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EXHIBIT 13
SOFTWARE
SPECTRUM
ANNUAL REPORT 1997
[PICTURE]
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TABLE OF CONTENTS
Financial Highlights ............................................. 1
Letter to Our Shareholders ....................................... 2
Operations Review ................................................ 4
Questions and Answers ............................................ 14
Selected Consolidated Financial Data ............................. 17
Management's Discussion and Analysis
of Financial Condition and Results of Operations ............... 18
Audited Financial Statements ..................................... 22
Report of Independent Certified Public Accountants ............... 31
Quarterly Financial Data and Market Information .................. 32
Corporate Directory ............................... inside back cover
[SOFTWARE SPECTRUM LOGO]
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CORPORATE PROFILE
Software Spectrum is a leading worldwide supplier of personal computer software
and technology services to organizations. Focused on delivering technology to
the workplace, Software Spectrum is committed to providing superior customer
service while maintaining a cost-efficient operating structure. The Company
provides customers with a wide variety of business software products, volume
software licensing and assistance in the design, implementation, deployment,
and ongoing support of their personal computing strategies. The Company has
sales locations, operations centers and technology services offices in North
America, Europe, and Asia/Pacific. Visit Software Spectrum's Web site at
www.softwarespectrum.com.
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
YEARS ENDED
YEAR ENDED MARCH 31,
APRIL 30, --------------------------------------
1997 1996 1995 1994 1993
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STATEMENT OF OPERATIONS DATA
Net sales $796,285 $398,501 $352,141 $283,063 $219,471
Net income (loss) (845) 7,366 8,788 7,004 6,282
Earnings (loss) per share (.20) 1.73 2.08 1.66 1.70
AS OF
AS OF MARCH 31,
APRIL 30, --------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
BALANCE SHEET DATA
Working capital $ 31,673 $ 59,052 $ 58,407 $ 50,619 $ 46,712
Total assets 270,441 150,180 124,698 94,255 69,387
Shareholders' equity 73,939 73,363 65,834 57,041 49,801
NET SALES
(In millions)
[GRAPH]
In fiscal 1997, the Company changed its fiscal year-end from March 31 to April
30.
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DEAR SHAREHOLDERS:
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FISCAL 1997 WAS A MOST IMPORTANT AND CHALLENGING TIME IN OUR COMPANY'S HISTORY,
AS WE INTEGRATED TWO STRATEGIC ACQUISITIONS INTO OUR COMPANY--
one which doubled our size in North America and the other which completed our
global operations strategy by establishing a presence for us in Asia/Pacific.
At the same time, we continued to aggressively expand our Technology Services
Group and our European business. Fiscal 1997 was a success from a long-term,
strategic perspective, but disappointing from a financial results perspective.
For the year ended April 30, 1997, we almost doubled our sales to $796 million,
compared to $399 million in fiscal 1996, reflecting the impact of the Company's
acquisitions that took place in April and May 1996. At the same time,
identifiable transition costs related primarily to our acquisition of the
corporate, government and education (CGE) division of Egghead, Inc. and
operating losses in Asia/Pacific resulted in a loss per share of $.20 for 1997.
In fiscal 1997, we realized exceptional sales increases in each aspect of our
business, including sales of software to large organizations, as well as
mid-sized and small customers. Because of the CGE acquisition, our large
account division saw the greatest gain in software sales. And, despite both the
difficulty we encountered in integrating our acquisitions and the effect of
declining gross margins on product sales, our product business continued to be
profitable throughout the year and provided support for our strategic
investments in our Technology Services Group and our international expansion.
Revenue growth from our Technology Services Group exceeded 135% in fiscal 1997,
as the number of our consulting offices increased from ten to twenty-four
during the year. In the fourth quarter of fiscal 1997, the Technology Services
Group generated a contribution to overhead, reflecting the positive impact from
our maturing consulting offices and growth in the Technology Support Center,
which provides fee-based telephone support on behalf of software publishers and
corporate customers. Gross margins, as a percent of sales, from our technology
services business are much higher than on product sales. And, as more of our
existing consulting sites mature over time, our services operating results are
anticipated to continue to improve. Our rapid expansion of this division in the
past two years allows us to compete aggressively within the technology services
market. Our Technology Services Group is an important component of our business
and one that will play a significant role in our future.
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For fiscal 1997, sales outside the United States totaled $106 million, evidence
that today we are truly a global company. Our operating results were negatively
impacted by a sizable operating loss in Asia/Pacific reflecting slow sales and
excess operating costs in the region. Beginning in November 1996, we
accelerated our plans to adjust the business model in Asia/Pacific to more
closely mirror the lower cost structure in our North American operations and in
the fourth quarter of fiscal 1997, saw improving utilization of our technology
services personnel in the region. As a result, our operating loss for
Asia/Pacific decreased late in the fiscal year and we are continuing to see
improvement as we enter fiscal 1998.
Our focus for the coming year encompasses four key areas. First, it is
essential that we grow our global sales. Our growth will mirror the demand by
our customers for expertise in complex software volume licensing and
distributed computing infrastructures. Second, we must improve our operating
results in both Europe and Asia/Pacific and decrease the investments these
regions have required. Third, we must continue to develop our consulting
practice to ensure our newer Technology Services Group sites continue to move
toward profitability as they mature this year.
And, finally, we must focus on our operating structure to realize the
efficiencies of our larger organization. In the past, we have had a track
record of achieving sales growth while managing a cost-effective operating
structure. With our transition year behind us, fiscal 1998 will be a year of
returning to these traditions.
And, as we look to the future, electronic commerce capabilities become
increasingly important. The proliferation of the Internet and corporate
intranets provide the opportunity to expand our role in servicing our customers
through Web-based commerce, and in helping customers establish and implement
their own electronic commerce strategies through our technology division.
With the talent and commitment of our employees throughout the world, and the
continued support and confidence of our shareholders, I continue to be
optimistic about our future prospects. Our strategy, and the important steps we
have taken, position us well to take advantage of marketplace opportunities.
/s/ JUDY O. SIMS
[PICTURE] Judy O. Sims
Chief Executive Officer
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IS YOUR TECHNOLOGY AT WORK?
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TODAY'S IT DEPARTMENTS REQUIRE INDIVIDUALIZED SERVICE AND TECHNICAL KNOW-HOW.
The advancement of computing technology prompts corresponding demands for new
products, additional support from outside service providers, and migration to
better technologies without sacrificing access to legacy data.
Software Spectrum continues to meet the evolving technology requirements of
Fortune 500 companies, a growing base of multinational organizations, and
thousands of mid-sized customers from every industry. The Company also serves
the government and educational market segments with custom product selection
and services.
When purchasing software, the overall needs of large organizations have not
changed. Foremost, they seek guidance in volume purchasing in order to derive
the best price, product selection and upgrade opportunities for their
particular business. Software Spectrum offers its volume licensing customers
expert decision support and management services that help them conquer the
complexity of distributed software licensing and maintenance. A licensing
consultant, who is recognized by the Software Publishers Association as a
Certified Software Manager, analyzes a large customer's software base and
buying trends, anticipates customer concerns, proposes cost-effective options,
and develops an individualized strategy for licensing software at a good value.
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The volume licensing expertise held by Software Spectrum, coupled with the
Company's global capabilities, eases customers' administrative burdens by
providing easy access to coordinated services for multinational organizations,
including current account information, automated reports, and multi-currency
pricing.
What has changed? Software Spectrum is able to provide the assistance needed by
large organizations even faster. This year, the Company will offer selected
large customers with volume purchasing agreements their own, secure catalog on
the Company's Web site, which can be linked to the customer's in-house
intranet. From around the globe, customers will be able to access a wide array
of information on their licensing agreements, pricing and product selections.
With the acquisition of Egghead's CGE division, Software Spectrum was provided
with an established customer base in both the education and government markets.
The Company's software and services expertise is meeting the information
technology needs of learning institutions and educators, as well as government
agencies.
Fn order to better serve both the education and government markets, Software
Spectrum will provide online catalogs for each of these customer groups.
Federal, state and local government agencies have needs similar to corporate
customers--they expect fast service and extensive product selection, as well as
thorough account reporting and guidance on the smartest way to buy. Software
Spectrum meets these demands every day. Government agencies can easily
reference, select and purchase personal computer software products from
Software Spectrum.
