for the 2001 fiscal year was tied to Software Spectrum's
financial performance and growth. For the 2001 fiscal year, Software Spectrum
did not achieve all of the financial performance and growth goals, and
accordingly, only some of our executives received payment under the incentive
compensation portion of the plan.
For the 2001 fiscal year, the annual performance pay plan for all executives
provided for a potential total payment of $823,000 to all executives as a group,
of which we paid $331,000, or 40%.
As a committee, we believe that incentives based upon Software Spectrum's stock
performance are an important component of each executive officer's overall
compensation package. We also believe that the number of stock options granted
to each officer should be determined by a subjective evaluation of each
executive officer's ability to influence Software Spectrum's long-term growth
and profitability as well as data obtained from independent sources. During
fiscal 2001, we recommended and we granted options to the executive officers as
set forth in the Executive Compensation Table that appears earlier in this
document. Because the value of an option ties directly to our stock price, we
believe as a committee that option grants are an effective incentive for
executive officers to create value for our shareholders.
Mellon C. Baird, Brian N. Dickie and Frank Tindle
15
20
STOCK PERFORMANCE GRAPH
The following graph shows how an initial investment of $100 in our common stock
on March 31, 1996 would have compared to an equal investment in the Nasdaq
National Market (U.S. Companies) and an index of stocks listed on the Nasdaq
National Market under Standard Industrial Code ("SIC") 504, which is a broad
index prepared by the University of Chicago's Center for Research in Security
Prices that includes companies in the computer, computer peripheral, and
computer software industries. The graph assumes that any dividends are
reinvested.
[PERFORMANCE GRAPH]
<Table>
<Caption>
3/31/96 4/30/97 4/30/98 4/30/99 4/30/00 4/30/01
Software Spectrum, Inc. 100.0 67.9 84.0 59.3 89.8 54.8
Nasdaq National Market - (U.S.) 100.0 114.6 171.3 234.9 356.1 194.6
Nasdaq Stocks - SIC 504 100.0 80.9 117.9 86.1 98.4 75.9
</Table>
16
21
ADDITIONAL INFORMATION
ANNUAL REPORT
A copy of our Annual Report on Form 10-K is enclosed with this proxy statement.
We will also send you, at no charge, any other document which we refer to in
this proxy statement, if requested in writing by a person who was a shareholder
(of record or beneficially) at the close of business on August 3, 2001. You
should send your request to our Corporate Secretary at the address listed under
Questions on this page.
HOW WE SOLICIT PROXIES
In addition to this mailing, our employees, directors, officers, or other
authorized designees may solicit proxies personally, electronically, or by
telephone. We pay the costs of soliciting the proxies. We also reimburse banking
institutions, brokers, custodians, trustees, nominees, and fiduciaries for
expenses incurred in sending these materials to you and getting your
instructions.
SHAREHOLDERS' PROPOSALS
The deadline for shareholder proposals for the proxy statement related to next
year's Annual Meeting is April 18, 2002. These proposals must be received at our
principal executive office by the deadline in order to be considered for
inclusion in the proxy statement and form of proxy. These proposals must also
comply with the other requirements of the proxy solicitation rules of the
Securities and Exchange Commission.
In addition, our bylaws require a shareholder who desires to bring business
before an annual meeting to give our Secretary written notice of that business
not less than sixty nor more than ninety days prior to the anniversary date of
the prior annual meeting. The notice must comply with other requirements
contained in our bylaws.
CERTIFIED PUBLIC ACCOUNTANTS
The firm of Grant Thornton LLP, independent auditors, has served as our auditors
for the fiscal year ended April 30, 2001 and will serve in that capacity for the
current fiscal year which will end on April 30, 2002. A representative of Grant
Thornton is expected to be present at our Annual Meeting to respond to
appropriate questions and to make a statement if desired.
QUESTIONS
If you have questions or need more information about the Annual Meeting, you may
write to:
Corporate Secretary
Software Spectrum, Inc.
2140 Merritt Drive
Garland, Texas 75041
Or call us at (972) 840-6600 and ask for Investor Relations.
FOR ADDITIONAL INFORMATION REGARDING SOFTWARE SPECTRUM, WE ALSO INVITE YOU TO
VISIT OUR INTERNET SITE AT www.softwarespectrum.com.
By Order of the Board of Directors,
ROBERT D. GRAHAM
Secretary
Garland, Texas
August 15, 2001
WE URGE YOU TO COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD.
17
22
APPENDIX A
SOFTWARE SPECTRUM, INC.
