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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
Mark One Quarterly Report Pursuant to Section 13 or 15(d) of the
[X] Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2001
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
- ------------------------------- ------------------------------------
(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)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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
--- ---
At December 7, 2001, the Registrant had outstanding 3,076,413 shares of its
Common Stock, par value $.01 per share.
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INDEX
<Table>
<Caption>
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at October 31, 2001
and April 30, 2001 1
Consolidated Statements of Operations for the
Three and Six Months Ended October 31, 2001 and 2000 2
Consolidated Statements of Cash Flows for the
Six Months Ended October 31, 2001 and 2000 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
</Table>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<Table>
<Caption>
October 31, April 30,
2001 2001
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 35,348 $ 13,937
Marketable equity security 416 2,450
Trade accounts receivable, net of allowance for doubtful
accounts of $4,191 at October 31 and $3,649 at April 30 195,346 151,734
Prepaid expenses 1,475 1,010
Other current assets 1,145 3,156
------------ ------------
Total current assets 233,730 172,287
Furniture, equipment and leasehold improvements, at cost 44,018 43,495
Less accumulated depreciation and amortization 26,358 25,369
------------ ------------
17,660 18,126
Other assets, consisting primarily of goodwill, net of accumulated
amortization of $13,293 at October 31 and $12,095 at April 30 37,273 37,376
------------ ------------
$ 288,663 $ 227,789
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 206,930 $ 152,735
Other current liabilities 17,368 11,531
------------ ------------
Total current liabilities 224,298 164,266
Long-term debt 3,800 3,800
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, 4,621,814 shares at October 31 and 4,615,025 shares at April 30 46 46
Additional paid-in capital 42,664 42,601
Retained earnings 43,977 42,269
Currency translation adjustments (4,536) (4,835)
------------ ------------
82,151 80,081
Less treasury stock at cost - 1,524,801 shares at October 31 and
1,409,801 shares at April 30 21,586 20,358
------------ ------------
Total shareholders' equity 60,565 59,723
------------ ------------
$ 288,663 $ 227,789
============ ============
</Table>
See notes to consolidated financial statements.
1
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<Table>
<Caption>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales
Software $ 342,075 $ 231,985 $ 617,708 $ 480,455
Contact services 13,863 14,030 26,543 29,459
---------- ---------- ---------- ----------
355,938 246,015 644,251 509,914
---------- ---------- ---------- ----------
Cost of sales
Software 320,595 213,126 575,760 442,196
Contact services 9,437 11,419 18,789 23,448
---------- ---------- ---------- ----------
330,032 224,545 594,549 465,644
---------- ---------- ---------- ----------
Gross margin 25,906 21,470 49,702 44,270
Selling, general and administrative expenses 20,174 20,308 39,278 39,824
Depreciation and amortization 2,239 2,578 4,493 5,148
---------- ---------- ---------- ----------
Operating income (loss) 3,493 (1,416) 5,931 (702)
Non-operating expense (income)
Interest expense 324 427 518 786
Interest income (135) (260) (401) (543)
Unrealized loss on marketable equity security 912 -- 2,868 --
---------- ---------- ---------- ----------
1,101 167 2,985 243
---------- ---------- ---------- ----------
Income (loss) before income taxes 2,392 (1,583) 2,946 (945)
Income tax expense (benefit) 1,005 (702) 1,238 (440)
---------- ---------- ---------- ----------
Income (loss) from continuing operations 1,387 (881) 1,708 (505)
Loss on disposition of discontinued professional
services business (net of applicable tax benefit) -- 465 -- 465
---------- ---------- ---------- ----------
Net income (loss) $ 1,387 $ (1,346) $ 1,708 $ (970)
========== ========== ========== ==========
Earnings (loss) per share - basic and diluted
Income (loss) from continuing operations $ 0.44 $ (0.25) $ 0.54 $ (0.14)
========== ========== ========== ==========
Net income (loss) $ 0.44 $ (0.38) $ 0.54 $ (0.27)
========== ========== ========== ==========
Weighted average shares outstanding
Basic 3,145 3,523 3,177 3,622
========== ========== ========== ==========
Diluted 3,146 3,523 3,178 3,622
========== ========== ========== ==========
</Table>
See notes to consolidated financial statements.