For several years, Software Spectrum has helped organizations reduce their
computing costs by providing extensive software management products and
services. During fiscal 1997, Software Spectrum expanded its consulting
services to help customers identify where and how technology and best practices
can be implemented to reduce the cost of managing and supporting enterprise
networks.
Providing software products and technology services that empower organizations
to put desktop technology to work for them is what Software Spectrum has always
done best. The Company helps customers manage their most challenging computing
tasks, such as embracing emerging technologies, integrating systems, and
reducing complexity to control cost.
[PICTURE]
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ELECTRONIC COMMERCE IS RESHAPING THE MARKETPLACE.
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THE CHALLENGE IS TO STAY AHEAD OF THE TECHNOLOGY SO CUSTOMERS CAN STAY
COMPETITIVE.
Electronic commerce has become critical to the short- and long-term success of
most organizations. Whether it's online advertising, extranets linking vendors
to corporations, or selling merchandise to customers around the globe,
electronic commerce is transforming the global marketplace.
The success and profitability of today's organizations are directly dependent
upon distributed computing and Internet/intranet technologies. To realize the
greatest benefit from electronic commerce, organizations must choose
technologies that extend existing infrastructure and plan their computing
strategies to address future challenges. Software Spectrum adds value by
providing expert decision support and deployment expertise that helps customers
successfully embrace the latest electronic commerce technologies.
For years, Software Spectrum has consistently employed electronic commerce
technologies as a means to provide reporting and procurement services for
customers and suppliers. However, electronic commerce has changed dramatically
since it was first implemented by the Company. Today, Software Spectrum's
electronic commerce strategy is to help customers evolve and extend existing
infrastructure and applications to optimize their use of the Internet and
intranets.
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Through early implementation and the development of certified expertise,
Software Spectrum has established a leadership position in providing Internet
commerce solutions employing Microsoft and IBM/Lotus Internet and intranet
technologies. These new products enable easy navigation, superior graphics and
better service to online customers.
Convenient purchasing via the Company's state-of-the-art online catalog allows
customers at mid-sized and small organizations to access extensive information
on products and services, purchase products via the Internet, and ultimately,
receive products through electronic software distribution. Software Spectrum's
online catalogs offer mid-sized customers overall value, including service
options, such as technology training, planning and deployment workshops, and
technical support. Expert technology consulting services, sound licensing
advice, and global access to account information continue to be the highest
priority for Software Spectrum's customers.
Our advanced technology solutions help businesses employ leading technologies
to reduce cost, improve communication, and provide a significant new medium for
competing in a global marketplace. Software Spectrum's certified consultants
help customers build intranet information centers to enhance employee
communications. The Company can also extend intranets to create "extranets"
- --private business-to-business Web links to customers and suppliers.
Software Spectrum's online catalogs provide security authorization, product
searches, order placement, online registration for training classes and
seminars, and extensive product information. Customer-specific online catalogs
include a wealth of information for large organizations that purchase product
via volume licensing agreements. These customers can easily access their
specific volume licensing information, purchasing reports and more. Software
Spectrum is also committed to bringing the advantages of electronic commerce to
all customers wherever they do business around the world.
Through these catalog development initiatives, Software Spectrum will continue
to lead the industry in developing business-to-business electronic services
that adopt emerging technologies, such as the Internet, to serve unique
customer requirements. During fiscal 1998, the Company will continue to
progress toward achieving its strategic goals of serving the world market, and
offering customer-specific and market-specific catalogs that supply electronic
purchasing and electronic software distribution (ESD) for multinational
organizations.
[PICTURE]
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FEW CORPORATIONS HAVE ALL THE IT EXPERTISE REQUIRED TO EMBRACE EMERGING
TECHNOLOGIES.
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INCREASING COMPLEXITY DRIVES RISING DEMAND FOR TECHNOLOGY SERVICES.
Network operating systems, client/server environments, groupware and messaging,
Internet/intranet systems--each aspect of distributed computing has become
increasingly complex. This complexity requires greater innovation, flexibility
and expertise from technology service providers.
Software Spectrum has grown its Technology Services Group considerably within
the last two years. This division of the Company's business is comprised of
over 600 consultants and twenty-four consulting offices throughout North
America, Europe and Asia/Pacific. Our consultants address the rising demand for
expertise in planning, deploying and managing complex distributed computing
solutions and supplement our clients' in-house IT resources.
Software Spectrum has created separate, worldwide consulting practices, one
focused exclusively on Microsoft(R) solutions, and one focused on
IBM(R)/Lotus(R) solutions. The services and solutions are provided by certified
consultants who have developed extensive expertise in deploying advanced
technologies from the world's largest software publishers.
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Because of the demand to grow these practices, Software Spectrum has founded
the Institute for Microsoft Technology and the Institute for IBM/Lotus
Technology. The Institutes provide advanced training for technical
certification, as well as service delivery methodology and advanced consulting
skills, providing consultants with the skills to develop and deploy complex
enterprise solutions.
Software Spectrum is a recognized industry leader in assisting customers with
Microsoft Systems Management Server (SMS) and Microsoft Exchange solutions.
This expertise, coupled with the Company's worldwide expansion, has enabled
Software Spectrum to provide advanced solutions that deliver global benefits
for multinational customers. One example is a customer with headquarters in The
Netherlands that requested technology services after purchasing products from
Software Spectrum. The customer, a software publisher that develops
applications for Windows(TM) platforms, was in the process of reengineering
their worldwide network infrastructure and required assistance in migrating to
a 32-bit Microsoft-centric environment. Software Spectrum worked with the
customer's European headquarters, as well as 15 other offices throughout North
America, to implement an international conversion and deployment of Microsoft
NT(TM) Server, Exchange(TM) Server, SMS(TM) and Outlook(TM). This migration,
which was successfully accomplished in three months, now provides a robust
network and communications environment that extends the value of the customer's
IT assets and prepares their infrastructure for tomorrow's global information
networks.
Software Spectrum helps customers drive down computing cost and boost the value
of their IT assets by moving to a managed environment. Reduced cost and
enhanced value are the result of the Company's holistic approach addressing
people, processes, and technology. Employing a proven methodology, Software
Spectrum helps customers strategically assess their computing environment, plan
a technology-driven management strategy, and build solutions that provide early
return on investment. Software Spectrum empowers customers to implement a
strategic management plan that is based on accurate information and delivers
measurable, validated results.
Few organizations have all the IT expertise required to maintain and support
their computing environments. Timely, cost-effective technical support, such as
that offered by Software Spectrum's Technology Support Center, has become an
increasingly important component of many organizations' computing solutions.
Our Technology Support Center experienced significant growth this year,
successfully meeting the rising demand for desktop and systems level support
for today's advanced technologies.
The trend of increasing complexity in desktop computing will continue.
Organizations must make decisions today that will affect their capabilities for
years to come. As they embrace new technologies, customers must also preserve
access to vast amounts of information in legacy systems. Software Spectrum's
technology experts provide comprehensive services that help organizations
derive optimal value from their technology assets.
[PICTURE]
LINK SIMPSON,
President,
Technology Services Group
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GLOBAL COMMERCE MUST SURMOUNT TRADITIONAL BOUNDARIES.
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MEETING THE DIVERSE REQUIREMENTS OF CUSTOMERS AROUND THE WORLD.
For years, multinational customers have managed their PC environments at
locations around the globe without the advantage of centralized procurement or
consolidated reporting.
Now, as a result of the completion of Software Spectrum's global strategy, as
well as the worldwide integration of the Company's computing systems,
multinational customers have seamless access to products and services
throughout Europe and Asia/Pacific, as well as North America. Software Spectrum
is the supplier of choice for multinational organizations, providing
consolidated, cross-border procurement, licensing, tracking and reporting
capabilities. Customers around the world enjoy technical support in their own
languages, invoicing in their local currencies, and local access to technology
services.
Multinational customers can purchase products via volume licensing agreements
and leverage their purchasing power worldwide. Volume purchasing of standard
products reduces per-unit software prices, trims training and support costs,
and lays the foundation for increased savings through electronic software
distribution, automated technical support, and more efficient asset management.
