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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 JANUARY 31, 2002
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 March 8, 2002, the Registrant had outstanding 3,145,913 shares of its
Common Stock, par value $.01 per share.
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INDEX
<Table>
<Caption>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 2002
and April 30, 2001 1
Consolidated Statements of Income for the Three and
Nine Months Ended January 31, 2002 and 2001 2
Consolidated Statements of Cash Flows for the
Nine Months Ended January 31, 2002 and 2001 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 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
</Table>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<Table>
<Caption>
January 31, April 30,
2002 2001
----------- ----------
(Unaudited)
Current assets
Cash and cash equivalents $ 10,113 $ 13,937
Marketable equity security 892 2,450
Trade accounts receivable, net of allowance for doubtful
accounts of $4,228 at January 31 and $3,649 at April 30 205,580 151,734
Prepaid expenses 1,767 1,010
Other current assets 2,187 3,156
---------- ----------
Total current assets 220,539 172,287
Furniture, equipment and leasehold improvements, at cost 44,432 43,495
Less accumulated depreciation and amortization 27,945 25,369
---------- ----------
16,487 18,126
Other assets, consisting primarily of goodwill, net of accumulated
amortization of $13,843 at January 31 and $12,095 at April 30 36,969 37,376
---------- ----------
$ 273,995 $ 227,789
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 191,243 $ 152,735
Other current liabilities 15,001 11,531
---------- ----------
Total current liabilities 206,244 164,266
Long-term debt -- 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, 4,623,714 shares at January 31 and 4,615,025 shares at April 30 46 46
Additional paid-in capital 42,688 42,601
Retained earnings 51,374 42,269
Currency translation adjustments (4,466) (4,835)
---------- ----------
89,642 80,081
Less treasury stock at cost - 1,545,401 shares at January 31 and
1,409,801 shares at April 30 21,891 20,358
---------- ----------
Total shareholders' equity 67,751 59,723
---------- ----------
$ 273,995 $ 227,789
========== ==========
</Table>
See notes to consolidated financial statements.
1
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
<Table>
<Caption>
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenues
Software sales $ 393,244 $ 416,749 $ 1,010,952 $ 897,204
Contact services 15,284 12,363 41,827 41,822
------------ ------------ ------------ ------------
408,528 429,112 1,052,779 939,026
------------ ------------ ------------ ------------
Cost of revenues
Software 368,786 389,720 944,546 831,916
Contact services 10,540 9,292 29,329 32,740
------------ ------------ ------------ ------------
379,326 399,012 973,875 864,656
------------ ------------ ------------ ------------
Gross margin 29,202 30,100 78,904 74,370
Selling, general and administrative expenses 21,063 20,896 60,341 60,720
Depreciation and amortization 2,225 2,515 6,718 7,663
------------ ------------ ------------ ------------
Operating income 5,914 6,689 11,845 5,987
Non-operating expense (income)
Interest expense 132 618 650 1,404
Interest income (230) (110) (631) (653)
(Gain) loss on investments (476) (151) 2,392 (151)
------------ ------------ ------------ ------------
(574) 357 2,411 600
------------ ------------ ------------ ------------
Income before income taxes 6,488 6,332 9,434 5,387
Income tax expense (benefit) (909) 2,596 329 2,156
------------ ------------ ------------ ------------
Income from continuing operations 7,397 3,736 9,105 3,231
Loss on disposition of discontinued professional
services business (net of applicable tax benefit) -- -- -- 465
------------ ------------ ------------ ------------
Net income $ 7,397 $ 3,736 $ 9,105 $ 2,766
============ ============ ============ ============
Earnings per share - basic
Income from continuing operations $ 2.40 $ 1.10 $ 2.89 $ 0.91
============ ============ ============ ============
Net income $ 2.40 $ 1.10 $ 2.89 $ 0.78
============ ============ ============ ============
Earnings per share - diluted
Income from continuing operations $ 2.36 $ 1.10 $ 2.88 $ 0.91
============ ============ ============ ============
Net income $ 2.36 $ 1.10 $ 2.88 $ 0.78
============ ============ ============ ============
Weighted average shares outstanding
Basic 3,084 3,410 3,146 3,551
============ ============ ============ ============
Diluted 3,128 3,410 3,161 3,558
============ ============ ============ ============
</Table>
See notes to consolidated financial statements.