2
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<Table>
<Caption>
Six Months Ended
October 31,
------------------------
2001 2000
---------- ----------
Operating activities
Income (loss) from continuing operations $ 1,708 $ (505)
Adjustments to reconcile income (loss) from continuing operations to
net cash provided by (used in) operating activities
Provision for bad debts 662 591
Depreciation and amortization 4,493 5,148
Unrealized loss on marketable equity security 2,868 --
Changes in operating assets and liabilities
Trade accounts receivable (44,643) 12,712
Marketable equity security (834) --
Prepaid expenses and other assets 413 2,063
Trade accounts payable and other
current liabilities 60,499 (31,672)
---------- ----------
Net cash provided by (used in) operating activities 25,166 (11,663)
---------- ----------
Investing activities
Purchase of furniture, equipment and
leasehold improvements (2,837) (4,030)
---------- ----------
Net cash used in investing activities (2,837) (4,030)
---------- ----------
Financing activities
Borrowings on long-term debt 109,550 92,050
Repayments of long-term debt (109,550) (80,463)
Proceeds from stock issuance 92 201
Purchase of treasury stock (1,258) (4,585)
---------- ----------
Net cash provided by (used in) financing activities (1,166) 7,203
---------- ----------
Effect of exchange rate changes on cash 248 (508)
---------- ----------
Net cash provided by (used in) continuing operations 21,411 (8,998)
Net cash provided by discontinued operations -- 9,914
---------- ----------
Increase in cash and cash equivalents 21,411 916
Cash and cash equivalents at beginning of period 13,937 5,652
---------- ----------
Cash and cash equivalents at end of period $ 35,348 $ 6,568
========== ==========
Supplemental disclosure of cash paid during the period
Income taxes $ 149 $ 1,583
Interest 464 560
</Table>
See notes to consolidated financial statements.
3
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements include the accounts of Software Spectrum,
Inc. (the "Company") and its wholly owned 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.
The consolidated financial statements contained herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position as of October 31, 2001, the
consolidated results of operations for the three and six months ended October
31, 2001 and 2000, and the consolidated cash flows for the six months ended
October 31, 2001 and 2000 have been made. In addition, in the opinion of
management, all such adjustments made are of a normal recurring nature. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
interim reporting rules of the Securities and Exchange Commission. The interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes for the year ended April 30,
2001, included in the Company's 2001 Annual Report on Form 10-K.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible
Assets, which revises the accounting for purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment annually as well
as in the event of an impairment indicator. The Company will adopt SFAS 142
effective May 1, 2002. For the three and six months ended October 31, 2001,
goodwill amortization reduced net income by $341,000 and $688,000, and earnings
per share by approximately $.11 and $.22 per share, respectively.
NOTE B -- OTHER COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
<Table>
<Caption>
Three Months Ended Six Months Ended
October 31, October 31,
-------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $ 1,387 $ (1,346) $ 1,708 $ (970)
Currency translation adjustments (106) (1,263) 299 (513)
-------- -------- -------- --------
Comprehensive income (loss) $ 1,281 $ (2,609) $ 2,007 $ (1,483)
======== ======== ======== ========
</Table>
4
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C -- 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 728,000 and 674,000 shares
for the three and six months ended October 31, 2001 and 665,000 and 639,000
shares for the three and six months ended October 31, 2000, respectively.
