- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
---------------------
FORM 10-K
---------------
MARK ONE
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED APRIL 30, 1998
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to .
Commission file number 0-19349
SOFTWARE SPECTRUM, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1878002
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2140 MERRITT DRIVE,
GARLAND, TEXAS
75041
(Address of principal executive offices)
(Zip Code)
972-840-6600
(Registrant's telephone number, including area code)
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value on July 24, 1998 of the Registrant's voting
securities held by non-affiliates was $49,443,952.
At July 24, 1998, the Registrant had outstanding 4,268,731 shares of its
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on Form
10-K certain of the information contained in the registrant's proxy statement
for its annual meeting of shareholders to be held September 17, 1998, which will
be filed by the registrant within 120 days after April 30, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
Software Spectrum, Inc. (the "Company") is a leading global supplier of
personal computer business software and technology services to organizations.
The Company serves Fortune 500 and Global 500 companies, thousands of mid-sized
customers from every industry and the government and academic market segments.
The Company provides its customers with a wide variety of business software
products, volume software licensing services and technology services and assists
them in the implementation, deployment and ongoing support of their personal
computing strategies. The Company has established supply arrangements with major
personal computer software publishers, including Microsoft, IBM/Lotus, Novell,
Attachmate, Symantec, Netscape and Corel. The Company markets software titles
for IBM, IBM-compatible and Macintosh personal computers, including software for
all major operating systems such as Windows 95, Windows 98, OS/2, Novell NetWare
and Microsoft Windows NT.
The Company was incorporated under the laws of the State of Texas in April
1983. The Company's principal facilities and its executive offices are located
at 2140 Merritt Drive, Garland, Texas 75041, and its telephone number at that
location is (972) 840-6600. Except where the context otherwise requires, the
term "Company" as used herein includes Software Spectrum, Inc. and its
subsidiaries.
FORWARD-LOOKING INFORMATION
The Company or its representatives from time to time may make or may have
made certain forward-looking statements, whether orally or in writing, including
without limitation any such statements made or to be made in the Management's
Discussion and Analysis of Financial Condition and Results of Operations, press
releases and other information contained in its various filings with the
Securities and Exchange Commission. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements, so as to ensure
to the fullest extent possible the protections of the safe harbor established in
the Private Securities Litigation Reform Act of 1995. Accordingly, such
statements are qualified in their entirety by reference to and are accompanied
by the following discussion of certain important factors that could cause actual
results to differ materially from those projected in such forward-looking
statements. The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a rapidly changing business, and new risk
factors emerge from time to time. Management cannot predict every risk factor,
nor can it assess the impact, if any, of all such risk factors on the Company's
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those projected in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results.
RELIANCE ON FINANCIAL INCENTIVES, VOLUME DISCOUNTS AND MARKETING FUNDS
As part of its supply agreements with certain publishers and distributors,
the Company receives substantial incentives in the form of rebates, volume
purchase discounts, cooperative advertising funds and market development funds.
A reduction or discontinuance of these incentives, discounts or advertising
allowances could have a material adverse effect on the Company's business and
financial results.
DEPENDENCE ON VENDORS
A large percentage of the Company's sales are represented by popular
personal computer business software products from a small number of vendors. For
the year ended April 30, 1998, approximately 65% of the Company's net sales were
derived from products published by Microsoft and IBM/Lotus. Most of the
Company's contracts with vendors are terminable by either party, without cause,
upon 30 to 60 days notice. The loss or significant change of the Company's
relationship with these vendors could have a material adverse effect on the
Company's business and financial results. Although the Company believes
1
the software products would be available from other parties, the Company may
have to obtain such products on terms that could adversely affect its financial
results.
VOLUME LICENSING AND MAINTENANCE AGREEMENTS
The Company serves as a designated services provider for volume licensing
and maintenance ("VLM") agreements between many of its customers and major
publishers of personal computer software. VLM agreements are typically used by
customers seeking to standardize desktop software applications and,
consequently, typically involve significant quantities of unit sales for each
customer. Although unit volume sales are increased by the use of VLM agreements,
generally lower gross margins are realized on such sales as compared to sales of
full-packaged software products. The Company continues to experience an increase
in the percentage of sales made pursuant to VLM agreements and, consequently,
overall gross margin percentages on the sale of software products should
continue to decline. In addition, the trend toward use of enterprise-wide
licensing agreements, which have lower gross margins and administrative costs
than other VLM programs, could cause further decreases in the Company's product
gross margins.
ECONOMIC CONDITIONS AND GEOGRAPHIC EXPANSION
The Company's business is sensitive to the spending patterns of its
customers, which in turn are subject to prevailing economic and business
conditions. Further, sales to large corporations have been important to the
Company's growth, and its ability to continue its historic rate of growth is
dependent on its continued success in such market. The Company's operations and
geographic expansion outside the United States involve currency exchange risks,
political risks and other risks of conducting business abroad.
HIGHLY COMPETITIVE ENVIRONMENT
The desktop technology marketplace is intensely competitive. The Company
faces competition from a wide variety of sources including other software
suppliers, hardware manufacturers and resellers, technology service providers,
personal computer retail stores (including superstores), mail order, internet
and other discount business suppliers and software publishers. Many of the
Company's competitors, particularly software publishers, have substantially
greater financial resources than the Company. Because of the intense competition
within the personal computer software channel, companies that compete in this
market, including the Company, are characterized by low gross and operating
margins. Consequently, the Company's profitability is highly dependent upon
effective cost and management controls.
NEW DEVELOPMENTS AND RAPID TECHNOLOGICAL CHANGE; RETENTION OF QUALIFIED
PERSONNEL
The market for the Company's products and services is characterized by
rapidly changing technology, evolving industry standards and frequent
introductions of new products and services. The Company's future success will
depend in part on its ability to enhance existing technology services and to
offer new services on a timely basis. Additionally, the Company's business
results can be adversely affected by disruptions in customer ordering patterns
and the impact of new product releases.
The growth and success of the Company's technology services business depends
largely upon its ability to attract, develop, motivate and retain highly-skilled
technical employees in an industry characterized by high employee turnover.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. If the Company is unable to attract
and retain sufficient numbers of highly-skilled technical employees, the
Company's technology services business could be adversely affected.
CHANGING METHODS OF SOFTWARE DISTRIBUTION
The manner in which personal computer software products are distributed and
sold is continually changing, and new methods of distribution may emerge or
expand. Software publishers may intensify their
2
efforts to sell their products directly to end-users, including current and
potential customers of the Company. Other products and methodologies for
distributing software to users may be introduced by publishers, present
competitors or other third parties. If personal computer software suppliers'
participation in these programs is reduced or eliminated, or if other methods of
distribution of software, which exclude the personal computer software resale
channel, become common, the Company's business and financial results could be
materially adversely affected.
TELEPHONE SUPPORT SERVICES AGREEMENTS
Certain of the Company's key telephone support contracts generate revenues
based upon the number of support requests received by the Company or the time
spent on such requests. Consequently, the amount of revenues generated is
dependent upon consumers' support needs. With respect to agreements that provide
for pricing on a per-call basis, the Company's profitability may be adversely
affected if the Company receives fewer support requests than expected or the
time spent in resolving inquiries is greater than anticipated.
Certain of the Company's support contracts provide that the contract may be
terminated on short notice if the Company fails to meet specified performance
criteria. Cancellation of, or a significant decrease in, the services provided
under a key support contract could have an adverse effect on the Company's
profitability. In addition, the Company may be required to rapidly expand its
support operations to meet the demands of its customers. Such rapid changes to
the size of the Company's support operations and employee base could involve
significant costs, including costs associated with employee hiring and training,
the purchase of additional workstations, equipment and technology and the
establishment of additional call centers.
YEAR 2000
The Company is currently conducting a review of its core management
information systems to verify compliance with Year 2000 date codes and is also
reviewing and assessing its desktop computers, networks and servers, software
applications and packages, and products and services provided by third parties
for internal operations to determine whether or not they support Year 2000 date
codes. While the Company's review and assessment of its internal systems is
still in process, the Company expects that any required modifications will be
made on a timely basis and that the cost of such modifications will not have a
material effect on the Company's operating results. However, in the event that
the Company's key vendors cannot provide the Company with software products that
meet Year 2000 requirements on a timely basis, or if customers delay or forego
software purchases based upon Year 2000 related issues, the Company's operating
results could be materially adversely affected. In general, as a reseller of
software products, the Company only passes through to its customers the
applicable vendors' warranties. The Company's operating results could be
materially adversely affected, however, if it were held liable for the failure
of software products resold by the Company to be Year 2000 compliant despite its
disclaimer of software product warranties.
OVERVIEW
The Company is a leading global supplier of personal computer business
software and technology services to organizations. The Company's strategy is to
leverage its global infrastructure to provide a high level of customer service,
to maintain a cost-efficient operating structure and to grow its product and
services business around the world. The Company controls its costs by
centralizing its administrative support and customer service operations while
utilizing a geographically dispersed field sales force and technology services
staff strategically located in major business markets worldwide. The majority of
the Company's revenues are derived from sales to large organizations, including
Fortune 500 and Global 500 companies, as well as thousands of mid-sized
customers from every industry, including the government and academic market
segments.
3
The Company derives revenues from two primary areas, sales of personal
computer software to organizations and sales of technology services delivered by
its Technology Services Group (the "Technology Services Group" or "TSG").
The largest component of the Company's business is providing personal
computer software, licenses and related services to large organizations with
over 1,000 desktop computers, including companies in the Fortune 500 and Global
500. The Company concentrates on building and expanding these relationships
through personal sales contacts made throughout major global desktop technology
markets. The Company's field sales representatives are divided into two groups:
one sales force which markets primarily personal computer software products to
organizations, and the second sales force which markets primarily fee-based
services provided by the Company's Technology Services Group. Through its
strategically located, centralized operations centers in North America, Europe
and Asia/Pacific, the Company supports the global marketing efforts of these two
sales forces. The Company also serves mid-sized customers through a combined
field sales and outbound calling sales effort. See "Sales and Marketing" below.
The Company's home page on the Internet has an electronic catalog which can
be used by customers to obtain pricing information, check order status, run
purchase activity reports and purchase products. For certain customers, the
Company offers a secure on-line customer-specific catalog, VISTA, which contains
products, prices and other information unique to each customer.
The Company's Technology Services Group provides fee-based services,
including consulting, custom training and technical support for a number of
specific technologies including advanced networking infrastructure, enterprise
messaging and groupware, distributed client/server business solutions,
enterprise software management services and Internet/Intranet services. TSG's
strategy is to focus on select technologies to allow its personnel to develop
in-depth knowledge to support complex customer requirements. TSG provides
services to assist customers in determining where and how technology and
products can be implemented to reduce the cost of managing and supporting
enterprise networks. TSG also provides fee-based telephone support services
through its technology support centers in North America, Europe and
Asia/Pacific. These services are utilized by software publishers that desire to
outsource their technology support services as well as organizations that choose
to outsource their internal help desk function. As of June 30, 1998, TSG had
over 1,400 technical professionals worldwide. For the year ended April 30, 1998,
TSG represented approximately 6% of the Company's revenues but approximately 21%
of its gross margin dollars. See "Global Operations" and "Technology Services
Group" below.
The Company adapts its product-related services to specific customer
requests, consults with customers on developing strategies to efficiently manage
the customer's investment in desktop software and hardware and provides accurate
and timely delivery of products. The Company provides its customers with
information, advice and assistance through its marketing, sales and technical
staff on the wide range of software procurement choices available. For customers
electing to standardize desktop software applications or otherwise take
advantage of right-to-copy arrangements, the Company provides volume licensing
and maintenance agreement services and support. Under VLM agreements, the
Company acts as a designated service provider to sell software licensing rights
that permit customers to make copies of a publisher's software program from a
master disk and distribute this software within a customer's organization for a
fee for each copy made. Maintenance agreements entitle customers to all upgrades
of certain products during a specified period of time, typically two years
following the software purchase. By utilizing VLM agreements, customers are able
to consolidate their worldwide purchases and acquire software under a single
master agreement for a given publisher from a global supplier such as the
Company. One of the latest trends with respect to VLM agreements involves
enterprise-wide licensing agreements which give the customer the right to use an
entire suite of products offered by a publisher on all desktops across its
enterprise. The Company's licensing consultants can assist customers in
selecting the most advantageous form of licensing available based on specific
needs or constraints. Among its other services, the Company offers on-site
consultants for large corporations, custom training and support of complex
technologies,
4
strategic planning for information systems departments, software selection
assistance and determination of price and availability of hard-to-find software
products.
