<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996 .
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission file number 0-19349
-------------
SOFTWARE SPECTRUM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-1878002
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer/Identification 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)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
At November 7, 1996, the Registrant had outstanding 4,312,051 shares of its
common stock, par value $.01 per share.
1
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SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION 3
Item 1. Consolidated Financial Statements.
Consolidated Balance Sheets-
September 30, 1996 and March 31, 1996 4
Consolidated Statements of Operations-
Three and Six Months Ended
September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows-
Six Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results Of Operations 10
PART II - OTHER INFORMATION 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
3
<PAGE> 4
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,097 $ 28,123
Short-term investments -- 8,407
Trade accounts receivable, net of
allowance for doubtful accounts 139,375 73,875
Inventories 17,729 12,937
Prepaid expenses 9,242 10,092
Other current assets 4,482 2,435
------------ -----------
Total current assets 177,925 135,869
Furniture, equipment and leasehold
improvements, at cost 25,701 17,033
Less accumulated depreciation and amortization 9,722 7,866
------------ -----------
15,979 9,167
Intangibles and other assets 54,219 5,144
------------ -----------
$ 248,123 $ 150,180
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,500 $ --
Notes payable 13,224 --
Trade accounts payable 113,061 61,231
Other current liabilities 17,068 15,586
------------ -----------
Total current liabilities 144,853 76,817
Long-term debt, less current maturities 28,500 --
Shareholders' equity
Preferred stock, par value $.01;
authorized, 400,000 shares; issued
and outstanding, none -- --
Common stock, par value $.01;
authorized, 20,000,000 shares; issued,
4,345,057 shares at September 30 and
4,241,384 shares at March 31 43 42
Additional paid-in capital 38,605 36,394
Retained earnings 36,667 37,465
------------ -----------
75,315 73,901
Less treasury stock at cost; 34,288 shares
at September 30 and 34,026 shares at March 31 545 538
------------ -----------
Total shareholders' equity 74,770 73,363
------------ -----------
$ 248,123 $ 150,180
============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 181,891 $ 89,748 $ 342,770 $ 181,145
Cost of sales 159,938 77,203 302,143 156,168
------------ ------------ ------------ ------------
Gross margin 21,953 12,545 40,627 24,977
Selling, general and
administrative expenses 20,236 9,486 37,845 19,126
Depreciation and amortization expense 1,844 661 3,164 1,267
------------ ------------ ------------ ------------
Operating income (loss) (127) 2,398 (382) 4,584
Interest income (expense), net (673) 241 (780) 502
------------ ------------ ------------ ------------
Income (loss) before income taxes (800) 2,639 (1,162) 5,086
Income tax expense (benefit) (267) 851 (373) 1,683
------------ ------------ ------------ ------------
Net income (loss) $ (533) $ 1,788 $ (789) $ 3,403
============ ============ ============ ============
Earnings (loss) per share $ (0.12) $ (0.42) $ (0.18) $ 0.80
============ ============ ============ ============
Weighted average shares
outstanding 4,288 4,291 4,276 4,259
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
---------------------------
1996 1995
---------- ---------
<S> <C> <C>
Operating Activities
Net income (loss) $ (789) $ 3,403
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for bad debts 937 164
Depreciation and amortization 3,164 1,267
Changes in operating assets and liabilities
Increase in accounts receivable (58,001) (4,820)
Increase in inventories (2,927) (5,509)
Increase in prepaid expenses
and other assets (22) (2,626)
Increase in trade accounts payable and
other current liabilities 34,936 17,533
---------- ---------
Net cash provided by (used in) operating activities (22,702) 9,412
---------- ---------
Investing Activities
Sales (purchases) of short term investments, net 8,407 (1,693)
Purchase of furniture, equipment and
leasehold improvements (6,850) (2,630)
Purchase of subsidiaries, net of cash acquired (44,163) --
---------- ---------
Net cash used in investing activities (42,606) (4,323)
---------- ---------
Financing Activities
Borrowings on notes payable 36,424 --
Repayments of notes payable (23,200) --
Borrowings on long-term debt 30,000 --
Proceeds from stock issuance including tax
benefit related to stock options exercised 1,074 351
Other (16) (67)
---------- ---------
Net cash provided by financing activities 44,282 284
Increase (decrease) in cash and cash equivalents (21,026) 5,373
Cash and cash equivalents at beginning of period 28,123 11,543
---------- ---------
Cash and cash equivalents at end of period $ 7,097 $ 16,916
========== =========
Supplemental disclosure of cash paid
during the period
Income taxes $ 671 $ 1,697
Interest 868 14
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six months ended September 30, 1996
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Software
Spectrum, Inc. (the "Company") and its wholly-owned subsidiaries, Spectrum
Integrated Services, Inc. (d.b.a. Software Spectrum Technology Services Group),
Software Spectrum Canada, Ltd., Software Spectrum Pty, Ltd., Software Spectrum
Limited and Software Spectrum B.V. All intercompany accounts and transactions
have been eliminated in consolidation. Certain prior period amounts have been
reclassified to conform to the current period presentation.