<Table>
<Caption>
Three Months Ended Six Months Ended
October 31, October 31,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Income (loss) from continuing operations $ 1,387 $ (881) $ 1,708 $ (505)
======== ======== ======== ========
Loss from discontinued operations $ -- $ (465) $ -- $ (465)
======== ======== ======== ========
Weighted average shares outstanding - basic 3,145 3,523 3,177 3,622
Effect of dilutive employee and director
stock options 1 -- 1 --
-------- -------- -------- --------
Weighted average shares outstanding - diluted 3,146 3,523 3,178 3,622
-------- -------- -------- --------
Earnings (loss) per share from continuing
operations - basic and diluted $ 0.44 $ (0.25) $ 0.54 $ (0.14)
======== ======== ======== ========
Loss per share from discontinued
operations - basic and diluted $ -- $ (0.13) $ -- $ (0.13)
======== ======== ======== ========
</Table>
NOTE D -- BUSINESS SEGMENTS
Information for the Company's reportable segments for the three and six months
ended October 31, 2001 and 2000 is presented below (in thousands):
<Table>
<Caption>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales
Product services $ 342,075 $ 231,985 $ 617,708 $ 480,455
Contact services 13,863 14,030 26,543 29,459
---------- ---------- ---------- ----------
$ 355,938 $ 246,015 $ 644,251 $ 509,914
========== ========== ========== ==========
Operating income (loss)
Product services $ 11,768 $ 9,896 $ 23,461 $ 20,619
Contact services 1,106 (1,600) 1,301 (1,765)
Unallocated corporate overhead (9,381) (9,712) (18,831) (19,556)
---------- ---------- ---------- ----------
$ 3,493 $ (1,416) $ 5,931 $ (702)
========== ========== ========== ==========
</Table>
Sales to one Product Services customer accounted for approximately 13% and 8% of
total sales for the three and six months ended October 31, 2001. No customer
accounted for more than 10% of sales for the three or six months ended October
31, 2000.
NOTE E -- MARKETABLE EQUITY SECURITY
The Company's marketable equity security consists of 137,600 shares of publicly
traded stock acquired in fiscal 2001 through the sale of a subsidiary. As of
December 7, 2001, the quoted market price of the stock was $5.88 per share.
5
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F -- SUBSEQUENT EVENT
Effective November 30, 2001, the Company amended its existing revolving credit
facility. The amended credit facility (the "Amended Facility"), which is secured
by accounts receivable and a pledge of the stock of certain of the Company's
subsidiaries, permits the Company to borrow up to $75 million, subject to
availability under its borrowing base. The Amended Facility continues to require
the Company to maintain certain financial covenants and ratios and continues to
place limitations on dividends, capital expenditures and certain other
borrowings. The Amended Facility bears interest at a variable rate and expires
in November 2004.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a global business-to-business software services provider with
sales locations, operations and contact centers located in 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 contact center solutions to software publishers, Internet service
providers, original equipment manufacturers and other organizations.
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales.
<Table>
<Caption>
Three Months Ended Six Months Ended
October 31, October 31,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.7 91.3 92.3 91.3
-------- -------- -------- --------
Gross margin 7.3 8.7 7.7 8.7
Selling, general and administrative expenses 5.7 8.3 6.1 7.8
Depreciation and amortization 0.6 1.0 0.7 1.0
-------- -------- -------- --------
Operating income (loss) 1.0 (0.6) 0.9 (0.1)
Non-operating expense, net 0.3 0.1 0.4 0.1
-------- -------- -------- --------
Income (loss) before income taxes 0.7 (0.7) 0.5 (0.2)
Income tax expense (benefit) 0.3 (0.3) 0.2 (0.1)
-------- -------- -------- --------
Income (loss) from continuing operations 0.4% (0.4)% 0.3% (0.1)%
======== ======== ======== ========
</Table>
NET SALES
Software sales for the three and six months ended October 31, 2001 increased
approximately 47% and 29% over those for the three and six months ended October
31, 2000. The increase is partially due to sales to new customers. The Company's
strong competitive position with global enterprises, licensing expertise,
electronic innovation, and the expansion of the sales force throughout fiscal
2001 contributed to the addition of these new customers. A portion of the
revenue growth is also attributable to announced changes in Microsoft licensing
programs effective October 1, 2001 which, in a number of cases, resulted in
customers purchasing software earlier than anticipated. In addition, revenues
for the October 31, 2001 quarter increased due to the timing of a significant
transaction with one large customer. This customer accounted for approximately
14% of total product sales for the three months ended October 31, 2001, but was
less than 10% of total product sales for the six months ended October 31, 2001
and the three and six months ended October 31, 2000.
