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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
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Mark One Annual Report Pursuant to Section 13 or 15(d) of the
[X] Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
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)
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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 (l) 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 15, 1999 of the Registrant's
voting securities held by non-affiliates was $51,275,803.
At July 15, 1999, the Registrant had outstanding 4,103,180 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 23, 1999,
which will be filed by the registrant within 120 days after April 30, 1999.
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PART I
ITEM 1. BUSINESS
Software Spectrum, Inc. (the "Company") is a global business-to-business
software licensing and services provider. 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 comprehensive information technology solutions including a
wide variety of third-party 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, Adobe Systems and Visio. 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, 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, 1999, approximately 73% of the Company's net software
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
the software products would be available from other parties, the Company may
have to obtain such products on terms that would likely adversely affect its
financial results.
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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 typically have lower gross margins and
administrative costs than other VLM programs, has resulted in 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 professional and support services
businesses depend 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 professional and support services businesses 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 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
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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 technical 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 the support needs of end-users. 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 center facilities.
YEAR 2000
The Company has conducted a review and assessment of its core management
information systems, desktop computers, networks and servers and software
applications and packages to determine whether or not they support Year 2000
date codes. The Company has completed testing of its critical applications and
its networks and servers and has uncovered no material date-related issues. The
Company is in the process of updating its third-party software tools, database
engines and applications to the most current releases and remediating any of its
personal computers, desktop software applications and non-IT embedded systems
that do not support Year 2000 date codes. 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. The Company's Year 2000 initiative also calls for contacting key
software vendors and other business partners to determine whether they have
effective plans to address their Year 2000 issues. 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, forego or
return software purchases, or delay professional services contracts 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.
With respect to the Company's professional services, the failure of client
systems or processes could subject the Company to claims. Such claims, or the
defense thereof, could have a material adverse effect on the Company's operating
results.
COMPANY OVERVIEW
The Company is a global business-to-business software licensing and
services provider that delivers comprehensive information technology solutions
to organizations throughout North America, Europe and Asia/Pacific. The Company
sells personal computer ("PC") software through volume licensing and maintenance
agreements, or right-to-copy arrangements, and full-packaged PC software
products, primarily through third-party distributors. In addition, the Company
provides infrastructure design, enterprise software management, applications
development and technical support services to help organizations maximize
business value from information technology. 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, customer service and technical support
operations while utilizing a geographically dispersed field sales force and
professional services staff strategically located in major business markets
worldwide. The majority of the Company's revenues are derived from sales to
large organizations,
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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.
The Company derives revenues from three primary business lines, which
consist of product services, professional services and support services.
The largest component of the Company's business is providing third-party
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
distributed computing technology markets. The Company maintains a sales force
which focuses on the software licensing and distribution needs of its larger
customers and serves mid-sized customers through a combined field sales and
outbound calling sales effort. Through its strategically located, centralized
operations centers in North America, Europe and Asia/Pacific, the Company
supports the global marketing efforts of its sales forces.
The Company's Internet Web site, WWW.SOFTWARESPECTRUM.COM, includes an
electronic catalog which can be used by customers to obtain pricing information,
check order status, run purchase activity reports and purchase products. For
many customers, the Company offers secure on-line customer-specific catalogs
which contain products, prices and other information unique to each customer. In
conjunction with this electronic business-to-business web tool, the Company
maintains headquarters-based sales representatives to facilitate purchases and
self-help services by the Company's customers over the Internet. See "Sales and
Marketing."
The Company's fee-based professional services are structured to meet
customers' three fundamental solution requirements: advanced network
infrastructure, including enterprise messaging and collaborative platforms;
enterprise software management to help customers track and monitor their
technology investments; and custom applications designed to meet a customer's
unique business and e-commerce needs. The Company's professional services
strategy is to focus on select technologies to allow its personnel to develop
in-depth knowledge to support complex customer requirements. Software Spectrum
provides services to assist customers in determining where and how technology
and products can be applied to reduce the cost of managing and supporting
enterprise networks, and has also demonstrated its ability to develop
business-critical e-commerce solutions for customers.
The Company markets its professional services through a dedicated field
sales force strategically located to reach the Company's major markets. As of
April 30, 1999, the Company employed over 450 professional service consultants
worldwide, which contributed approximately 5% of the Company's revenues for the
year then ended.
Software Spectrum provides technical support services through its support
centers located in North America, Europe and Asia/Pacific. These services are
primarily 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. In July 1999, the Company began providing
telephone support services for one of the leading Internet service providers in
the U.S. The Company employed over 1,100 technical support analysts and support
personnel as of April 30, 1999, including a dedicated sales force.
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 distributed computing software and hardware and
manages the 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 per 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
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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, 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 professional
services related to those 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,
1999 ("fiscal 1999"), sales through VLM agreements represented approximately 83%
of software sales of the Company, compared to 77% and 61% of software sales for
the years ended April 30, 1998 ("fiscal 1998") and April 30, 1997 ("fiscal
1997"), 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.
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 Dallas, Texas, with a
major product and technical support call center located in Spokane, Washington
and an additional technical support call center in Tampa, Florida, which was
added in 1999. The Company also maintains professional services offices in major
cities within the U.S. and Canada. 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
professional services offices in London, England in 1996, Frankfurt, Germany in
early 1997 and The Hague, The Netherlands, in 1998. The Company began operations
in Australia and New Zealand in April 1996, through an acquisition that
significantly extended Software Spectrum's geographic coverage by providing an
immediate presence in the Asia/Pacific region. In fiscal 1997, the Company
established sales offices in Hong Kong and Singapore. During fiscal 1997 and
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 $.7 million in the
fiscal year ended April 30, 1999, which reflects a substantial improvement over
operating losses of approximately $2.5 million in the fiscal year ended April
30, 1998.
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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.
With centralized operations centers in North America, Europe and
Asia/Pacific, the Company is able to serve the major distributed computing
technology markets around the world. Today, Software Spectrum provides software
or fulfillment services to customers located in over 100 countries, provides
support services in 11 languages, invoices customers in many local currencies
and provides consolidated worldwide reporting to customers.
PROFESSIONAL SERVICES
Through its worldwide professional services offices, the Company provides
fee-based professional IT services structured to meet customers' three
fundamental solution requirements: infrastructure design, enterprise software
management and applications development.
The Company's professional services 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; (iv) to provide strategies for controlling the rising cost of
supporting distributed computing; and (v) to develop comprehensive computing
solutions to their unique business and e-commerce needs.
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 2
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, 1999, the Company had professional services offices in
Chicago, Dallas, Atlanta, New York, Houston, San Francisco, Denver, Detroit, Los
Angeles, Minneapolis, Raleigh-Durham, Toronto, Sydney, Melbourne, Wellington,
Singapore, London, Frankfurt and The Hague. Through its joint venture in Japan,
Uchida-Spectrum, Inc., the Company also offers professional services to its
customers in Japan.
The Company is a Microsoft Solutions Provider, Lotus Notes Business Partner
and IBM BESTeam Premium 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. 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.
Building on a foundation of solid infrastructure and effective software
asset management, the Company also provides custom applications which provide
solutions to customers' unique business needs. Custom applications may be
developed using a number of third-party software tools and databases, including
use of the Internet to deliver business-critical e-commerce solutions. Custom
applications often require extended service engagements which
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solidify long-term client relationships. Applications development represented
approximately one-third of the Company's professional services business at April
30, 1999.