2
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<Table>
<Caption>
Nine Months Ended
January 31,
------------------------
2002 2001
---------- ----------
Operating activities
Income from continuing operations $ 9,105 $ 3,231
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities
Provision for bad debts 800 1,695
Depreciation and amortization 6,718 7,663
Net (gain) loss on investments 2,392 (151)
Changes in operating assets and liabilities
Trade accounts receivable (55,358) (94,848)
Marketable equity security (834) 1,306
Prepaid expenses and other assets (1,272) (1,270)
Trade accounts payable and other current liabilities 42,827 104,323
---------- ----------
Net cash provided by operating activities 4,378 21,949
---------- ----------
Investing activities
Purchase of subsidiary, net of cash acquired -- (2,159)
Sale of subsidiary, net -- 503
Purchase of furniture, equipment and
leasehold improvements (3,330) (4,781)
---------- ----------
Net cash used in investing activities (3,330) (6,437)
---------- ----------
Financing activities
Borrowings on long-term debt 162,300 188,430
Repayments of long-term debt (166,150) (192,493)
Proceeds from stock issuance 166 260
Purchase of treasury stock (1,611) (4,628)
---------- ----------
Net cash used in financing activities (5,295) (8,431)
---------- ----------
Effect of exchange rate changes on cash 423 (667)
---------- ----------
Net cash provided by (used in) continuing operations (3,824) 6,414
Net cash provided by discontinued operations -- 11,865
---------- ----------
Increase (decrease) in cash and cash equivalents (3,824) 18,279
Cash and cash equivalents at beginning of period 13,937 5,652
---------- ----------
Cash and cash equivalents at end of period $ 10,113 $ 23,931
========== ==========
Supplemental disclosure of cash paid during the period
Income taxes $ 149 $ 3,326
Interest 864 832
Non-cash investing and financing activities
Marketable equity securities received from sale of subsidiary $ -- $ 5,309
</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 January 31, 2002, the
consolidated results of operations for the three and nine months ended January
31, 2002 and 2001, and the consolidated cash flows for the nine months ended
January 31, 2002 and 2001 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 nine months ended January 31, 2002,
goodwill amortization reduced net income by $358,000 and $1.1 million, and
earnings per share by approximately $.11 and $.34 per share, respectively.
NOTE B -- OTHER COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 7,397 $ 3,736 $ 9,105 $ 2,766
Currency translation adjustments 70 288 369 (225)
-------- -------- -------- --------
Comprehensive income $ 7,467 $ 4,024 $ 9,474 $ 2,541
======== ======== ======== ========
</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 380,000 and 576,000 shares
for the three and nine months ended January 31, 2002 and 655,000 and 494,000
shares for the three and nine months ended January 31, 2001, respectively.
<Table>
<Caption>
Three Months Ended Nine Months Ended
January 31, January 31,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income from continuing operations $ 7,397 $ 3,736 $ 9,105 $ 3,231
============ ============ ============ ============
Loss from discontinued operations $ -- $ -- $ -- $ 465
============ ============ ============ ============
Weighted average shares outstanding - basic 3,084 3,410 3,146 3,551
Effect of dilutive employee and director
stock options 44 -- 15 7
------------ ------------ ------------ ------------
Weighted average shares outstanding - diluted 3,128 3,410 3,161 3,558
------------ ------------ ------------ ------------
Earnings per share from continuing
operations - basic $ 2.40 $ 1.10 $ 2.89 $ 0.91
============ ============ ============ ============
Earnings per share from continuing
operations - diluted $ 2.36 $ 1.10 $ 2.88 $ 0.91
============ ============ ============ ============
Loss per share from discontinued
operations - basic and diluted $ -- $ -- $ -- $ 0.13
============ ============ ============ ============
</Table>
NOTE D -- BUSINESS SEGMENTS
Information for the Company's reportable segments for the three and nine months
ended January 31, 2002 and 2001 is presented below (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales
Product services $ 393,244 $ 416,749 $ 1,010,952 $ 897,204
Contact services 15,284 12,363 41,827 41,822
------------ ------------ ------------ ------------
$ 408,528 $ 429,112 $ 1,052,779 $ 939,026
============ ============ ============ ============
Operating income (loss)
Product services $ 15,254 $ 17,394 $ 38,715 $ 38,013
Contact services 1,273 (312) 2,574 (2,077)
Unallocated corporate overhead (10,613) (10,393) (29,444) (29,949)
------------ ------------ ------------ ------------
$ 5,914 $ 6,689 $ 11,845 $ 5,987
============ ============ ============ ============
</Table>
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
March 8, 2002, the quoted market price of the stock was $5.25 per share.
