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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
Mark One Quarterly Report Pursuant to Section 13 or 15(d) of the
[X] Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2140 MERRITT DRIVE
GARLAND, TEXAS
75041
(Address of principal executive offices)
(Zip Code)
972-840-6600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At September 9, 1998, the Registrant had outstanding 4,266,176 shares of
its Common Stock, par value $.01 per share.
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at July 31, 1998 and April 30, 1998 1
Consolidated Statements of Income for the Three Months Ended
July 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the Three Months Ended
July 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
July 31, April 30,
1998 1998
----------- ----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 6,460 $ 7,129
Trade accounts receivable, net of allowance for
doubtful accounts of $2,723 at July 31 and $3,050 at 153,321 171,460
April 30
Inventories 4,345 4,564
Prepaid expenses 4,171 2,279
Other current assets 831 1,024
---------- ----------
Total current assets 169,128 186,456
Furniture, equipment and leasehold improvements, at cost 42,742 37,951
Less accumulated depreciation and amortization 19,286 17,538
---------- ----------
23,456 20,413
Other assets, consisting primarily of goodwill, net of
accumulated amortization of $6,255 at July 31 and $5,661
at April 30 50,603 51,762
---------- ----------
$ 243,187 $ 258,631
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 644 $ 393
Trade accounts payable 138,843 160,331
Other current liabilities 13,444 13,824
---------- ----------
Total current liabilities 152,931 174,548
Long-term debt, less current maturities 13,657 7,813
Shareholders' equity
Preferred stock, par value $.01; authorized, 1,000,000
shares; issued and outstanding, none -- --
Common stock, par value $.01; authorized, 20,000,000
shares; issued 4,433,342 shares at July 31 and
4,397,678 shares at April 30 44 44
Additional paid-in capital 40,069 39,496
Retained earnings 42,065 40,765
Currency translation adjustments (2,827) (2,627)
---------- ----------
79,351 77,678
Less treasury stock at cost; 164,611 shares at July 31
and 92,111 shares at April 30 2,752 1,408
---------- ----------
Total shareholders' equity 76,599 76,270
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$ 243,187 $ 258,631
---------- ----------
---------- ----------
See notes to consolidated financial statements.
1
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended
July 31,
--------------------------
1998 1997
---------- ----------
Net sales $ 224,266 $ 211,958
Cost of sales 199,066 188,246
---------- ----------
Gross margin 25,200 23,712
Selling, general and administrative expenses 20,055 19,365
Depreciation and amortization 2,572 2,264
---------- ----------
Operating income 2,573 2,083
Interest expense (income)
Interest expense 298 957
Interest income (100) (39)
---------- ----------
198 918
---------- ----------
Income before income taxes 2,375 1,165
Income tax expense 1,075 624
---------- ----------
Net income $ 1,300 $ 541
---------- ----------
---------- ----------
Earnings per share
Basic $ 0.30 $ 0.12
---------- ----------
---------- ----------
Diluted $ 0.30 $ 0.12
---------- ----------
---------- ----------
Weighted average shares outstanding
Basic 4,281 4,332
---------- ----------
---------- ----------
Diluted 4,345 4,341
---------- ----------
---------- ----------
See notes to consolidated financial statements.
2
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
July 31,
-------------------------
1998 1997
----------- ---------
Operating activities
Net income $ 1,300 $ 541
Adjustments to reconcile net income to net cash
used in operating activities
Provision for bad debts 207 430
Depreciation and amortization 2,572 2,264
Deferred income taxes 388 375
Changes in operating assets and liabilities
Trade accounts receivable 17,165 (8,646)
Inventories 213 1,536
Prepaid expenses and other assets (1,582) (5)
Trade accounts payable and other current
liabilities (21,240) (820)
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Net cash used in operating activities (977) (4,325)
---------- ---------
Investing activities
Purchase of furniture, equipment and leasehold
improvements (4,955) (3,800)
---------- ---------
Net cash used in investing activities (4,955) (3,800)
---------- ---------
Financing activities
Borrowings on long-term debt 45,758 99,239
Repayments of long-term debt (39,695) (89,640)
Proceeds from stock issuance including tax
benefit related to stock options exercised 574 72
Purchase of treasury stock (1,344) --
Other 26 71
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Net cash provided by financing activities 5,319 9,742
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Effect of exchange rate changes on cash (56) (374)
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Increase (decrease) in cash and cash equivalents (669) 1,243
Cash and cash equivalents at beginning of period 7,129 7,440
---------- ---------
Cash and cash equivalents at end of period $ 6,460 $ 8,683
---------- ---------
---------- ---------
Supplemental disclosure of cash paid during the period
Income taxes $ 1,838 $ 42
Interest 159 298
See notes to consolidated financial statements.