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Software Spectrum's Assurance Services for volume licensing customers provide
remote sites with the same quality of support and services offered to the
organization's headquarters.
Throughout fiscal 1997, Software Spectrum reached a number of milestones in its
"follow the sun" strategy. In addition to establishing sites in Australia, New
Zealand, Singapore and Hong Kong, the Company entered into a joint venture with
Uchida Yoko of Japan, giving Software Spectrum a presence in the Japanese
marketplace as Uchida Spectrum.
In fiscal 1997, sales in Europe doubled as compared to the previous year.
Software Spectrum's European operations now list their largest accounts as
European-based corporations, rather than subsidiaries of U.S. businesses. This
shift indicates increased awareness of the Company and an expanding market
share in Europe, factors that will play an important role in future growth of
our European operations.
Last year's expansion of Software Spectrum's Technology Services Group provides
the Company with offices strategically positioned around the globe in North
America, United Kingdom, Germany, Australia and New Zealand. These worldwide
offices offer multinational customers easy access to Software Spectrum
consultants--regardless of the customer's location. They also provide a local
services presence for Software Spectrum in each market where a technology
services office is located.
The benefits of Software Spectrum's global services can be seen in a solution
provided for one of the world's largest advertising agencies. As a global
company, the agency had reached the limits of their existing messaging
capabilities, encountering frequent difficulties in supporting the diverse
communication needs of their international offices. Software Spectrum provided
a global communications solution, deployed at the agency's headquarters in
London and, simultaneously, on the other side of the Atlantic in New York.
Software Spectrum's consultants converted the agency's systems, enabling
up-to-the-moment communication throughout international offices and with major
clients throughout the world--including scheduling, calendaring and messaging.
The benefit Software Spectrum provided through this global services engagement
was effective centralized management of the agency's enterprise-wide computing
resources.
Software Spectrum's strategic global expansion has earned the Company a
position as a leading supplier of personal computer products and services to
organizations worldwide. This position delivers superior benefits for present
and future customers, as well as the Company's shareholders, suppliers and
employees.
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LEADERSHIP AND SUPERIOR SERVICE REQUIRE A FAR-SIGHTED STRATEGY.
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STRATEGIC EVOLUTION EMPOWERS SOFTWARE SPECTRUM TO SERVE CHANGING CUSTOMER
NEEDS.
Fiscal 1997 has been a most important and challenging year in Software
Spectrum's history, as the Company completed and integrated two strategic
acquisitions--one that doubled the Company's size in North America, and another
which completed its global operations strategy by establishing a presence in
Asia/Pacific. At the same time, the Company continued to grow and expand its
technology services and European business while completing crucial development
and integration of internal computing systems. Software Spectrum has
established twenty-four technology consulting offices on four continents, and
trained or recruited hundreds of technical professionals to support this
expansion. Software Spectrum is now equipped to serve any size organization
seeking to acquire software products or technology services in most regions of
the world.
A continuing commitment to provide superior customer service fueled this
expansion during fiscal 1997. Although these achievements are significant, new
challenges and goals also lie ahead.
The Company's current customer base will increase its demand for technology
services, particularly in the area of Internet, intranet and extranet
technologies. Through the growth of the Technology Services Group, Software
Spectrum has positioned itself to meet these demands with certified expertise
and strategic relationships with the world's largest, most influential software
publishers.
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Customers outside North America will continue to increase their computing power
in order to prosper in the global economy. Software Spectrum's European and
Asia/Pacific offices, and its joint venture in Japan are ready to meet this
demand.
One of Software Spectrum's greatest assets is its commitment to anticipate
industry trends and prepare for those trends within its business model.
Software Spectrum's service strategy is to embrace emerging technologies and
anticipate technology-driven change in the services that customers demand. This
evolution has been evident in the development of expertise in software volume
licensing programs, in the Company's deployment of electronic commerce
capabilities long before Internet commerce developed in today's business world,
in the strategic global expansion that began in 1993 with entry into the
European market, and in the development of technology services to meet growing
customer needs for skilled technicians to augment in-house information
technology resources.
Fs Software Spectrum pursues its business objectives in sales, customer
service, cost management and profitability, strategic evolution will continue
to play a vital role in shaping the Company and determining its future
direction.
Software Spectrum's industry leadership is the product of stable management,
years of successfully servicing the changing needs of customers, and strong
long-standing relationships with all the leading software publishers. As
technology evolves, Software Spectrum remains committed to providing superior
customer service and value through timely delivery of products and quality
technical information and services.
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QUESTIONS & ANSWERS
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AN INTERVIEW WITH JUDY SIMS, CHAIRMAN AND CEO AND KEITH COOGAN, EXECUTIVE VICE
PRESIDENT AND COO
THE COMPANY HAD A LOSS IN FISCAL 1997. WHAT CAUSED THIS LOSS, AND LOOKING BACK
TODAY, DO YOU CONSIDER THE COMPANY'S ACQUISITIONS TO HAVE BEEN SUCCESSFUL?
Fiscal 1997 was strategic from a long-term perspective, but disappointing
from a financial results perspective. While we doubled the Company's sales as a
result of our strategic acquisitions, we had a net loss for the first time in
the Company's history. The loss reflected transition costs attributable to our
acquisitions and an operating loss in Asia/Pacific. Clearly, we are
disappointed with the loss for fiscal 1997. We were optimistic about how
quickly we could integrate our acquisitions into our existing business and,
instead, this transition proved to be a more difficult task than we
anticipated. With the transition year behind us, we are focusing on our
operating structure to realize the efficiencies of a larger organization.
Both of the acquisitions were key components in our strategy for continued
market leadership. The acquisition of the Egghead CGE division doubled our
market presence in North America, allowing us to capitalize on our areas of
greatest expertise--volume software licensing support and technology services.
The acquisition of the Essentially Group provided a technology services
presence in Asia/Pacific and was critical to our global expansion plan. It
completed our global operations center strategy, and enabled us to support the
needs of multinational customers around the world and around the clock. Our
strategy, and these important steps we have taken, position us well to take
advantage of marketplace opportunities.
WHAT ROLE DOES ELECTRONIC COMMERCE PLAY IN SOFTWARE SPECTRUM'S FUTURE?
For years Software Spectrum has employed electronic commerce technologies
as a means to provide reporting and procurement services for customers and
suppliers. However, electronic commerce has changed dramatically since it was
first implemented by the Company. Today, our electronic catalogs supplement our
traditional EDI capabilities to allow our customers to interact with us much
more effectively. The proliferation of the Internet and corporate intranets
provides the opportunity to expand our
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role in servicing our customers through Web-based commerce, and in helping
customers establish and implement their own electronic commerce strategies
through our technology services division.
SOFTWARE SPECTRUM'S SALES DOUBLED IN FISCAL 1997 AS A RESULT OF ITS
ACQUISITIONS. WHAT SALES GROWTH DO YOU HOPE TO SEE IN FISCAL 1998?
We did see exceptional sales increases in fiscal 1997 in each aspect of
our business, including sales of software to large organizations, as well as
mid-sized and small customers. Because of the CGE acquisition, our large
account sales showed the greatest gain in software sales. Growth in revenue
from our Technology Services Group exceeded 135% in fiscal 1997 as the number
of our consulting offices increased from ten to twenty-four during the year,
and as we grew our Technology Support Center.
Our focus for fiscal 1998 includes growing our global sales now that we
have stabilized the customer bases we acquired. We expect to see growth in all
components of our business, with the Technology Services Group and
international markets being the fastest growing.
WHAT ARE YOUR GOALS FOR FISCAL 1998?
In addition to growing our global sales, we must improve our operating
results in both Europe and Asia/Pacific and decrease the investments these
regions have required. We must continue to develop our consulting practice to
assure our younger TSG sites continue to move toward profitability as they
mature this year. And, finally, we must focus on our operating structure to
realize the efficiencies of a larger organization. In the past, we have had a
track record of managing both sales growth and a cost-effective operating
structure. With our transition year behind us, fiscal 1998 will be a year of
returning to these principles.
[PICTURE]
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CORPORATE DIRECTORY
DIRECTORS
Judy O. Sims
Chairman, Chief Executive Officer and President
Software Spectrum, Inc.