SUPPORT SERVICES
The Company provides fee-based telephone and 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 four
principal areas. First, it contracts with software publishers to provide
telephone support on their behalf to customers. Second, the Company provides
technical support to large organizations to replace the customer's internal help
desk capabilities for the customer's employees. Third, in July 1999, the Company
initiated technical support for the customers of a leading Internet service
provider ("ISP"). Finally, support analysts handle support calls from the
Company's corporate customers' technical personnel for escalation services. The
staff in the Company's 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 Certified Support Center (one of nine in the United States), a
Lotus Premium Business Partner and a Novell Authorized Service Center. The
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 increasingly utilize the
Internet as an electronic means to forward support questions and receive answers
from the Company.
The Company's support business grew rapidly in the 1999 fiscal year. The
growth has been primarily in providing support services under contracts with
software publishers, although the Company has also increased its support
business with end-users and organizations. The Company maintains support
facilities in Dallas, Texas; Spokane, Washington; Tampa, Florida; Dublin,
Ireland and Sydney, Australia.
PRODUCT 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 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."
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
7
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 managers certified by
the Software Publishers' Association ("SPA"), a division of the Software and
Information Industry Association, 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.
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, communicating with
end-users, reporting and compliance under VLM agreements and telephone support.
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. The Company has also enabled its customers to obtain this
information directly from the Company's Web site. Approximately 75% of the
Company's customers now status their orders via this Internet tool. Also,
customers can submit orders or other data to the Company from their computer
systems via the Company's electronic data interchange ("EDI") capabilities. EDI
and on-line Web order placement improve order accuracy and reduce administrative
costs for corporate customers and the Company.
MAINTENANCE AND UPGRADE SERVICES
A number of customers who have elected to purchase software licenses
through VLM agreements have also purchased software 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 for a
separate fee.
ELECTRONIC SERVICES AND CAPABILITIES
The Company offers a number of services and is, on an ongoing 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 professional services offices, 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.
8
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 currently delivers a limited amount of software
in this manner and intends to continue 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.
WORLD WIDE WEB SITE AND PUBLICATIONS
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 and
provides product descriptions. The Company offers customer-specific, secure
catalogs 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.
The Company's World Wide Web site provides customers with information
concerning the Company, its products (including third-party reviews) 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 comprehensive on-line 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 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 its product and professional services to
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 professional services. Generally, each team consists of one account
executive and/or PSAM, supported by technical, marketing, customer service and
sales support personnel at the Company's operations centers or professional
services sites, as well as Web-based self-service capabilities.
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 global accounts, several account
executives and/or PSAMs may work with the customer in different parts of North
America, Europe and Asia/Pacific, coordinated by a designated national or global
account manager. 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.
9
Account executives work directly with senior and mid-level procurement
managers, IT 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 produce 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.
They also help customers perform many of these functions directly by guiding
them through the variety of options available on the Company's Web site -
WWW.SOFTWARESPECTRUM.COM. 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.
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 professional services to this category of customers. Initial contact and
sales are made typically through field sales or telephone inquiries. The Company
interfaces with smaller customers via outbound telephone inquiries as well as
Web-based self-service offerings.
The Company sells its telephone and Internet-based support services through
a dedicated sales force which focuses on the types of organizations who most
often require such services. Software publishers typically outsource some or all
of their telephone support on significant products, which allows the Company to
leverage its existing relationship with major publishers. The Company also
solicits large organizations who may desire to outsource all, or a portion of,
their internal help desk function. The Company's market for support services
also extends to a number of other technology-related organizations, including
Internet service providers and hardware manufacturers and resellers.
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's 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.
10
PRODUCTS AND DISTRIBUTION
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, 1999, the top 20 software titles sold by the
Company represented approximately 73% of the Company's net software sales.
In April 1999, the Company adopted a virtual warehouse model for the
distribution of shrink-wrapped software in North America. The model was
facilitated through an agreement with Ingram Micro, a leading technology
distributor, to provide distribution capability for product purchased from
Ingram Micro as well as product purchased elsewhere. A three-year agreement with
Ingram Micro was signed December 24, 1998. The Company's former distribution
facility in Louisville, Kentucky was closed in April 1999. The Company continues
to operate a distribution facility in Sydney, Australia.
Generally, the Company uses the services of distributors or publishers
to ship products directly to its customers, both in the U.S. and other
countries, usually the same day the Company receives the order. As of April 30,
1999, the Company did not have a significant order backlog.
CUSTOMERS
In fiscal 1999, the Company handled more than 8,800 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 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 1999, no single customer represented more than 5% of the Company's
revenues, and the Company's customer base included 307 of the 1998 Fortune 500
companies and 216 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
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 1999, approximately 84% of the
Company's sales represented products purchased from its ten largest publishers.
For each of the fiscal years ended April 30, 1999 and 1998, products from
Microsoft accounted for approximately 65% and 55% of net software sales,
respectively, and products from IBM/Lotus accounted for approximately 8% and 10%
of net software sales, respectively.
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.
Publisher contracts also generally permit the Company to submit adjustment
reports for licensing and maintenance transactions within a certain time period
after the
11
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. 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.
COMPETITION
The personal computer software market is intensely competitive. The Company
faces competition from a wide variety of sources, including "software-only"
resellers, hardware resellers 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 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 resellers and aggregators. These
companies compete in the large organization market with marketing efforts to
provide customers with software and hardware services. Other competitors include
Dell Computer Corporation, a hardware manufacturer that also sells software, and
systems integrators such as GE Capital Corporation, Compaq Computer Corporation,
Compucom Systems, Inc. and Microage, Inc. These companies do have a global
presence and offer technology services. The Company believes its VLM expertise
and services, software-focused solutions, 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 professional services market, there are a significant number of
competitors, ranging from small local consulting services practices to large
companies such as Whittman-Hart, Inc., Cambridge Technology Partners, Inc. and
Keane, Inc., the technology services divisions of major hardware resellers, such
as Compucom Systems, Inc., and the consulting divisions of national accounting
firms such as KPMG LLP and PricewaterhouseCoopers LLP. The Company believes that
its concentration on high-end enterprise architectural planning and consultation
covering multiple key specific technologies, as well as its global presence,
help to differentiate the Company from other competitors in the professional
services area of its business. There are a number of significant competitors in
the global technical software support services market, including Keane, Inc.,
Stream International, Inc., Sykes Enterprises Incorporated and DecisionOne
Corporation. The Company competes in this market based primarily on the quality
of services provided and cost. Many of the Company's competitors have
significantly greater financial resources than the Company. However, the Company
believes that its emphasis on training and quality programs, and its focus on
high customer satisfaction at a reasonable cost, allows the Company to compete
effectively in this highly competitive market.
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
12
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 currently delivers a limited amount of
software in this manner and intends to continue 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 the changing needs of its customers. Sales
of personal computers to homes and small businesses with many popular software
application programs bundled with the hardware have continued to increase. 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, 1999, the Company had approximately 2,500 employees in
North America, Europe and Asia/Pacific. The Company has entered into
non-competition agreements and/or non-solicitation agreements with substantially
all of its sales and professional services 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 remaining
terms of six to eight years. The Company leases approximately 71,000 square feet
of office space in Spokane, Washington with current monthly payments of
approximately $58,000. As of April 30, 1999, the Spokane lease had a remaining
term of two years. In 1999, the Company opened a support services center in
Tampa, Florida. This facility consists of approximately 98,500 square feet of
space which is leased for approximately $107,000 per month. The remaining term
of the lease is approximately five years. Within North America, the Company also
leases office space in various markets for its professional services sites.
