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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996 .
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19349
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SOFTWARE SPECTRUM, INC.
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(Exact name of registrant as specified in its charter)
Texas 75-1878002
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(State or other jurisdiction of (I.R.S. Employer/Identification No.)
incorporation or organization)
2140 Merritt Drive, Garland, Texas 75041
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(Address of principal executive offices) (Zip code)
(214) 840-6600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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At August 6, 1996, the Registrant had outstanding 4,293,196 shares of its
common stock, par value $.01 per share.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I - FINANCIAL INFORMATION 3
Item 1. Consolidated Financial Statements.
Consolidated Balance Sheets-
June 30, 1996 and March 31, 1996 4
Consolidated Statements of Income-
Three Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows-
Three Months Ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results Of Operations 10
PART II - OTHER INFORMATION 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I - FINANCIAL INFORMATION
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, March 31,
1996 1996
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(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 10,339 $ 28,123
Short-term investments -- 8,407
Trade accounts receivable, net of
allowance for doubtful accounts 126,029 73,875
Inventories 20,644 12,937
Prepaid expenses 11,027 10,092
Other current assets 1,780 2,435
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Total current assets 169,819 135,869
Furniture, equipment and leasehold
improvements, at cost 22,563 17,033
Less accumulated depreciation and amortization 8,680 7,866
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13,883 9,167
Intangibles and other assets 54,901 5,144
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$238,603 $150,180
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,500 $ --
Trade accounts payable 111,467 61,231
Other current liabilities 22,323 15,586
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Total current liabilities 135,290 76,817
Long-term debt, less current maturities 28,500 --
Shareholders' equity
Preferred stock, par value $.01;
authorized, 400,000 shares; issued
and outstanding, none -- --
Common stock, par value $.01;
authorized, 10,000,000 shares; issued
4,325,339 shares at June 30 and
4,241,384 shares at March 31 43 42
Additional paid-in capital 38,115 36,394
Retained earnings 37,197 37,465
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75,355 73,901
Less treasury stock at cost; 34,175 shares
at June 30 and 34,026 shares at March 31 542 538
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Total shareholders' equity 74,813 73,363
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$238,603 $150,180
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See notes to consolidated financial statements.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended
June 30,
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1996 1995
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Net sales $ 160,879 $ 91,397
Cost of sales 142,205 78,965
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Gross margin 18,674 12,432
Selling, general and
administrative expenses 17,609 9,640
Depreciation and amortization expense 1,320 606
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Operating income (loss) (255) 2,186
Interest income (expense), net (107) 261
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Income (loss) before income taxes (362) 2,447
Income tax expense (benefit) (106) 832
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Net income (loss) $ (256) $ 1,615
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Earnings (loss) per share $ (0.06) $ 0.38
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Weighted average shares
outstanding 4,288 4,226
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See notes to consolidated financial statements.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
June 30,
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1996 1995
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Operating activities
Net income (loss) $ (256) $ 1,615
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for bad debts 525 79
Depreciation and amortization 1,320 606
Changes in operating assets and liabilities
Increase in accounts receivable (43,958) (2,251)
Increase in inventories (5,548) (5,332)
Increase in prepaid expenses
and other assets (975) (1,864)
Increase in accounts payable and
other current liabilities 39,678 9,205
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Net cash provided by (used in) operating activities (9,214) 2,058
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Investing activities
Sales (purchases) of short-term investments, net 8,407 (98)
Purchase of furniture, equipment and
leasehold improvements (3,770) (843)
Purchase of subsidiaries, net of cash acquired (43,277) --
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Net cash used in investing activities (38,640) (941)
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Financing activities
Borrowings on long-term debt 30,000 --
Other 70 --
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Net cash provided by financing activities 30,070 --
Increase (decrease) in cash and cash equivalents (17,784) 1,117
Cash and cash equivalents at beginning of period 28,123 11,543
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Cash and cash equivalents at end of period $ 10,339 $ 12,660
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Supplemental disclosure of cash paid
during the period
Income taxes $ 177 $ 382
Interest 293 11
See notes to consolidated financial statements.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended June 30, 1996
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Software
Spectrum, Inc. (the "Company") and its wholly-owned subsidiaries, Spectrum
Integrated Services, Inc. (d.b.a. Software Spectrum Technology Services Group),
Software Spectrum Canada, Ltd., Software Spectrum Pty, Ltd., Software Spectrum
Limited and Software Spectrum B.V. 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 June 30,
1996, and the consolidated results of operations and cash flows for the three
months ended June 30, 1996 and 1995 have been made. In addition, all such
adjustments made, in the opinion of management, 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 generally accepted accounting principles
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 March 31, 1996,
included in the Company's 1996 Annual Report on Form 10-K.