The Company serves an important role in the software industry by providing a
service-oriented and cost-effective means for personal computer software
publishers to market, sell, distribute and provide support for their products.
The services provided by the Company assist publishers by building product
awareness, marketing products directly on behalf of publishers to businesses and
other organizations, and providing additional technical support and services for
software products. The Company is also instrumental in the selection, design and
implementation of VLM programs for its customers. The Company believes that
maintaining its relationships with major publishers is important to the
Company's future growth and profitability. The Company will often coordinate
product introductions and marketing programs with publishers, which may involve
joint regional product seminars and cross-selling of selected complementary
products. Due to its volume of purchases, the Company believes it is able to
obtain favorable pricing, avail itself of marketing funds provided by major
publishers and work closely with publisher personnel on various marketing and
selling matters such as the introduction of new products, programs and related
service opportunities.
The Company has continued to experience significant growth in the sale of
software to its customers through VLM agreements. For the year ended April 30,
1998 ("fiscal 1998"), sales through VLM agreements represented approximately 72%
of net sales of the Company, compared to 59% and 46% of net sales for the years
ended April 30, 1997 ("fiscal 1997") and March 31, 1996 ("fiscal 1996"),
respectively. Since individual software packages and documentation may not be
provided to each user, and due to volume pricing incentives and lower
distribution costs, customers utilizing VLM agreements can purchase licenses for
software at a lower cost than by purchasing individual shrink-wrapped software
packages. In general, the Company receives lower gross margins, as a percent of
sales, on sales made through VLM agreements. Lower gross margins are partially
offset by lower operating costs associated with such agreements.
In May 1996, the Company acquired certain operating assets of Egghead,
Inc.'s corporate, government and education division ("CGE"). During fiscal 1997,
the Company integrated the North American sales forces of the two organizations,
stabilized CGE's customer base and expanded its operations to include an
operations center located in Spokane, Washington, which serves several thousand
customers and also provides technology support services.
The Company is one of the world's largest global suppliers of personal
computer business software and technology services to organizations. The
Company's large customer base provides additional opportunities for growth of
its Technology Services Group.
GLOBAL OPERATIONS
Under VLM agreements, multinational customers can consolidate their
worldwide volume software purchases under a single master agreement for a given
publisher. The Company's ability to sell software globally through these
programs was a key factor in its global expansion, which began in fiscal 1993.
The Company's North American operations are based in Garland, Texas, with a
major call center located in Spokane, Washington. The Company's European sales
headquarters is located in The Hague, The Netherlands and its operations center
is located in Dublin, Ireland. The Company augmented its European operations by
establishing a TSG office in London, England in 1996 and another TSG office in
Frankfurt, Germany in early 1997. The Company's April 1996 acquisition of
Essentially Group Limited ("Essentially Group"), a leading information
technology company in Australia and New Zealand, significantly extended Software
Spectrum's geographic coverage by providing an immediate presence in the Asia/
Pacific region. With this acquisition, the Company obtained an established
customer base, management team and services capabilities to provide the Company
with many of the key resources needed to permit further expansion throughout the
Asia/Pacific region. In fiscal 1997, the Company established sales offices
5
in Hong Kong and Singapore. During fiscal 1997 and fiscal 1998, the Company
consolidated the administrative and support functions of its Asia/Pacific
operations in Sydney to more closely align these functions with the centralized
structure and operations of the Company's North American and European
operations. The Company also installed information systems that are common to
all of its operations centers. The Company's operations in Asia/Pacific incurred
operating losses of approximately $2.5 million in the fiscal year ended April
30, 1998, which reflects a substantial improvement over operating losses of
approximately $4.9 million in the fiscal year ended April 30, 1997.
In fiscal 1997, the Company entered into a joint venture in Japan, named
Uchida-Spectrum, Inc., with Uchida-Yoko Co., Ltd. Through this joint venture, in
which the Company owns a 45% equity interest, the Company sells software
products and provides technology services to customers in Japan.
In fiscal 1999, the Company plans to open additional TSG sites in key cities
in Europe and Asia/ Pacific to better serve its customers' requirements in these
regions.
With centralized operations centers in North America, Europe and
Asia/Pacific, the Company is able to serve the major desktop technology markets
around the world. Today, Software Spectrum provides software or fulfillment
services to customers located in over 100 countries, provides support services
in 14 languages, invoices customers in many local currencies and provides
consolidated worldwide reporting to customers.
TECHNOLOGY SERVICES GROUP
Through its Technology Services Group, the Company provides fee-based
technology services including consulting, custom training and telephone and
Internet support services.
CONSULTING AND TRAINING SERVICES
The Company's consulting and training service offerings are centered around
a number of specific technologies including advanced networking infrastructure,
enterprise messaging and groupware, distributed client/server business
solutions, enterprise software management ("ESM") services and Internet/
Intranet services. These technologies address customers' needs (i) to provide
access to information at sites throughout the world within their organizations;
(ii) to enable employees at different locations to communicate with each other
in a cost-efficient manner; (iii) to provide more flexible access to mission
critical information; and (iv) to provide strategies for controlling the rising
cost of supporting distributed computing.
To support these service offerings, the Company developed the Institute for
Microsoft Technology and the Institute for IBM/Lotus Technology as a training
medium for its consultants. The Institutes provide introductory and advanced
training for technical certification, as well as service delivery methodology
and advanced consulting skills, enabling consultants to develop and deploy
complex solutions.
The Company is an industry leader in assisting customers in implementing
Microsoft's Systems Management Server ("SMS"). In 1995, the Company founded the
Software Spectrum SMS Alliance, in cooperation with Microsoft, and is its
managing member. Members of the SMS Alliance collectively represent more than
1.5 million desktops and meet regularly to share SMS deployment and management
solutions. Based on the success of the SMS Alliance, during fiscal 1998 the
Company created an Exchange Solutions Alliance in cooperation with Microsoft.
As of April 30, 1998, the Company had Technology Services Group offices in
Chicago, Dallas, Atlanta, Boston, Philadelphia, Houston, San Antonio, San
Francisco, Seattle, Denver, Detroit, Los Angeles, Minneapolis, New York,
Raleigh-Durham, Phoenix, Sydney, Melbourne, Wellington, Toronto, London and
Frankfurt. Through its joint venture in Japan, Uchida-Spectrum, Inc., the
Company also offers TSG services to its customers in Japan.
6
The Company is a Microsoft Solutions Provider, Lotus Notes Business Partner,
IBM BESTeam Premium Partner and Tivoli Premier Partner and is authorized to
sell, support, train and develop applications in many complex products. The
Company's advanced networking infrastructure design capabilities cover a broad
range of topologies and protocols, including local area and wide area networks
and the ability to provide interfaces to many mainframes and minicomputers. The
Company also provides sophisticated messaging and information-sharing solutions
to provide a stable communications platform for enterprise-wide connectivity.
The Company's ESM services are designed to help customers with the
evaluation, implementation, operation and support of electronic desktop
management solutions, such as Microsoft's Systems Management Server and Tivoli's
TME 10 product. These services help customers manage and support their software
assets at various sites from a single location. Utilizing these electronic
software distribution products and ESM services, customers can inventory
hardware and software assets, perform software product distribution and provide
electronic help desk services.
In addition, the Company offers education and custom technical training
opportunities for its customers' information technology professionals in the
various advanced technologies supported by the Company, with such seminars and
training provided at the customers' or the Company's location.
TECHNOLOGY SUPPORT
The Company also provides fee-based telephone or Internet support services
on behalf of software publishers and to end-users of business customers that
choose to fully or partially outsource their internal help desk function. The
Company's services cover a number of technologies, including desktop
applications and operating systems and network operating systems.
The Company provides quality technology support for organizations in three
principal business categories. First, it contracts with software publishers to
provide telephone support on their behalf to customers. Second, technology
support analysts handle support calls from the Company's corporate customers'
technical personnel for escalation services. Third, the Company provides
technology support to large organizations to replace the customer's internal
help desk capabilities for the customer's employees. The staff in the Company's
technology support centers are experienced in over 150 major personal computer
software titles and can provide support for software products running on most
major personal computer operating systems and environments, including Windows
95, Windows 98, Macintosh, Microsoft Windows NT, Novell Netware and other
network operating systems. The Company is designated as a Microsoft Authorized
Support Center (one of nine in the United States), a Lotus Premium Business
Partner and a Novell Authorized Service Center. The technology support centers
include large capacity file servers, multiple CD ROM databases and other
resources that enable the Company's support personnel to recreate a customer's
individual problem, develop a solution and guide the customer through the
solution on a step-by-step basis. Customers may utilize the Internet as an
electronic means to forward support questions and receive answers from the
Company.
The Company's technology support business grew rapidly in the 1998 fiscal
year. The growth has been primarily in providing help desk services under
contracts with software publishers, although the Company has also increased its
support business with end-users and organizations. The Company maintains
technology support facilities in Garland, Texas; Spokane, Washington; Dublin,
Ireland and Sydney, Australia.
CUSTOMER SERVICES
LICENSING, PROCUREMENT AND DEPLOYMENT SERVICES
The Company's customers can purchase software applications in a number of
different ways. VLM agreements, or right-to-copy agreements, allow a customer
either to purchase a license for each user in a
7
transaction-based process or track and periodically report its software copies,
paying a license fee for each copy made. The Company sells, supports and
services the various VLM arrangements currently utilized by software publishers.
For customers, the overall cost of using one of these methods of acquiring
personal computer software is likely to be substantially less than the
traditional method of purchasing shrink-wrapped full-packaged software products.
Since each major publisher has chosen a different set of procedures for
implementing VLM agreements, businesses are faced with a significant challenge
to sort through all the alternatives and procedures to ensure that they are
utilizing the appropriate agreements, complying with the publishers' licensing
terms and properly reporting and paying for their software licenses. Certain
publishers have recently introduced licensing programs that reduce the reporting
burden of customers and the Company by requiring annual payments over a two to
three year term, provided the customer agrees to standardize certain
applications within its organization. In order to address the wide range of
procurement choices available to its customers, the Company provides
information, analysis, advice and assistance to its customers relating to their
procurement decisions and negotiations through its team of licensing consultants
as well as by means of the Company's marketing and sales staff and through its
publications. See "World Wide Web Site and Publications" and "Sales and
Marketing."
To help customers develop or improve their personal computer software
management programs, the Company developed a software management process and
corresponding implementation services that allow customers to effectively
utilize the benefits associated with VLM programs. The Company provides its
customers with a methodology for evaluating the individual customer's personal
computer software management process and analyzing issues in implementing the
VLM programs offered by various publishers. The service options available from
the Company are designed to assist the customer in implementing its software
management plan, including internal distribution services, communication with
end-users, telephone support and reporting and compliance under VLM agreements.
Increasingly, large corporate customers are electing to standardize desktop
applications and coordinate their enterprise-wide personal computer management
responsibilities. In response to this trend, publishers have developed new types
of enterprise-wide VLM agreements, which simplify the terms, conditions and
administration of VLM arrangements and provide the customer with more
predictable annual costs. The Company works closely with its customers to
educate them regarding the opportunities available under VLM agreements and has
developed the systems needed to provide the global integration and milestone
reporting required under these programs.
The Company's licensing consultants are Software Publishers' Association
("SPA") certified software managers that are trained to provide customers with
advice in the evaluation of the various VLM programs offered by publishers. In
addition to the Company's extensive experience in dealing with VLM agreements,
it has continued to invest in technology-based systems to support the special
requirements necessary to service VLM agreements for its customers. The Company
has developed a custom, client/server-based system which provides individualized
customer contract management data, assists customers in complying with VLM
agreements and provides customers with necessary reporting mechanisms.
