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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 July 31, 1997
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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
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/
incorporation or organization) Identification No.)
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 [ ]
At September 11, 1997, the Registrant had outstanding 4,337,386 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-
July 31, 1997 and April 30, 1997 4
Consolidated Statements of Operations-
Three Months Ended July 31, 1997 and
June 30, 1996 5
Consolidated Statements of Cash Flows-
Three Months Ended July 31, 1997 and
June 30, 1996 6
Notes to Consolidated Financial Statements 7
Consolidated Statement of Operations-
Month Ended January 31, 1997 9
Consolidated Statement of Cash Flows-
Month Ended January 31, 1997 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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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)
July 31, April 30,
1997 1997
---------- ----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 8,683 $ 7,440
Trade accounts receivable, net of
allowance for doubtful accounts 169,284 161,469
Inventories 16,758 18,285
Prepaid expenses 6,032 6,596
Other current assets 3,209 3,015
---------- ----------
Total current assets 203,966 196,805
Furniture, equipment and leasehold
improvements, at cost 34,397 30,627
Less accumulated depreciation and amortization 12,913 11,440
---------- ----------
21,484 19,187
Other assets, consisting primarily of goodwill, net of accumulated
amortization ($3,647 at July 31 and $2,858 at April 30) 54,010 54,449
---------- ----------
$ 279,460 $ 270,441
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 6,188 $ 6,000
Trade accounts payable 141,017 145,260
Other current liabilities 17,158 13,872
---------- ----------
Total current liabilities 164,363 165,132
Long-term debt, less current maturities 40,816 31,370
Shareholders' equity
Preferred stock, par value $.01;
authorized, 1,000,000 shares; issued
and outstanding, none -- --
Common stock, par value $.01;
authorized, 20,000,000 shares; issued
4,369,607 shares at July 31 and
4,363,523 shares at April 30 44 44
Additional paid-in capital 39,111 39,040
Retained earnings 35,672 35,401
---------- ----------
74,827 74,485
Less treasury stock at cost; 34,311 shares 546 546
---------- ----------
Total shareholders' equity 74,281 73,939
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$ 279,460 $ 270,441
========== ==========
See notes to consolidated financial statements.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended
-----------------------
July 31, June 30,
1997 1996
---------- ----------
Net sales $ 211,958 $ 160,879
Cost of sales 188,246 142,205
---------- ----------
Gross margin 23,712 18,674
Selling, general and
administrative expenses 19,365 17,609
Depreciation and amortization expense 2,264 1,320
---------- ----------
Operating income (loss) 2,083 (255)
Interest expense, net 918 107
---------- ----------
Income (loss) before income taxes 1,165 (362)
Income tax expense (benefit) 624 (106)
---------- ----------
Net income (loss) $ 541 $ (256)
========== ==========
Earnings (loss) per share $ 0.12 $ (0.06)
========== ==========
Weighted average shares
outstanding 4,341 4,288
========== ==========
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
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July 31, June 30,
1997 1996
---------- ----------
Operating activities
Net income (loss) $ 541 $ (256)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Provision for bad debts 430 525
Depreciation and amortization 2,264 1,320
Changes in operating assets and liabilities
Trade accounts receivable (8,646) (43,958)
Inventories 1,536 (5,548)
Prepaid expenses
and other assets 204 (975)
Trade accounts payable and
other current liabilities (654) 39,678
---------- ----------
Net cash used in operating activities (4,325) (9,214)
---------- ----------
Investing activities
Sales of short-term investments, net -- 8,407
Purchase of furniture, equipment and
leasehold improvements (3,800) (3,770)
Purchase of subsidiaries, net of cash acquired -- (43,277)
---------- ----------
Net cash used in investing activities (3,800) (38,640)
---------- ----------
Financing activities
Borrowings on long-term debt 99,239 30,000
Repayments of long-term debt (89,640) --
Other 143 113
---------- ----------
Net cash provided by financing activities 9,742 30,113
---------- ----------
Effect of exchange rate changes on cash (374) (43)
---------- ----------
Increase (decrease) in cash and cash equivalents 1,243 (17,784)
Cash and cash equivalents at beginning of period 7,440 28,123
---------- ----------
Cash and cash equivalents at end of period $ 8,683 $ 10,339
========== ==========
Supplemental disclosure of cash paid
during the period
Income taxes $ 42 $ 177
Interest 298 293
See notes to consolidated financial statements.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended July 31, 1997
(Unaudited)
NOTE A - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements include the accounts of Software
Spectrum, Inc. (the "Company") and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
In 1997, the Company changed its fiscal year-end from March 31 to April 30.