Mellon C. Baird
Chairman, Chief Executive Officer and President
Delfin Systems
Carl S. Ledbetter, Jr.
Chief Executive Officer
Hybrid Networks
Richard G. Sims
Senior Vice President, Software Spectrum, Inc.
Frank Tindle
Retired Founder, Software Spectrum, Inc.
EXECUTIVE OFFICERS
Judy O. Sims
Chairman, Chief Executive Officer and President
Richard G. Sims
Senior Vice President
Keith R. Coogan
Executive Vice President and Chief Operating Officer
Robert D. Graham
Vice President, Strategic Relationships and General Counsel
Roger J. King
Vice President, Sales and Marketing
Robert B. Mercer
Vice President and Chief Information Officer
Deborah A. Nugent
Vice President of Finance and Chief Financial Officer
Lisa M. Stewart
Vice President, Customer Operations
[PICTURE]
Back Row (L-R): Bob Mercer, Deborah Nugent, Roger King, Robert Graham
Front Row (L-R): Lisa Stewart, Keith Coogan, Judy Sims, Richard Sims
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SELECTED CONSOLIDATED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA Years Ended
(In thousands, except per share amounts) Year Ended March 31,
April 30, -----------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net sales $796,285 $398,501 $352,141 $283,063 $219,471
Gross margin 94,330 54,438 48,328 38,142 30,211
Operating income 1,816 10,163 12,938 10,562 9,594
Net income (loss) (845) 7,366 8,788 7,004 6,282
Earnings (loss) per share (.20) 1.73 2.08 1.66 1.70
Weighted average shares outstanding 4,314 4,260 4,217 4,216 3,690
As Of
As Of March 31,
BALANCE SHEET DATA April 30, ------------------------------------
(In thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital $ 31,673 $ 59,052 $ 58,407 $ 50,619 $ 46,712
Total assets 270,441 150,180 124,698 94,255 69,387
Shareholders' equity 73,939 73,363 65,834 57,041 49,801
In fiscal 1997, the Company changed its fiscal
year-end from March 31 to April 30.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues are derived primarily from the sale of PC software
products and technology services in North America, Europe and Asia/Pacific. The
Company also sells peripheral and hardware products in the Asia/Pacific region.
The Company sells PC software applications through volume license and
maintenance ("VLM") agreements, or right to copy arrangements, and
full-packaged PC software products either from its distribution centers or
through third party distributors. With the continued increase in sales of
software applications through VLMs, the third month of each calendar quarter
has come to represent close to 50% of the Company's sales volume in recent
quarters. In 1997, the Company changed its fiscal year end from March 31 to
April 30 in order to better match the Company's fiscal year and quarter ends
with its business cycles.
In April 1996, the Company acquired substantially all of the assets 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, at a purchase price of $6.3 million. 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 and the
needs of its customers who do business globally.
In May 1996, the Company acquired certain operating assets of the
corporate, government and education ("CGE") division of Egghead, Inc., a
leading supplier of PC software products to organizations in North America at a
purchase price of $45 million. With the CGE acquisition, the Company
significantly increased its market presence in North America. For fiscal 1997
and 1996, the pro forma combined sales of the Company and the CGE division were
$808 million and $762 million, respectively. The change in the Company's year
end will provide enhanced comparability between fiscal 1997 and 1998, as the
financial impact of the Company's May 1996 acquisition of the CGE division, is
now reflected across each quarter of fiscal 1997.
Throughout this discussion, "fiscal 1997" refers to the fiscal year ended
April 30, 1997. "Fiscal 1996" and "fiscal 1995" refer to the fiscal years ended
March 31, 1996 and 1995, respectively.
Percentage Of Net Sales
For Years Ended
--------------------------------------- Year To Year Change
April 30, March 31, March 31, --------------------------
1997 1996 1995 1996 to 1997 1995 to 1996
----- ----- ----- --------------------------
Net sales 100.0% 100.0% 100.0% 99.8% 13.2%
Cost of sales 88.2 86.3 86.3 104.0 13.2
----- ----- -----
Gross margin 11.8 13.7 13.7 73.3 12.6
Selling, general and
administrative expenses 10.6 10.4 9.4 104.4 25.1
Depreciation and amortization 1.0 .7 .6 176.3 23.2
----- ----- -----
Operating income .2 2.6 3.7 (82.1) (21.4)
Interest income (expense),net (.3) .2 .1 (331.6) 107.8
----- ----- -----
Income (loss) before income taxes (.1) 2.8 3.8 (106.8) (16.3)
Income taxes -- 1.0 1.3 (98.4) (16.4)
----- ----- -----
Net income (loss) (.1%) 1.8% 2.5% (111.5%) (16.2%)
===== ===== =====
18
21
NET SALES
The Company's sales have increased in each year since the Company's
inception in 1983. Increases in sales of software and technology services have
resulted from the Company's market share growth and geographic expansion. The
increases also reflect overall growth in the software and technology services
industries. The significant growth in sales in 1997 reflects the impact of the
acquisitions the Company made early in the fiscal year. During fiscal 1997, the
Company successfully stabilized the acquired CGE customer base and reversed the
trend of declining sales that the CGE division had experienced prior to the
acquisition.
For the years ended April 1997 and March 1996, sales of PC software
increased 100% and 12%, respectively. 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. The increased popularity of
VLM agreements has contributed to the increase in unit volume sales, as well as
the reduction in average unit prices of desktop software in recent years. Sales
of software through VLM agreements represented 59%, 46% and 36% of sales for
the years ended April 1997, March 1996, and March 1995, respectively.
For the years ended April 1997 and March 1996, revenue from technology
services provided through the Company's Technology Services Group, increased
138% and 90%, respectively. The Company increased the number of its technology
services offices from ten at March 31, 1996, to 24 worldwide locations at April
30, 1997. Because fee-based services revenue has grown from a relatively small
base, as compared to the Company's sales of software, fee-based technology
services represented approximately 4% of the Company's overall sales while
representing approximately 16% of the Company's gross margin for fiscal 1997.
During fiscal 1997, the Company saw improvement in the contribution to overhead
from its maturing consulting sites and expanding Technology Support Center,
which provides fee-based telephone support on behalf of software publishers and
corporate customers. The Company expects that as more of the consulting offices
mature over time, their contribution to overhead should increase and the
Technology Services Group's impact on the Company's consolidated operating
results will continue to improve.
The Company believes that future increases in sales will depend upon the
Company's ability to maintain and increase its customer base, to continue to
increase its market share, to develop and expand its technology services, and
to capitalize on continued growth in desktop technology markets around the
world.
INTERNATIONAL OPERATIONS
For fiscal 1997, sales outside of the United States totaled $106 million
as compared to $27 million for the prior year when the Company's international
operations were located only in the Canadian and European markets.
In fiscal 1997, the Company's operating results were negatively impacted
by a $4.9 million operating loss in Asia/Pacific reflecting slow sales in the
region and expenses associated with the increased staffing of the Company's
Technology Services Group in Australia and New Zealand. In the fourth quarter
of fiscal 1997, the Company accelerated its plan to adjust the Asia/Pacific
business model to more closely mirror the lower cost, more centralized
structure in the Company's North American operations and saw improving
utilization of its technology services personnel in this region. As a result of
these efforts, the operating loss in Asia/Pacific for the April 1997 quarter
was $1.1 million, reflecting improvement from the loss of $1.8 million realized
in the January 1997 quarter.
In fiscal 1997, fluctuations in foreign currencies against the U.S. dollar
did not have a significant effect on the Company's operating results.
GROSS MARGIN
Overall gross margin as a percentage of sales was 11.8% in fiscal 1997 and
13.7% in fiscal 1996 and 1995. The decline in overall gross margin as a
percentage of sales in 1997, as compared to the prior year, reflects the
decline in gross margin on the sale of PC software, discussed below, and the
change in the Company's sales mix as a result of the CGE acquisition.
Substantially all revenue from former CGE customers was derived from PC
software sales, which have lower gross margins than do the Company's technology
services offerings.