Most of the Company's products are ordered by the customer's procurement or
information systems department and may be billed to the department of the
end-user, which may be located at a different site than the procurement or
information systems department. The Company provides customers, upon request,
open-order status and purchase activity reports formatted to each customer's
specifications, or the same information can be obtained directly by the customer
from the Company's Web site. Also, the Company's electronic data interchange
("EDI") capabilities allow customers to submit orders (or other data) from their
computer systems to the Company via modem. EDI improves order accuracy and
reduces administrative costs for corporate customers and the Company.
8
MAINTENANCE AND UPGRADE SERVICES
A number of customers who have elected to purchase software licenses through
VLM agreements have also purchased maintenance, which allows customers to
receive new versions, upgrades or updates of software products released during
the maintenance period in exchange for a specified annual fee, which may be paid
in monthly, quarterly or annual installments. Upgrades and updates are revisions
to previously published software that improve or enhance certain features of the
software and correct errors found in previous versions. Customers that have
elected not to purchase maintenance agreements are still able to upgrade
multiple units of specific products through the Company.
ELECTRONIC SERVICES AND CAPABILITIES
The Company offers a number of services and is, on an on-going basis,
implementing new and enhanced systems to support its customers' migration toward
electronic commerce and electronic software distribution ("ESD").
ESD takes two forms; the first is distributing software within an
organization, via a company's internal network. ESD technology within a large
organization is a means to permit an organization to reduce the total cost of
ownership of desktop computing assets. ESD can provide hardware and software
asset management, remote desktop support and automatic installation of packaged
and custom software to the desktop.
Through its Technology Services Group, the Company supplies enterprise
software management services for customers who adopt ESD within their
organizations. These services help manage distributed PC environments through
use of products such as the Microsoft Systems Management Server and Tivoli's TME
10 product.
The second form of ESD is between businesses via electronic links such as
the Internet. This form of ESD supports the fast, convenient delivery of
software products. The Company intends to participate in this method of
distribution as demand for this service by large organizations emerges and as
communication technology improvements enable this form of ESD to become more
widely used.
The Company's World Wide Web site contains an on-line catalog of thousands
of products that can be purchased over the Internet. The Internet catalog
provides information about products through a comprehensive search engine,
extensive product descriptions and third-party reviews. For certain large
customers, the Company offers VISTA, a customer-specific, secure catalog
available over the Internet. Each specialized electronic catalog contains
specific products and pricing unique to that customer as well as information
particular to the VLM agreements in which that customer is enrolled. The
customer is also able to status open orders and order certain standard reports
on-line.
WORLD WIDE WEB SITE AND PUBLICATIONS
The Company's World Wide Web site provides customers with information
concerning the Company, its products and services, and the publishers
represented by the Company. The Company also provides information through
various Company publications. A portion of the marketing funds provided to the
Company by publishers is used to offset the Company's cost of producing these
publications. The Company publishes newsletters, service and product brochures
and product catalogs, and also provides other timely information coincident with
major product releases. IN TOUCH, a new comprehensive online magazine, offers
the latest news and commentary on industry trends, software products, promotions
and Company-sponsored workshops, seminars and other technology-related events.
The Company prepares and distributes an annual publication which includes
more in-depth analyses of various product offerings called the LICENSING AND
SOFTWARE MANAGEMENT GUIDE. This publication provides comprehensive information
on the many facets of software licensing. The Guide provides the purchasing
requirements and qualification restrictions of the numerous VLM publisher
programs. Issues
9
such as concurrent licensing and copying software on home or portable computers
are identified. Because of the potential savings a corporation can realize by
utilizing alternative procurement methods, customers have expressed a
significant amount of interest in this publication. In addition, the Software
Publishers' Association utilizes this publication in connection with its
certified software manager course curriculum.
SALES AND MARKETING
The Company sells and markets to its existing and potential large customers
through its account executives, professional services account managers
("PSAMs"), customer service representatives and its marketing and support staff.
The Company organizes account management teams to serve and support each of its
customer's needs for product and services. Generally, each team consists of one
account executive and/or PSAM, supported by technical, marketing, customer
service and sales support personnel located at the Company's operations centers
or TSG sites.
The Company assigns to account executives and PSAMs specific accounts and/or
a specific territory, which generally includes major metropolitan areas in one
or more countries, states or provinces. Account executives and PSAMs market the
overall service and advantages of using the Company as the customer's preferred
software and services supplier, and they concentrate on generating new customer
relationships, maintaining and improving existing customer relationships and
increasing the volume of software and services provided to corporate customers.
For national and international accounts, several account executives and/or PSAMs
may work with the customer in different parts of North America, Europe and
Asia/Pacific with all efforts coordinated by a designated national or global
account representative. The number of accounts handled by each account executive
or PSAM depends on the relative size of the accounts and the level of service
required by each customer within the assigned territory.
Account executives work directly with procurement managers, information
system managers and computer support managers of existing and potential
customers to identify the specific needs of each customer and to facilitate the
purchase of software products and services by the customer's organization.
Account executives maintain close contact with customers in order to provide
them with timely communications and assistance with any special or strategic
requests. Account executives are responsible for providing customers with useful
and relevant product information to assist the customer in its selection of
software available for the desired application, providing customers with
information and guidance on software procurement options including VLM
agreements, implementation and deployment of software under VLM agreements and
planning product presentations and seminars by representatives of the Company
and publishers.
The Company's licensing consultants work with its customers to provide
advice and consultation on VLM programs and to complete detailed customer
account analysis and reporting. The Company also assigns a team of customer
service representatives to each product account. Customer service
representatives, who are based primarily at the Company's operations centers,
handle all aspects of the day-to-day customer account servicing, including
common presale technical questions, customer order placement, order status
inquiries, requests for a demonstration product for evaluation and searches for
hard-to-find products. This structure enables customer service representatives
to develop close relationships with individuals within the customer's
organization and to better serve them by being familiar with their account. By
assigning a specific team of customer service representatives to specific
customers, the Company adds additional direct contacts that reinforce customer
relationships.
PSAMs work with senior and mid-level information technology professionals of
existing and potential customers to assist them in determining where and how
technology and products can be implemented to reduce the cost of managing and
supporting enterprise networks. They also consult with the Company's technology
specialists and product development professionals to determine how existing and
emerging technologies can best be utilized to meet the business needs of the
Company's customers.
10
To solicit business from mid-sized organizations, the Company utilizes a
coordinated effort from field sales and outbound calling team members. While
product price and delivery terms are key factors in mid-sized organizations, the
Company also provides a broad range of VLM agreement support and services, as
well as technical services to this category of customers. Initial contact and
sales are made typically through field sales or telephone inquiries.
SUPPORT SYSTEMS
The Company has developed certain proprietary support systems that
facilitate the delivery of product and services to its customers and has
invested in technology-based systems to support the special requirements
necessary to service VLM agreements for its customers. SOLO, a custom,
client/server-based system, provides individualized contract management data,
assists customers in complying with the terms of their VLM agreements and
provides customers with necessary reporting mechanisms. Using individualized
data in SOLO, in conjunction with the Company's contract management database,
the Company representatives can guide a customer through the various purchasing
options and assist in administering VLM agreements. SOLO also provides the
Company's customer service representatives with a customer profile, account
status, order status and product pricing and availability details.
PRODUCTS
In addition to selling, supporting and servicing the various VLM programs
available from software publishers, the Company inventories approximately 1,500
business software titles, ranging in price from approximately $2 to $16,000. In
certain international markets, the Company also sells hardware, peripheral
products and accessories, such as modems, expansion cards and keyboards.
Although the Company maintains an inventory of only the most popular products in
locations where it maintains warehouse facilities, the Company offers more than
27,000 different software and peripheral products to its customers.
The software applications offered by the Company include major business
programs such as spreadsheet, word processing, electronic mail, groupware,
database, and graphics, as well as operating systems, utilities and languages.
For the fiscal year ended April 30, 1998, the top 20 software titles sold by the
Company represented approximately 63% of the Company's net sales.
The Company maintains an extensive database of hard-to-find software
required by customers as well as software available from the Company's major
publishers and vendors. The Company continually adds to its database information
on these types of products and their sources of supply in order to expedite
customer requests.
DISTRIBUTION
A component of the Company's procurement services is its ability to provide
timely delivery of its products to customers by maintaining a sufficient
inventory of the most popular software products. The Company's United States
distribution operations are located in Louisville, Kentucky. The Company also
operates distribution facilities in Sydney, Australia and Auckland, New Zealand.
The Company generally ships products that it carries in inventory the same day
the Company receives the customer order, utilizing independent carriers. In
addition, the Company uses the services of publishers and distributors to ship
products directly to its customers, both in the United States and other
countries. As of April 30, 1998, the Company did not have a significant order
backlog.
CUSTOMERS
In fiscal 1998, the Company handled more than 12,000 active customer
accounts. The Company's customer base includes corporations, government
agencies, educational institutions, non-profit institutions and other business
entities. The Company also has established a presence in the educational market,
and
11
the Company has software resale authorizations from all major educational
product publishers. Sales contracts with large customers for the procurement of
products generally cover a one to three year period subject to the customers'
rights to terminate the contract upon notice. These contracts usually include
provisions regarding price, availability, payment terms and return policy.
Contracts covering technology services vary in length depending on the services
to be provided and are generally terminable upon 30 days notice. Standard
payment terms with the Company's customers are net 30 days from the date of
invoice or net 10 days in the case of summary periodic billings to customers. In
fiscal 1998, no single customer represented more than 5% of the Company's
revenues and the Company's customer base included 314 of the 1997 Fortune 500
companies and 194 of the Fortune Global 500 companies. The Company does not
believe that the loss of any single customer would have a material adverse
effect on its business.
VENDORS
Substantially all of the Company's sales from software are derived from
products purchased from publishers and distributors. The decision whether to buy
products directly from publishers or through distributors is determined on a
vendor-by-vendor basis based on publisher requirements, cost, availability,
return privileges and demand for a particular product. For fiscal 1998,
approximately 82% of the Company's sales represented products purchased from its
ten largest vendors. For each of the fiscal years ended April 30, 1998 and 1997,
products from Microsoft accounted for approximately 55% of net sales, and
products from IBM/Lotus accounted for approximately 10% of net sales.
The Company has contractual relationships with all its major vendors
covering price, payment terms and return privileges. These contracts are
non-exclusive and non-territorial and are generally terminable by either party
without cause upon 30 to 60 days notice. The Company's contracts with its major
vendors are generally for one or two year terms, and the majority contain no
provision for automatic renewal.
Publisher contracts generally permit the Company to return or dispose of
products within certain specified time periods in exchange for credit against
future purchases in the event that a product is defective or made obsolete,
whether through the development of upgrades, new releases or otherwise. In
addition, such contracts permit the Company to stock balance its inventory,
generally on a quarterly basis, by allowing returns for credit against future
purchases of a limited portion (usually 3% to 15%) of the products previously
purchased by the Company. Publisher contracts also generally permit the Company
to submit adjustment reports for licensing and maintenance transactions within a
certain time period after the transaction is reported. The agreements typically
provide that the Company may obtain credit against future purchases if the
vendor subsequently lowers its prices on products that have been purchased by
the Company within a 30 to 90 day period prior to such price decrease. The
purpose of the foregoing stock balancing and price protection provisions is to
permit the Company to maintain an inventory of products that is sufficient to
meet its customers' needs while reducing the obsolescence risks associated
therewith. Such contracts do not typically require the Company to ensure
end-user compliance with its publishers' licensing and copyright or patent right
protection provisions. Certain of the Company's contracts with vendors provide
for early payment discounts. Under the terms of its vendor contracts, the
Company is not generally required to meet any minimum purchase or sales
requirements, except to the extent that the Company's level of purchases or
sales may affect the amount or availability of financial incentives, advertising
allowances and marketing funds. The reduction in amount, discontinuance of or
the Company's inability to meet requirements established by vendors for
achieving financial incentives, advertising allowances and marketing funds could
have an adverse effect on the Company's business and financial results.
12
COMPETITION
The personal computer software market is intensely competitive. The Company
faces competition from a wide variety of sources, including traditional software
resellers, hardware dealers and aggregators and large systems integrators.