AUDIT COMMITTEE CHARTER
I. PURPOSE
The Audit Committee's purpose is to assist the Board of Directors in fulfilling
its oversight responsibilities with respect to: the financial reports and other
material financial information prepared by the Company; the Corporation's
systems of internal controls regarding finance and accounting that management
and the Board have established; and the Corporation's auditing, accounting and
financial reporting processes generally. The Audit Committee should advocate the
continuous improvement of, and should foster adherence to, the Corporation's
policies, procedures and practices at all levels. The Audit Committee's primary
duties and responsibilities are to:
a. Serve as an independent and objective party to monitor the
Corporation's financial reporting process and internal control
system.
b. Review and appraise the audit activities of the Corporation's
independent accountants and internal auditing function.
c. Provide open communication among the independent accountants,
financial and senior management, the internal auditing
function, and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by carrying
out certain of the activities enumerated in Article III and Article IV of this
Charter. In discharging its oversight role, the Committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities and personnel of the Company and the power to retain outside
counsel, auditors or other experts for this purpose.
II. MEMBERSHIP
The Audit Committee will be composed of not less than three members of the Board
of Directors. Each member of the Audit Committee will be selected by the Board,
taking into account prior experience in accounting or related financial
management and other matters to be considered by the Committee, the financial
literacy of the members, probable availability at times required for
consideration of these matters, and their individual independence and
objectivity.
All of the members will be directors independent of management and free from any
relationship that, in the opinion of the Board of Directors, would interfere
with the exercise of their independence from management and the Company.
No officers or employees or family members of such persons of the Company or its
subsidiaries will serve on the Committee. One former officer or employee of the
Company or any of its subsidiaries may serve on the committee (even though the
former officer may be receiving pension or deferred compensation payments from
the Company) only if, in the opinion of the Board of Directors, membership on
the Committee by the former officer or employee is required by the best
interests of the corporation and its shareholders and if the Board of Directors
determines that such individual will exercise independent judgment and will
materially assist the committee's function. In any event, a majority of the
committee will be directors who were not formerly officers of the Company or any
of its subsidiaries.
In considering relationships that might affect independence, including possible
affiliate status, the Board of Directors will give appropriate consideration to
guidelines issued by the New York Stock Exchange or NASDAQ as supplementary
material to its Audit Committee policy, which were provided to assist boards of
directors in observing the spirit of the policy.
23
III. ACTIONS OF THE COMMITTEE
The Committee's job is one of oversight, and it is recognized that the Company's
management is responsible for preparing the Company's financial statements and
that the outside auditors are responsible for auditing those financial
statements. Additionally, the Committee recognizes that financial management, as
well as the outside auditors, have more time, knowledge and more detailed
information on the Company than do Committee members; consequently, in carrying
out its oversight responsibilities, the Committee is not providing any expert or
special assurance as to the Company's financial statements or any professional
certification as to the outside auditor's work.
The activities of the Audit Committee may include the following types of
actions.
a. Those in which the Committee will inform the Board of Directors that
action has been taken in the Board's interest and does not require
prior Board of Director approval.
1. Review and approve the scope of the annual audit for the Company and
its subsidiaries recommended by the independent certified public
accountants and the Chief Executive Officer.
2. When requested by the Chairman of the Board during an annual
shareholders' meeting, the Audit Committee Chairman will answer
questions raised by a shareholder on matters relating to the
Committee's activities.
3. Request the Chief Executive Officer or President to have internal
audit personnel study a particular area of interest or concern.
4. Review with management and the outside auditors the audited
financial statements to be included in the Company's Annual Report on
Form 10-K (or the Annual Report to Shareholders if distributed prior to
the filing of Form 10-K) and review and consider with the outside
auditors the matters required to be discussed by Statement of Auditing
Standards ("SAS") No. 61.
5. Review such interim financial results and other matters as may be
required to be reviewed, and prepare such reports as may be required to
be prepared, by the Committee from time to time in accordance with the
requirements of Nasdaq and of the Securities Exchange Act of 1934, as
amended.
b. Those in which the Committee will initially review and study and then
recommend action by the Board of Directors based upon advice and input
from management and other third parties, as the Committee deems
necessary or desirable.
1. Appoint independent public accountants.
2. Review major accounting policy changes before implementation.
3. Review Securities and Exchange Commission registration statements.
4. Review annual audit reports and the content of proposed published
reports.
c. Those which the Committee will review and study and provide summary
information reports to the Board of Directors when the Committee deems
appropriate in its discretion.
1. Review trends in accounting policy changes proposed or adopted by
organizations such as the Financial Accounting Standards Board, the
Securities and Exchange Commission (SEC), and the American Institute of
Certified Public Accountants or by comparable bodies outside the United
States.
2. Discuss with the Company's independent certified public accountants
the review and analysis of strengths and weaknesses of the Company's
financial staff, systems, adequacy of controls and other factors which
might be pertinent to the integrity of published financial reports.