NOTE B - BUSINESS ACQUISITIONS
On April 2, 1996, the Company acquired substantially all of the assets of the
New Zealand business operations of Essentially Group Limited and all of the
outstanding shares of capital stock of Essentially Group (Australia) Limited,
privately held information technology companies in New Zealand and Australia.
The purchase price approximated $6 million, subject to adjustment, including
cash of $4.3 million and the issuance of 80,363 shares of the Company's common
stock. The acquisition has been accounted for using the purchase method of
accounting.
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NOTE B - BUSINESS ACQUISITIONS (CONTINUED)
The estimated fair values of the assets acquired, liabilities assumed and stock
issued in connection with the purchase were $15.8 million, $9.6 million and
$1.7 million, respectively. The excess of the purchase price over the fair
values of the net assets acquired was $5 million and is being amortized on the
straight-line method over 20 years. The operating results of the acquired
businesses have been included in the consolidated statements of income from the
date of acquisition. Pro forma operating results, giving effect to the
acquisition as though it had occurred at the beginning of fiscal 1996 or 1995,
are not presented because they are not materially different than the Company's
actual results.
On May 13, 1996, the Company acquired certain operating assets of the
corporate, government, and educational ("CGE") division of Egghead, Inc.
("Egghead"), a leading supplier of microcomputer software to organizations in
North America, for approximately $45 million in cash. The acquisition has been
accounted for using the purchase method of accounting.
The estimated fair values of the assets acquired and liabilities assumed were
$51 million and $6 million, respectively. The excess of the purchase price
over the fair values of the net assets acquired was $45 million and is being
amortized on the straight-line method over 20 years. The operating results of
the acquired business have been included in the consolidated statements of
income from the date of acquisition. The following unaudited pro forma
information presents summary consolidated results of operations of the Company
and the CGE division as if the acquisition had occurred at the beginning of
each period presented.
Three Months
Ended June 30,
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(in thousands, except per share amounts)
1996 1995
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Net sales $ 200,000 $ 181,000
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Net income (loss) $ (600) $ 1,500
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Earnings (loss) per share $ (0.14) $ 0.35
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These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made as of these dates or of results which may occur in the future.
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NOTE C - FINANCING ARRANGEMENT WITH BANK
Long-term debt consists of a term bank loan due in quarterly installments
beginning June 30, 1997 through March 31, 2001 ranging from $1.5 million to
$2.25 million. The note bears interest at a variable rate, which approximated
6.9% at June 30, 1996, subject to quarterly adjustment, based on certain
financial ratios of the Company.
The financing arrangement also includes a $60 million revolving credit facility
which expires in May 1999. No amounts were outstanding under the revolving
credit facility at June 30, 1996. The revolving credit facility bears interest
at prime or LIBOR plus a variable rate, based on certain financial ratios of
the Company.
Until certain financial ratios are maintained for specified periods, borrowings
under the financing arrangement are secured by liens on accounts receivable,
inventory, the pledge of all the Company's shares in Spectrum Integrated
Services, Inc. and the pledge of 66.67% of the Company's shares in its foreign
subsidiaries.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
The following table sets forth, for each of the periods indicated, consolidated
statement of income data expressed as a percentage of net sales for the period
specified.
Percentage of Net
Sales for Three Months
Ended June 30,
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1996 1995
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Net sales 100.0% 100.0%
Cost of sales 88.4 86.4
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Gross margin 11.6 13.6
Selling, general and
administrative expenses 10.9 10.5
Depreciation and amortization 0.8 0.7
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Operating income (loss) (0.1) 2.4
Interest income (expense), net (0.1) 0.3
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Income (loss) before income taxes (0.2) 2.7
Income tax expense (benefit) (0.1) 0.9
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Net income (loss) (0.1)% 1.8%
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NET SALES:
The Company's revenues are derived primarily from the sale of PC software,
peripheral and hardware products and technology services in North America,
Europe and the Asia/Pacific region. For the three months ended June 30, 1996,
sales increased by 76% over sales for the corresponding quarter in 1995,
reflecting the impact of the Company's recent acquisitions.
In April 1996, the Company acquired substantially all of the assets of the New
Zealand business of Essentially Group Limited and all of the outstanding shares
of capital stock of Essentially Group (Australia) Limited, information
technology companies in the Asia/Pacific region. The acquisition of
Essentially Group provided the Company with a business presence in the
Asia/Pacific market and completes the Company's global operations strategy
which includes maintaining operations centers in North America, Europe and
Asia/Pacific to service the major worldwide desktop technology markets. During
the June 1996 quarter, the Company expanded its presence in the Asia/Pacific
region by opening a sales office in Singapore.
In May 1996, the Company acquired certain operating assets of the corporate,
government and educational ("CGE") division of Egghead, Inc., a leading
supplier of PC software products to organizations in North America. With the
CGE acquisition, the Company
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significantly increased its market presence in North America. For the quarter
ended June 1996 and 1995, the pro forma combined sales of the Company and the
CGE division were $200 and $181 million, respectively.