Current competitors from the software reseller category would include Corporate
Software and Technology, Inc., ASAP Corporate Express, Softmart and
Softwarehouse International. The Company believes that it possesses a number of
significant differentiating features from this group. These features include the
Company's global presence and capabilities, extensive technology services
capabilities and offerings, VLM expertise, services and systems that support the
Company's business and knowledgeable, industry-experienced personnel.
Competitors also include hardware dealers and aggregators. These companies
compete in the large organization market with marketing efforts to provide
customers with complete software and hardware services. Other competitors
include Dell Computer Corporation, a hardware manufacturer that also sells
software, and large systems integrators such as GE Capital Corporation, Digital
Equipment Corporation and Electronic Data Systems. These companies do have a
global presence and offer technology services. The Company believes its VLM
expertise and services, custom computing systems specifically designed to
support the Company's business and knowledgeable industry-experienced personnel
are differentiating factors in this group of competitors.
In the technology services market, there are a significant number of
competitors, ranging from small local consulting services practices to large
companies such as Whittman-Hart, the technology services divisions of major
hardware resellers such as VanStar Corporation, ENTEX Information Services, Inc.
and Compucom Systems, Inc. and the consulting divisions of national accounting
firms such as Andersen Consulting. The Company believes that its concentration
on high-end enterprise architectural planning and consultation covering multiple
key specific technologies helps to differentiate the Company from other
competitors in the technology services area of its business, as well as its
global presence.
The manner in which personal computer software products are distributed and
sold is continually changing and new methods of distribution may emerge or
expand. Software publishers may intensify their efforts to sell their products
directly to end-users, including current and potential customers of the Company.
In the past, direct sales from software publishers to end-users have not been
significant, although end-users have traditionally been able to purchase
upgrades directly from publishers. From time to time, some publishers have
instituted programs for the direct sale of single large order quantities of
software to major corporate accounts, and the Company anticipates that these
types of transactions will continue to be used by various publishers in the
future. The Company could be adversely affected if major software publishers
successfully implement programs for the direct sale of software through volume
purchase agreements or other arrangements intended to exclude the resale
channel. The Company believes that the total range of services it provides to
its customers cannot be easily substituted by publishers, particularly because
publishers do not offer the scope of services or product offerings required by
most of the Company's customers. However, there can be no assurance that
publishers will not increase their efforts to sell substantial quantities of
software directly to end-users. In addition, the acceptance of VLM agreements by
organizations as a method to purchase software has continued to expand over the
past year. Should publishers permit others to sell VLM agreements, or should
additional competitors develop the capabilities required to service and support
large licensing programs, the Company's competitive advantage could be
negatively impacted. If the resale channel's participation in VLM agreements is
reduced or eliminated or if other methods of distribution of software become
common, the Company's business and financial results could be materially
adversely affected. Management believes that greater acceptance of VLM
agreements will be one of the factors that over time will lead to electronic
distribution of software. The Company intends to participate in this method of
software distribution as demand for this service by large organizations emerges
and as communications technology improvements permit electronic software
distribution to be made securely and efficiently. The Company's continuing
investment in electronic software distribution and electronic commerce reflects
the Company's commitment to meeting
13
the changing needs of its customers. There continues to be an increase in the
sale of personal computers to homes and small businesses with many popular
software application programs bundled with the hardware. If bundling of software
with hardware becomes accepted by large corporate customers in the future, such
bundling could have an adverse effect on the Company's business.
EMPLOYEES
As of April 30, 1998, the Company had approximately 1,700 employees in North
America, Europe and Asia/Pacific. Over 550 additional employees were added by
June 30, 1998, as a result of a large support contract won by the Company. The
Company has entered into non-competition agreements and/or non-solicitation
agreements with substantially all of its sales and Technology Services Group
personnel. None of the Company's employees are represented by a union.
ITEM 2. PROPERTIES
The Company currently leases approximately 211,000 square feet of space in
Garland, Texas (a suburb of Dallas) for its corporate headquarters. The Garland
leases have current monthly payments of approximately $79,000 and, pursuant to
recent extensions, have remaining terms of seven to nine years. The Company
leases approximately 71,000 square feet of office space in Spokane, Washington
with current monthly payments of approximately $55,000. As of April 30, 1998,
the Spokane lease had a remaining term of three years. The Company's
distribution facility in Louisville, Kentucky consists of approximately 62,500
square feet of space which is leased for approximately $18,000 per month. The
remaining term of the Louisville lease is approximately three years. Within
North America, the Company also leases office space in various markets for its
Technology Services Group.
With respect to its European-based operations, the Company currently leases
space for its operations center in Dublin, Ireland, and leases office space in
three other markets. In Asia/Pacific, the Company occupies leased office space
in seven markets.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The ultimate disposition of these matters will not
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended April 30, 1998.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded over the counter and is listed on The
Nasdaq Stock Market under the symbol SSPE. The following table sets forth the
range of high and low last reported sales prices for the Company's common stock
for the last eight fiscal quarters.
HIGH LOW
--------- ---------
Fiscal Year 1998 Quarter Ended:
July 31.............................................................................. $ 15.00 $ 10.50
October 31........................................................................... 19.13 12.75
January 31........................................................................... 15.75 11.19
April 30............................................................................. 22.56 15.38
Fiscal Year 1997 Quarter Ended:
July 31.............................................................................. 25.00 21.50
October 31........................................................................... 30.50 23.00
January 31........................................................................... 33.50 22.50
April 30............................................................................. 24.25 13.00
On July 24, 1998, the last reported sales price of the Company's common
stock as reported on The Nasdaq Stock Market was $19.88 per share. On July 24,
1998 there were 558 holders of record (representing approximately 2,000
beneficial owners) 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this document.
STATEMENT OF OPERATIONS DATA
(In thousands, except per share amounts)
YEAR ENDED APRIL 30, YEAR ENDED MARCH 31,(1)
---------------------- ----------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Net sales............................................ $ 884,087 $ 796,285 $ 398,501 $ 352,141 $ 283,063
Gross margin......................................... 100,310 94,330 54,438 48,328 38,142
Operating income..................................... 11,149 1,816 10,163 12,938 10,562
Net income (loss).................................... 4,487 (845) 7,366 8,788 7,004
Earnings (loss) per share (2)
Basic.............................................. 1.04 (.20) 1.76 2.11 1.69
Diluted............................................ 1.03 (.20) 1.73 2.08 1.66
Weighted average shares outstanding
Basic.............................................. 4,318 4,314 4,196 4,169 4,145
Diluted............................................ 4,351 4,314 4,260 4,217 4,216
15
BALANCE SHEET DATA
(In thousands)
AS OF APRIL 30, AS OF MARCH 31,
---------------------- ---------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
Working capital....................................... $ 11,908 $ 31,673 $ 59,052 $ 58,407 $ 50,619
Total assets.......................................... 258,631 270,441 150,180 124,698 94,255
Total debt............................................ 8,206 37,370 -- -- --
Shareholders' equity.................................. 76,270 73,939 73,363 65,834 57,041
- ------------------------
(1) In fiscal 1997, the Company changed its fiscal year-end from March 31 to
April 30.
(2) The earnings per share amounts prior to 1998 have been restated to comply
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
ITEM 7. 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 sells PC software through volume licensing 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 VLM agreements, the third month of each calendar quarter generally
represents 40% to 60% of the Company's quarterly sales volume. Accordingly, in
1997, the Company changed its fiscal year-end from March 31 to April 30 to
better match the Company's fiscal periods 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, privately-held information technology
companies, at a purchase price of $6.3 million. The acquisition of Essentially
Group provides 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
serve the major worldwide desktop technology markets and the needs of 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. for $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 also provides enhanced comparability
between fiscal 1997 and 1998, as the financial impact of the Company's May 1996
acquisition of the CGE division--which doubled the size of the Company--is now
reflected across each quarter of fiscal 1997.
Throughout this discussion, "fiscal 1998" and "fiscal 1997" refer to the
fiscal years ended April 30, 1998 and 1997. "Fiscal 1996" refers to the fiscal
year ended March 31, 1996.
16
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
PERCENTAGE OF NET SALES
FOR YEAR ENDED
--------------------------------------
APRIL 30, APRIL 30, MARCH 31,
1998 1997 1996
----------- ----------- ------------
Net sales.............................................................. 100.0% 100.0% 100.0%
Cost of sales.......................................................... 88.7 88.2 86.3
----- ----- -----
Gross margin........................................................... 11.3 11.8 13.7
Selling, general and administrative expenses........................... 9.0 10.6 10.4
Depreciation and amortization.......................................... 1.1 1.0 .7
----- ----- -----
Operating income....................................................... 1.2 .2 2.6
Interest expense (income), net......................................... .3 .3 (.2)
----- ----- -----
Income (loss) before income taxes...................................... .9 (.1) 2.8
Income tax expense..................................................... .4 -- 1.0
----- ----- -----
Net income (loss)...................................................... .5% (.1)% 1.8%
----- ----- -----
----- ----- -----
NET SALES
Sales have increased each year since the Company's inception in 1983.
Increases in sales of PC software and technology services have resulted from the
Company's market share growth, geographic expansion and strategic acquisitions.
Sales increases also reflect overall growth in the PC software and technology
services industries.
For the year ended April 1998, sales of PC software increased 9%. Software
sales increased 100% for the year ended April 1997 due to the CGE acquisition.
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 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 PC software in
recent years. Sales of software through VLM agreements represented 72%, 59% and
46% of net sales for fiscal 1998, 1997 and 1996, respectively.
For the years ended April 1998 and 1997, revenue from technology services
provided through the Company's Technology Services Group ("TSG") increased 63%
and 138%, respectively. The Company increased its technology services locations
from ten at March 31, 1996, to 23 worldwide locations at April 30, 1998. The
Company plans to open additional international sites during fiscal 1999. In
fiscal 1998 and 1997, fee-based technology services represented approximately 6%
and 4% of the Company's overall sales; however, such revenue generated
approximately 21% and 16% of the Company's gross margin dollars. During fiscal
1998, the Company saw continued improvement in the contribution to overhead from
its consulting sites and expanding technology support centers, which provide
fee-based telephone support on behalf of software publishers and corporate
customers. As more of the consulting offices mature over time, the impact of TSG
on the Company's consolidated operating results should 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 Group
and to capitalize on continued growth in desktop technology markets around the
world.
17
INTERNATIONAL OPERATIONS
For fiscal 1998 and 1997, sales outside of the United States totaled $128
million and $106 million as compared to $27 million for fiscal 1996, when the
Company's international operations were limited to the Canadian and European
markets.
Sales in Europe increased 100% to $55.3 million in fiscal 1998 as compared
to $27.7 million in the prior year. The increase is primarily due to increased
sales of software under VLM agreements.
In fiscal 1998, the Company's operating loss in Asia/Pacific was
approximately $2.5 million, a reduction from the $4.9 million operating loss
reported in the prior year. In recent quarters, the Company has adjusted its
Asia/Pacific business model to mirror the lower-cost, more centralized structure
in the Company's North American and European operations. Recently installed
information systems have allowed the Company to complete its consolidation into
a centralized operations center in Sydney, Australia. In addition, the Company
has reduced expenses by closing smaller unprofitable offices and reducing the
number of employees in the region.
Fluctuations in foreign currencies against the U.S. dollar did not have a
significant effect on the Company's operating results for the periods presented.
GROSS MARGIN
Overall gross margin as a percentage of net sales was 11.3%, 11.8% and 13.7%
in fiscal 1998, 1997 and 1996, respectively. The decline in overall gross margin
as a percentage of net sales reflects the decline in gross margin on the sale of
PC software, discussed below. In addition, gross margin was negatively impacted
by 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 1998, gross margins on PC software sales declined to 9.5%, as
compared to 10.4% in fiscal 1997 and 11.9% in fiscal 1996. The decline in
product gross margins reflects the increasing percentage of VLM product sales
and lower levels of financial incentives available from suppliers. 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 fiscal 1998 was partially offset by
growth in revenue from fee-based services, which have higher gross margins as a
percent of net sales than sales of software. The contribution from these
services represented approximately 21% of overall gross margin dollars in fiscal
1998 as compared to 16% and 17% of gross margin dollars in fiscal 1997 and 1996,
respectively.