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 eight markets.
13
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, 1999.
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.
FISCAL YEAR 1999 QUARTER ENDED: High Low
--------- ---------
July 31 $ 21.88 $ 17.13
October 31 18.50 12.00
January 31 18.19 14.13
April 30 15.88 10.88
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
On July 15, 1999, the last reported sales price of the Company's common
stock as reported on The Nasdaq Stock Market was $18.50 per share. On July 15,
1999 there were 655 holders of record (representing approximately 2000
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.
14
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 Year Ended
April 30, March 31, (1)
------------------------------------- -------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Net sales $ 929,965 $ 884,087 $ 796,285 $ 398,501 $ 352,141
Gross margin 111,156 100,310 94,330 54,438 48,328
Operating income 12,013 11,149 1,816 10,163 12,938
Net income (loss) 6,131 4,487 (845) 7,366 8,788
Earnings (loss) per share (2)
Basic 1.44 1.04 (.20) 1.76 2.11
Diluted 1.43 1.03 (.20) 1.73 2.08
Weighted average shares outstanding
Basic 4,244 4,318 4,314 4,196 4,169
Diluted 4,273 4,351 4,314 4,260 4,217
BALANCE SHEET DATA
(In thousands)
Year Ended Year Ended
April 30, March 31,
------------------------------------- -------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Working capital $ 15,951 $ 11,908 $ 31,673 $ 59,052 $ 58,407
Total assets 236,454 258,631 270,441 150,180 124,698
Total debt 8,626 8,206 37,370 -- --
Shareholders' equity 78,925 76,270 73,939 73,363 65,834
(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 is a global business-to-business software services provider
that delivers comprehensive information technology solutions to organizations
throughout North America, Europe and Asia/Pacific. The Company sells personal
computer ("PC") software through volume licensing and maintenance ("VLM")
agreements, or right-to-copy arrangements, and full-packaged PC software
products, primarily through third-party distributors. In addition, the Company
provides infrastructure design, enterprise software management, applications
15
development and technical support services to help organizations maximize
business value from information technology. Sales have increased each year since
the Company's inception in 1983. Increases in sales of PC software and
technology services over that period 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.
RESULTS OF OPERATIONS
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,
--------------------------------------------
1999 1998 1997
------------- ------------- --------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 88.0 88.7 88.2
------------- ------------- --------------
Gross margin 12.0 11.3 11.8
Selling, general and administrative expenses 9.5 9.0 10.6
Depreciation and amortization 1.2 1.1 1.0
------------- ------------- --------------
Operating income 1.3 1.2 .2
Interest expense, net .2 .3 .3
------------- ------------- --------------
Income (loss) before income taxes 1.1 .9 (.1)
Income tax expense .5 .4 --
------------- ------------- --------------
Net income (loss) .6% .5% (.1%)
------------- ------------- --------------
------------- ------------- --------------
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.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales increased approximately 5% in fiscal 1999 compared to fiscal
1998. Software sales for the year ended April 30, 1999 were comparable to those
for the year ended April 30, 1998. The Company serves as a designated service
provider for VLM agreements which are frequently used by organizations seeking
to standardize desktop software applications and, consequently, may involve
significant quantities of unit sales for each customer at lower per-unit prices
than full-packaged software products. Sales of software through VLM agreements
represented approximately 83% of software sales for the year ended April 30,
1999 compared to 77% for the year ended April 30, 1998. 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.
Certain publishers offer enterprise-wide licensing arrangements which simplify
the administration of VLM agreements for customers who elect to standardize
desktop applications across their organizations. These programs typically have
lower gross margins and administrative costs than traditional VLM arrangements.
Revenues derived from technology services increased by 81% during fiscal
1999 compared to fiscal 1998. The increase was primarily attributable to support
services provided under a large technical support contract that began in the
July 1998 quarter. In addition, sales from the Company's professional services
sites increased approximately 15% for the year ended April 30, 1999. Although
fee-based services only represented approximately 10% of the Company's overall
sales for the year ended April 30, 1999 and 6% for the year ended April 30,
1998, such revenue generated approximately 30% and 21%, 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 this aspect of its business.
For the year ended April 30, 1999, sales outside of the United States
increased 24% to $159 million, compared to sales of $128 million for the year
ended April 30, 1998. Sales in Europe increased 23% to $68 million while
16
sales in Asia/Pacific increased 15% to $47 million for the year ended April 30,
1999. These increases over 1998 were primarily due to increased sales of
software under VLM agreements, including enterprise-wide licensing arrangements.
Growing European licensing revenues have been subject to margin pressures
similar to that experienced in North America. In fiscal 1999, the Company's
operating loss in Asia/Pacific was approximately $737,000, a significant
reduction from the $2.5 million operating loss reported in the prior year. The
reduction is due to increased sales, including several large enterprise-wide
licensing arrangements, and changes to the Company's business model implemented
in fiscal 1998.
Overall gross margin as a percentage of net sales was 12.0% and 11.3% for
the years ended April 30, 1999 and 1998, respectively. The increase in overall
gross margin as a percentage of net sales is primarily due to the increasing
percentage of gross margin provided by fee-based services, which have higher
gross margins as a percentage of net sales than sales of software.
For the year ended April 30, 1999, gross margin on the sale of PC software
declined to 9.3% as compared to 9.5% for the year ended April 30, 1998,
reflecting the increasing percentage of sales of software through high-volume
VLM agreements. The decline in software gross margin percentages for the year
ended April 30, 1999 was offset by an increase in gross margin dollars from
technology services. Gross margin percentages on sales of technology services
were 35% and 40% for the years ended April 30, 1999 and 1998, respectively. This
decline is due primarily to the increasing percentage of sales provided by
support services, which have lower margins than the Company's consulting
services.
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, particularly enterprise-wide agreements, continues or if
publishers respond to continued market pressures by reducing financial
incentives to resellers. However, this potential decrease in product gross
margin percentages may be offset by anticipated increases in gross margin
dollars generated by technology services.
Selling, general and administrative ("SG&A") expenses include the costs of
the Company's sales and marketing organization as well as purchasing,
distribution and administration costs. For the year ended April 30, 1999, SG&A
expenses, as a percentage of net sales, increased to 9.5% as compared to 9.0%
for the year ended April 30, 1998. The increase is due to growth in the
professional and support services business lines, which have higher levels of
SG&A expenses as a percentage of net sales than the Company's software product
business. The Company remains focused on controlling operating costs in each
of its business lines.
In December 1998, the Company signed an agreement to outsource its packaged
software distribution operations in the United States. This model, which was
implemented in April 1999, is expected to decrease the Company's distribution
costs. A significant portion of the decrease will be offset by additional
investment in the Company's services business, including a new technical support
center in Tampa, Florida.
Depreciation and amortization for the year ended April 30, 1999, increased
to $10.9 million compared to $9.7 million for the year ended April 30, 1998. The
increase reflects additional depreciation on the higher level of fixed assets
utilized in the Company's services business in 1999.
The Company's effective tax rate for the year ended April 30, 1999 was
approximately 42% as compared to approximately 45% for the year ended April 30,
1998. The decline in the Company's effective tax rate reflects the impact of
improved international operations.