The consolidated financial statements contained herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial position as of September
30, 1996, and the consolidated results of operations for the three months and
six months ended September 30, 1996 and 1995 and the consolidated cash flows
for the six months ended September 30, 1996 and 1995 have been made. In
addition, all such adjustments made, in the opinion of management, are of a
normal recurring nature. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the full
fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the interim reporting rules of the
Securities and Exchange Commission. The interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended March 31, 1996,
included in the Company's 1996 Annual Report on Form 10-K.
NOTE B - BUSINESS ACQUISITIONS
On April 2, 1996, the Company acquired substantially all of the assets of the
New Zealand business operations of Essentially Group Limited and all of the
outstanding shares of capital stock of Essentially Group (Australia) Limited,
privately held information technology companies in New Zealand and Australia.
The purchase price was $6.3 million, including cash of $5.1 million and the
issuance of 55,363 shares of the Company's common stock. The acquisition has
been accounted for using the purchase method of accounting.
7
<PAGE> 8
NOTE B - BUSINESS ACQUISITIONS (CONTINUED)
The estimated fair values of the assets acquired, liabilities assumed and stock
issued in connection with the purchase were $15.8 million, $9.6 million and
$1.2 million, respectively. The excess of the purchase price over the fair
values of the net assets acquired was $5.2 million and is being amortized on
the straight-line method over 20 years. The operating results of the acquired
businesses have been included in the consolidated statements of income from the
date of acquisition. Pro forma operating results, giving effect to the
acquisition as though it had occurred at the beginning of fiscal 1996 or 1995,
are not presented because they do not differ materially from the Company's
actual results.
On May 13, 1996, the Company acquired certain operating assets of the
corporate, government, and educational ("CGE") division of Egghead, Inc.
("Egghead"), a leading supplier of microcomputer software to organizations in
North America, for approximately $45 million in cash. The acquisition has been
accounted for using the purchase method of accounting.
The estimated fair values of the assets acquired and liabilities assumed were
$51 million and $6 million, respectively. The excess of the purchase price
over the fair values of the net assets acquired was $45 million and is being
amortized on the straight-line method over 20 years. The operating results of
the acquired business have been included in the consolidated statements of
income from the date of acquisition. The following unaudited pro forma
information presents summary consolidated results of operations of the Company
and the CGE division as if the acquisition had occurred at the beginning of
each period presented.
<TABLE>
<CAPTION>
Six Months
Ended September 30,
-------------------------------------
(in thousands, except per share amounts)
1996 1995
------------- --------------
<S> <C> <C>
Net sales $ 382,000 $ 362,000
============ ==============
Net income (loss) $ (1,100) $ 2,300
============ ==============
Earnings (loss) per share $ (0.26) $ 0.54
============ ==============
</TABLE>
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made as of these dates or of results which may occur in the future.
8
<PAGE> 9
NOTE C - FINANCING ARRANGEMENT WITH BANK
Long-term debt consists of a term bank loan due in quarterly installments
beginning June 30, 1997 through March 31, 2001 ranging from $1.5 million to
$2.25 million. The note bears interest at a variable rate, which approximated
7.125% at September 30, 1996, subject to quarterly adjustment, based on certain
financial ratios of the Company.