Sales of software through VLM agreements represented approximately 92% and 90%
of software sales for the three and six months ended October 31, 2001 compared
to approximately 84% and 85% for the three and six months ended October 31,
2000, respectively.
7
As previously discussed, effective October 1, 2001, certain new Microsoft
enterprise-wide licensing arrangements ("Enterprise Agreements") are priced,
billed and collected directly by Microsoft. The Company will continue to provide
sales and support services related to these transactions and will earn a service
fee directly from Microsoft for these activities. In addition, the Company will
continue to realize software revenue from existing Enterprise Agreements, which
generally have terms of three years, as well as from sales of software under
Microsoft's other licensing programs. This change will result in significantly
lower revenues for the Company on the affected transactions. While the precise
impact of these changes on gross margin dollars is not known, the Company does
not expect the effect to be significant. For the six months ended October 31,
2001, approximately 24% of the Company's product sales were under Enterprise
Agreements, none of which were under the new selling model.
For the three and six months ended October 31, 2001, Contact Services revenues
decreased 1% and 10% as compared to the three and six months ended October 31,
2000. The decrease was primarily attributable to the decision by one of the
Company's largest customers in October 2000 to reduce and realign call volumes
outsourced to third parties, which resulted in lower call volumes in the
Company's Dallas and Spokane call centers. Contact Services represented
approximately 4% of the Company's overall sales for both the three and six
months ended October 31, 2001 as compared to 6% for both the three and six
months ended October 31, 2000. Such revenue accounted for approximately 17% and
16%, respectively, of the Company's gross margin dollars for the three and six
months ended October 31, 2001, and 12% and 14%, respectively, of the Company's
gross margin dollars for the comparable periods in the prior year.
The Company believes that customers may reduce their information technology
purchasing volumes due to current economic conditions. If customers or potential
customers decrease their spending for information technology, the Company's
revenues could be adversely affected.
In recent discussions with the Company's principal Contact Services customers
concerning their long-term outsourcing strategies, the Company has been made
aware of plans by these customers to move current call volumes handled by the
Company to offshore locations during calendar year 2002. The impact of these
plans on the Company's Contact Services business cannot be determined at the
present time; however, if the Company is not able to replace volumes lost as a
result of the implementation of such strategies on terms comparable to those
existing today, the Company's Contact Services business would be adversely
impacted.
The Company believes its future growth will depend upon its ability to maintain
and increase its customer base, to develop and expand its Contact Services and
to capitalize on continued growth in desktop technology markets around the
world.
INTERNATIONAL OPERATIONS
For the three and six months ended October 31, 2001, sales outside of North
America increased 66% and 13% to $48 million and $78 million, respectively, as
compared to $29 million and $69 million for the three and six months ended
October 31, 2000.
Sales in Europe increased 22% and 16% to $22 million and $40 million for the
three and six months ended October 31, 2001, while sales in Asia/Pacific
increased 137% and 11% to $26 million and $38 million during the same period.
During fiscal 2002, certain large customers in Asia Pacific delayed the renewal
of their licensing contracts, resulting in a significant shift of revenue from
the July to the October fiscal quarter.
For the three and six months ended October 31, 2001, fluctuations in foreign
currencies reduced operating income by approximately $359,000 and $459,000,
respectively. Fluctuations in foreign currencies increased operating income by
approximately $301,000 and $12,000 for the three and six months ended October
31, 2000.