FISCAL 1998 COMPARED TO FISCAL 1997
Sales of PC software increased 9% for the year ended April 30, 1998. 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 77% and 61%
of net software sales for fiscal 1998 and 1997, respectively.
17
For the year ended April 1998, revenue from services increased 63%. 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.
For fiscal 1998 and 1997, sales outside of the United States totaled $128
million and $106 million. Sales in Europe increased 100% to $55 million in
fiscal 1998 as compared to $28 million in the prior year. The increase was
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. During fiscal 1998, the Company adjusted its Asia/Pacific business model
to mirror the lower-cost, more centralized structure in the Company's North
American and European operations and installed information systems that allowed
the Company to complete its consolidation into a centralized operations center
in Sydney, Australia. In addition, the Company reduced expenses by closing
smaller unprofitable offices and reducing the number of employees in the region.
Overall gross margin as a percentage of net sales was 11.3% and 11.8% in
fiscal 1998 and 1997, 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. In fiscal 1998, gross margins on PC software sales declined to
9.5% as compared to 10.4% in fiscal 1997. The decline in product gross
margins reflected the increasing percentage of VLM product sales and lower
levels of financial incentives available from suppliers. 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 percentage 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% of gross margin dollars in fiscal 1997.
For fiscal 1998 and 1997, SG&A expenses, as a percentage of net sales, were
9.0% and 10.6%, respectively. Selling, general and administrative expenses in
fiscal 1997 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 a business acquisition in May 1996. Excluding these identifiable transition
costs, SG&A expenses as a percentage of net sales would have been 10.2% for
fiscal 1997. The remaining decline in SG&A expenses as a percentage of net sales
was due in part to the Company's ongoing efforts to reduce its operating costs.
The increases in depreciation and amortization for fiscal 1998 as compared
to fiscal 1997 reflect depreciation on the higher level of fixed assets.
The Company's effective tax rate was approximately 45% in both fiscal 1998
and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a secured revolving credit facility (the "Facility") which
permits the Company to borrow up to $100 million, subject to availability under
its borrowing base. At April 30, 1999, $72 million was available under the
Facility. The Facility, which expires in March 2002, bears interest at a
variable rate (6.16% at April 30, 1999) and provides for an annual commitment
fee equal to a variable percentage of the unused line of credit. The Facility,
which is secured by accounts receivable, inventory and a pledge of the stock of
certain of the Company's subsidiaries, 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 5.10% at April 30, 1999) and are secured by
letters of credit issued by the Company. The facilities expire in February and
March 2001. Annual maturities of long-term debt are $763,000, $63,000 and $7.8
million for the years ending April 30, 2000, 2001 and 2002, respectively.
In 1997, the Company implemented a stock repurchase program which allows
for the purchase of the Company's Common Stock from time to time in the open
market or through privately negotiated transactions. The
18
Company funds such purchases with cash or borrowings under the Company's credit
facility. As of June 15, 1999 the Company had repurchased 337,900 shares of
Common Stock, for a total of $5 million, under the stock repurchase program and
has been authorized by its Board of Directors to repurchase up to an additional
$5 million of its Common Stock.
The decrease in trade accounts receivable and trade accounts payable from
April 30, 1998 to April 30, 1999 is due to collection of receivables associated
with large sales at the end of fiscal 1998 and payment of the related
liabilities. At April 30, 1999 and 1998, accounts receivable represented
approximately 55 and 61 days of historical sales, respectively.
Net cash provided by operations was $25.7 million in fiscal 1999, as
compared to $37.7 million of cash provided by operations in fiscal 1998. Cash
provided by operations in fiscal 1998 reflected large reductions in inventory
due to increased use of VLM agreements and a shift toward shipping product
directly from the Company's vendors. In addition, the Company had improved
collections on accounts receivable in fiscal 1998. During fiscal 1997, $13.1
million of cash was used in operations. 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 an acquisition in May 1996.
The increase in furniture, equipment and leasehold improvements in
fiscal 1999 reflects approximately $9.7 million of capital expenditures
relating to the ongoing upgrade of the Company's computer systems and
expansion of its support centers in Dallas, Texas, Spokane, Washington and
Tampa, Florida. The increase in furniture, equipment and leasehold
improvements in fiscal 1998 reflects approximately $8.1 million of capital
expenditures relating to upgrades of the Company's computer systems and
expansion of its operations centers in Dallas, Texas and Dublin, Ireland.
The Company's capital expenditures for fiscal 2000 are expected to be
approximately $10 million, including expenditures to further upgrade the
Company's computer systems and to expand its U.S. support facilities.
The Company expects that its cash requirements for fiscal 2000 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financial activities. The Company does
not use derivative financial instruments for speculative or trading purposes.
The Company conducts business in many foreign currencies and is subject to
foreign currency exchange rate risk on cash flows related to sales, expenses and
financing transactions. The impacts of fluctuations in foreign currency exchange
rates on the Company's geographically diverse operations are often varied and at
times offsetting. The Company occasionally uses forward-exchange contracts to
hedge these exposures. In addition, the Company issues intercompany advances to
its foreign subsidiaries denominated in U.S. dollars, which expose the foreign
subsidiaries to the effect of changes in spot exchange rates of their local
currencies relative to the U.S. dollar. Based on the Company's foreign currency
exchange rate exposure for intercompany borrowings of approximately $11 million
at April 30, 1999, a 10% adverse change in currency rates would reduce net
income by less than $1 million.
The Company's credit arrangements expose it to fluctuations in interest
rates. At April 30, 1999, certain of the Company's subsidiaries had $7.8 million
outstanding under revolving credit facilities, which provide for interest to be
paid based on variable rates. Thus, interest rate changes would result in a
change in the amount of interest to be paid. Based upon the interest rates and
borrowings at April 30, 1999, a 10% increase in interest rates would not
materially affect the Company's financial position, results of operations or
cash flows.
19
YEAR 2000
The Company has developed an overall plan outlining the tasks, resources
and target dates necessary to ensure the ongoing operation of the Company's
business through the turn of the century and beyond. Over the last three years,
the Company has replaced substantially all of the core management information
systems used in the Company's business, and the platforms upon which these
systems were developed are designed to process dates accurately beyond the Year
2000. The Company is in the process of updating its third-party software tools,
database engines and applications to the most current releases and plans to
complete these projects in the third quarter of calendar 1999. Based on the
Company's testing of these core systems and representations received from third
parties, the Company believes that following the planned updates, its Year 2000
remediation of these systems will be substantially complete. The Company has
also completed testing of its networks and servers and, based on this testing
together with information provided by the Company's vendors, has confirmed the
compliancy of this equipment.
In addition, the Company has conducted an inventory, review and assessment
of its personal computers, desktop software applications and non-IT embedded
systems to determine whether they support Year 2000 date codes. The Company is
in the process of remediating the systems that are not in compliance and plans
to complete remediation and to test all of its systems in the third quarter of
calendar 1999. Based on its review and assessment, the Company expects that any
required modifications will be made on a timely basis. In the event of an
unexpected failure in one of the Company's systems, the Company's employees
should be able to continue operations on a manual basis until such systems have
been restored to full operating capacity.
As part of its overall readiness plan, the Company constructed a systems
test lab which simulated a replica of the Company's production environment. The
lab allowed the Company to perform integrated system tests of the Company's
critical applications in a production environment. The Company has completed
testing of its critical applications and testing uncovered no material
date-related issues.