The financing arrangement also includes a $60 million revolving credit facility
which expires in May 1999. $13.2 million was outstanding under the revolving
credit facility at September 30, 1996. The revolving credit facility bears
interest at prime or LIBOR plus a variable rate, which approximated 8.25% at
September 30, 1996.
Until certain financial ratios are maintained for specified periods, borrowings
under the financing arrangement are secured by liens on accounts receivable,
inventory, the pledge of all the Company's shares in Spectrum Integrated
Services, Inc. and the pledge of 66.67% of the Company's shares in its foreign
subsidiaries.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
The following table sets forth, for each of the periods indicated, consolidated
statements of operations data expressed as a percentage of net sales for the
period specified.
<TABLE>
<CAPTION>
Percentage of Net Percentage of Net
Sales for Three Months Sales for Six Months
Ended September 30, Ended September 30,
-------------------------- -------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0% 100.0 % 100.0%
Cost of sales 87.9 86.0 88.1 86.2
------- ------- ------- -------
Gross margin 12.1 14.0 11.9 13.8
Selling, general and administrative expenses 11.1 10.6 11.1 10.6
Depreciation and amortization 1.0 0.7 0.9 0.7
------- ------- ------- -------
Operating income (loss) 0.0 2.7 (0.1) 2.5
Interest income (expense), net (0.4) 0.2 (0.2) 0.3
------- ------- ------- -------
Income (loss) before income taxes (0.4) 2.9 (0.3) 2.8
Income tax expense (benefit) (0.1) 0.9 (0.1) 0.9
------- ------- ------- -------
Net income (loss) (0.3)% 2.0% (0.2)% 1.9%
======= ======= ======= =======
</TABLE>
NET SALES:
The Company's revenues are derived primarily from the sale of PC software,
peripheral and hardware products and technology services in North America,
Europe and the Asia/Pacific region. For the three and six months ended
September 30, 1996, sales increased by 103% and 89% over sales for the
corresponding periods in 1995, reflecting the impact of the Company's recent
acquisitions.
In April 1996, the Company acquired substantially all of the assets of the New
Zealand business of Essentially Group Limited and all of the outstanding shares
of capital stock of Essentially Group (Australia) Limited, information
technology companies in the Asia/Pacific region. The acquisition of Essentially
Group provided the Company with a business presence in the Asia/Pacific market
and completes the Company's global operations strategy which includes
maintaining operations centers in North America, Europe and Asia/Pacific to
service the major worldwide desktop technology markets.
In May 1996, the Company acquired certain operating assets of the corporate,
government and educational ("CGE") division of Egghead, Inc., a leading
supplier of PC software products to organizations in North America. With the
CGE acquisition, the Company significantly increased its market presence in
North America. For the six months ended
10
<PAGE> 11
September 1996 and 1995, the pro forma combined sales of the Company and the
CGE division were $382 and $362 million, respectively.
For the three and six months ended September 1996, sales of PC software
increased 103%, and 87%, respectively, as compared to the corresponding periods
in 1995. The Company sells PC software through volume license and maintenance
("VLM") agreements, or right to copy arrangements, and ships full-packaged PC
software products either from its distribution centers or through third party
distributors. The Company serves as a designated service provider for VLM
agreements which are frequently used by customers seeking to standardize
desktop software applications and, consequently, may involve significant
quantities of unit sales for each customer at lower per unit prices than full-
packaged software products. For the three and six months ended September 30,
1996, sales of software through VLM agreements represented approximately 50% of
net sales as compared to approximately 45% and 43%, respectively, of net sales
for the corresponding periods of the prior year.
For the three and six months ended September 30, 1996, revenue from technology
services provided through the Company's Technology Services Group increased by
more than 120% as compared to the corresponding periods in 1995. The Company
increased the number of its technology services offices from ten at March 31,
1996, to 23 world-wide locations at September 30, 1996. Because fee-based
services revenue has grown from a relatively small base, as compared to the
Company's sales of PC software, fee-based services continued to represent less
than 5% of the Company's overall sales while representing approximately 14% of
the Company's gross margin for the six months ended September 1996.