5
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F -- LONG-TERM DEBT
Effective November 30, 2001, the Company amended its existing revolving credit
facility. The amended credit facility (the "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 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 Facility bears interest at a variable rate and expires in
November 2004.
NOTE G - INCOME TAXES
Effective May 1, 2001 the Company elected to treat certain of its subsidiaries
as branches for U.S. Federal income tax purposes. This election resulted in a
deemed liquidation of these subsidiaries for Federal income tax purposes only.
The Company recorded a benefit of approximately $3.4 million in the quarter
ended January 31, 2002 relating to tax deductions for accumulated losses
recognized upon the deemed liquidations.
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 Income expressed as a percentage of net sales.
<Table>
<Caption>
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.9 93.0 92.5 92.1
------- ------- ------- -------
Gross margin 7.1 7.0 7.5 7.9
Selling, general and administrative expenses 5.2 4.8 5.7 6.5
Depreciation and amortization 0.4 0.6 0.7 0.8
------- ------- ------- -------
Operating income 1.5 1.6 1.1 0.6
Non-operating (income) expense, net (0.1) 0.1 0.2 0.1
------- ------- ------- -------
Income before income taxes 1.6 1.5 0.9 0.5
Income tax expense (benefit) (0.2) 0.6 -- 0.2
------- ------- ------- -------
Income from continuing operations 1.8% 0.9% 0.9% 0.3%
======= ======= ======= =======
</Table>
NET SALES
Software sales for the third quarter ended January 31, 2002 decreased
approximately 6% compared to sales for the quarter ended January 31, 2001. The
decrease is primarily due to announced changes in Microsoft volume licensing
programs, effective October 1, 2001, which resulted in some customers
accelerating purchases into the second fiscal quarter. In addition, the January
31, 2002 quarter is the first full fiscal quarter in which new enterprise-wide
licensing arrangements, designated Microsoft Enterprise Agreement 6.0s ("EA 6.0"
agreements), were sold. These agreements are priced, billed and collected
directly by the publisher. The Company does not record software sales revenue
for these agreements, but continues to provide sales and related customer
services associated with these transactions, and earns a software advisory fee
directly from the publisher for these activities. During the quarter ended
January 31, 2002, the Company earned $667,000 in fees for advisory services
related to the EA 6.0 agreements. The Company continues to realize software
revenue from enterprise-wide licensing arrangements ("Enterprise Agreements")
that were sold prior to the introduction of EA 6.0 agreements, from sales of
software under Microsoft's other licensing programs and from sales of software
under licensing programs of other publishers.
7
Software sales for the nine months ended January 31, 2002 increased
approximately 13% over those for the nine months ended January 31, 2001. 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.
Sales of software through VLM agreements represented approximately 91% of
software sales for both the three and nine months ended January 31, 2002
compared to approximately 90% and 87% for the three and nine months ended
January 31, 2001, respectively.
The Company believes that customers have reduced their information technology
purchasing volumes due to economic conditions and have focused their spending on
basic technology needs. If this trend continues and if the Company is unable to
offset reduced demand through new customer acquisition or sales of new products
to existing customers, the Company's operating results could be adversely
affected. As sales of EA 6.0 agreements increase and as prior Enterprise
Agreements expire, generally over the next three years, the substitution of
advisory fees for software sales revenue is expected to result in lower revenues
for the Company. Because significant changes in Microsoft's licensing programs,
including the introduction of EA 6.0 agreements, have just recently been
implemented, the impact of these changes on revenues and gross margin dollars
cannot be accurately predicted. For the nine months ended January 31, 2002,
approximately 31% of the Company's product sales were under Enterprise
Agreements.