8
GROSS MARGIN
Overall gross margin as a percentage of net sales was 7.3% and 7.7%,
respectively, for the three and six months ended October 31, 2001, as compared
to 8.7% for the comparable periods of the prior year. The decrease in overall
gross margin as a percentage of net sales is due to lower gross margins on
software sales. For the three and six months ended October 31, 2001, gross
margin on software sales decreased to 6.3% and 6.8%, as compared to 8.1% and
8.0% for the three and six months ended October 31, 2000, primarily due to price
competition and an increase in the percentage of revenue derived from licensing
arrangements.
The Company believes that gross margin percentages on sales of software may
continue to experience downward pressure if the current level of price
competition continues, or if publishers continue to respond to market pressures
by reducing financial incentives to resellers. While the precise effect that the
new Microsoft selling model will have on gross margin dollars is not currently
known, the Company believes that the impact of the new model may partially
offset the potential pressure on gross margin percentages of price competition
and reduced financial incentives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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 three and six months ended October 31, 2001,
SG&A expenses, as a percentage of net sales, decreased to 5.7% and 6.1%, as
compared to 8.3% and 7.8% for the three and six months ended October 31, 2000.
The decrease is primarily due to the sufficiency of the Company's
infrastructure, which allowed the Company to generate incremental sales volume
without a corresponding increase in overhead costs. In addition, SG&A expenses
for the three and six months ended October 31, 2000 included a nonrecurring
charge of $730,000 relating to excess capacity created by the decline in the
Contact Services business. The Company remains focused on controlling operating
costs in both of its business lines.
DEPRECIATION AND AMORTIZATION
The decrease in depreciation and amortization for the three and six months ended
October 31, 2001, as compared to the three and six months ended October 31,
2000, is primarily attributable to a decline in the level of fixed assets used
in the Company's Contact Services business.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible
Assets, which revises the accounting for purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment annually as well
as in the event of an impairment indicator. The Company will adopt SFAS 142
effective May 1, 2002. For the three and six months ended October 31, 2001,
goodwill amortization reduced net income by approximately $341,000 and $688,000
and earnings per share by approximately $.11 and $.22 per share, respectively.
OPERATING INCOME
Operating income for the three and six months ended October 31, 2001 was $3.5
million and $5.9 million, compared to operating losses of $1.4 million and
$702,000 for the three and six months ended October 31, 2000. The increase in
operating income is due to the increase in software sales and the resulting
increase in gross margin dollars, improved operations in the Contact Services
9
business, the Company's ability to control its operating costs, and $1.3 million
of nonrecurring charges related to the Contact Services business that were
incurred in the October 31, 2000 quarter.
UNREALIZED LOSS ON MARKETABLE EQUITY SECURITY
The Company's marketable equity security consists of 137,600 shares of publicly
traded stock acquired in December 2000 through the sale of a subsidiary. For the
quarter ended October 31, 2001, the Company incurred an unrealized loss of
approximately $900,000 to adjust this security to its market value of $3.02 per
share at October 31, 2001. The market price of the security was $5.88 per share
at December 7, 2001.
INCOME TAX EXPENSE
The Company's effective tax rate was approximately 42% for the three and six
months ended October 31, 2001 as compared to 44% and 47% for the three and six
months ended October 31, 2000. The decrease in the Company's effective tax rate
is primarily due to the impact of its international operations.
During the quarter ended October 31, 2001, the Company resolved, for all
applicable tax years, the tax issues previously disclosed in the Company's
Annual Report on Form 10-K for the year ended April 30, 2001. The Company's
total liability for additional taxes, including interest expense, for all such
tax years approximated the $1.5 million estimate previously accrued in the
Company's April 30, 2001 financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2001, the Company had approximately $35 million in cash and cash
equivalents and had $3.8 million of debt outstanding. The Company amended its
revolving credit facility effective November 30, 2001. Based on its expected
borrowing requirements, the Company reduced the facility to $75 million, subject
to availability under the borrowing base. The amended credit facility (the
"Amended Facility"), which is secured by accounts receivable and a pledge of the
stock of certain of the Company's subsidiaries, bears interest at a variable
rate and expires in November 2004. The Amended Facility continues to require the
Company to maintain certain financial covenants and ratios and continues to
place limitations on dividends, capital expenditures and certain other
borrowings. As of November 30, 2001, the Company had approximately $67 million
of borrowing availability under the terms of the Amended Facility.