In fiscal 1997, gross margins on PC software sales declined to 10.4%, as
compared to 11.9% and 12.3% in fiscal 1996 and 1995, respectively. The decline
in product gross margin in fiscal 1997 reflected a lower level of financial
incentives available from suppliers and a higher percentage of VLM product
sales as compared to fiscal 1996. The Company generally realizes lower gross
margins on sales of software through VLM agreements, as compared to sales of
full-packaged software products. In addition, in connection with the
acquisition of the CGE division, the Company entered into an agreement (the
"Fulfillment Agreement") with Egghead whereby
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
GROSS MARGIN (Continued)
Egghead continued to purchase product and supply it on behalf of the Company
pending the implementation of the Company's information systems to support the
requirements of the former CGE customers. Under the Fulfillment Agreement,
which expired in September 1996, the Company incurred higher software costs
than it incurred servicing its customers under its own supplier contracts and
through its own systems and facilities.
The stability in overall gross margin in fiscal 1996, as compared to
fiscal 1995, resulted from the growth in revenue from fee-based services. The
contribution from these services in fiscal 1996 represented approximately 17%
of overall gross margin, an increase from approximately 13% of gross margin for
fiscal 1995.
For the years ended April 1997 and March 1996, sales of software through
VLM agreements significantly increased to approximately 59% and 46%,
respectively, of net sales, compared to 36% of net sales in fiscal 1995. The
Company believes that gross margin percents on sales of software may continue
to decline if the volume of software product sales by the Company through VLM
agreements continue to increase or if publishers respond to continued market
pressures by further reducing financial incentives available to resellers. The
Company believes that this potential decrease in product gross margins may be
partially offset by anticipated increases in revenue from its technology
services which traditionally have had much higher gross margins than sales of
product and by lower operating costs of servicing VLM agreements.
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
administrative costs. The Company incurs a significant amount of marketing and
advertising costs based upon available advertising and cooperative marketing
funds received from software publishers. These funds are offset against related
selling, general and administrative expenses.
For fiscal 1997 and 1996, selling, general and administrative expenses, as
a percentage of net sales, were 10.6% and 10.4%, respectively, as compared to
9.4% for fiscal 1995. The increase in selling, general and administrative
expenses as a percentage of sales in fiscal 1997 reflects certain transition
costs, including temporary staffing, excess travel and telephone expenses and
costs associated with systems implementation, totaling approximately $3.7
million, primarily in connection with the Company's CGE acquisition. Without
these identifiable transition costs, selling, general and administrative
expenses as a percentage of sales would have been 10.2% for fiscal 1997. The
Company does not expect to incur any additional significant residual transition
costs from the CGE acquisition.
The increase in selling, general and administrative expenses, as a
percentage of sales, in fiscal 1996 compared to fiscal 1995, was primarily due
to the expansion of the Company's Technology Services Group and development of
the Company's European operations.
The Company's operating results in fiscal 1997 were negatively impacted by
the costs associated with integrating its recent business acquisitions into the
Company's overall operating structure. In the future, the Company believes it
may realize operating efficiencies in its product business as a result of its
larger size and increased market presence.
DEPRECIATION AND AMORTIZATION
The increase in depreciation and amortization for fiscal 1997 as compared
to fiscal 1996 reflects depreciation on fiscal 1997 fixed asset additions and
amortization of goodwill recorded in connection with the Company's business
acquisitions. Most of the purchase price for these acquisitions represents
goodwill which the Company is amortizing over a 20-year period.
INCOME TAX EXPENSE
The Company's effective tax rates for fiscal 1997, 1996 and 1995 were 45%,
35%, and 35%, respectively. The increase in the effective tax rate in fiscal
1997 reflects the ratio of nondeductible expenses, including goodwill
amortization in Asia/Pacific, to the Company's pre-tax loss. In addition, the
Company incurred state and local taxes within the United States and provincial
taxes in Canada, regions in which the Company was profitable.
20
23
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company had approximately $7.4 million in cash and
cash equivalents, $30 million outstanding under its term loan and $7.4 million
outstanding under its $60 million revolving credit line. The term loan and
credit line are secured by accounts receivable and inventory and a pledge of
the stock of the Company's domestic and foreign subsidiaries. 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. The
revolving credit line expires in May 1999.
The increase in trade accounts receivable from March 31, 1996 to April 30,
1997, reflects the increase in net sales for fiscal 1997. At April 30, 1997 and
March 31, 1996, accounts receivable represented approximately 75 and 63 days of
historical sales, respectively. The increase in the number of days sales is
primarily due to the increase in the percentage of receivables represented by
sales made through VLM agreements, which, in general, require detailed
reconciliation and reporting processes and, as a result, have lengthened both
the billing and collection cycles.
The Company generally carries inventory adequate to meet product sales
levels for a period of approximately one month. The increase in inventory as of
April 30, 1997 compared to March 31, 1996, results from the increased sales
volume. The increase in trade accounts payable from March 31, 1996 to April 30,
1997, reflects the increased levels of accounts receivable and inventories.
For fiscal 1997, the Company used $13.1 million of cash in its operations
primarily due to the increase in accounts receivable. In fiscal 1996 and 1995,
$16.7 million and $15.5 million of cash, respectively, were provided by
operations. The Company realized cash from operations in fiscal 1996 and 1995,
as a result of reduced inventory levels and management of vendor payments
related to VLM agreements. Because sales of software through VLM agreements
represent sales of licensed products not held in inventory, the Company has not
increased its inventory balances in proportion to its sales growth. In
addition, prior to fiscal 1997, certain software suppliers' VLM programs
allowed for periodic payments; therefore, cash flow from operations in fiscal
1996 and 1995 improved as sales of software through VLM agreements increased.
The increase in furniture, equipment and leasehold improvements at April
30, 1997 reflects approximately $2 million of capital assets included in the
recent business acquisitions and approximately $11.6 million of capital
expenditures related to the Company's installation of computer and telephone
systems to support its recent acquisitions, the ongoing upgrade of its existing
computer and telephone systems, expansion of its Technology Services Group
offices, and relocation and consolidation of its United States distribution
facilities in Louisville, Kentucky. The Company's capital expenditures for
fiscal 1998 are expected to total approximately $7.5 million, including
expenditures to further upgrade and expand the Company's computer and telephone
systems in its operations centers, expand its office facilities in Dublin,
Ireland, and to continue to grow its Technology Services Group division.
The Company expects that its cash requirements for fiscal 1998 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, as well
as the accompanying Company's Annual Report, 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 growth, anticipated revenue and gross margin levels, and cost savings
and efficiencies. The Company's ability to continue to grow product sales and
develop its technology consulting practice, improve its operating results in
international markets, and improve operational efficiencies will be key to its
success in the future. Further, the ability of the Company to develop
electronic strategies, in order to effectively lower the cost of business, will
be a key factor in the future growth and profitability of the Company. 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 April 30,
1997 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 report.
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
21
24
SOFTWARE SPECTRUM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS April 30, March 31,
1997 1996
-------- --------
Current assets
Cash and cash equivalents $ 7,440 $ 28,123
Short-term investments -- 8,407
Trade accounts receivable, net of allowance for doubtful
accounts ($2,421 in 1997 and $1,201 in 1996) 161,469 73,875
Inventories 18,285 12,937
Prepaid expenses 6,596 10,092
Other current assets 3,015 2,435
-------- --------
Total current assets 196,805 135,869
Furniture, equipment and leasehold improvements, at cost 30,627 17,033
Less accumulated depreciation and amortization 11,440 7,866
-------- --------
19,187 9,167
Other assets, consisting primarily of goodwill, net of accumulated
amortization ($2,858 in 1997 and $156 in 1996) 54,449 5,144
-------- --------
$270,441 $150,180
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 6,000 $ --
Trade accounts payable 145,260 61,231
Other current liabilities 13,872 15,586
-------- --------
Total current liabilities 165,132 76,817
Long-term debt, less current maturities 31,370 --
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 4,363,523 shares in 1997
and 4,241,384 shares in 1996 44 42
Additional paid-in capital 39,040 36,394
Retained earnings 35,401 37,465
-------- --------
74,485 73,901
Less treasury stock at cost--34,311 shares in 1997
and 34,026 shares in 1996 546 538
-------- --------
Total shareholders' equity 73,939 73,363
-------- --------
$270,441 $150,180
======== ========
See notes to consolidated financial statements.