3. Review insurance programs from the standpoint of gaps and exposure
as well as fraud.
4. Review periodic SEC filings by the Company and assure that adequate
programs and procedures exist to comply with SEC regulations and
regulations of securities exchanges (such as the NASD and NYSE).
24
IV. ADDITIONAL RESPONSIBILITIES
a. The Audit Committee shall be responsible for ensuring that it
receives from the Company's independent certified public
accountants a formal written statement delineating all
relationships between the independent certified public
accountants and the Company, consistent with Independence
Standards Board Standard 98-1. The Audit Committee is also
responsible for initiating and engaging in a dialogue with the
Company's independent certified public accountants with
respect to disclosure of relationships or services that may
impact the objectivity and independence of such accountants
and to take, or recommend that the full Board take,
appropriate action to ensure the independence of the outside
independent certified public accountants.
b. The Audit Committee shall also periodically review and provide
recommendations to management regarding the Company's internal
audit procedures and plans, including the scope of work,
procedures and findings of the internal audit function.
V. RELATIONSHIP OF INDEPENDENT ACCOUNTANTS
The independent certified public accountants appointed by the Board of Directors
shall be accountable to the Board of Directors and the Audit Committee, as
representatives of the shareholders of the Company. The Board of Directors and
the Audit Committee shall be vested with the authority and responsibility to
select, evaluate and, where appropriate, replace the Company's independent
certified public accountants.
25
APPENDIX B
AMENDMENT NO. 2 TO THE
SOFTWARE SPECTRUM, INC.
1998 LONG-TERM INCENTIVE PLAN
WHEREAS, Software Spectrum, Inc. (the "Company") has heretofore adopted
the Software Spectrum, Inc. 1998 Long-Term Incentive Plan and an Amendment No. 1
thereto (collectively, the "1998 Plan"); and
WHEREAS, the 1998 Plan provides for the grant of up to 400,000 stock
options with or without tandem stock appreciation rights, performance units
and/or shares of restricted stock; and
WHEREAS, pursuant to those provisions of the 1998 Plan permitting the
Board of Directors of the Company to amend the 1998 Plan from time to time, the
Company desires to amend the 1998 Plan to: (i) increase the shares available for
grant thereunder by 150,000, for an aggregate of 550,000 shares to be available
for grant thereunder; and (ii) provide for grants of Non-Qualified Stock Options
thereunder to non-employee directors of the Company at the commencement of their
service on the Company's Board of Directors and annually thereafter;
NOW, THEREFORE, effective as of July 1, 2001, the Plan is hereby
amended as follows:
FIRST
A new sub-section (e) is hereby added to paragraph I-1 of the 1998 Plan
to read in its entirety as follows:
(e) attract and retain well-qualified individuals to serve as members
of the Company's Board of Directors;
SECOND
The definition of "Participant" in paragraph I-3 of the 1998 Plan is
hereby amended to read in its entirety as follows:
"Participant" means any regular full-time employee of the Company or
any Subsidiary (meaning an employee who works 30 hours or more per week) who is
selected by the Committee to participate in the 1998 Plan. Unless a different
meaning is indicated or required by the context, the term "employee", "regular
full-time employee" or "Participant" as used in this 1998 Plan shall include a
non-employee director of the Company, and the term "employed" or "employment"
shall include service by a non-employee director as a member of the Company's
Board of Directors.
THIRD
The second sentence of paragraph I-6 of the 1998 Plan is hereby amended
to read in its entirety as follows:
Subject to the provisions of paragraph I.10, the number of shares of
Stock available under the 1998 Plan for the grant of Stock Options with or
without tandem Stock Appreciation Rights, Performance Units and Restricted Stock
shall not exceed 550,000 shares in the aggregate.
FOURTH
The second sentence of paragraph II-2 of the 1998 Plan is hereby
amended to read in its entirety as follows:
Incentive Stock Options may be awarded only to employees;
non-employee directors shall not be eligible to receive awards of Incentive
Stock Options.
FIFTH
A new sub-section (d) is hereby added to paragraph III-5 of the 1998
Plan to read in its entirety as follows:
26
(d) in the case of a non-employee director who is the holder of any
Non-Qualified Stock Option whose service as a director is terminated (except by
reason of death or disability), the date that is three months after the date of
such termination of service as a director, but in no event later than the date
on which the Non-Qualified Stock Option expires and only to the extent such
Non-Qualified Stock Option was exercisable at the date of such termination.