For the three months ended January 31, 2002, Contact Services revenues increased
24% as compared to the three months ended January 31, 2001. The increase was
primarily attributable to increased support levels for the Company's two largest
Contact Services customers. Contact Services represented approximately 4% of the
Company's overall revenues for both the three and nine months ended January 31,
2002 as compared to 3% and 4% for the three and nine months ended January 31,
2001.
In 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 an undetermined amount of their
currently outsourced call volumes to offshore locations at an undetermined
future date, possibly as early as 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 capitalize on continued growth in desktop
technology markets around the world, and to develop and expand its Contact
Services.
INTERNATIONAL OPERATIONS
For the three months ended January 31, 2002, sales outside of North America
decreased 26% to $26 million as compared to $35 million for the three months
ended January 31, 2001, primarily due to economic conditions in Europe and
Asia/Pacific and the impact of changes in the Microsoft licensing programs.
Sales in Europe decreased 30% to $17 million for the three months ended January
31, 2002, while sales in Asia/Pacific decreased 18% to $9 million during the
same period. Sales outside of North America for the nine months ended January
31, 2002 were $104 million, which is comparable to the level of sales for the
nine months ended January 31, 2001.
For the three and nine months ended January 31, 2002, fluctuations in foreign
currencies reduced operating income by approximately $307,000 and $765,000,
respectively. Fluctuations in foreign currencies increased operating income by
approximately $403,000 and $415,000 for the three and nine months ended January
31, 2001.
8
GROSS MARGIN
Overall gross margin as a percentage of net sales was 7.1% and 7.5%,
respectively, for the three and nine months ended January 31, 2002, as compared
to 7.0% and 7.9% for the comparable periods of the prior year. For the three and
nine months ended January 31, 2002, gross margin on software sales decreased to
6.2% and 6.6%, as compared to 6.5% and 7.3% for the three and nine months ended
January 31, 2001, primarily due to price competition. In addition, software
gross margin percentages for the three months ended January 31, 2002 were
negatively impacted by reduced financial incentives from publishers. The
increase in the percentage of software revenue derived from licensing
arrangements further reduced software gross margin percentages for the nine
months ended January 31, 2002 as compared to the nine months ended January 31,
2001.
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 effect that the recent
changes in the Microsoft licensing programs will have on gross margin dollars
cannot be accurately predicted, the Company expects the impact of the
substitution of advisory fees for software sales revenue to partially offset the
potential pressure on gross margins, as a percentage of sales, caused by 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 and
administration costs. For the three and nine months ended January 31, 2002, SG&A
expenses, as a percentage of net sales, were 5.2% and 5.7%, as compared to 4.8%
and 6.5% for the three and nine months ended January 31, 2001. The increase for
the quarter ended January 31, 2002 compared to the quarter ended January 31,
2001 is due to the effect of fluctuations in foreign currencies. The
year-to-date decrease in SG&A expenses as a percentage of sales from fiscal 2001
to fiscal 2002 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. 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 nine months
ended January 31, 2002, as compared to the three and nine months ended January
31, 2001, 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 nine months ended January 31, 2002,
goodwill amortization reduced net income by approximately $358,000 and $1.1
million and earnings per share by approximately $.11 and $.34 per share,
respectively.
OPERATING INCOME
Operating income for the three and nine months ended January 31, 2002 was $5.9
million and $11.8 million, compared to operating income of $6.7 million and $6.0
million for the three and nine months ended January 31, 2001. The decrease in
operating income for the quarter ended January 31, 2002 is primarily the result
of reduced software sales during this period and the corresponding reduction in
gross margin dollars, as well as the impact of foreign currency fluctuations,
offset by improved
9
operations in the Contact Services business. The increase in operating income
for the nine months ended January 31, 2002 is due to the increase in software
sales during this period and the resulting increase in gross margin dollars,
improved operations in the Contact Services business and the Company's ability
to control its operating costs. In addition, $1.3 million of nonrecurring
charges related to the Contact Services business were incurred in the October
31, 2000 quarter.