The Company's Year 2000 initiative also provides for contacting key
software vendors and other business partners to determine whether they have
effective plans to address their Year 2000 issues. In the event that the
Company's key vendors cannot provide the Company with software products and
services that meet Year 2000 requirements on a timely basis, or if customers
delay, forego or return software purchases, or delay professional services
contracts, based upon Year 2000 related issues, the Company's operating results
could be materially adversely affected.
The Company believes that its most reasonably-likely worst case scenario
involves a temporary business disruption caused by the failure of a supplier to
provide needed products or services. The most significant potential disruption
would be a telecommunications failure at one of the Company's facilities, which
could render the Company unable to accept sales orders or to perform under its
technical support contracts. To the extent that a potential failure is deemed
likely and the risk to the Company is significant, the Company's contingency
plans would include rerouting calls to alternate operations centers, securing
substitute or second-source suppliers and implementing revised business
processes. The Company is currently developing and reviewing its contingency
plans, which it plans to finalize in the fourth quarter of calendar 1999.
The Company estimates that the total cost of the Year 2000 project will not
exceed $1 million. The majority of the costs will involve reallocation of
existing resources rather than incremental costs. This reallocation of resources
is not anticipated to have a material impact on the implementation of any
significant internal systems projects.
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. With
respect to the Company's consulting services, the failure of client systems or
processes could subject the Company to claims. Such claims, or the defense
thereof, could have a material adverse effect on the Company's operating
results.
20
EURO CURRENCY ISSUES
On January 1, 1999, eleven of the fifteen member countries of the European
Union introduced a common legal currency called the Euro, which is intended to
replace the currently existing currencies of the participating countries by
January 2002. The initial introduction of the Euro did not have a significant
effect on the Company's operations or financial results. The Company believes
that its internal systems are Euro capable and does not expect increased use of
the Euro to materially impact its financial condition, operating results or use
of derivative instruments.
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
statements of the Company that may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements include future market trends, expectations concerning the
Company's growth, estimates regarding the economy and the software industry in
general, key performance indicators that impact the Company, statements
regarding market risk and statements included in the Year 2000 and Euro Currency
discussions above. In developing any forward-looking statements, the Company
makes a number of assumptions, including expectations for continued market
growth, supplier relationships, anticipated revenue and gross margin levels, and
cost savings and efficiencies that 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 professional
and support services practices, 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. This report on Form 10-K for the Company's
fiscal year ended April 30, 1999 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."
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
21
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 23, 1999, 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.
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 Odom Sims Chairman and Chief Executive Officer 1983 46
Keith R. Coogan President and Chief Operating Officer 1990 47
Roger J. King Executive Vice President of Sales
and Marketing 1990 46
James W. Brown Vice President and Chief Financial Officer 1998 42
Robert D. Graham Vice President of Strategic Relationships 1997 44
and General Counsel, Secretary
Robert B. Mercer Vice President and Chief Information Officer 1994 47
Lisa M. Stewart Vice President of Customer Operations 1996 37
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
Kelli H. Cole Vice President of Human Resources 1998 38
22
Judy Odom 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.
Keith R. Coogan was named President in May 1998 and has been Chief
Operating Officer since April 1996. Mr. Coogan has served as a director of the
Company since August 1998. 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.
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 has served as Vice President of Strategic Relationships
and General Counsel since January 1997 and Secretary since 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 Liddell & Sapp LLP 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 and sales management positions, most recently as Director of North
American Sales West.
23
Link W. Simpson was promoted to Vice President of Services in May 1998. Mr.
Simpson also serves as President of the Company's professional services
subsidiary, 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.
Kelli H. Cole joined the Company in November 1998 as Vice President of
Human Resources. From September 1995 through July 1998, Ms. Cole served as Vice
President - Global Human Resources Operations for Mary Kay Inc., a
privately-held global cosmetics company. From June 1994 through August 1995, she
served as Vice President - Office of Development for Morgan Stanley Inc. From
December 1990 through June 1994, Ms. Cole was Vice President of Human Resources
for Bankers Trust.
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 23,
1999, 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 23,
1999, under the captions "Stock Ownership of Principal Shareholders" and "Stock
Ownership of Management," which information is incorporated herein by reference.
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).
24
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(a) Restated Bylaws of the Company, as amended (incorporated by
reference to the Company's Registration Statement No.
33-40794 on Form S-1).
3.2(b) Articles of Amendment to Article 8 of the Company's Amended
and Restated Bylaws effective September 17, 1998
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October
31, 1998).
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)
(incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended April 30, 1998).
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, 1998
between Microsoft Corporation and the Company, including
Addendum dated July 1, 1998 (Appointment as a Large Account
Reseller).
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 (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1998).
10.4(d) Fourth Amendment to Lease Agreement, dated effective as of
October 1, 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).
25
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 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended April 30,
1998).
10.6 Lease Agreement between Spokane Teachers Credit Union and
the Company, dated May 1, 1998 (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 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 Second Amended and Restated Limited Waiver Agreement, dated
March 29, 1999 between the Company and Private Capital
Management, Inc.
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).
10.17 The Software Spectrum, Inc. 1998 Long Term Incentive Plan
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October
31, 1998).
26
10.18 First Amendment to Amended and Restated Credit Agreement,
dated as of August 15, 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 fiscal quarter ended October 31, 1998).
10.19 Lease Agreement, dated October 19, 1998 between
Highwoods/Florida Holdings, L.P. and the Company, together
with First Amendment thereto, dated April 16, 1999.
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,
1999.
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Certified Public Accountants F - 1
Financial Statements (Item 14(a) (1))
Consolidated Balance Sheets as of April 30, 1999 and 1998 F - 2
Consolidated Statements of Operations for the three years ended April 30, 1999 F - 3
Consolidated Statements of Shareholders' Equity for the three years ended April 30, 1999 F - 4
Consolidated Statements of Cash Flows for the three years ended April 30, 1999 F - 5
Consolidated Statements of Comprehensive Income (Loss) for the three years ended April 30, 1999 F - 6
Notes to Consolidated Financial Statements F - 7
Financial Statement Schedule (Item 14 (a) (2))
Report of Independent Certified Public Accountants on Schedules S - 1
Schedule II - Valuation and Qualifying Accounts for the three years ended April 30, 1999 S - 2
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.
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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, cash flows and
comprehensive income (loss) for each of the three years in the period ended
April 30, 1999. 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, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended April 30, 1999 in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
- --------------------------
Grant Thornton LLP
Dallas, Texas
June 15, 1999
F-1
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 30,
---------
1999 1998
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 20,084 $ 7,129
Trade accounts receivable, net of allowance for doubtful
accounts of $2,687 in 1999 and $3,050 in 1998 142,714 171,460
Inventories 370 4,564
Prepaid expenses 1,753 2,279
Other current assets 696 1,024
----------- -----------
Total current assets 165,617 186,456
Furniture, equipment and leasehold improvements, at cost 47,448 37,951
Less accumulated depreciation and amortization 25,410 17,538
----------- -----------
22,038 20,413
Other assets, consisting primarily of goodwill, net of accumulated
amortization of $8,431 in 1999 and $5,661 in 1998 48,799 51,762
----------- -----------
$ 236,454 $ 258,631
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 763 $ 393
Trade accounts payable 134,353 160,331
Other current liabilities 14,550 13,824
----------- -----------
Total current liabilities 149,666 174,548
Long-term debt, less current maturities 7,863 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, 4,491,542 shares in 1999 and 4,397,678 shares in 1998 45 44
Additional paid-in capital 40,833 39,496
Retained earnings 46,896 40,765
Currency translation adjustments (3,092) (2,627)
----------- -----------
84,682 77,678
Less treasury stock at cost - 384,901 shares in 1999
and 92,111 shares in 1998 5,757 1,408
----------- -----------
Total shareholders' equity 78,925 76,270
----------- -----------
$ 236,454 $ 258,631
----------- -----------
----------- -----------
See notes to consolidated financial statements.