The Company believes its gross margin percentage 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 further reducing financial incentives available to
resellers. The Company believes that this potential decrease in product gross
margin percentage may be partially offset by anticipated increases in revenue
from technology services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include the costs of the
Company's sales and marketing organization as well as 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 and vendors. These funds are offset
against related selling, general and administrative expenses.
For fiscal 1998, 1997 and 1996, selling, general and administrative
expenses, as a percentage of net sales, were 9.0%, 10.6% and 10.4%,
respectively. Selling, general and administrative expenses in fiscal 1997
18
reflected 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. Excluding these identifiable transition costs, selling, general
and administrative expenses as a percentage of net sales would have been 10.2%
for fiscal 1997. The decline in selling, general and administrative expenses as
a percentage of net sales is due in part to the Company's ongoing efforts to
reduce its operating costs, as well as operating efficiencies realized as a
result of the Company's larger size.
DEPRECIATION AND AMORTIZATION
The increases in depreciation and amortization for fiscal 1998 and 1997 as
compared to fiscal 1996 reflect depreciation on the higher level of fixed assets
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 1998, 1997 and 1996 were 45%,
45% and 35%, respectively. The increase in the effective tax rates since fiscal
1996 reflects the impact of foreign operations and an increase in non-deductible
expenses, primarily goodwill amortization in Asia/Pacific.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company had approximately $7.1 million in cash and
cash equivalents. In fiscal 1998, the Company amended its bank financing
arrangements by restructuring its $30 million term loan and $60 million
revolving line of credit as a $100 million secured revolving credit facility
(the "Amended Facility"). The Amended Facility, which is secured by accounts
receivable, inventory and a pledge of the stock of certain of the Company's
subsidiaries, permits the Company to borrow up to $100 million, subject to
availability under its borrowing base. As of April 30, 1998, the Company had no
outstanding borrowings under the Amended Facility. The Amended Facility requires
the Company to maintain certain financial covenants and ratios and places
limitations on dividend payments, capital expenditures and certain other
borrowings. The Amended Facility bears interest at a variable rate and expires
in March 2001. In addition, the Company had approximately $7.3 million
outstanding under its $8 million foreign revolving credit facilities. These
facilities are secured by letters of credit issued by the Company and expire in
April 1999. The Company intends to refinance the outstanding amounts through
borrowings under the Amended Facility.
In September 1997, the Company announced the adoption of a Stock Repurchase
Plan, which allows the Company to purchase up to $2.5 million of the Company's
common stock in the open market or through privately negotiated transactions.
The Company funds such purchases with cash or borrowings under its credit
facility. As of June 30, 1998, the Company had repurchased 130,300 shares of
common stock, for a total of $2.2 million, under the Stock Repurchase Plan. In
July 1998, the Company announced the extension of the Stock Repurchase Plan to
include an additional $2.5 million.
The increase in trade accounts receivable from April 30, 1997 to April 30,
1998 reflects the increase in net sales for fiscal 1998 offset by improved
collections. At April 30, 1998 and 1997, accounts receivable represented
approximately 61 and 75 days of historical sales, respectively. The Company
generally carries inventory adequate to meet product sales levels for a period
of less than one month. The decrease in inventory as of April 30, 1998 compared
to April 30, 1997 resulted from the increasing percentage of product sales under
VLM agreements as well as a shift toward shipping product directly from the
Company's vendors.
19
Net cash provided by operations was $37.7 million in fiscal 1998, as opposed
to $13.1 million of cash used in operations in fiscal 1997. The increase in cash
provided by operations reflects the Company's improved profitability, reduced
inventory levels and increased collections on accounts receivable. In addition,
the Company used a higher level of cash in its operations in fiscal 1997 as it
financed the growth in its receivables resulting from increased sales following
the CGE acquisition. In fiscal 1996, $16.7 million of cash was provided by
operations. The Company realized cash from operations in fiscal 1996 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 did not increase its
inventory balances in proportion to its sales growth.
The increase in furniture, equipment and leasehold improvements in fiscal
1998 reflects approximately $8.1 million of capital expenditures relating to the
ongoing upgrade of the Company's computer systems and expansion of its
operations centers in Garland, Texas and Dublin, Ireland. The increase in
furniture, equipment and leasehold improvements in fiscal 1997 reflected
approximately $2 million of capital assets included in the Company's
acquisitions and approximately $11.6 million of capital expenditures related to
installation of computer and telephone systems to support these acquisitions,
ongoing upgrade of the Company's existing computer and telephone systems,
expansion of its technology services offices, and relocation and consolidation
of its United States distribution facilities in Louisville, Kentucky. The
Company's capital expenditures for fiscal 1999 are expected to exceed $9
million, including expenditures to further upgrade the Company's computer
systems and to expand its U.S. operations facilities.
The Company expects that its cash requirements for fiscal 1999 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
YEAR 2000
Over the last three years, the Company has replaced or upgraded most of the
core management information systems used in the Company's business. The Company
is currently conducting a review of these systems to verify their compliance
with Year 2000 date codes. In addition, the Company is conducting an inventory,
review and assessment of its desktop computers, networks and servers, software
applications and packages, and products and services provided by third parties
for internal operations to determine whether or not they support Year 2000 date
codes. The Company is also developing an overall plan outlining the tasks,
resources and target dates necessary to ensure the ongoing operation of the
Company's systems through the turn of the century and beyond. The Company plans
to complete remediation of the systems that are not currently in compliance and
to begin testing all of its systems in fiscal 1999. While the Company's
inventory, review and assessment is still in process, the Company expects that
the required modifications will be made on a timely basis and that the cost of
such modifications will not have a material effect on the Company's operating
results.
The Company's Year 2000 initiative also provides for contacting key software
vendors to determine whether they have effective plans to address the Year 2000.
In the event that the Company's key vendors cannot provide the Company with
software products that meet Year 2000 requirements on a timely basis, or if
customers delay or forego software purchases based upon Year 2000 related
issues, the Company's operating results could be materially adversely affected.
In general, as a reseller of software products, the Company only passes through
to its customers the applicable vendors' warranties. The Company's operating
results could be materially adversely affected, however, if it were held liable
for the failure of software products resold by the Company to be Year 2000
compliant despite its disclaimer of software product warranties.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Other than statements of historical fact, this Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as the
accompanying Annual Report on Form 10-K, includes
20
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 that 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, which includes the ability of the
Company to develop electronic strategies. Although the Company believes these
assumptions are reasonable, no assurance can be given that they will prove
correct. The Company's ability to continue to grow 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. 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 cautionary statements under "Forward-Looking
Information" in Item I identify factors that could cause the Company's actual
results to differ materially from those in the forward-looking statements in
this document. All forward-looking statements in this document are expressly
qualified in their entirety by the cautionary statements in this paragraph and
under "Forward-Looking Information."
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the current directors of the Company, and the
persons nominated for election as directors of the Company at its Annual Meeting
of Shareholders to be held on September 17, 1998, will appear in the Company's
definitive Proxy Statement relating to the Annual Meeting of Shareholders under
the caption "Election of Directors" to be filed pursuant to Regulation 14A. Such
information is incorporated herein by reference.
21
EXECUTIVE OFFICERS
Officers are elected annually by the Board of Directors and serve until
their successors are elected and qualified. The current executive officers of
the Company are as follows:
OFFICER
NAME POSITION SINCE AGE
- ---------------------- ---------------------------------------------------------------- ----------- ---
Judy O. Sims Chairman and Chief Executive Officer 1983 45
Keith R. Coogan President and Chief Operating Officer 1990 46
Roger J. King Executive Vice President of Sales and Marketing 1990 45
Richard G. Sims Senior Vice President 1983 44
James W. Brown Vice President and Chief Financial Officer 1998 41
Robert D. Graham Vice President of Strategic Relationships and General Counsel, 1997 43
Secretary
Robert B. Mercer Vice President and Chief Information Officer 1994 46
Lisa M. Stewart Vice President of Customer Operations 1996 36
Lorraine Castorina Vice President of North American Sales 1998 52
Link W. Simpson Vice President of Services 1998 44
Melissa D. Womack Vice President of Marketing 1998 40
Judy O. Sims has served as Chief Executive Officer of the Company since
April 1988 and Chairman of the Board since July 1992. Ms. Sims is a co-founder
of the Company and has been a director of the Company since its inception in
1983. Ms. Sims served as Treasurer of the Company from 1983 to October 1990, as
Vice President from April 1987 to April 1988 and as President from April 1996 to
May 1998. Ms. Sims was employed by the national accounting firm of Grant
Thornton LLP from 1977 to 1985, where she last served as an audit partner. Ms.
Sims is a Certified Public Accountant and is married to Richard Sims.
Keith R. Coogan was named President in May 1998 and has been Chief Operating
Officer since April 1996. Mr. Coogan served as Executive Vice President of the
Company from April 1996 to May 1998 and had been a Vice President of the Company
since October 1990. Mr. Coogan served as Secretary of the Company from May 1991
through July 1992 and as Treasurer from October 1990 to March 1992. From May
1989 until joining the Company, Mr. Coogan served as Vice President of Finance
for Leather Center Holdings, Inc., a privately-held manufacturer and retailer of
leather furniture. From January 1986 to May 1989, he was Vice President and
Chief Financial Officer of Trinity Texas Corporation and Ward Hunt Investments,
both of which were privately-held real estate sales and development
organizations. Mr. Coogan is a Certified Public Accountant.
Roger J. King was named Executive Vice President of Sales and Marketing in
May 1998, having held the title of Vice President of Sales and Marketing since
April 1996. From September 1990 to March 1996, Mr. King served as Vice President
of Sales of the Company. Mr. King was employed by Lotus Development Corporation
from September 1987 to September 1990, where he last served as Regional Manager
for the software business group and was responsible for product sales in a
14-state region. From July 1985 to September 1987, Mr. King was a Vice President
of the banking software group of Sterling Software, Inc., a software development
company. Prior thereto, he spent nine years with IBM in various sales and sales
management positions.
Richard G. Sims is a co-founder of the Company and has been a director of
the Company since 1983. In April 1996, Mr. Sims assumed the title of Senior Vice
President with responsibility for the Company's Asia/Pacific expansion and
operations. He is also involved with internal information systems design. From
22
1983 to March 1996, Mr. Sims served as President of the Company. Prior to 1983,
Mr. Sims served as controller for various companies. Mr. Sims is a Certified
Public Accountant and is married to Judy Sims.
James W. Brown joined the Company in February 1998 as Vice President and
Chief Financial Officer. From November 1991 until joining the Company, Mr. Brown
served as Vice President of Corporate Accounting for Affiliated Computer
Services, Inc., a publicly-held information technology outsourcing provider. Mr.
Brown is a Certified Public Accountant.
Robert D. Graham was elected Vice President of Strategic Relationships and
General Counsel in January 1997 and Secretary in February 1997. Mr. Graham
served on the Board of Directors of the Company from 1991 until February 1997.
From 1980 through January 1997, Mr. Graham was in the private practice of law
with the law firm of Locke Purnell Rain Harrell (A Professional Corporation) and
its predecessor, in Dallas, Texas.
Robert B. Mercer has been a Vice President and the Chief Information Officer
of the Company since January 1994. Mr. Mercer is responsible for internal
software application development and information systems processing for the
Company. From March 1992 until joining the Company, Mr. Mercer was the Vice
President and Chief Information Officer of Lechters, Inc., a publicly-held
specialty retailer. From 1988 to March 1992, he served as Senior Vice President
and Chief Information Officer of KG Men's Store, a privately-held clothing store
chain.
Lisa M. Stewart has been Vice President of Customer Operations since April
1996. From January 1994 through March 1996, Ms. Stewart served as Director of
Customer Operations for the Company after having served in various sales, sales
management and operations positions. Prior to joining the Company in 1988, Ms.
Stewart was employed by Fox T.V. and Hilton Services Corporation.
Lorraine Castorina was promoted to Vice President of North American Sales in
May 1998. Ms. Castorina joined the Company in February 1987 and has served in
various sales positions, most recently as Director of North American
Sales--West.
Link W. Simpson was promoted to Vice President of Services in May 1998. Mr.
Simpson also serves as President of the Company's Technology Services Group, a
position he has held since February 1992. From 1985 until February 1992, Mr.