The increase in trade accounts receivable and trade accounts payable from April
30, 2001 to October 31, 2001 is due to the increased sales in the October 31,
2001 quarter and the timing of collections of accounts receivable and payments
to the Company's vendors. At October 31, 2001 and April 30, 2001, accounts
receivable represented approximately 48 and 56 days of historical sales,
respectively.
For the six months ended October 31, 2001, the Company's operating activities
provided $25 million of cash compared to $12 million of cash used in operations
during the six months ended October 31, 2000. The increase in cash provided by
operations is primarily due to the required timing of payments to the Company's
largest vendors, as well as the increase in operating income.
The increase in furniture, equipment and leasehold improvements from April 30,
2001 to October 31, 2001 reflects approximately $2.8 million of capital
expenditures related primarily to the ongoing investment in the Company's
computer systems.
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 December 7,
2001 the Company had repurchased 1,493,400 shares of Common Stock, for a
10
total of $21.1 million, under the stock repurchase program and has been
authorized by its Board of Directors to repurchase up to an additional $706,000
of its common stock.
The Company expects that its cash requirements for fiscal 2002 will be satisfied
from cash flow from operations and borrowings under the Amended Facility.
EURO CURRENCY ISSUES
On January 1, 1999, eleven of the fifteen 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 Company does not believe that use of the Euro has or will 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. The
Company uses words like "expects", "anticipates" or "believes" to identify
forward-looking statements. These statements include future market trends,
expectations concerning the Company's growth and profitability, expectations
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 Euro Currency discussion 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, legal and regulatory proceedings and cost
savings and efficiencies. 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 its Product and Contact Services
businesses 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. Further, the Company
undertakes no obligation to update forward-looking statements after the date
they are made to conform the statements to actual results or changes in the
Company's expectations. The Company's report on Form 10-K for the fiscal year
ended April 30, 2001 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" in the Company's Form 10-K.
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three and six months ended October 31,
2001 does not differ materially from that discussed in Item 7 of the Company's
Annual Report on Form 10-K for its fiscal year ended April 30, 2001.
11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On September 20, 2001, the Company held its Annual Meeting of Shareholders (the
"Meeting"). At the Meeting, Mellon C. Baird and Keith R. Coogan were elected as
directors to serve three-year terms expiring at the Company's Annual Meeting of
Shareholders to be held in the Year 2004. In addition, Amendment No. 2 to the
Company's 1998 Long-Term Incentive Plan, which increased the number of shares of
Common Stock reserved for issuance under the plan by 150,000 shares, was
approved.
The following table sets forth the number of shares of Common Stock that were
voted for or against or abstained from each matter.
<Table>
<Caption>
For Against Abstained
---------- ---------- ----------
Election of Mellon C. Baird to the Board of Directors 2,711,395 -- 52,858
Election of Keith R. Coogan to the Board of Directors 2,687,534 -- 76,719
Adoption of Amendment No. 2 to the Company's
1998 Long-Term Incentive Plan 2,616,384 132,377 15,492
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 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.
Exhibit 10.18(e) - Fifth Amendment to Amended and Restated Credit
Agreement and Modification to Other Loan Documents, dated November
30, 2001 among the Company, JPMorgan Chase Bank, as a Bank, as
Administrative Agent and as Collateral Agent, and other
participating financial institutions.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period
ended October 31, 2001.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTWARE SPECTRUM, INC.
Date: December 17, 2001 By: /s/ James W. Brown
--------------------------------------
James W. Brown
Vice President and Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
13
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
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.
10.18(e) Fifth Amendment to Amended and Restated Credit Agreement and
Modification to Other Loan Documents, dated November 30, 2001
among the Company, JPMorgan Chase Bank, as a Bank, as
Administrative Agent and as Collateral Agent, and other
participating financial institutions.
</Table>
14