F-2
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
April 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net sales
Software $ 833,667 $ 830,792 $ 763,519
Technology services 96,298 53,295 32,766
----------- ----------- -----------
929,965 884,087 796,285
Cost of sales
Software 755,758 751,581 683,835
Technology services 63,051 32,196 18,120
----------- ----------- -----------
818,809 783,777 701,955
----------- ----------- -----------
Gross margin 111,156 100,310 94,330
Selling, general and administrative expenses 88,257 79,510 84,734
Depreciation and amortization 10,886 9,651 7,780
----------- ----------- -----------
Operating income 12,013 11,149 1,816
Interest expense (income)
Interest expense 1,956 3,279 2,956
Interest income (519) (332) (358)
----------- ----------- -----------
1,437 2,947 2,598
----------- ----------- -----------
Income (loss) before income taxes 10,576 8,202 (782)
Income tax expense 4,445 3,715 63
----------- ----------- -----------
Net income (loss) $ 6,131 $ 4,487 $ (845)
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per share
Basic $ 1.44 $ 1.04 $ (.20)
----------- ----------- -----------
----------- ----------- -----------
Diluted $ 1.43 $ 1.03 $ (.20)
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding
Basic 4,244 4,318 4,314
----------- ----------- -----------
----------- ----------- -----------
Diluted 4,273 4,351 4,314
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
F-3
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 Total
------ ------ ------- -------- ----------- ------ ------ -----
Balances at May 1, 1996 4,297,523 $ 43 $ 37,544 $37,123 $ (153) (34,026) $ (538) $ 74,019
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $103 66,000 1 1,496 -- -- -- -- 1,497
Purchase of treasury stock -- -- -- -- -- (285) (8) (8)
Net loss -- -- -- (845) -- -- -- (845)
Currency translation adjustments -- -- -- -- (724) -- -- (724)
---------- ------- --------- ------- ------- -------- ------- --------
Balances at April 30, 1997 4,363,523 44 39,040 36,278 (877) (34,311) (546) 73,939
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $5 34,155 -- 456 -- -- -- -- 456
Purchase of treasury stock -- -- -- -- -- (57,800) (862) (862)
Net income -- -- -- 4,487 -- -- -- 4,487
Currency translation adjustments -- -- -- -- (1,750) -- -- (1,750)
--------- ------- --------- ------- ------- -------- ------- --------
Balances at April 30, 1998 4,397,678 44 39,496 40,765 (2,627) (92,111) (1,408) 76,270
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $105 93,864 1 1,337 -- -- -- -- 1,338
Purchase of treasury stock -- -- -- -- -- (292,790) (4,349) (4,349)
Net income -- -- -- 6,131 -- -- -- 6,131
Currency translation adjustments -- -- -- -- (465) -- -- (465)
--------- ------- --------- ------- ------- -------- ------- --------
Balances at April 30, 1999 4,491,542 $ 45 $ 40,833 $46,896 $(3,092) (384,901) $(5,757) $ 78,925
--------- ------- --------- ------- ------- -------- ------- --------
--------- ------- --------- ------- ------- -------- ------- --------
See notes to consolidated financial statements.
F-4
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
April 30,
------------------------------
1999 1998 1997
---- ---- ----
Operating activities
Net income (loss) $ 6,131 $ 4,487 $ (845)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Provision for bad debts 1,456 1,747 2,001
Depreciation and amortization 10,886 9,651 7,780
Deferred income taxes 830 (140) (1,402)
Changes in operating assets and liabilities
Trade accounts receivable 27,113 (13,040) (90,065)
Inventories 4,183 13,705 (1,324)
Prepaid expenses and other assets 1,238 4,357 7,164
Trade accounts payable and other
current liabilities (26,093) 16,980 63,585
----------- ----------- -----------
Net cash provided by (used in) operating activities 25,744 37,747 (13,106)
----------- ----------- -----------
Investing activities
Sales of short-term investments, net -- -- 7,370
Purchase of furniture, equipment and
leasehold improvements (9,739) (8,091) (12,726)
Purchase of subsidiaries, net of cash acquired -- -- (41,188)
----------- ----------- -----------
Net cash used in investing activities (9,739) (8,091) (46,544)
----------- ----------- -----------
Financing activities
Borrowings on long-term debt 205,366 266,381 257,985
Repayments of long-term debt (204,898) (295,663) (220,615)
Proceeds from stock issuance, including tax benefit
related to stock options exercised 1,338 456 1,497
Purchase of treasury stock (4,349) (862) (8)
----------- ----------- -----------
Net cash provided by (used in) financing activities (2,543) (29,688) 38,859
----------- ----------- -----------
Effect of exchange rate changes on cash (507) (279) (725)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 12,955 (311) (21,516)
Cash and cash equivalents at beginning of year 7,129 7,440 28,956
----------- ----------- -----------
Cash and cash equivalents at end of year $ 20,084 $ 7,129 $ 7,440
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash paid during the year
Income taxes $ 5,070 $ 2,004 $ 2,020
Interest 1,673 3,730 2,459
See notes to consolidated financial statements.
F-5
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended
April 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net income (loss) $ 6,131 $ 4,487 $ (845)
Currency translation adjustments (465) (1,750) (724)
----------- ----------- -----------
Comprehensive income (loss) $ 5,666 $ 2,737 $ (1,569)
----------- ----------- -----------
----------- ----------- -----------
See notes to consolidated financial statements.
F-6
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is a global business-to-business software services provider
that delivers comprehensive information technology solutions to organizations
throughout North America, Europe and Asia/Pacific. The Company sells personal
computer ("PC") software through volume licensing and maintenance ("VLM")
agreements, or right-to-copy arrangements, and full-packaged PC software
products, primarily through third-party distributors. In addition, the Company
provides infrastructure design, enterprise software management, applications
development and technical support services to help organizations maximize
business value from information technology.
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.
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 2 to 10 years.
Amortization of leasehold improvements is provided on the straight-line method
over the shorter of the useful lives of the assets or the terms of the
corresponding leases.
F-7
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
GOODWILL
Goodwill represents the excess of acquisition costs over the fair value of
the net assets of businesses purchased and is amortized on the straight-line
method over periods up to twenty years. The Company periodically evaluates the
possible impairment of goodwill based on the undiscounted projected cash flows
of the related business unit.
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 impact of this policy change was 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
The Company computes basic earnings per share based on the weighed average
number of common shares outstanding. Diluted earnings per share is computed
based on the weighted average number of shares outstanding, plus the number of
additional common shares that would have been outstanding if dilutive potential
common shares had been issued.