Simpson managed Info-Pro, Inc., a network integration and applications
development services company, which was acquired by the Company in February
1992. Before forming Info-Pro, Mr. Simpson was employed by Rockwell,
International for nine years, where he held various positions in systems
engineering and business development.
Melissa D. Womack was promoted to Vice President of Marketing in May 1998.
From May 1997 through April 1998, Ms. Womack served as Director of Marketing for
the Company. Ms. Womack was previously Director of Sales and Marketing for SABRE
Interactive and served in other marketing and sales positions for the SABRE
Group since 1987.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on September 17,
1998, under the caption "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on September 17,
1998, under the captions "Stock Ownership of Principal Shareholders" and "Stock
Ownership of Management," which information is incorporated herein by reference.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(1) and (2)--Index to Financial Statements and Schedules--The information
required by this portion of Item 14 is set forth in a separate section
following Part IV of this Report.
(3)--The following documents are filed or incorporated by reference as
exhibits to this Report:
3.1(a) Restated Articles of Incorporation of the Company, filed with the
Secretary of State of Texas on May 12, 1989, as amended (incorporated by
reference to the Company's Registration Statement No. 33-40794 on Form
S-1).
3.1(b) Statement of Designation of Series A Junior Participating Preferred Stock
(incorporated by reference to the Company's Current Report on Form 8-K
dated December 13, 1996).
3.1(c) Articles of Amendment to Restated Articles of Incorporation, filed with
the Secretary of State of Texas on November 25, 1996 (incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1997).
3.1(d) Statement of Cancellation of Treasury Shares, filed with the Secretary of
State of Texas on March 21, 1997 (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended April 30,
1997).
3.2 Restated Bylaws of the Company, as amended (incorporated by reference to
the Company's Registration Statement No. 33-40794 on Form S-1).
3.3 Rights Agreement between the Company and KeyCorp Shareholder Services,
Inc., (the "Rights Agreement") dated December 13, 1996, (incorporated by
reference to the Company's Current Report on Form 8-K dated December 13,
1996).
3.4 Letter of Substitution of Rights Agent under Rights Agreement, dated June
7, 1997 (appointing ChaseMellon Shareholders Services, L.L.C. as
successor rights agent).
10.1 IBM Business Partner Agreement between the Company, IBM Corporation and
Lotus Development Corporation dated June 30, 1997 (incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1997).
10.2 Microsoft Corporation Channel Agreement dated July 1, 1997 between
Microsoft Corporation and the Company, including Addendum dated July 1,
1997 (Appointment as a Direct Reseller); Addendum dated July 1, 1997
(Appointment as a Large Account Reseller); and Addendum dated July 1,
1997 (Rebate and Marketing Fund).
10.3 [intentionally omitted]
10.4(a) Commercial Lease Agreement, dated May 1, 1990, between CIIF Associates II
Limited Partnership and the Company (incorporated by reference to the
Company's Registration Statement No. 33-40794 on Form S-1).
10.4(b) Amendment to Lease Agreement dated March 31, 1995 between CIIF Associates
II Limited Partnership and the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1995).
24
10.4(c) Third Amendment to Lease Agreement dated effective as of April 20, 1998
between CIIF Associates II Limited Partnership and the Company.
10.5(a) Commercial Lease Agreement dated as of April 19, 1993, between Kancro,
L.P. and the Company (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993).
10.5(b) Amendment #2--Expansion Agreement to Lease Agreement dated as of June 20,
1994 between Kancro, L.P. and the Company (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1994).
10.5(c) Third Amendment to Commercial Lease Agreement dated effective April 1,
1995 between Kancro, L.P. and the Company (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1995).
10.5(d) Fourth Amendment to Commercial Lease Agreement dated effective as November
25, 1996 between Kancro, L.P. and the Company (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1997).
10.5(e) Fifth Amendment to Commercial Lease Agreement dated effective as of March
9, 1998 between Kancro, L.P. and the Company.
10.6 Lease Agreement between Spokane Teachers Credit Union and the Company
dated May 1, 1998.
10.7 Lease Agreement dated March 8, 1996 by and between Riverport Commerce
Center, Inc. and the Company (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996).
10.8 Lease Agreement dated April 26, 1996 by and between Beneficiaries of
American National Bank Trust Number 104601-03 and the Company
(incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996).
10.9 1989 Stock Option Plan of the Company, as amended (incorporated by
reference to the Company's Registration Statement No. 33-40794 on Form
S-1).
10.10 Software Spectrum, Inc. Employee Stock Purchase Plan, as amended
(incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended April 30, 1997).
10.11 The Software Spectrum, Inc. 1993 Long Term Incentive Plan (incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1994).
10.12 Employees' Profit Sharing Plan of the Company, Adoption Agreement dated
December 14, 1994 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995).
10.13 Management Continuity Agreement ("Continuity Agreement") between the
Company and James W. Brown, dated March 1, 1998, together with schedule
identifying additional executive officers that are parties to Continuity
Agreements.
10.14 Non-Employee Directors' Retainer Stock Plan (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the Quarter ended
December 31, 1995).
25
10.15 Limited Waiver Agreement, dated July 31, 1997, between the Company and
Private Capital Management, Inc. (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 1997).
10.16 Amended and Restated Credit Agreement dated March 11, 1998 among the
Company, the Chase Manhattan Bank, as Administrative Agent, Chase Bank
of Texas, National Association, as Collateral Agent and other
participating financial institutions (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 1998).
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP, Independent Accountants
24 Power of Attorney (included on the signature page of this Form 10-K).
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter ended April 30,
1998.
26
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Certified Public Accountants
Financial Statements (Item 14(a) (1))
Consolidated Balance Sheets as of April 30, 1998 and 1997
Consolidated Statements of Operations for the two years ended April 30, 1998, the
month ended April 30, 1996 and the year ended March 31, 1996
Consolidated Statements of Shareholders' Equity for the two years ended April 30,
1998, the month ended April 30, 1996 and the year ended March 31, 1996
Consolidated Statements of Cash Flows for the two years ended April 30, 1998, the
month ended April 30, 1996 and the year ended March 31, 1996
Notes to Consolidated Financial Statements
Financial Statement Schedule (Item 14 (a) (2))
Report of Independent Certified Public Accountants on Schedules
Schedule II--Valuation and Qualifying Accounts for the two years ended April 30,
1998, the month ended April 30, 1996 and the year ended March 31, 1996
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required or are
inapplicable and therefore have been omitted. Individual financial statements of
Software Spectrum, Inc. have been omitted since consolidated financial
statements are being filed and no significant amount of the assets of the
subsidiaries included in the consolidated financial statements being filed are
restricted as to transfer to Software Spectrum, Inc.
27
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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended April 30, 1998 and 1997, the month ended April 30, 1996, and the
year ended March 31, 1996. 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, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for the years
ended April 30, 1998 and 1997, the month ended April 30, 1996, and the year
ended March 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
- -------------------------------
Grant Thornton LLP
Dallas, Texas
June 24, 1998
28
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
APRIL 30,
----------------------
1998 1997
---------- ----------
Current assets
Cash and cash equivalents............................................................... $ 7,129 $ 7,440
Trade accounts receivable, net of allowance for doubtful accounts of $3,050 in 1998 and
$2,421 in 1997........................................................................ 171,460 161,469
Inventories............................................................................. 4,564 18,285
Prepaid expenses........................................................................ 2,279 6,596
Other current assets.................................................................... 1,024 3,015
---------- ----------
Total current assets.................................................................. 186,456 196,805
Furniture, equipment and leasehold improvements, at cost.................................. 37,951 30,627
Less accumulated depreciation and amortization.......................................... 17,538 11,440
---------- ----------
20,413 19,187
Other assets, consisting primarily of goodwill, net of accumulated amortization of $5,661
in 1998 and $2,858 in 1997.............................................................. 51,762 54,449
---------- ----------
$ 258,631 $ 270,441
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt.................................................... $ 393 $ 6,000
Trade accounts payable.................................................................. 160,331 145,260
Other current liabilities............................................................... 13,824 13,872
---------- ----------
Total current liabilities............................................................. 174,548 165,132
Long-term debt, less current maturities................................................... 7,813 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, 4,397,678 shares in
1998 and 4,363,523 shares in 1997..................................................... 44 44
Additional paid-in capital.............................................................. 39,496 39,040
Retained earnings....................................................................... 40,765 36,278
Currency translation adjustments........................................................ (2,627) (877)
---------- ----------
77,678 74,485
Less treasury stock at cost--92,111 shares in 1998 and 34,311 shares in 1997............ 1,408 546
---------- ----------
Total shareholders' equity............................................................ 76,270 73,939
---------- ----------
$ 258,631 $ 270,441
---------- ----------
---------- ----------
See notes to consolidated financial statements.
29
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MONTH
APRIL 30, ENDED YEAR ENDED
---------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
---------- ---------- --------- ----------
Net sales......................................................... $ 884,087 $ 796,285 $ 28,380 $ 398,501
Cost of sales..................................................... 783,777 701,955 24,260 344,063
---------- ---------- --------- ----------
Gross margin.................................................... 100,310 94,330 4,120 54,438
Selling, general and administrative expenses...................... 79,510 84,734 4,667 41,459
Depreciation and amortization..................................... 9,651 7,780 297 2,816
---------- ---------- --------- ----------
Operating income (loss)......................................... 11,149 1,816 (844) 10,163
Interest expense (income)
Interest expense................................................ 3,279 2,956 42 53
Interest income................................................. (332) (358) (122) (1,175)
---------- ---------- --------- ----------
2,947 2,598 (80) (1,122)
---------- ---------- --------- ----------
Income (loss) before income taxes............................... 8,202 (782) (764) 11,285
Income tax expense (benefit)...................................... 3,715 63 (269) 3,919
---------- ---------- --------- ----------
Net income (loss)............................................... $ 4,487 $ (845) $ (495) $ 7,366
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Earnings (loss) per share
Basic........................................................... $ 1.04 $ (.20) $ (.12) $ 1.76
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Diluted......................................................... $ 1.03 $ (.20) $ (.12) $ 1.73
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Weighted average shares outstanding
Basic........................................................... 4,318 4,314 4,263 4,196
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Diluted......................................................... 4,351 4,314 4,263 4,260
---------- ---------- --------- ----------
---------- ---------- --------- ----------
See notes to consolidated financial statements.
30
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
COMMON STOCK ADDITIONAL CURRENCY TREASURY STOCK
---------------------- PAID-IN RETAINED TRANSLATION ----------------------
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS SHARES AMOUNT
--------- ----------- ----------- ----------- ------------- --------- -----------
Balances at April 1, 1995............... 4,209,550 $ 42 $ 35,979 $ 30,252 $ 63 (32,238) $ (502)
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $165............................... 31,834 -- 415 -- -- -- --
Purchase of treasury stock.............. -- -- -- -- -- (1,788) (36)
Net income.............................. -- -- -- 7,366 -- -- --
Currency translation adjustments........ -- -- -- -- (216) -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at March 31, 1996.............. 4,241,384 42 36,394 37,618 (153) (34,026) (538)
Stock issued pursuant to employee
benefit plans......................... 776 -- 14 -- -- -- --
Stock issued in connection with
acquisition of Essentially Group...... 55,363 1 1,136 -- -- -- --
Net loss................................ -- -- -- (495) -- -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at April 30, 1996.............. 4,297,523 43 37,544 37,123 (153) (34,026) (538)
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $103............................... 66,000 1 1,496 -- -- -- --
Purchase of treasury stock.............. -- -- -- -- -- (285) (8)
Net loss................................ -- -- -- (845) -- -- --
Currency translation adjustments........ -- -- -- -- (724) -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at April 30, 1997.............. 4,363,523 44 39,040 36,278 (877) (34,311) (546)
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $5................................. 34,155 -- 456 -- -- -- --
Purchase of treasury stock.............. -- -- -- -- -- (57,800) (862)
Net income.............................. -- -- -- 4,487 -- -- --
Currency translation adjustments........ -- -- -- -- (1,750) -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at April 30, 1998.............. 4,397,678 $ 44 $ 39,496 $ 40,765 $ (2,627) (92,111) $ (1,408)
--------- --- ----------- ----------- ------------- --------- -----------
--------- --- ----------- ----------- ------------- --------- -----------
TOTAL
---------
Balances at April 1, 1995............... $ 65,834
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $165............................... 415
Purchase of treasury stock.............. (36)
Net income.............................. 7,366
Currency translation adjustments........ (216)
---------
Balances at March 31, 1996.............. 73,363
Stock issued pursuant to employee
benefit plans......................... 14
Stock issued in connection with
acquisition of Essentially Group...... 1,137
Net loss................................ (495)
---------
Balances at April 30, 1996.............. 74,019
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $103............................... 1,497
Purchase of treasury stock.............. (8)
Net loss................................ (845)
Currency translation adjustments........ (724)
---------
Balances at April 30, 1997.............. 73,939
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $5................................. 456
Purchase of treasury stock.............. (862)
Net income.............................. 4,487
Currency translation adjustments........ (1,750)
---------
Balances at April 30, 1998.............. $ 76,270
---------
---------
See notes to consolidated financial statements.