The Company believes that increases in revenue depend upon the Company's
ability to maintain and increase its customer base, to continue to increase its
market share, to develop and expand its technology services, and to capitalize
on continued growth in desktop technology markets around the world.
For the three and six months ended September 1996, fluctuations in foreign
currencies against the U.S. dollar did not have a material effect on the
Company's financial results.
GROSS MARGIN:
Overall gross margin as a percentage of net sales was 12.1% and 11.9% for the
three and six months ended September 30, 1996, respectively, as compared to 14%
and 13.8% for the corresponding periods of the previous year. The decline in
overall gross margin as a percentage of sales, as compared to the previous
year, primarily reflects the change in the Company's sales mix as a result of
the acquisition of the CGE Division of Egghead. Because substantially all
revenue from former CGE customers was derived from PC software sales, which
have lower gross margins than do the Company's technology services offerings,
the Company's overall gross margin declined in the three and six months ended
September 1996.
11
<PAGE> 12
For the three and six months ended September 30, 1996, gross margin on the sale
of PC software declined to 10.8% and 10.5%, respectively, as compared to 12.1%
and 12.0% for the three and six months ended September 30, 1995, respectively.
The decline in PC software gross margin reflects the growth in sales of PC
software through VLM agreements which generally have lower gross margins as
compared to sales of full-packaged software products, and lower levels of
financial incentives from software publishers in the current periods. In
addition, in connection with the acquisition of the CGE division of Egghead,
the Company entered into an agreement (the "Fulfillment Agreement") with
Egghead whereby Egghead continued to purchase product and supply it on behalf
of the Company to the former CGE customers pending the implementation of the
Company's information systems to support the requirements of the former CGE
customers. Under the Fulfillment Agreement, the Company incurred higher
software costs than it incurs servicing its customers under its own supplier
contracts and through its own system and facilities. The fulfillment period
ended mid-September 1996, and gross margins on software sales began to improve
as the Company began to consolidate all purchasing activities under the
Company's supplier contracts during the September quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses include the costs of the Company's
sales and marketing organization and purchasing, distribution and
administration costs. For the three and six months ended September 1996,
selling, general and administrative expenses, as a percentage of net sales,
were 11.1%, as compared to 10.6% for each of the corresponding periods in 1995.
The increase in selling, general and administrative expenses as a percentage of
sales reflects certain transition costs, including temporary staffing, travel
expense and costs associated with systems implementation, totaling
approximately $1.4 million and $3.2 million, respectively, incurred in the
three and six months ended September 1996, in connection with the Company's
recent acquisitions. Without these identified transition costs, selling,
general and administrative expenses as a percentage of sales would have been
10.4% and 10.1%, respectively, for the three and six months ended September
1996.
The Company does not expect to incur substantial excess costs associated with
the recent acquisitions in future quarters of this fiscal year. The Company
anticipates that its operating results for the remainder of fiscal 1997 should
improve as the Company begins to realize operating efficiencies as a result of
its larger size and increased market presence.
DEPRECIATION AND AMORTIZATION:
The increase in depreciation and amortization for the three and six months
ended September 1996, as compared to the corresponding periods in 1995,
reflects amortization of goodwill recorded in connection with the Company's
recent business acquisitions. Most of the purchase price for these acquisitions
represents goodwill which the Company began amortizing over a 20-year period in
the June 1996 quarter.
INCOME TAX EXPENSE (BENEFIT):
12
<PAGE> 13
The Company's effective tax rate for the three and six months ended September
1996 was 33.4% and 32.1%, respectively, as compared to 32.2% and 33.1% in the
corresponding periods of the prior year. The Company's effective tax rates
reflect the expected federal tax benefit of the September 1996 quarter and year
to date losses, net of state tax expense.