COMPREHENSIVE INCOME
Effective May 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 (SFAS 130), REPORTING COMPREHENSIVE
INCOME, which addresses the manner in which certain adjustments to shareholders'
equity are displayed in the financial statements. In accordance with SFAS 130, a
Consolidated Statement of Comprehensive Income (Loss) is included in the
consolidated financial statements. Adoption of SFAS 130 did not affect the
Company's reported assets or net income.
F-8
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 133 (SFAS 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This standard, which is effective for fiscal
years beginning after June 15, 2000, requires that all derivatives be recognized
as either assets or liabilities at estimated fair value. The adoption of SFAS
133 is not expected to have a material effect on the Company's financial
position or results of operations.
NOTE B - LONG-TERM DEBT
Long-term debt consisted of (in thousands):
April 30,
-----------------------------
1999 1998
----------- -----------
Secured $100 million revolving credit facility $ -- $ --
Floating rate term loan due August 1999 -- --
Notes payable to foreign banks 7,800 7,300
Other 826 906
----------- -----------
8,626 8,206
Less current maturities 763 393
----------- -----------
$ 7,863 $ 7,813
----------- -----------
----------- -----------
The Company has a secured revolving credit facility (the "Facility") which
permits the Company to borrow up to $100 million, subject to availability under
its borrowing base. At April 30, 1999, $72 million was available under the
Facility. The Facility, which expires in March 2002, bears interest at a
variable rate (6.16% at April 30, 1999) and provides for an annual commitment
fee equal to a variable percentage of the unused line of credit. The Facility,
which is secured by accounts receivable, inventory and a pledge of the stock of
certain of the Company's subsidiaries, 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 5.10% at April 30, 1999) and are secured by
letters of credit issued by the Company. The facilities expire in February and
March 2001.
Annual maturities of long-term debt are $763,000, $63,000 and $7.8 million
for the years ending April 30, 2000, 2001 and 2002, respectively.
F-9
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE C - INCOME TAXES
The Company's provision for income taxes is comprised of the following (in
thousands):
Federal Foreign State Total
----------- ----------- ----------- -----------
Year ended April 30, 1999
Current $ 2,837 $ 483 $ 295 $ 3,615
Deferred 496 334 -- 830
----------- ----------- ----------- -----------
$ 3,333 $ 817 $ 295 $ 4,445
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
A reconciliation of income tax expense (benefit) using the statutory
federal income tax rate of 34% to the actual income tax expense follows (in
thousands):
Year Ended
April 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
Income tax at statutory rate $ 3,596 $ 2,789 $ (266)
State and local income
taxes, net of federal benefit 195 271 101
Differences between foreign and U.S. tax rates,
including foreign losses without tax benefits 234 327 7
Non-deductible goodwill amortization 144 165 137
Other 276 163 84
----------- ----------- -----------
Income tax expense $ 4,445 $ 3,715 $ 63
----------- ----------- -----------
----------- ----------- -----------
F-10
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, 1999 and 1998, which
are included in other assets and other current liabilities, consist of the
following (in thousands):
April 30,
-----------------------------
1999 1998
----------- -----------
Accounts receivable $ 291 $ 561
Inventories -- 541
Accrued expenses 524 586
Foreign net operating loss carryforward 233 569
Other 177 11
----------- -----------
Deferred tax assets 1,225 2,268
----------- -----------
Depreciation and amortization (517) (603)
Other (2) (110)
----------- -----------
Deferred tax liabilities (519) (713)
----------- -----------
$ 706 $ 1,555
----------- -----------
----------- -----------
At April 30, 1999, the Company's foreign subsidiaries had net operating
loss carryforwards of approximately $2.6 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. In September 1998,
the shareholders approved the adoption of the 1998 Long Term Incentive Plan.
Under the terms of the 1998 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 1999 through 2005. At April 30, 1999, 146,750 and 89,390 shares of
common stock were reserved for future grant under the 1998 and 1993 Long Term
Incentive Plans, respectively.
F-11
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE D - EMPLOYEE BENEFIT PLANS (CONTINUED)
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 (loss) per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):
Year Ended
April 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net income (loss) - as reported $ 6,131 $ 4,487 $ (845)
Net income (loss) - pro forma 5,646 4,069 (1,127)
Earnings (loss) per share - as reported
Basic 1.44 1.04 (.20)
Diluted 1.43 1.03 (.20)
Earnings (loss) per share - pro forma
Basic 1.33 .94 (.26)
Diluted 1.32 .94 (.26)
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 1999, 1998 and
1997, respectively: dividend yield of 0% for all periods; volatility of 49%, 45%
and 42%; risk-free interest rates of 5.75%, 6.2% and 6.2% and expected lives of
four years for all periods. The weighted average fair values of options granted
were $8.34, $5.76 and $9.55 per share during fiscal 1999, 1998 and 1997,
respectively.
F-12
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE D - EMPLOYEE BENEFIT PLANS (CONTINUED)
Option activity for the three years ended April 1999 is summarized as
follows:
Number of Shares Weighted Average
Underlying Options Exercise Price
------------------ ----------------
Outstanding at May 1, 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
Granted 174,850 18.69
Exercised (53,800) 13.06
Canceled/forfeited (80,900) 18.99
-----------
Outstanding at April 30, 1999 523,090 17.28
-----------
-----------
Exercisable at April 30, 1997 146,560 20.02
-----------
-----------
Exercisable at April 30, 1998 211,650 18.84
-----------
-----------
Exercisable at April 30, 1999 208,430 18.37
-----------
-----------
Further information regarding options outstanding and options exercisable
at April 30, 1999 is summarized below:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of of Remaining Exercise of Exercise
Exercise Prices Shares Life Price Shares Price
---------------------- ----------- ---------------- ----------- ----------- ---------
$ 10.00 to 15.00 188,290 3.62 $ 12.78 74,450 $ 12.62
15.01 to 20.00 149,350 3.59 16.68 59,080 17.25
20.01 to 25.00 144,950 4.04 21.33 34,400 23.91
25.01 TO 30.00 40,500 .40 25.89 40,500 25.89
---------------------- ----------- ---------------- ----------- ----------- ---------
$ 10.00 to 30.00 523,090 3.48 $ 17.28 208,430 $ 18.37
---------------------- ----------- ---------------- ----------- ----------- ---------
---------------------- ----------- ---------------- ----------- ----------- ---------
F-13
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE D - EMPLOYEE BENEFIT PLANS (CONTINUED)
In July 1992, the Company approved an Employee Stock Purchase Plan which
allows eligible employees to purchase shares of common stock through payroll
deductions. The shares can be purchased at an amount equal to 85% of the fair
market value of the common stock on the exercise date. The plan provides for a
series of monthly offerings, with an exercise date of the 15th of each month.
Each employee may purchase up to $15,000 of fair market value of common stock
per calendar year, limited to 10% of a participant's compensation. At April 30,
1999, a total of 56,000 shares of common stock were reserved for issuance under
the plan. For the years ended April 30, 1999, 1998 and 1997, 40,196, 30,929 and
10,656 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 six months 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, 1999 and 1998, net of reductions for forfeitures,
were $320,000 and $202,000, respectively. No contributions were made for the
year ended April 30, 1997.
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 293,000, 119,000 and 483,000
shares for the years ended April 30, 1999, 1998 and 1997, respectively.