31
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MONTH YEAR
APRIL 30, ENDED ENDED
------------------------ APRIL 30, MARCH 31,
1998 1997 1996 1996
----------- ----------- --------- -----------
Operating activities
Net income (loss).............................................. $ 4,487 $ (845) $ (495) $ 7,366
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Provision for bad debts...................................... 1,747 2,001 46 633
Depreciation and amortization................................ 9,651 7,780 297 2,816
Deferred income taxes........................................ (140) (1,402) (9) 435
Changes in operating assets and liabilities
Trade accounts receivable.................................. (13,040) (90,065) 8,313 (4,427)
Inventories................................................ 13,705 (1,324) (3,354) 755
Prepaid expenses and other assets.......................... 4,357 7,164 (1,452) (6,251)
Trade accounts payable and other current
liabilities.............................................. 16,980 63,585 1,917 15,367
----------- ----------- --------- -----------
Net cash provided by (used in) operating activities............ 37,747 (13,106) 5,263 16,694
----------- ----------- --------- -----------
Investing activities
Sales of short-term investments, net........................... -- 7,370 1,037 6,321
Purchase of furniture, equipment and leasehold improvements.... (8,091) (12,726) (502) (4,166)
Purchase of subsidiaries, net of cash acquired................. -- (41,188) (4,803) (2,377)
----------- ----------- --------- -----------
Net cash used in investing activities.......................... (8,091) (46,544) (4,268) (222)
----------- ----------- --------- -----------
Financing activities
Borrowings on long-term debt................................... 266,381 257,985 -- --
Repayments of long-term debt................................... (295,663) (220,615) -- --
Proceeds from stock issuance, including tax benefit related to
stock options exercised...................................... 456 1,497 14 415
Purchase of treasury stock..................................... (862) (8) -- (36)
----------- ----------- --------- -----------
Net cash provided by (used in) financing activities............ (29,688) 38,859 14 379
----------- ----------- --------- -----------
Effect of exchange rate changes on cash.......................... (279) (725) (176) (271)
----------- ----------- --------- -----------
Increase (decrease) in cash and cash equivalents................. (311) (21,516) 833 16,580
Cash and cash equivalents at beginning of period................. 7,440 28,956 28,123 11,543
----------- ----------- --------- -----------
Cash and cash equivalents at end of period....................... $ 7,129 $ 7,440 $ 28,956 $ 28,123
----------- ----------- --------- -----------
----------- ----------- --------- -----------
Supplemental disclosure of cash paid during the period
Income taxes................................................... $ 2,004 $ 2,020 $ 11 $ 3,776
Interest....................................................... 3,730 2,459 6 35
See notes to consolidated financial statements.
32
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
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 global supplier of
personal computer software and technology services to organizations. In fiscal
1998 and 1997, the Company's revenues were derived primarily from the sale of
personal computer 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 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.
In 1997, the Company changed its fiscal year end from March 31 to April 30.
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.
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 and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. 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.
CREDIT RISK
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 values of the Company's financial instruments, consisting of cash
and cash equivalents, accounts receivable, accounts payable and long-term debt,
approximate 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
33
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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. 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. Since the
Company has no material costs associated with future performance under these
contracts, the Company began recognizing this revenue when invoiced in fiscal
1998. The cumulative impact of this policy change and the impact of the change
on the 1998 fiscal year were not material. Service revenue is recognized as the
services are provided. Advance billings are recorded as deferred revenue.
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
and to apply SFAS 123 on a disclosure basis only.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER SHARE. SFAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. Earnings per share amounts for all
periods have been restated to conform to the requirements of SFAS 128.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board released Statement
No. 130 (SFAS 130), REPORTING COMPREHENSIVE INCOME and Statement No. 131 (SFAS
131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS
130 addresses the manner in which certain adjustments to shareholders' equity
are displayed in the financial statements, but does not affect reported assets
or net income. SFAS 131 requires disclosure of certain information about
operating segments and geographic
34
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
areas of operation. The new pronouncements are effective for the Company's
fiscal year ending April 30, 1999.
NOTE B--LONG-TERM DEBT
Long-term debt consisted of (in thousands):
APRIL 30,
--------------------
1998 1997
--------- ---------
Secured $100 million revolving credit facility..................................... $ -- $ --
Floating rate term loan due March 2001............................................. -- 30,000
Notes payable to foreign banks..................................................... 7,300 7,307
Capital lease obligations.......................................................... 877 --
Other.............................................................................. 29 63
--------- ---------
8,206 37,370
Less current maturities............................................................ 393 6,000
--------- ---------
$ 7,813 $ 31,370
--------- ---------
--------- ---------
In fiscal 1998, the Company amended its domestic bank financing arrangements
to restructure its $30 million term loan and $60 million revolving credit
facility as a $100 million secured revolving credit facility (the "Amended
Facility"). The Amended Facility, which is secured by accounts receivable,
inventory and a pledge of the stock of certain of the Company's subsidiaries,
permits the Company to borrow up to $100 million, subject to availability under
its borrowing base. At April 30, 1998, $92 million was available under the
Amended Facility. The Amended Facility bears interest at a variable rate (7.375%
at April 30, 1998) and provides for an annual commitment fee equal to a variable
percentage of the unused line of credit. The Amended Facility, which expires in
March 2001, requires the Company to maintain certain financial covenants and
ratios and places limitations on dividend payments, capital expenditures and
certain other borrowings.
Certain of the Company's foreign subsidiaries have revolving credit
facilities with local banks totaling $8 million. Borrowings bear interest at
floating rates (approximately 5.8% at April 30, 1998) and are secured by letters
of credit issued by the Company. The facilities expire in April 1999. The
Company intends to refinance the outstanding amounts through borrowings under
the Amended Facility.
Computer equipment totaling $877,000 was acquired in 1998 under a two-year
agreement classified as a capital lease. The lease has an effective interest
rate of 4.15% and includes a purchase option at its termination in May 2000.
Annual maturities of long-term debt are $393,000, $461,000 and $7,352,000 for
the years ending April 30, 1999, 2000 and 2001, respectively.
35
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--INCOME TAXES
The Company's provision (benefit) for income taxes is comprised of the
following (in thousands):
FEDERAL FOREIGN STATE TOTAL
--------- ----------- --------- ---------
Year ended April 30, 1998
Current......................................................... $ 3,531 $ (87) $ 411 $ 3,855
Deferred........................................................ (282) 142 -- (140)
--------- ----- --------- ---------
$ 3,249 $ 55 $ 411 $ 3,715
--------- ----- --------- ---------
--------- ----- --------- ---------
Year ended 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
--------- ----- --------- ---------
--------- ----- --------- ---------
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
APRIL 30, MONTH ENDED YEAR ENDED
-------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
--------- --------- ----------- -----------
Income tax at statutory rate................................... $ 2,789 $ (266) $ (260) $ 3,837
State and local income taxes, net of federal benefit........... 271 101 (4) 259
Differences between foreign and U.S. tax rates, including
foreign losses without tax benefits.......................... 327 7 (15) --
Tax-exempt interest............................................ -- (17) (5) (282)
Non-deductible goodwill amortization........................... 165 137 9 8
Other.......................................................... 163 101 6 97
--------- --------- ----- -----------
Income tax expense (benefit)................................... $ 3,715 $ 63 $ (269) $ 3,919
--------- --------- ----- -----------
--------- --------- ----- -----------
36
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities as of April 30, 1998 and 1997 consist of
the following (in thousands):
APRIL 30,
--------------------
1998 1997
--------- ---------
Accounts receivable.................................................................. $ 561 $ 352
Inventories.......................................................................... 541 432
Accrued expenses..................................................................... 586 338
Deferred revenue..................................................................... 11 137
Foreign net operating loss carryforward.............................................. 569 752
--------- ---------
Deferred tax assets................................................................ 2,268 2,011
--------- ---------
Depreciation and amortization........................................................ (603) (563)
Other................................................................................ (110) (113)
--------- ---------
Deferred tax liabilities........................................................... (713) (676)
--------- ---------
$ 1,555 $ 1,335
--------- ---------
--------- ---------
At April 30, 1998, the Company's foreign subsidiaries had net operating loss
carryforwards of approximately $2.7 million. Utilization of these carryforwards
is limited to income of the respective subsidiaries.
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
1998 through 2004. At April 30, 1998, 142,400 shares of common stock were
reserved for future grant under the 1993 Long Term Incentive Plan.
The Company has adopted only the disclosure provisions of SFAS 123 for
employee stock options and continues to apply APB 25 for recording stock options
granted. If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for options granted subsequent to March 31,
1995, consistent with the methodology prescribed by SFAS 123, net income (loss)
and earnings
37
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EMPLOYEE BENEFIT PLANS (CONTINUED)
(loss) per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
YEAR ENDED
APRIL 30, MONTH ENDED YEAR ENDED
-------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
--------- --------- ----------- -----------
Net income (loss)--as reported............................... $ 4,487 $ (845) $ (495) $ 7,366
Net income (loss)--pro forma................................. 4,069 (1,127) (505) 7,276
Earnings (loss) per share--as reported
Basic...................................................... 1.04 (.20) (.12) 1.76
Diluted.................................................... 1.03 (.20) (.12) 1.73
Earnings (loss) per share--pro forma
Basic...................................................... .94 (.26) (.12) 1.73
Diluted.................................................... .94 (.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 Black-Scholes option pricing model with the
following weighted average assumptions used for grants in fiscal 1998, 1997 and
1996, respectively: dividend yield of 0% for all periods; volatility of 45%, 42%
and 43%; risk-free interest rates of 6.2%, 6.2% and 6.1% and expected lives of
four years for all periods. The weighted average fair values of options granted
were $5.76, $9.55 and $7.28 per share during fiscal 1998, 1997 and 1996,
respectively.
38
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EMPLOYEE BENEFIT PLANS (CONTINUED)
Option activity for the period from April 1995 to April 1998 is summarized
as follows:
NUMBER OF SHARES WEIGHTED AVERAGE
UNDERLYING OPTIONS EXERCISE PRICE
------------------ -----------------
Outstanding at April 1, 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
Granted........................................................... 222,000 13.48
Exercised......................................................... (2,600) 12.34
Canceled/forfeited................................................ (220,000) 21.48
--------
Outstanding at April 30, 1998..................................... 482,940 16.65
--------
--------
Exercisable at March 31, 1996..................................... 124,620 22.12
--------
--------
Exercisable at April 30, 1997..................................... 146,560 20.02
--------
--------
Exercisable at April 30, 1998..................................... 211,650 18.84
--------
--------
Further information regarding options outstanding and options exercisable at
April 30, 1998 is summarized below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
- ----------------- --------- ------------- ----------- --------- -----------
$ 10.00 to 15.00 246,290 3.73 $ 12.65 71,960 $ 12.44
15.01 to 20.00 124,300 3.58 17.38 48,140 17.39
20.01 to 25.00 70,650 1.45 23.83 56,750 23.86
25.01 to 30.00 41,700 1.52 25.88 34,800 25.89
- ----------------- --------- --- ----------- --------- -----------
$ 10.00 to 30.00 482,940 3.17 $ 16.65 211,650 $ 18.84
- ----------------- --------- --- ----------- --------- -----------
- ----------------- --------- --- ----------- --------- -----------
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
39
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EMPLOYEE BENEFIT PLANS (CONTINUED)
participant's compensation. At April 30, 1998, a total of 96,000 shares of
common stock were reserved for issuance under the plan. For the years ended
April 30, 1998, April 30, 1997 and March 31, 1996 and the month ended April 30,
1996, 30,929, 10,656, 6,260 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 April 30, 1998 and March 31, 1996, net of reductions for
forfeitures, were $202,000 and $207,000, respectively. No contributions were
made for the year ended April 30, 1997, or the month ended April 30, 1996.