SIXTH
A new paragraph III-6 is hereby added to the 1998 Plan to read in its
entirety as follows:
6. Annual Awards to Non-employee Directors. Each director of the
Company who is not also a regular full-time employee of the Company or one of
its subsidiaries (a "non-employee director") shall automatically be granted a
Non-Qualified Stock Option to purchase 3,000 shares of Common Stock
(appropriately adjusted to reflect stock splits, dividends, recapitalizations
and the like occurring after the effective date of the 1998 Plan) on the date
such individual becomes a non-employee director, and each year thereafter, each
non-employee director shall automatically be granted an additional Non-Qualified
Stock Option to purchase 3,000 shares of the Company's Common Stock
(appropriately adjusted to reflect stock splits, dividends, recapitalizations
and the like occurring after the effective date of the 1998 Plan) immediately
following each annual meeting of the shareholders of the Company, subject
thereafter to adjustment under paragraph I-10 hereof. The exercise price per
share of Common Stock of each Non-Qualified Stock Option granted to a
non-employee director shall be the Fair Market Value per share (as defined in
paragraph I-3 hereof) on the date such option is granted. Each such option
granted to a non-employee director shall become exercisable in full, six months
following the date of the grant. Subject to the provisions of paragraph
III-5(b)-(d), to the extent not previously exercised, all options granted to a
non-employee director under the 1998 Plan will expire on the fifth anniversary
following the date of each grant. Notwithstanding the provisions of paragraph
I-13 of the 1998 Plan, the provisions of this paragraph III-6 may not be amended
more than once every six (6) months, other than to comply with changes in the
Code, the Employee Retirement Income Security Act of 1974, as amended, or the
rules and regulations thereunder.
SEVENTH
A new sentence is hereby added to paragraph IV-2 of the 1998 Plan to
read in its entirety as follows:
Notwithstanding the foregoing, non-employee directors are not eligible
to receive grants of Stock Appreciation Rights.
EIGHTH
A new sentence is hereby added to paragraph V-2 of the 1998 Plan to
read in its entirety as follows:
Notwithstanding the foregoing, non-employee directors are not eligible
to receive grants of Restricted Stock.
NINTH
A new sentence is hereby added to paragraph VI-2 of the 1998 Plan to
read in its entirety as follows:
Notwithstanding the foregoing, non-employee directors are not eligible
to receive grants of Performance Units.
The remaining provisions of the 1998 Plan shall remain in full force and effect
and shall not be impacted by this Amendment.
27
[COMPANY LOGO]
SOFTWARE SPECTRUM, INC.
2140 MERRITT DRIVE
GARLAND, TEXAS 75041
28
<Table>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO Please mark
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND PROPOSAL 2. your votes as
indicated in [X]
this example
1. Election of Directors Nominees: 01 Mellon C. Baird, 02 Keith R. Coogan
FOR nominees WITHHOLD (Instruction: To withhold authority to vote for any individual
listed to the right AUTHORITY nominee, write that nominee's name on the space provided below.)
to vote for all nominees
listed to the right
----------------------------------------------------------------
[ ] [ ]
2. To approve the adoption of Amendment No. 2 to the Company's 3. In their discretion on such other matters as may properly
1998 Long Term Incentive Plan. come before the meeting.
FOR AGAINST ABSTAIN
[ ] [ ] [ ] Signature(s):
------------------------------
------------------------------
Date Signed:
-------------------------------
Please sign exactly as your name appears on
this proxy. If your stock is jointly owned,
both parties must sign. Fiduciaries and
representatives should so indicate when
signing, and when more than one is named, a
majority should sign. If signed by a
corporation, its seal should be affixed.
PLEASE DATE, SIGN AND RETURN THIS PROXY
PROMPTLY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED.
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
*FOLD AND DETACH HERE*
29
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
SOFTWARE SPECTRUM, INC.
ANNUAL MEETING OF SHAREHOLDERS - SEPTEMBER 20, 2001
The undersigned hereby appoints Judy C. Odom and Robert D. Graham and
each of them with full power of substitution, attorneys, agents and proxies of
the undersigned to vote as directed below the shares of stock which the
undersigned would be entitled to vote, if personally present, at the Annual
Meeting of Shareholders of Software Spectrum, Inc. (the "Company") to be held at
the offices of the Company, 2140 Merritt Drive, Garland, Texas, Thursday,
September 20, 2001 at 10:00 a.m. Central time, and at any adjournment or
adjournments thereof. If more than one of the above attorneys shall be present
in person or by substitution at such meeting or at any adjournment thereof, both
of said attorneys so present and voting, either in person or by substitution,
shall exercise all of the powers hereby given. The undersigned hereby revokes
any proxy or proxies heretofore given to vote upon or act with respect to such
shares of stock and hereby ratifies and confirms all that said attorneys, their
substitutes, or any of them, may lawfully do by virtue hereof.
- --------------------------------------------------------------------------------
*FOLD AND DETACH HERE*