Recasting the quarterly financial information for fiscal 1997 is not cost
justified. Accordingly, the Company has elected to present comparative
information for the quarter ended June 30, 1996, as allowed under the
transition reporting rules of the Securities and Exchange Commission. The
Company does not have seasonal trends that would impact the comparability of
the quarters presented.
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 July 31,
1997, and the consolidated results of operations and cash flows for the three
months ended July 31, 1997 and June 30, 1996 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.
Historically, the Company has recognized maintenance revenue ratably over the
terms of the related contracts. While the contracts provide for cancellation by
the customer, the Company has experienced limited refunds of maintenance
payments. Therefore, since the Company has no material costs associated with
future performance under these contracts, beginning in fiscal 1998, the Company
began recognizing this revenue when invoiced. The cumulative impact of this
policy change and the impact of the change on the July 1997 quarter were not
material.
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 April 30, 1997,
included in the Company's 1997 Annual Report on Form 10-K.
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NOTE B - BUSINESS ACQUISITION
On May 13, 1996, the Company acquired certain operating assets of the
corporate, government, and educational ("CGE") division of Egghead, Inc. for
approximately $45 million in cash. The acquisition has been accounted for using
the purchase method of accounting.
The operating results of the acquired business have been included in the
consolidated statements of operations from the date of acquisition. Unaudited
pro forma summary consolidated results of operations of the Company and the CGE
division for the quarter ended June 30, 1996 as if the acquisition had occurred
at April 1, 1996 are approximately: net sales of $200,000,000, net loss of
$600,000 and loss per share of $.14. 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 this date or of results which
may occur in the future.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
One
Month Ended
January 31,
1997
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Net sales $ 41,242
Cost of sales 35,185
----------
Gross margin 6,057
Selling, general and
administrative expenses 7,319
Depreciation and amortization expense 650
----------
Operating loss (1,912)
Interest expense, net 219
----------
Loss before income taxes (2,131)
Income tax benefit (648)
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Net loss $ (1,483)
==========
Loss per share $ (0.34)
==========
Weighted average shares
outstanding 4,325
==========
This financial Statement is presented in accordance with the
transition rules in Regulation 13A of the Securities Exchange Act.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
One
Month Ended
January 31,
1997
----------
Operating activities
Net loss $ (1,483)
Adjustments to reconcile net loss to
net cash provided by operating activities
Provision for bad debts 51
Depreciation and amortization 650
Changes in operating assets and liabilities
Trade accounts receivable 44,947
Inventories (4,980)
Prepaid expenses
and other assets 377
Trade accounts payable and
other current liabilities (31,879)
----------
Net cash provided by operating activities 7,683
----------
Investing activities
Purchase of furniture, equipment and
leasehold improvements (496)
----------
Net cash used in investing activities (496)
----------
Financing activities
Borrowings on long-term debt 11,727
Repayments of long-term debt (11,113)
Other 181
----------
Net cash provided by financing activities 795
----------
Increase in cash and cash equivalents 7,982
Cash and cash equivalents at beginning of period 5,407
----------
Cash and cash equivalents at end of period $ 13,389
==========
Supplemental disclosure of cash paid
during the period
Income taxes $ 5
Interest 100
This financial Statement is presented in accordance with the
transition rules in Regulation 13A of the Securities Exchange Act.
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ITEM 2. 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 the Asia/Pacific
region. 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. With the continued increase in sales of
software applications through VLM agreements, 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.
Due to the cost and administrative difficulty involved, the Company has elected
not to recast its quarterly financial information for fiscal 1997. Accordingly,
this discussion focuses on the quarters ended July 31, 1997 and June 30, 1996.
The Company does not have seasonal trends that would impact the comparability
of the quarters presented.
The following table sets forth, for each of the periods indicated, consolidated
statement of operations data expressed as a percentage of net sales for the
period specified.