22
25
SOFTWARE SPECTRUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended Month Ended Year Ended Year Ended
April 30, April 30, March 31, March 31,
1997 1996 1996 1995
---------- ----------- ---------- ----------
Net sales $796,285 $28,380 $398,501 $352,141
Cost of sales 701,955 24,260 344,063 303,813
-------- ------- -------- --------
Gross margin 94,330 4,120 54,438 48,328
Selling, general and administrative expenses 84,734 4,667 41,459 33,105
Depreciation and amortization expense 7,780 297 2,816 2,285
-------- ------- -------- --------
Operating income (loss) 1,816 (844) 10,163 12,938
Interest income (expense)
Interest income 358 122 1,175 587
Interest expense (2,956) (42) (53) (47)
-------- ------- -------- --------
(2,598) 80 1,122 540
Income (loss) before income taxes (782) (764) 11,285 13,478
Income tax expense (benefit) 63 (269) 3,919 4,690
-------- ------- -------- --------
Net income (loss) $ (845) $ (495) $ 7,366 $ 8,788
======== ======= ======== ========
Earnings (loss) per share $ (.20) $ (.12) $ 1.73 $ 2.08
======== ======= ======== ========
Weighted average shares outstanding 4,314 4,263 4,260 4,217
======== ======= ======== ========
See notes to consolidated financial statements.
23
26
SOFTWARE SPECTRUM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except number of shares)
Common Stock Additional Treasury Stock
---------------- Paid-In Retained ---------------
Shares Amount Capital Earnings Shares Amount Total
--------- ------ ------- -------- ------ ------- --------
Balances at April 1, 1994 4,155,895 $42 $35,540 $ 21,459 -- $ -- $ 57,041
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $171 53,655 -- 439 -- -- -- 439
Purchase of treasury stock -- -- -- -- (32,238) (502) (502)
Net income -- -- -- 8,788 -- -- 8,788
Foreign currency
translation adjustment -- -- -- 68 -- -- 68
--------- --- ------- -------- ------- ----- --------
Balances at March 31, 1995 4,209,550 42 35,979 30,315 (32,238) (502) 65,834
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $165 31,834 -- 415 -- -- -- 415
Purchase of treasury stock -- -- -- -- (1,788) (36) (36)
Net income -- -- -- 7,366 -- -- 7,366
Foreign currency
translation adjustment -- -- -- (216) -- -- (216)
--------- --- ------- -------- ------- ----- --------
Balances at March 31, 1996 4,241,384 42 36,394 37,465 (34,026) (538) 73,363
Stock issued pursuant to employee
benefit plans 776 -- 14 -- -- -- 14
Stock issued in connection with
acquisition of Essentially Group 55,363 1 1,136 -- -- -- 1,137
Net loss -- -- -- (495) -- -- (495)
--------- --- ------- -------- ------- ----- --------
Balances at April 30, 1996 4,297,523 43 37,544 36,970 (34,026) (538) 74,019
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $103 66,000 1 1,496 -- -- -- 1,497
Purchase of treasury stock -- -- -- -- (285) (8) (8)
Net loss -- -- -- (845) -- -- (845)
Foreign currency
translation adjustment -- -- -- (724) -- -- (724)
--------- --- ------- -------- ------- ----- --------
Balances at April 30, 1997 4,363,523 $44 $39,040 $ 35,401 (34,311) $(546) $ 73,939
========= === ======= ======== ======= ===== ========
See notes to consolidated financial statements.
24
27
SOFTWARE SPECTRUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended Month Ended Year Ended Year Ended
April 30, April 30, March 31, March 31,
1997 1996 1996 1995
---------- ----------- ---------- ----------
Operating activities
Net income (loss) $ (845) $ (495) $ 7,366 $ 8,788
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for bad debts 2,001 46 633 238
Depreciation and amortization 7,780 297 2,816 2,285
Changes in operating assets and liabilities
Trade accounts receivable (90,065) 8,313 (4,427) (21,382)
Inventories (1,324) (3,354) 755 5,314
Prepaid expenses and other assets 5,450 (1,532) (5,897) (1,393)
Trade accounts payable and other current liabilities 63,897 1,988 15,448 21,656
--------- -------- -------- --------
Net cash provided by (used in) operating activities (13,106) 5,263 16,694 15,506
--------- -------- -------- --------
Investing activities
Sales (purchases) of short-term investments, net 7,370 1,037 6,321 (9,696)
Purchase of furniture, equipment and leasehold improvements (12,726) (502) (4,166) (3,515)
Purchase of subsidiaries, net of cash acquired (41,188) (4,803) (2,377) --
--------- -------- -------- --------
Net cash used in investing activities (46,544) (4,268) (222) (13,211)
--------- -------- -------- --------
Financing activities
Borrowings on long-term debt 257,985 -- -- --
Repayments of long-term debt (220,615) -- -- --
Proceeds from stock issuance, including tax
benefit related to stock options exercised 1,497 14 415 439
Purchase of treasury stock (8) -- (36) (502)
--------- -------- -------- --------
Net cash provided by (used in) financing activities 38,859 14 379 (63)
--------- -------- -------- --------
Effect of exchange rate changes on cash (725) (176) (271) 68
--------- -------- -------- --------
Increase (decrease) in cash and cash equivalents (21,516) 833 16,580 2,300
Cash and cash equivalents at beginning of period 28,956 28,123 11,543 9,243
--------- -------- -------- --------
Cash and cash equivalents at end of period $ 7,440 $ 28,956 $ 28,123 $ 11,543
========= ======== ======== ========
Supplemental disclosure of cash paid during the period
Income taxes $ 2,020 $ 11 $ 3,776 $ 4,308
Interest 2,459 6 35 32
See notes to consolidated financial statements.
25
28
SOFTWARE SPECTRUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Software Spectrum, Inc. (the Company) is a leading worldwide supplier of
personal computer software and technology services to organizations. In fiscal
1997, the Company's revenues were derived primarily from the sale of PC
software and technology services in North America, Europe and Asia/Pacific.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All inter-company accounts and transactions
have been eliminated in consolidation. Certain prior period amounts have been
reclassified to conform to the current period presentation.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of contingent assets and liabilities. Actual results could
differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investments with maturities of three months or
less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist of debt securities issued by municipalities
and U.S. government agencies. These investments are classified as available for
sale and are recorded at fair value, which approximates amortized cost.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are generally due from a diverse group of
companies and, accordingly, do not include any specific concentrations of
credit risk.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments, consisting of cash
and cash equivalents, investments, accounts receivable, accounts payable and
long-term debt, approximates their carrying values.
INVENTORIES
Inventories, which consist primarily of purchased personal computer
software programs, are stated at cost, not in excess of market value. Cost is
determined by the moving weighted average method.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation of furniture and equipment is provided primarily on the
straight-line method over the estimated useful lives ranging from 2 to 10
years. Amortization of leasehold improvements is provided on the straight-line
method over the terms of the corresponding leases.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. Assets and liabilities of the foreign subsidiaries
are translated to U.S. dollars at year-end exchange rates. Income and expense
items are translated at the average rates of exchange prevailing during the
year. The adjustments resulting from translating the financial statements of
foreign subsidiaries are reflected in shareholders' equity.
REVENUE RECOGNITION
The Company recognizes revenue from software sales at the time of product
shipment, or in accordance with terms of licensing contracts. Maintenance and
service revenue are recognized ratably over the contractual period or as the
services are provided. Advance billings are recorded as deferred revenue.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are based on the weighted average number of
shares outstanding during the year, and, if dilutive, are increased by
incremental shares included from outstanding stock options as determined under
the treasury stock method.
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE,
is effective for financial statements issued after December 15, 1997. The
adoption of this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
26
29
NOTE A -- NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (SFAS 123),
ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations.
FISCAL YEAR
In 1997, the Company changed its fiscal year end from March 31 to April
30. Accordingly, the Company's current fiscal year commenced on May 1, 1996,
and ended on April 30, 1997. The financial statements for the period from April
1, 1996, to April 30, 1996, are also presented herein. The amounts reflected
for the one month period ended April 30, 1996, should not be considered
indicative of results that would have been obtained for a full fiscal quarter
or year.