UNREALIZED GAIN 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 January 31, 2002, the Company recorded an unrealized gain of
approximately $476,000 to adjust this security to its market value of $6.48 per
share at January 31, 2002. The market price of the security was $5.25 per share
at March 8, 2002.
INCOME TAX EXPENSE
Effective May 1, 2001, the Company elected to treat certain of its foreign
subsidiaries as branches for Federal income tax purposes, resulting in a deemed
liquidation of these subsidiaries for Federal income tax purposes only. During
the quarter ended January 31, 2002, the Company recorded a tax benefit of $3.4
million relating to tax deductions taken for accumulated losses recognized on
the deemed liquidation of these subsidiaries. The liquidations are for tax
purposes only, and do not reflect any change in the Company's manner of
conducting business or scope of operations in its foreign locations.
Excluding the impact of the $3.4 million tax benefit discussed above, the
Company's effective tax rate was approximately 39% for the nine months ended
January 31, 2002 as compared to 40% for the nine months ended January 31, 2001.
The decrease in the Company's effective tax rate is primarily due to the impact
of its international operations.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2002, the Company had approximately $10.1 million in cash and
cash equivalents and had no 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
"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 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 January 31, 2002, the Company had approximately $71 million of borrowing
availability under the Facility.
The increase in trade accounts receivable and trade accounts payable from April
30, 2001 to January 31, 2002 is due to the increased sales in the January 31,
2002 quarter and the timing of collections of accounts receivable and payments
to the Company's vendors. At January 31, 2002 and April 30, 2001, accounts
receivable represented approximately 52 and 56 days of historical sales,
respectively.
For the nine months ended January 31, 2002, the Company's operating activities
provided $4.4 million of cash compared to $21.9 million of cash provided by
operations during the nine months ended January 31, 2001. The decrease in cash
provided by operations is primarily due to the required timing of payments to
the Company's largest vendors, partially offset by the increase in operating
income for the nine months ended January 31, 2002.
10
The increase in furniture, equipment and leasehold improvements from April 30,
2001 to January 31, 2002 reflects approximately $3.3 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 March 8, 2002
the Company had repurchased 1,493,400 shares of Common Stock, for a 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 $700,000 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 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 replaced the former
currencies of the participating countries in January 2002. Use of the Euro has
not, and is not expected to, materially impact the Company's 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.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three and nine months ended January 31,
2002 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.
12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - IBM Business Partner Agreement, dated January 1, 2002,
between International Business Machines Corporation and Software
Spectrum, Inc.
Exhibit 10.2 - Microsoft Large Account Reseller Agreement, dated
October 1, 2001, between MSLI, G.P. and the Company.
Exhibit 10.3 - Microsoft Enterprise Software Advisor Service Agreement,
dated October 1, 2001, between MSLI, G.P. and the Company.
Exhibit 10.17(c) - Amendment No. 2 to the Software Spectrum, Inc. 1998
Long Term Incentive Plan.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended
January 31, 2002.
13
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: March 15, 2002 By: /s/ James W. Brown
-------------------------------------
James W. Brown
Vice President and Chief Financial
Officer (Principal Financial
Officer and Principal Accounting
Officer)
14
EXHIBIT INDEX
<Table>
Exhibit 10.1 IBM Business Partner Agreement, dated January 1, 2002, between
International Business Machines Corporation and Software
Spectrum, Inc.
Exhibit 10.2 Microsoft Large Account Reseller Agreement, dated October 1,
2001, between MSLI, G.P. and the Company.
Exhibit 10.3 Microsoft Enterprise Software Advisor Service Agreement, dated
October 1, 2001, between MSLI, G.P. and the Company.
Exhibit 10.17(c) Amendment No. 2 to the Software Spectrum, Inc. 1998 Long Term
Incentive Plan.
</Table>