3
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements include the accounts of Software
Spectrum, Inc. (the "Company") and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
The consolidated financial statements contained herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial position as of July 31,
1998, and the consolidated results of operations and cash flows for the three
months ended July 31, 1998 and 1997 have been made. In addition, all such
adjustments made, in the opinion of management, are of a normal recurring
nature. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the interim reporting
rules of the Securities and Exchange Commission. The interim consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes for the year ended April
30, 1998, included in the Company's 1998 Annual Report on Form 10-K.
NOTE B -- OTHER COMPREHENSIVE INCOME
Effective May 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
which addresses the manner in which certain adjustments to shareholders'
equity are displayed in the financial statements. Adoption of this statement
had no effect on the Company's financial position or operating results. For
the quarters ended July 31, 1998 and 1997, non-owner changes in stockholders'
equity, comprised solely of currency translation adjustments, were $200,000
and $271,000, respectively, resulting in comprehensive income of $1,100,000
and $270,000, respectively.
NOTE C -- EARNINGS PER SHARE
The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted earnings per share. Outstanding options that
were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market price of the
common shares totaled approximately 227,000 and 256,000 shares for the three
months ended July 31, 1998 and 1997, respectively.
Three Months Ended
July 31,
----------------------
1998 1997
-------- --------
Net income $ 1,300 $ 541
-------- --------
Weighted average shares outstanding (basic) 4,281 4,332
Effect of dilutive employee and director stock options 64 9
-------- --------
Weighted average shares outstanding (diluted) 4,345 4,341
-------- --------
Earnings per share
Basic $ 0.30 $ 0.12
-------- --------
-------- --------
Diluted $ 0.30 $ 0.12
-------- --------
-------- --------
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATONS
OVERVIEW
The Company's revenues are derived primarily from the sale of personal computer
("PC") software products and technology services in North America, Europe and
Asia/Pacific.
The following table sets forth certain items from the Company's Consolidated
Statements of Income expressed as a percentage of net sales.
Percentage of Net Sales
For
Three Months Ended
July 31,
----------------------
1998 1997
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Net sales 100.0% 100.0%
Cost of sales 88.8 88.8
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Gross margin 11.2 11.2
Selling, general and administrative expenses 8.9 9.1
Depreciation and amortization 1.1 1.1
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Operating income 1.2 1.0
Interest expense, net 0.1 0.4
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Income before income taxes 1.1 0.6
Income tax expense 0.5 0.3
------ ------
Net income 0.6% 0.3%
------ ------
------ ------
NET SALES
The Company sells PC software applications 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. In addition, the Company provides fee-based
services, including consulting and technical support, through its Technology
Services Group ("TSG").
For the quarter ended July 31, 1998, software sales increased 2% over sales
for the quarter ended July 31, 1997. The Company serves as a designated
service provider for VLM agreements which are frequently used by customers
seeking to standardize desktop software applications and, consequently, may
involve significant quantities of unit sales for each customer at lower
per-unit prices than full-packaged software products. The increased
popularity of VLM agreements has contributed to the increase in unit volume
sales, as well as the reduction in average unit prices of desktop software,
in recent years. Sales of software through VLM agreements represented
approximately 75% and 68% of sales for the quarters ended July 31, 1998 and
1997, respectively.
5
For the quarter ended July 31, 1998, revenue from technology services
increased by 64% as compared to the quarter ended July 31, 1997. As of July
31, 1998, the Company had 23 TSG offices worldwide. The Company plans to open
additional international sites during fiscal 1999. Fee-based services
represented approximately 8% and 5% of the Company's overall sales for the
quarters ended July 31, 1998 and 1997, respectively; however, such revenue
generated approximately 27% and 20%, respectively, of the Company's gross
margin dollars. The Company expects that the percentage of gross margin
dollars provided by fee-based services will increase as the Company continues
to develop and expand its technology services business.
The Company believes future increases in sales will depend upon the Company's
ability to maintain and increase its customer base, to develop and expand its
technology services and to capitalize on continued growth in desktop
technology markets around the world.
INTERNATIONAL OPERATIONS
For the three months ended July 31, 1998, sales outside of the United States
increased 25% to $37 million, as compared to $30 million for the quarter
ended July 31, 1997.
Sales in Europe increased 22% to $12.8 million for the quarter ended July 31,
1998, primarily due to increased sales of software under VLM agreements.
Sales in Asia/Pacific were $14.4 million for the quarter ended July 31, 1998,
a 17% increase over sales of $12.3 million in the quarter ended July 31,
1997. The increase in sales is primarily due to increased sales of software
under VLM agreements. For the quarter ended July 31, 1998, the Company
realized nominal operating income, prior to allocation of corporate overhead,
in Asia/Pacific, due in part to seasonally high sales in that region of the
world.
For the three months ended July 31, 1998, fluctuations in foreign currencies
against the U.S. dollar did not have a material effect on the Company's
financial results.