NOTE B -- FINANCING ARRANGEMENTS WITH BANK
The Company has a $30 million 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, 7.16% at April 30,
1997. The interest rate is 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. At April 30, 1997, $7.4 million was
outstanding under the facility, which bears interest at prime or LIBOR plus a
variable rate, 7.28% at April 30, 1997. The facility provides for an annual
commitment fee equal to .20% of the unused line of credit.
Future minimum principal payments on long-term debt at April 30, 1997, are
as follows (in thousands):
Years ending April 30:
1998 $ 6,000
1999 6,750
2000 15,620
2001 9,000
-------
$37,370
=======
Until certain financial ratios are maintained for specified periods,
borrowings under the financing arrangements are secured by liens on accounts
receivable, inventory, the pledge of all of the Company's shares in Spectrum
Integrated Services, Inc., a wholly-owned subsidiary, and the pledge of 66.67%
of the Company's shares in its foreign wholly-owned subsidiaries.
NOTE C -- OTHER CURRENT LIABILITIES
Other current liabilities include deferred revenue of $4.9 million and
$9.5 million at April 30, 1997, and March 31, 1996, respectively.
NOTE D -- EMPLOYEE BENEFIT PLANS
In July 1989, the Company adopted the 1989 Stock Option Plan in which
non-incentive stock options were granted. In August 1993, the shareholders
approved the adoption of the 1993 Long Term Incentive Plan and the Company then
ceased granting new options under the 1989 Stock Option Plan. Under the terms
of the 1993 Long Term Incentive Plan, awards may be presented in the form of
incentive or non-qualified stock options, restricted shares of common stock, or
units valued on the basis of Company performance. Stock options are granted at
the quoted market price of the Company's stock at the date of grant, become
exercisable over periods of up to five years and expire on various dates from
1997 through 2003. At April 30, 1997, 168,000 shares of common stock were
reserved for future grant under the 1993 Long Term Incentive Plan.
The Company has adopted the disclosure provisions of SFAS 123 for employee
stock options and continues to apply APB 25 for stock options granted under the
plans. If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for options granted under the plans in fiscal
1997 and 1996, consistent with the methodology prescribed by SFAS 123, the
effect on net income (loss) and earnings (loss) per share would have been as
follows (in thousands, except per share amounts):
Year Month Year
Ended Ended Ended
April 30, April 30, March 31,
1997 1996 1996
--------- --------- ---------
Net income (loss) - as reported $ (845) $(495) $7,366
Net income (loss) - pro forma (1,127) (505) 7,276
Earnings (loss) per share - as reported (.20) (.12) 1.73
Earnings (loss) per share - pro forma (.26) (.12) 1.71
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before fiscal 1996. The fair value of these options was estimated
at the date of grant using the
27
30
SOFTWARE SPECTRUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE D -- EMPLOYEE BENEFIT PLANS (Continued)
Black-Scholes option pricing model with the following weighted-average
assumptions: expected volatility of 42%; risk-free interest rates ranging from
5.5% to 6.4%; no dividend yield; and expected lives of four years. The weighted
average fair value per share of options granted during fiscal 1997 was $9.55.
Information with respect to options outstanding under the plans is as
follows:
Number of Weighted
Shares Average
Underlying Exercise
Options Price
---------- --------
Outstanding at April 1, 1994 296,699 $ 18.67
Granted 105,250 12.48
Exercised (46,099) 3.88
Canceled/forfeited (31,675) 19.43
-------
Outstanding at March 31,1995 324,175 18.69
Granted 121,250 17.62
Exercised (25,445) 5.50
Canceled/forfeited (19,790) 18.72
-------
Outstanding at March 31, 1996 400,190 19.20
Granted 10,000 19.75
-------
Outstanding at April 30, 1996 410,190 19.21
Granted 159,550 23.56
Exercised (54,850) 21.25
Canceled/forfeited (31,350) 20.47
-------
Outstanding at April 30, 1997 483,540 20.34
=======
Exercisable at April 30, 1997 146,560 20.02
Exercisable at March 31, 1996 124,620 22.12
Options outstanding at April 30, 1997:
Range of Number of Weighted Average Weighted Average
Exercise Prices Shares Remaining Life Exercise Price
- --------------- --------- ---------------- ----------------
$ 4.00 to 5.00 900 .7 years $ 4.67
10.00 to 15.00 79,390 3.2 12.10
15.01 to 20.00 117,150 4.0 17.32
20.01 to 25.00 231,900 4.0 23.46
25.01 to 30.00 54,200 2.5 25.86
-------
483,540
=======
Options exercisable at April 30, 1997:
Range of Number of Weighted Average
Exercise Prices Shares Exercise Price
- --------------- --------- ----------------
$ 4.00 to 5.00 900 $ 4.67
10.00 to 15.00 28,600 12.29
15.01 to 20.00 24,060 17.25
20.01 to 25.00 59,400 23.59
25.01 to 30.00 33,600 25.81
-------
146,560
=======
In July 1992, the Company approved an Employee Stock Purchase Plan, which
allows eligible employees to purchase shares of common stock through payroll
deductions. The shares can be purchased at an amount equal to 85% of the fair
market value of the common stock on the exercise date. The plan provides for a
series of monthly offerings, with an exercise date of the 15th of each month.
Each employee may purchase up to $15,000 of fair market value of common stock
per calendar year, limited to 10% of a participant's compensation. At April 30,
1997, a total of 127,000 shares of common stock were reserved for issuance
under the plan. For the years ended April 30, 1997, March 31, 1996, and March
31, 1995, and the month ended April 30, 1996, 10,656, 6,260, 7,556 and 702
shares, respectively, were issued under the plan.
The Company's employee profit sharing plan covers all employees who are 19
years of age or older and have one or more years of service with the Company.
The plan includes an employee savings plan component, which allows participants
to make voluntary pre-tax contributions in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. Employer contributions to the plan
are at the discretion of the Board of Directors and are reduced by forfeited
contributions. The Company's contributions to the employee profit sharing plan
for the years ended March 31, 1996 and 1995, prior to reductions for
forfeitures, were $372,000, and $447,000, respectively. No contributions were
made for the year ended April 30, 1997, or the month ended April 30, 1996.
28
31
NOTE E -- LEASES
The Company leases various office and distribution facilities as well as
certain office equipment under leases classified as operating leases. Future
minimum rental payments under all long-term, noncancelable operating leases at
April 30, 1997, are as follows (in thousands):
Years ending April 30:
1998 $3,422
1999 3,174
2000 2,388
2001 1,850
2002 1,183
Thereafter 1,112
-------
$13,129
=======
Rent expense for operating leases for the years ended April 30, 1997,
March 31, 1996, and March 31, 1995, totaled $3.3 million, $1.3 million and $1.3
million, respectively, and $165,000 for the one month ended April 30, 1996.
NOTE F -- INCOME TAXES
The Company's provision (benefit) for income taxes is comprised of the
following (in thousands):
Year Ended Federal Foreign State Total
------- ------- ------- -------
April 30, 1997
Current $1,234 $ 78 $153 $1,465
Deferred (523) (879) -- (1,402)
------ ----- ---- ------
$ 711 $(801) $153 $ 63
====== ===== ==== ======
Month Ended
April 30, 1996
Current $ (191) $ (65) $ (4) $ (260)
Deferred 19 (28) -- (9)
------ ----- ---- ------
$ (172) $ (93) $ (4) $ (269)
====== ===== ==== ======
Year Ended
March 31, 1996
Current $3,109 $ -- $375 $3,484
Deferred 435 -- -- 435
------ ----- ---- ------
$3,544 $ -- $375 $3,919
====== ===== ==== ======
Year Ended
March 31, 1995
Current $4,049 $ -- $335 $4,384
Deferred 306 -- -- 306
------ ----- ---- ------
$4,355 $ -- $335 $4,690
====== ===== ==== ======
A reconciliation of income tax expense (benefit) using the statutory federal
income tax rate of 34% to the actual income tax expense (benefit) follows (in
thousands):
Year Ended Month Ended Year Ended Year Ended
April 30, April 30, March 31, March 31,
1997 1996 1996 1995
---------- ----------- ---------- ----------
Income tax at statutory rate $(266) $(260) $3,837 $4,583
State and local income
taxes, net of federal
benefit 101 (4) 259 337
Tax-exempt interest (17) (5) (282) (189)
Amortization of goodwill 137 9 8 8
Other 108 (9) 97 (49)
----- ----- ------ ------
Income tax expense (benefit) $ 63 $(269) $3,919 $4,690
===== ===== ====== ======
Deferred tax assets and liabilities as of April 30, 1997, and March 31, 1996,
consist of the following (in thousands):
April 30, March 31,
1997 1996
--------- ---------
Accounts receivable $ 352 $ 177
Inventories 432 122
Depreciation and amortization (563) (371)
Accrued expenses 338 168
Deferred revenue 137 53
Foreign net operating loss
carryforward 752 --
Other (113) (225)
------- -----
$ 1,335 $ (76)
======= =====
At April 30, 1997, certain of the Company's foreign subsidiaries had net
operating loss carryforwards of approximately $2.1 million. Utilization of
these carryforwards is limited to income of the respective subsidiaries.