NOTE E--EARNINGS PER SHARE
The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted earnings per share. Outstanding options that
were not included in the computation of diluted earnings per share because their
effect would be antidilutive totaled approximately 119,000, 483,000 and 182,000
shares for the years ended April 30, 1998, April 30, 1997 and March 31, 1996,
respectively, and approximately 410,000 shares for the month ended April 30,
1996.
YEAR ENDED APRIL 30,
MONTH ENDED YEAR ENDED
-------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
--------- --------- ----------- -----------
Net income (loss)....................................................... $ 4,487 $ (845) $ (495) $ 7,366
--------- --------- ----------- -----------
Weighted average shares outstanding (basic)............................. 4,318 4,314 4,263 4,196
Effect of dilutive employee and director stock options.................. 33 -- -- 64
--------- --------- ----------- -----------
Weighted average shares outstanding (diluted)........................... 4,351 4,314 4,263 4,260
--------- --------- ----------- -----------
Earnings per share (basic).............................................. $ 1.04 $ (.20) $ (.12) $ 1.76
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Earnings per share (diluted)............................................ $ 1.03 $ (.20) $ (.12) $ 1.73
--------- --------- ----------- -----------
--------- --------- ----------- -----------
40
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LEASES
The Company leases various office and distribution facilities as well as
certain office and computer equipment under leases classified as operating
leases. Future minimum rental payments under all long-term, noncancelable
operating leases at April 30, 1998 are as follows (in thousands):
Year Ending April 30:
- -----------------------------
1999....................... $ 3,452
2000....................... 3,301
2001....................... 2,558
2002....................... 1,151
2003....................... 493
Thereafter................. 5,998
-------
$ 16,953
-------
-------
Rent expense for operating leases totaled $4.2 million, $3.3 million and
$1.3 million for fiscal 1998, fiscal 1997 and fiscal 1996, respectively, and
$165,000 for the month ended April 30, 1996.
NOTE G--BUSINESS ACQUISITIONS
On April 2, 1996, the Company acquired substantially all of the assets of
the New Zealand business operations of Essentially Group Limited and all of the
outstanding shares of capital stock of Essentially Group (Australia) Limited,
privately-held information technology companies in New Zealand and Australia.
The purchase price 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 being amortized using 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 being amortized using 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, excess travel and telephone
expenses, and costs associated with systems implementation for the CGE
acquisition.
NOTE H--FOREIGN OPERATIONS
The Company operates in one business segment. Prior to April 1996, the
Company's foreign operations were not material, and therefore, information for
foreign operations for the year ended
41
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--FOREIGN OPERATIONS (CONTINUED)
March 31, 1996 has not been presented. Information for foreign operations for
the years ended April 30, 1998 and 1997, and the month ended April 30, 1996,
follows (in thousands):
OPERATING
INCOME
NET SALES (LOSS)
------------ -----------
Year Ended April 30, 1998
Domestic..................................................................... $ 756,155 $ 12,201
Foreign...................................................................... 127,932 (1,052)
------------ -----------
$ 884,087 $ 11,149
------------ -----------
------------ -----------
Year Ended April 30, 1997
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
ASSETS
------------
As of April 30, 1998
Domestic..................................................................... $ 221,888
Foreign...................................................................... 36,743
------------
$ 258,631
------------
------------
NOTE I--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited quarterly financial data for
the years ended April 30, 1998 and 1997 (in thousands, except per share
amounts):
QUARTER ENDED
--------------------------------------------------------------------------------------
FISCAL 1998 FISCAL 1997
------------------------------------------ ------------------------------------------
APRIL 30, JAN. 31, OCT. 31, JULY 31, APRIL 30, JAN. 31, OCT. 31, JULY 31,
1998 1998 1997 1997 1997 1997 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
Net sales...................... $ 230,509 $ 246,595 $ 195,025 $ 211,958 $ 200,818 $ 220,523 $ 188,097 $ 186,847
Gross margin................... 25,792 27,077 23,729 23,712 24,970 24,782 22,823 21,755
Net income (loss).............. 1,380 1,938 628 541 104 (119) (839) 9
Earnings (loss) per share
Basic........................ .32 .45 .14 .12 .02 (.03) (.20) --
Diluted...................... .32 .45 .14 .12 .02 (.03) (.20) --
42
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Software Spectrum, Inc., a Texas
corporation, and the undersigned directors and officers of Software Spectrum,
Inc., hereby constitutes and appoints Judy O. Sims its or his true and lawful
attorney-in-fact and agent, for it or him and in its or his name, place and
stead, in any and all capacities, with full power to act alone, to sign any and
all amendments to this Report, and to file each such amendment to this Report,
with all exhibits thereto, and any and all other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as it or he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ JUDY O. SIMS
-----------------------------------------
Judy O. Sims
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: July 28, 1998
43
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer
/s/ JUDY O. SIMS and Chairman of the
- ------------------------------ Board (Principal July 28, 1998
Judy O. Sims Executive Officer)
/s/ RICHARD G. SIMS
- ------------------------------ Senior Vice President and July 28, 1998
Richard G. Sims Director
Vice President and Chief
/s/ JAMES W. BROWN Financial Officer
- ------------------------------ (Principal Financial July 28, 1998
James W. Brown Officer and Principal
Accounting Officer)
/s/ MELLON C. BAIRD
- ------------------------------ Director July 28, 1998
Mellon C. Baird
/s/ CARL S. LEDBETTER
- ------------------------------ Director July 28, 1998
Carl S. Ledbetter
/s/ FRANK TINDLE
- ------------------------------ Director July 28, 1998
Frank Tindle
44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Shareholders and Board of Directors
Software Spectrum, Inc.
In connection with our audit of the consolidated financial statements of
Software Spectrum, Inc. and subsidiaries referred to in our report dated June
24, 1998, we have also audited Schedule II for the years ended April 30, 1998
and 1997, the month ended April 30, 1996 and the year ended March 31, 1996. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
- -------------------------------
Grant Thornton LLP
Dallas, Texas
June 24, 1998
45
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DEDUCTIONS
BALANCE AT CHARGED TO WRITE-OFFS BALANCE
BEGINNING COSTS AND NET OF AT END
OF YEAR EXPENSES RECOVERIES OF YEAR
------------ ------------ ------------- ------------
Allowance for Doubtful Accounts:
Year ended April 30, 1998: $ 2,421,000 $ 1,747,000 $ (1,118,000) $ 3,050,000
Year ended April 30, 1997: 1,247,000 2,001,000 (827,000) 2,421,000
Month ended April 30, 1996: 1,201,000 46,000 -- 1,247,000
Year ended March 31, 1996: 1,371,000 633,000 (803,000) 1,201,000
Inventory Valuation Account:
Year ended April 30, 1998: $ 1,903,000 $ 2,158,000 $ (1,872,000) $ 2,189,000
Year ended April 30, 1997: 805,000 2,219,000 (1,121,000) 1,903,000
Month ended April 30, 1996: 997,000 57,000 (249,000) 805,000
Year ended March 31, 1996: 1,123,000 1,249,000 (1,375,000) 997,000
46
EXHIBIT INDEX
EXHIBIT
- ----------
3.1(a) Restated Articles of Incorporation of the Company, filed with the Secretary of State of Texas
on May 12, 1989, as amended (incorporated by reference to the Company's Registration Statement
No. 33-40794 on Form S-1).
3.1(b) Statement of Designation of Series A Junior Participating Preferred Stock (incorporated by
reference to the Company's Current Report on Form 8-K dated December 13, 1996).
3.1(c) Articles of Amendment to Restated Articles of Incorporation, filed with the Secretary of State
of Texas on November 25, 1996 (incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1997).
3.1(d) Statement of Cancellation of Treasury Shares, filed with the Secretary of State of Texas on
March 21, 1997 (incorporated by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1997).
3.2 Restated Bylaws of the Company, as amended (incorporated by reference to the Company's
Registration Statement No. 33-40794 on Form S-1).
3.3 Rights Agreement between the Company and KeyCorp Shareholder Services, Inc., (the "Rights
Agreement") dated December 13, 1996, (incorporated by reference to the Company's Current Report
on Form 8-K dated December 13, 1996).
3.4 Letter of Substitution of Rights Agent under Rights Agreement, dated June 7, 1997 (appointing
ChaseMellon Shareholders Services, L.L.C. as successor rights agent).
10.1 IBM Business Partner Agreement between the Company, IBM Corporation and Lotus Development
Corporation dated June 30, 1997 (incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1997).
10.2 Microsoft Corporation Channel Agreement dated July 1, 1997 between Microsoft Corporation and
the Company, including Addendum dated July 1, 1997 (Appointment as a Direct Reseller); Addendum
dated July 1, 1997 (Appointment as a Large Account Reseller); and Addendum dated July 1, 1997
(Rebate and Marketing Fund).
10.3 [intentionally omitted]
10.4(a) Commercial Lease Agreement, dated May 1, 1990, between CIIF Associates II Limited Partnership
and the Company (incorporated by reference to the Company's Registration Statement No. 33-40794
on Form S-1).
10.4(b) Amendment to Lease Agreement dated March 31, 1995 between CIIF Associates II Limited
Partnership and the Company (incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995).
10.4(c) Third Amendment to Lease Agreement dated effective as of April 20, 1998 between CIIF Associates
II Limited Partnership and the Company.
10.5(a) Commercial Lease Agreement dated as of April 19, 1993, between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993).
10.5(b) Amendment #2--Expansion Agreement to Lease Agreement dated as of June 20, 1994 between Kancro,
L.P. and the Company (incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
10.5(c) Third Amendment to Commercial Lease Agreement dated effective April 1, 1995 between Kancro,
L.P. and the Company (incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995).
10.5(d) Fourth Amendment to Commercial Lease Agreement dated effective as November 25, 1996 between
Kancro, L.P. and the Company (incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1997).
EXHIBIT
- ----------
10.5(e) Fifth Amendment to Commercial Lease Agreement dated effective as of March 9, 1998 between
Kancro, L.P. and the Company.
10.6 Lease Agreement between Spokane Teachers Credit Union and the Company dated May 1, 1998.
10.7 Lease Agreement dated March 8, 1996 by and between Riverport Commerce Center, Inc. and the
Company (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996).
10.8 Lease Agreement dated April 26, 1996 by and between Beneficiaries of American National Bank
Trust Number 104601-03 and the Company (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996).
10.9 1989 Stock Option Plan of the Company, as amended (incorporated by reference to the Company's
Registration Statement No. 33-40794 on Form S-1).
10.10 Software Spectrum, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997).
10.11 The Software Spectrum, Inc. 1993 Long Term Incentive Plan (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
10.12 Employees' Profit Sharing Plan of the Company, Adoption Agreement dated December 14, 1994
(incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995).
10.13 Management Continuity Agreement ("Continuity Agreement") between the Company and James W.
Brown, dated March 1, 1998, together with schedule identifying additional executive officers
that are parties to Continuity Agreements.
10.14 Non-Employee Directors' Retainer Stock Plan (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the Quarter ended December 31, 1995).
10.15 Limited Waiver Agreement, dated July 31, 1997, between the Company and Private Capital
Management, Inc. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended July 31, 1997).
10.16 Amended and Restated Credit Agreement dated March 11, 1998 among the Company, the Chase
Manhattan Bank, and Administrative Agent, Chase Bank of Texas, National Association, as
Collateral Agent and other participating financial institutions (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1998).
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP, Independent Accountants
24 Power of Attorney (included on the signature page of this Form 10-K).
27 Financial Data Schedule