Year Ended
April 30,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
Net income (loss) $ 6,131 $ 4,487 $ (845)
----------- ----------- -----------
Weighted average shares outstanding (basic) 4,244 4,318 4,314
Effect of dilutive employee and director stock options 29 33 --
----------- ----------- -----------
Weighted average shares outstanding (diluted) 4,273 4,351 4,314
----------- ----------- -----------
Earnings (loss) per share (basic) $ 1.44 $ 1.04 $ (.20)
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per share (diluted) $ 1.43 $ 1.03 $ (.20)
----------- ----------- -----------
----------- ----------- -----------
NOTE F - LEASES
The Company leases various office 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,
1999 are as follows (in thousands):
Year Ending April 30:
- ---------------------
2000 $ 4,767
2001 4,588
2002 3,516
2003 3,146
2004 2,855
Thereafter 7,460
----------
$ 26,332
----------
----------
Rent expense for operating leases totaled $4.8 million, $4.2 million and
$3.3 million for fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
F-14
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE G - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company's reportable segments are strategic business units that
offer diverse products and services. The Company has three reportable
segments: software services, professional services and support services. The
software segment sells PC software applications through volume licensing
maintenance agreements and full-packaged PC software products. The
professional services segment provides fee-based services for a number of
specific technologies to corporate and government clients. The support
segment provides fee-based telephone and Internet support services to
software publishers and organizations. The segments interact to provide the
Company's customers with comprehensive information technology solutions.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based upon income or loss from operations prior to allocation of
corporate overhead. Unallocated corporate overhead includes the costs of the
Company's support functions, such as accounting, human resources, credit and
information systems, as well as the compensation of the Company's officers.
Information for the Company's reportable segments for the years ended April 30,
1999, 1998 and 1997 is presented below (in thousands). Note that the Company
does not allocate expenditures for assets on a segment basis for internal
management reporting and, therefore, such information is not presented.
Year Ended
April 30,
--------------------------------------
1999 1998 1997
----------- ----------- -----------
Net sales
Software $ 833,667 $ 830,792 $ 763,519
Professional services 42,657 37,096 24,592
Support 53,641 16,199 8,174
----------- ----------- -----------
$ 929,965 $ 884,087 $ 796,285
----------- ----------- -----------
----------- ----------- -----------
Operating income
Software $ 44,855 $ 38,697 $ 34,117
Professional services (3,126) 1,937 (2,468)
Support 6,613 1,285 1,103
Unallocated corporate overhead (36,329) (30,770) (30,936)
----------- ----------- -----------
$ 12,013 $ 11,149 $ 1,816
----------- ----------- -----------
----------- ----------- -----------
Depreciation and amortization
Software $ 1,078 $ 873 $ 810
Professional services 1,869 1,575 985
Support 2,351 562 280
Unallocated corporate overhead 5,588 6,641 5,705
----------- ----------- -----------
$ 10,886 $ 9,651 $ 7,780
----------- ----------- -----------
----------- ----------- -----------
Assets
Software $ 126,472 $ 174,576
Professional services 19,280 8,273
Support 12,064 5,641
Unallocated corporate assets 78,638 70,141
----------- -----------
$ 236,454 $ 258,631
----------- -----------
----------- -----------
F-15
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Information regarding foreign operations for the years ended April 30, 1999,
1998 and 1997 follows (in thousands). Sales are attributed to countries based
upon the location of the customer.
Year Ended
April 30,
--------------------------------------
1999 1998 1997
----------- ----------- -----------
Net sales
United States $ 771,017 $ 756,155 $ 690,641
Foreign 158,948 127,932 105,644
----------- ----------- -----------
$ 929,965 $ 884,087 $ 796,285
----------- ----------- -----------
----------- ----------- -----------
Long-lived assets
United States $ 58,773 $ 59,671
Foreign 9,636 10,107
----------- -----------
$ 68,409 $ 69,778
----------- -----------
----------- -----------
NOTE H - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited quarterly financial data for
the years ended April 30, 1999 and 1998 (in thousands, except per share
amounts):
Quarter Ended
-------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 1998
------------------------------------------ -----------------------------------------
April 30, Jan. 31, Oct. 31, July 31, April 30, Jan. 31, Oct. 31, July 31,
1999 1999 1998 1998 1998 1998 1997 1997
---------- -------- -------- -------- --------- -------- -------- --------
Net sales $243,802 $261,922 $199,975 $224,266 $230,509 $246,595 $195,025 $211,958
Gross margin 29,247 29,264 27,445 25,200 25,792 27,077 23,729 23,712
Net income 1,432 2,111 1,288 1,300 1,380 1,938 628 541
Earnings per share
Basic .34 .50 .30 .30 .32 .45 .14 .12
Diluted .34 .49 .30 .30 .32 .45 .14 .12
F-16
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 Odom 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 Odom Sims
-------------------------------------------------
Judy Odom Sims, Chairman and Chief Executive
Officer
Date: July 28, 1999
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
--------- ----- ----
/s/ Judy Odom Sims Chief Executive Officer and July 28, 1999
- ------------------------------------ Chairman of the Board
Judy Odom Sims (Principal Executive Officer)
/s/ Keith R. Coogan President, Chief Operating Officer July 28, 1999
- ------------------------------------ and Director
Keith R. Coogan
/s/ James W. Brown Vice President and Chief Financial Officer July 28, 1999
- ------------------------------------ (Principal Financial Officer and
James W. Brown Principal Accounting Officer)
/s/ Mellon C. Baird Director July 28, 1999
- ------------------------------------
Mellon C. Baird
/s/ Brian N. Dickie Director July 28, 1999
- ------------------------------------
Brian N. Dickie
/s/ Carl S. Ledbetter Director July 28, 1999
- ------------------------------------
Carl S. Ledbetter
/s/ Frank Tindle Director July 28, 1999
- ------------------------------------
Frank Tindle
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
15, 1999, we have also audited Schedule II for each of the three years in the
period ended April 30, 1999. 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 15, 1999
S-1
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, 1999: $ 3,050,000 $ 1,456,000 $ (1,819,000) $ 2,687,000
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
INVENTORY VALUATION ACCOUNT:
Year ended April 30, 1999: $ 2,189,000 $ 801,000 $ (2,954,000) $ 36,000
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
S-2
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(a) Restated Bylaws of the Company, as amended (incorporated by
reference to the Company's Registration Statement No.
33-40794 on Form S-1).
3.2(b) Articles of Amendment to Article 8 of the Company's Amended
and Restated Bylaws effective September 17, 1998
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended October 31, 1998).
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)
(incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended April 30, 1998).
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, 1998
between Microsoft Corporation and the Company, including
Addendum dated July 1, 1998 (Appointment as a Large Account
Reseller).
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 (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1998).
10.4(d) Fourth Amendment to Lease Agreement, dated effective as of
October 1, 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 (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended
April 30, 1998).
10.6 Lease Agreement between Spokane Teachers Credit Union and
the Company, dated May 1, 1998 (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 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 Second Amended and Restated Limited Waiver Agreement, dated
March 29, 1999 between the Company and Private Capital
Management, Inc.
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).
10.17 The Software Spectrum, Inc. 1998 Long Term Incentive Plan
(incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended October 31, 1998).
10.18 First Amendment to Amended and Restated Credit Agreement,
dated as of August 15, 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 fiscal quarter ended October 31, 1998).
10.19 Lease Agreement, dated October 19, 1998 between
Highwoods/Florida Holdings, L.P. and the Company, together
with First Amendment thereto, dated April 16, 1999.
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.