Percentage of Net
Sales for
Three Months Ended
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July 31, June 30,
1997 1996
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Net sales 100.0% 100.0%
Cost of sales 88.8 88.4
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Gross margin 11.2 11.6
Selling, general and
administrative expenses 9.1 10.9
Depreciation and amortization 1.1 0.8
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Operating income (loss) 1.0 (0.1)
Interest expense, net 0.4 0.1
------ ------
Income (loss) before income taxes 0.6 (0.2)
Income tax expense (benefit) 0.3 (0.1)
------ ------
Net income (loss) 0.3% (0.1)%
====== ======
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NET SALES:
Increases in the Company's 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.
For the quarter ended July 31, 1997, net sales increased by 32% over net sales
for the quarter ended June 30, 1996, reflecting the impact of the May 1996
acquisition of certain operating assets of the corporate, government and
educational ("CGE") division of Egghead, Inc. With the CGE acquisition, the
Company significantly increased its market presence in North America. For the
quarter ended June 30, 1996, the pro forma combined sales of the Company and
the CGE division were $200 million.
For the quarter ended July 31, 1997, sales of PC software increased 29% over
sales for the quarter ended June 30, 1996. 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 approximately 68% and 50% of
sales for the quarters ended July 31, 1997 and June 30, 1996, respectively.
For the quarter ended July 31, 1997, revenue from technology services provided
through the Company's Technology Services Group increased by 93% as compared to
the quarter ended June 30, 1996. As of July 31, 1997, the Company had increased
the number of its technology services offices to 25 world-wide locations.
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 approximately 5% of the Company's overall sales while representing
approximately 20% of the Company's gross margin for the quarter ended July 31,
1997. Improvements in the contribution to overhead have occurred in the
Company's maturing consulting sites and expanding Technology Support Center,
which provides fee-based telephone support on behalf of software publishers and
corporate customers. The Company anticipates that as more 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 improve.
The Company believes 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 the three months ended July 31, 1997, sales outside of the United States
increased 13% to $30 million, as compared to $26 million for the quarter ended
June 30, 1996.
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For the July 31, 1997 quarter, the Company continued to see sequential
quarterly improvement in its operating results in Asia/Pacific as its cost
reduction efforts continued to have the desired impact of reducing operating
costs in the region. The Company's operating loss in Asia/Pacific was $600,000,
reflecting a reduction from the operating loss of $1.1 million in the April
1997 quarter. The recently installed information systems in the Asia/Pacific
region became fully operational in the July quarter, allowing the Company to
complete its consolidation efforts into its centralized operations center in
Sydney. In addition, the Company closed its Technology Services Group office in
Singapore during the July quarter. For the June 30, 1996 quarter, the Company
realized an operating loss in Asia/Pacific of $100,000.
For the three months ended July 31, 1997, fluctuations in foreign currencies
against the U.S. dollar did not have a material effect on the Company's
financial results.
GROSS MARGIN:
Overall gross margin as a percentage of net sales was 11.2% and 11.6% for the
quarters ended July 31, 1997 and June 30, 1996, respectively. The decline in
overall gross margin as a percentage of sales reflects the decline in gross
margin on the sale of PC software, discussed below, as well as changes in the
Company's sales mix.
For the quarter ended July 31, 1997, gross margin on the sale of PC software
declined to 9.3%, as compared to 10.1% for the quarter ended June 30, 1996. For
the quarter ended July 31, 1997, the percentage of sales of software through
VLM agreements significantly increased to approximately 68% of net sales,
compared to 50% of net sales in the June 1996 quarter. The Company generally
realizes lower gross margins on sales of software through VLM agreements, as
compared to sales of full-packaged software products. The decline in software
margins in 1997 was partially offset by growth in revenue from fee-based
services. The contribution from these services in the quarter ended July 31,
1997 represented approximately 20% of overall gross margin, an increase from
approximately 16% of gross margin for the June 1996 quarter.
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 continues to increase or if publishers respond to
continued market pressures by reducing financial incentives available to
resellers. The Company believes that this potential decrease in product gross
margin percents 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.