For the quarter ended June 1996, sales of PC software increased 71%. The
Company sells PC software through volume license and maintenance ("VLM")
agreements, or right to copy arrangements, and ships full-packaged PC software
products from its distribution centers or through distributors. The Company
serves as a designated service provider for VLM agreements which are frequently
used by customers seeking to standardize desktop software applications and,
consequently, may involve significant quantities of unit sales for each
customer at lower per unit prices than full-packaged software products. Sales
of software through VLM agreements represented approximately 50% and 40% of
sales for the quarters ended June 30, 1996 and 1995, respectively.
For the quarter ended June 1996, revenue from technology services provided
through the Company's Technology Services Group increased by more than 100% as
compared to the quarter ended June 1995. As of June 30, 1996, the Company had
increased the number of its technology services offices to 20 in North America,
Europe and the Asia/Pacific region. Because fee-based services revenue has
grown from a relatively small base, as compared to the Company's sales of PC
software, fee-based services continued to represent less than 5% of the
Company's overall sales while representing approximately 16% of the Company's
gross margin for the quarter ended June 1996.
The Company believes that increases in revenue depend upon the Company's
ability to maintain the customer base of the acquired businesses, to continue
to grow its market share and to capitalize on continued growth in desktop
technology markets around the world.
For the quarter ended June 1996, fluctuations in foreign currencies against the
U.S. dollar did not have a significant effect on the Company's operations.
GROSS MARGIN:
Overall gross margin as a percentage of net sales was 11.6% and 13.6% for the
quarters ended June 30, 1996 and 1995, respectively. The decline in overall
gross margin as a percentage of sales reflects the change in the Company's
sales mix as a result of the acquisition of the CGE Division of Egghead.
Because substantially all of the revenue from former CGE customers was derived
from PC software sales, which have a lower gross margin than do the Company's
technology services offerings, the Company's overall gross margin declined in
the June 1996 quarter.
In addition, for the quarter ended June 1996, gross margin on the sale of PC
software declined to 10.1%, as compared to 11.9% for the quarter ended June
1995. In connection with the acquisition of the CGE division of Egghead, the
Company entered into an agreement (the "Fulfillment Agreement") with Egghead
whereby Egghead continued to purchase product and supply it on behalf of the
Company to the former CGE customers pending the implementation of the Company's
information systems to support the requirements of the former CGE customers.
Under the Fulfillment Agreement, the Company
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is incurring higher software costs than it expects to incur once it is servicing
the former CGE customers under its own supplier contracts and through its own
systems and facilities. The Company estimates the impact of this was
approximately $500,000 of increased software cost in the June 1996 quarter. The
Company expects to see PC software margins improve as it consolidates all of its
purchasing activities under the Company's supplier contracts and ceases using
Egghead fulfillment services in mid-September 1996. The decline in PC software
gross margin also reflects the growth in sales of PC software through VLM
agreements which generally have lower gross margins as compared to sales of
full-packaged software products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses include the costs of the Company's
sales and marketing organization and purchasing, distribution and
administration costs. For the quarter ended June 1996, selling, general and
administrative expenses, as a percentage of net sales, were 10.9%, compared to
10.5% for the corresponding quarter in 1995. The increase in selling, general
and administrative expenses as a percentage of sales reflects certain
transition costs, including temporary staffing, travel expense and costs
associated with systems implementation, totaling approximately $1.8 million,
incurred in the June 1996 quarter in connection with the Company's recent
acquisitions. Ignoring these identified transition costs, selling, general and
administrative expenses as a percentage of sales would have been 9.8% for the
June 1996 quarter.
The Company anticipates that its operating results for fiscal 1997 may be
negatively impacted by continuing transition costs associated with integrating
its recent business acquisitions into the Company's overall operating
structure. Thereafter, the Company believes it may realize operating
efficiencies as a result of its larger size and increased market presence.
DEPRECIATION AND AMORTIZATION:
The increase in depreciation and amortization for the quarter ended June 1996,
as compared to June 1995, reflects amortization of goodwill recorded in
connection with the Company's recent business acquisitions. Most of the
purchase price for these acquisitions represents goodwill which the Company
began amortizing over a 20-year period in the June 1996 quarter.
INCOME TAX EXPENSE (BENEFIT):
The Company's effective tax rate for the quarter ended June 1996 was
approximately 29%, as compared to approximately 34% in the corresponding quarter
of the prior year. This decrease in the Company's effective tax rate reflects
the expected federal tax benefit of the June 1996 quarter's loss, net of state
tax expense.