NOTE G - BUSINESS ACQUISITIONS
On October 13, 1995, Software Spectrum Canada, Ltd., a wholly-owned
subsidiary, acquired all of the outstanding shares of capital stock of Software
Alternatives, Inc., a privately-held supplier of personal computer software to
Canadian organizations, for approximately $2.5 million in cash. The acquisition
has been accounted for as a purchase transaction. The estimated fair values of
the assets acquired and liabilities assumed were $5.2 million and $2.7 million,
respectively. Goodwill was $2.6 million and is amortized on the straight-line
method over 20 years.
29
32
SOFTWARE SPECTRUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE G -- BUSINESS ACQUISITIONS (Continued)
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 was $6.3 million including cash of $5.1 million and the
issuance of 55,363 shares of the Company's common stock. The acquisition has
been accounted for using the purchase method of accounting. The estimated fair
values of the assets acquired, liabilities assumed and stock issued in
connection with the purchase were $17.4 million, $11.1 million and $1.2
million, respectively. Goodwill was $7.4 million and is amortized on the
straight-line method over 20 years.
On May 13, 1996, the Company acquired certain operating assets of the
corporate, government, and educational (CGE) division of Egghead, Inc., a
leading supplier of personal computer 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. Goodwill was $45 million and is amortized on the
straight-line method over 20 years.
The operating results of the acquired businesses have been included in the
consolidated statements of operations from the dates of acquisition.
Identifiable transition costs totaling $3.7 million are included in selling,
general and administrative expenses for the year ended April 30, 1997. These
costs relate primarily to temporary staffing costs, excess travel and telephone
expenses, and costs associated with systems implementation for the CGE division
acquisition.
Pro forma operating results, giving effect to the Software Alternatives,
Inc. and the Essentially Group acquisitions as though they had occurred at the
beginning of fiscal 1996, are not presented because they are not materially
different than the Company's actual results. The following unaudited pro forma
information presents summary consolidated results of operations of the Company
and CGE division as if this acquisition had occurred at the beginning of each
period presented (in thousands, except per share amounts).
Year Ended Month Ended Year Ended
April 30, April 30, March 31,
1997 1996 1996
--------- ----------- ------------
Net sales $807,697 $56,277 $761,839
Net income (loss) (957) (719) 7,070
Earnings (loss) per share (.22) (.17) 1.66
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.
NOTE H -- FOREIGN OPERATIONS
The Company operates in one business segment. Prior to April 1996, the
Company's foreign operations were not material. Accordingly, information for
foreign operations for the years ended March 31, 1996 and 1995, has not been
presented. Information for foreign operations for the year ended April 30,
1997, and the one month ended April 30, 1996, follows (in thousands):
Operating
Year Ended Net Income
April 30, 1997 Sales (Loss)
-------- ---------
Domestic $690,641 $7,742
Foreign 105,644 (5,926)
-------- ------
$796,285 $1,816
======== ======
Month Ended
April 30, 1996
Domestic $22,910 $ (256)
Foreign 5,470 (588)
-------- ------
$28,380 $ (844)
======== ======
Identifiable
As Of April 30, 1997 Assets
------------
Domestic $228,855
Foreign 41,586
--------
$270,441
========
30
33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Software Spectrum, Inc.
We have audited the accompanying consolidated balance sheets of Software
Spectrum, Inc. and subsidiaries as of April 30, 1997 and March 31, 1996, and
the related consolidated statements of operations, shareholders' equity and
cash flows for the year ended April 30, 1997, the month ended April 30, 1996,
and the years ended March 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Software
Spectrum, Inc. and subsidiaries as of April 30, 1997 and March 31, 1996, and
the consolidated results of their operations and their consolidated cash flows
for the year ended April 30, 1997, the month ended April 30, 1996, and the
years ended March 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
- ----------------------
Grant Thornton LLP
Dallas, Texas
July 7, 1997
31
34
QUARTERLY FINANCIAL DATA AND
MARKET INFORMATION (Unaudited)
The following table summarizes the unaudited quarterly financial data for
the years ended April 30, 1997, and March 31, 1996 and the quarterly range of
high and low quotations for the Company's common stock as reported by the
NASDAQ National Market System (in thousands, except per share amounts):
Common Stock
Net Earnings Price Per Share
Net Gross Income (Loss) ----------------
Period Sales Margin (Loss) Per Share High Low
- ------ -------- ------- ------ --------- ------ -----
Fiscal 1997
Quarter ended:
July 31 $186,847 $21,755 $ 9 $ -- $ 25.00 $21.50
October 31 188,097 22,823 (839) (.20) 30.50 23.00
January 31 220,523 24,782 (119) (.03) 33.50 22.50
April 30 200,818 24,970 104 .02 24.25 13.00
Fiscal 1996
Quarter ended:
June 30 91,397 12,432 1,615 .38 21.00 14.88
September 30 89,748 12,545 1,788 .42 26.50 20.25
December 31 117,751 15,591 2,773 .65 25.25 18.00
March 31 99,605 13,870 1,190 .28 23.50 17.00
================================================================================
The Company's common stock is traded over the counter and is listed on the
Nasdaq National Market System under the symbol SSPE.
On July 18, 1997, there were 150 holders of record of the Company's common
stock. The Company has never paid cash dividends on its common stock. The Board
of Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the near term.
CORPORATE COUNSEL
Locke Purnell Rain Harrell P.C.
Dallas, Texas
AUDITORS
Grant Thornton LLP
Dallas, Texas
REGISTRAR/TRANSFER AGENT
ChaseMellon Shareholder Services, LLC
Ridgefield Park, NJ
800-635-9270
COMMON STOCK
Software Spectrum's common stock is traded over the counter on the Nasdaq
National Market System under the symbol SSPE.
ANNUAL REPORT ON FORM 10-K
Shareholders may obtain a copy, free of charge, of Software Spectrum, Inc.'s
1997 Annual Report on Form 10-K (excluding exhibits) upon request to Investor
Relations, Software Spectrum, Inc. at Corporate Headquarters.
ANNUAL MEETING
The Annual Meeting of the Shareholders of Software Spectrum, Inc. will be held
at the Company's corporate headquarters, at 10:00 a.m. on September 18, 1997.
All shareholders are cordially invited to attend.
INVESTOR RELATIONS
Investor Relations Department
972-840-6600
Software Spectrum Technology Services Group is a wholly-owned subsidiary of
Software Spectrum, Inc.
All marks and registered trademarks are property of their respective
organizations.
Printed in the U.S.A.
32
35
CORPORATE HEADQUARTERS
2140 Merritt Drive
Garland, Texas 75041
972-840-6600
EMEA HEADQUARTERS
Kneuterdijk #2
2514 EN The Hague
The Netherlands
31-70-346-2936
EUROPEAN OPERATIONS CENTRE
Merrion House
Merrion Road
Dublin 4, Ireland
353-1-260-1788
ASIA/PACIFIC OPERATIONS CENTER
2-6 Orion Road
Lane Cove
NSW 2066
Australia
61-2-9418-3811
JAPANESE JOINT VENTURE
Uchida Spectrum
Across Shinkawa Building
Annex 8F, Shinkawa 1-16-14
CH UO-KU
Tokyo 104
Japan
81-3-5543-6800
[SOFTWARE SPECTRUM LOGO]