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. 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 the quarter ended July 31,
1997, selling, general and administrative expenses, as a percentage
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of net sales, decreased to 9.1%, compared to 10.9% for the quarter ended June
30, 1996. Selling, general and administrative expenses in 1996 include certain
transition costs primarily associated with the CGE acquisition, including
temporary staffing, travel expense and costs associated with systems
implementation, totaling approximately $1.8 million. Ignoring these identified
transition costs, selling, general and administrative expenses as a percentage
of sales would have been 9.8% for the June 30, 1996 quarter. The remaining
decline in selling, general and administrative expenses as a percentage of
sales is primarily due to the Company's efforts to reduce its operating costs
and realize operating efficiencies in its product business as a result of the
Company's larger size.
DEPRECIATION AND AMORTIZATION:
The increase in depreciation and amortization for the quarter ended July 31,
1997, as compared to June 30, 1996, reflects additional depreciation on the
higher level of fixed assets in the July 1997 quarter and amortization of
goodwill recorded in connection with the Company's CGE acquisition. Most of the
purchase price for this acquisition 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 July 31, 1997 was
approximately 54%, as compared to approximately 29% in the June 1996 quarter.
This increase in the Company's effective tax rate reflects the impact of its
operations in foreign countries and state and local taxes in the United States.
LIQUIDITY AND FINANCIAL CONDITION:
At July 31, 1997, the Company had approximately $8.7 million in cash and cash
equivalents and had $28.5 million outstanding under its term loan and $18.5
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 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 April 30, 1997 to July 31, 1997,
reflects the increase in net sales for the period ended July 31, 1997. At July
31, 1997 and April 30, 1997, accounts receivable represented approximately 71
and 75 days of historical sales, respectively. The Company generally carries
inventory adequate to meet product sales levels for a period of approximately
one month.
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For the quarter ended July 31, 1997, the Company used $4 million of cash in its
operations compared to $9 million of cash used in operations in the June 30,
1996 quarter. The decrease in cash used in operations reflects the Company's
improved profitability. In addition, for the quarter ended June 30, 1996, the
Company used a higher level of cash in its operations as it financed the growth
in its receivables resulting from increased sales following the CGE
acquisition.
The increase in furniture, equipment and leasehold improvements at July 31,
1997 reflects approximately $3.8 million of capital expenditures related to the
ongoing upgrade of the Company's computer systems and expansion of its
operations centers in Garland, Texas and Dublin, Ireland.
The Company expects that its cash requirements for fiscal 1998 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
On September 8, 1997, the Company announced the adoption of a Stock Repurchase
Plan. Under the Stock Repurchase Plan, the Company may purchase up to $2.5
million of the Company's Common Stock from time to time in the open market or
through privately negotiated transactions. The Company will fund any purchasing
with cash or borrowings under the Company's credit facility. In connection with
the implementation of the Stock Repurchase Plan, the Company entered into a
limited waiver agreement with Private Capital Management, Inc. (PCM) pursuant
to which PCM would not be deemed to be an acquiring person under the Company's
Shareholder Rights Agreement solely by reason of repurchases occurring under
the Stock Repurchase Plan. At July 31, 1997, PCM beneficially owned 19.9% of
the Company's common stock.
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 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 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 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 - Limited Waiver Agreement dated July 31, 1997, between Software
Spectrum, Inc. and Private Capital Management, Inc.
Exhibit 11.1 - Computation of Primary Earnings (Loss) Per Share
Exhibit 11.2 - Computation of Fully-Diluted Earnings (Loss) Per Share
Exhibit 18 - Letter of Preferability regarding Change in Accounting Policy
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three-month period ended
July 31, 1997.
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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.
Date: September 15, 1997 By: /s/ Deborah A. Nugent
-----------------------------------
Deborah A. Nugent, Vice President
of Finance
(Principal Financial Officer and
Principal Accounting Officer)
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EXHIBIT INDEX
Sequentially
Numbered
Pages
Exhibit 10.1 Limited Waiver Agreement dated July 31, 1997,
between Software Spectrum, Inc. and Private
Capital Management, Inc.
Exhibit 11.1 Computation of Primary Earnings (Loss) Per Share
Exhibit 11.2 Computation of Fully Diluted Earnings (Loss) Per Share
Exhibit 18 Letter of Preferability regarding Change in Accounting
Policy
Exhibit 27 Financial Data Schedule
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