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LIQUIDITY AND FINANCIAL CONDITION:
At June 30, 1996, the Company had approximately $10.3 million in cash and cash
equivalents. In May 1996, the Company replaced its credit facility with a $30
million term loan and a $60 million revolving credit line. The new facility is
initially secured by accounts receivable and inventory and a pledge of the
stock of the Company's domestic and foreign subsidiaries. In May 1996, the
Company utilized its term loan to fund a portion of the acquisition of the CGE
division of Egghead, Inc. The principal amount of the term loan is due in
quarterly installments beginning in June 1997 through March 2001, increasing
from $1.5 million to $2.25 million. In July 1996, the Company began borrowing
under its revolving credit line which expires in May 1999.
The increase in trade accounts receivable from March 31, 1996 to June 30, 1996,
reflects the increase in net sales for the period ended June 30, 1996. Terms
on the Company's accounts receivable are generally net 30 days from date of
invoice or 10 days in the case of summary periodic billings to customers. At
June 30, 1996 and March 31, 1996, accounts receivable represented approximately
58 and 63 days of historical sales, respectively. The Company generally
carries inventory adequate to meet product sales levels for a period of
approximately one month. The increase in inventory as of June 30, 1996,
compared to March 31, 1996, results from the recent acquisitions. The Company
also expects its inventory to increase as the Company increases its stocking
levels in order to service its customers at the conclusion of the Egghead
Fulfillment Agreement by mid-September 1996. The increase in trade accounts
payable from March 31, 1996 to June 30, 1996, reflects the increased size of
the Company as a result of its recent business acquisitions.
For the quarter ended June 1996, the Company used $9.2 million of cash in its
operations compared to $2.1 million of cash provided by operations in the June
1995 quarter. The increase in cash used in operations is primarily due to the
increase in accounts receivable reflecting the increase in sales resulting from
the Company's recent acquisitions.
The increase in furniture, equipment and leasehold improvements at June 30,
1996 reflects approximately $2 million of capital assets included in the recent
business acquisitions and approximately $3.5 million of capital expenditures
related to the Company's ongoing upgrade of its computer systems, expansion of
its Technology Services Group offices, and relocation and consolidation of its
United States distribution facilities to Louisville, Kentucky.
The Company expects that its cash requirements for fiscal 1997 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
This Management's Discussion and Analysis of Financial Condition includes
certain forward-looking statements of the Company including future market
trends, estimates regarding the economy and the software industry in general and
key performance indicators which impact the Company. In developing any
forward-looking statements, the Company makes a number of assumptions including
expectations for continued market
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growth, anticipated revenue and gross margin levels, and cost savings
and efficiencies. 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. The Company's Form 10-K
for the March 31, 1996 fiscal year, contains certain cautionary statements that
identify factors that could cause the Company's actual results to differ
materially from those in the forward-looking statements in this discussion.
INFLATION:
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
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PART II - OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit 10.1 - First Amendment to Credit Agreement and
Master Assignment and Acceptance dated as
of June 28, 1996 among Software Spectrum,
Inc., each of the banks or other lending
institutions which are a party thereto
and Texas Commerce Bank National
Association.
Exhibit 10.2 - Second Amendment to Credit Agreement
dated as of June 28, 1996 among Software
Spectrum, Inc., each of the banks or
other lending institutions which are a
party thereto and Texas Commerce Bank
National Association.
Exhibit 11.1 - Computation of Primary Earnings (Loss)
Per Share
Exhibit 11.2 - Computation of Fully-Diluted Earnings
(Loss) Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
During the three months ended June 30, 1996, a report on Form 8-K was
filed by the Company on April 2, 1996, reporting the Company's
acquisition of Essentially Group Limited, a report on Form 8-K was
filed by the Company on May 23, 1996, reporting the Company's
acquisition of the CGE Division of Egghead, Inc., and a report on Form
8-K/A was filed by the Company on July 25, 1996, disclosing the
Financial Statements of the CGE Division of Egghead, Inc.
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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.
August 14, 1996 By: /s/ Deborah A. Nugent
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Deborah A. Nugent, Vice President of Finance
(Principal Financial Officer and Principal
Accounting Officer)
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EXHIBIT INDEX
Exhibit 10.1 First Amendment to Credit Agreement and Master
Assignment and Acceptance dated as of June 28, 1996
among Software Spectrum, Inc., each of the banks or
other lending institutions which are a party thereto and
Texas Commerce Bank National Association.
Exhibit 10.2 Second Amendment to Credit Agreement dated as of
June 28, 1996 among Software Spectrum, Inc., each of
the banks or other lending institutions which are a party
thereto and Texas Commerce Bank National Association.
Exhibit 11.1 Computation of Primary Earnings (Loss) Per Share
Exhibit 11.2 Computation of Fully Diluted Earnings (Loss) Per Share
Exhibit 27 Financial Data Schedule
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