GROSS MARGIN
Overall gross margin as a percentage of net sales was 11.2% for each of the
quarters ended July 31, 1998 and 1997. The consistency in overall gross
margin as a percentage of net sales is comprised of a decline in gross margin
on the sale of PC software, discussed below, offset by an increase in gross
margin provided by fee-based services.
For the quarter ended July 31, 1998, gross margin on the sale of PC software
declined to 9.0%, as compared to 9.3% for the quarter ended July 31, 1997,
reflecting the increasing percentage of sales of software through VLM
agreements and lower levels of financial incentives from suppliers. The
Company generally realizes lower gross margins as a percentage of net sales
on sales of software through VLM agreements, as compared to sales of
full-packaged software products. The decline in software margins as a
percentage of net sales for the quarter ended July 31, 1998 was offset by
growth in revenue from fee-based services, which have higher gross margins as
a percentage of net sales than sales of software.
The Company believes that gross margin percentages on sales of software may
continue to decline if the volume of software product sales by the Company
through VLM agreements continues or if publishers respond to continued market
pressures by reducing financial incentives to resellers. This potential
decrease in product gross margin percentages may be partially offset by
anticipated increases in gross margin dollars generated by technology
services.
6
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 administration costs. For the quarter ended July 31, 1998,
selling, general and administrative expenses, as a percentage of net sales,
decreased to 8.9%, compared to 9.1% for the quarter ended July 31, 1997,
primarily due to the Company's ongoing focus on controlling its operating
costs.
DEPRECIATION AND AMORTIZATION
The increase in depreciation and amortization for the quarter ended July 31,
1998, as compared to the July 1997 quarter, reflects additional depreciation
on the higher level of fixed assets in 1998.
INCOME TAX EXPENSE
The Company's effective tax rate for the quarter ended July 31, 1998 was
approximately 45%, as compared to approximately 54% in the July 1997 quarter.
This decrease in the Company's effective tax rate primarily reflects the
impact of its improved operations in foreign countries.
LIQUIDITY AND FINANCIAL CONDITION
At July 31, 1998, the Company had approximately $6.5 million in cash and cash
equivalents and had $12.7 million outstanding under its $100 million
revolving credit facility. The credit 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 July 31, 1998, the Company had
approximately $48 million of additional borrowing availability under its
credit facility. The facility expires in March 2001.
The decrease in trade accounts receivable and trade accounts payable from
April 30, 1998 to July 31, 1998 is due to collection of the receivables
associated with large sales at the end of fiscal 1998 and payment of the
related liabilities. At July 31, 1998 and April 30, 1998, accounts receivable
represented approximately 63 and 61 days of historical sales, respectively.
For the quarter ended July 31, 1998, the Company used $1 million of cash in
its operations compared to $4 million of cash used in operations in the July
31, 1997 quarter. The decrease in cash used in operations reflects the
Company's improved profitability and increased collections of accounts
receivable.
The increase in furniture, equipment and leasehold improvements at July 31,
1998 reflects approximately $5 million of capital expenditures related to the
ongoing upgrade of the Company's computer systems and expansion of its
technical support centers in Garland, Texas and Spokane, Washington.
The Company expects that its cash requirements for fiscal 1999 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
In 1997, the Company implemented a stock repurchase program which, upon
amendment in July 1998, allowed the Company to purchase up to $5 million of
the Company's Common Stock from time to time in the open market or through
privately negotiated transactions. The Company funds such purchases with cash
or borrowings under the Company's credit facility. As of September 9, 1998,
the Company had repurchased 140,300 shares of common stock, for a total of
$2.4 million, under the Stock Repurchase Plan.
7
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
calendar 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 includes certain
forward-looking statements of the Company, including future market trends,
estimates regarding the economy and the software industry in general and key
performance indicators 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 include 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 Company's Form 10-K for its fiscal year ended April 30,
1998 contains certain cautionary statements under "Forward-Looking
Information" that identify factors that could cause the Company's actual
results to differ materially from those in the forward-looking statements in
this discussion. All forward-looking statements in this discussion are
expressly qualified in their entirety by the cautionary statements in this
paragraph and under "Forward-Looking Information" in the Company's Form 10-K.
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.15 - Amended and Restated Limited Waiver Agreement,
dated as of July 7, 1998, by and between Software
Spectrum, Inc. and Private Capital Management, Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period
ended July 31, 1998.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTWARE SPECTRUM, INC.
Date: September 11, 1998 By: /s/ James W. Brown
--------------------------------------
James W. Brown
Vice President and Chief Financial
Officer (Principal Financial
Officer and Principal Accounting
Officer)
EXHIBIT INDEX
Exhibit 10.15 Amended and Restated Limited Waiver Agreement, dated as
of July 7, 1998, by and between Software Spectrum, Inc. and
Private Capital Management, Inc.
Exhibit 27 Financial Data Schedule