LIQUIDITY AND FINANCIAL CONDITION:
At September 30, 1996, the Company had approximately $7.1 million in cash and
cash equivalents and had $43 million outstanding under its $30 million term
loan and $60 million revolving credit line established in connection with its
recent acquisitions. The term loan and credit line are initially secured by
accounts receivable and inventory and a pledge of the stock of the Company's
domestic and foreign subsidiaries. The principal amount of the term loan is due
in quarterly installments beginning in June 1997 through March 2001, increasing
from $1.5 million to $2.25 million. The revolving credit line expires in May
1999.
The increase in trade accounts receivable from March 31, 1996 to September 30,
1996, reflects the increase in net sales for the six months ended September 30,
1996. Terms on the Company's accounts receivable are generally net 30 days from
date of invoice or 10 days in the case of summary periodic billings to
customers. At September 30, 1996 and March 31, 1996, accounts receivable
represented approximately 62 and 63 days of historical sales, respectively. The
Company generally carries inventory adequate to meet product sales levels for a
period of approximately one month. The increase in inventory as of September
30, 1996, compared to March 31, 1996, results from the recent acquisitions. The
increase in trade accounts payable from March 31, 1996 to September 30, 1996,
reflects the increased levels of accounts receivable and inventories.
For the six months ended September 1996, the Company used $22.7 million of cash
in its operations compared to $9.4 million of cash provided by operations in
the six months ended September 1995. The increase in cash used in operations is
primarily due to the increase in accounts receivable.
The increase in furniture, equipment and leasehold improvements at September
30, 1996 reflects approximately $2 million of capital assets included in the
recent business acquisitions and approximately $4.8 million of capital
expenditures related to the Company's installation of computer and telephone
systems to support its recent acquisitions, the ongoing upgrade of its existing
computer and telephone systems, expansion of its Technology Services Group
offices, and relocation and consolidation of its United States distribution
facilities to Louisville, Kentucky.
The Company expects that its cash requirements for fiscal 1997 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
13
<PAGE> 14
This Management's Discussion and Analysis of Financial Condition includes
certain forward-looking statements of the Company including statements
concerning anticipated operating results, future market trends, estimates
regarding the economy and the software industry in general and key performance
indicators which impact the Company. In developing any forward-looking
statements, the Company makes a number of assumptions including expectations
for continued market growth, anticipated revenue and gross margin levels, and
cost savings and efficiencies. If the industry's or the Company's performance
differs materially from these assumptions or estimates, Software Spectrum's
actual results could vary significantly from the estimated performance
reflected in any forward-looking statements. Accordingly, forward-looking
statements should not be relied upon as a prediction of actual results. The
Company's Form 10-K for the March 31, 1996 fiscal year, contains certain
additional cautionary statements that describe factors that could cause the
Company's actual results to differ materially from those in the forward-looking
statements in this discussion.
INFLATION:
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
14
<PAGE> 15
PART II - OTHER INFORMATION
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 15, 1996, the Company held its Annual Meeting of Shareholders (the
"Meeting"). At the Meeting, Richard Sims was elected as a director to serve a
three-year term expiring at the 1999 Annual Meeting of Shareholders of the
Company. An Amendment to the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock to 20,000,000 was approved by
the statutorily required holders of two-thirds of the Company's outstanding
Common Stock entitled to vote at the Meeting. The following table sets forth
the numbers of shares of Common Stock that were voted for or against or
abstained from each matter:
<TABLE>
<CAPTION>
For Against Abstained
--------- ------- --------
<S> <C> <C> <C>
Nomination of Richard Sims 3,941,421 -- 5,251
Amendment to the Company's
Articles of Incorporation 3,810,484 97,849 15,939
</TABLE>
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits: Exhibit 10.1 - First Amendment to Purchase and Sale Agreement dated September, 1996 by and
among Software Spectrum, Inc., Software Spectrum (NZ) Limited, Essentially
Group (NZ) Limited, Essentially Software (Wellington) Limited, The McNabb
Family Trust, McNabb No. 2 Family Trust, McNabb No. 3 Family Trust, RMAD Trust,
David Colvin and Gary McNabb
Exhibit 11.1 - Computation of Primary Earnings (Loss) Per Share
Exhibit 11.2 - Computation of Fully-Diluted Earnings (Loss) Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K During the three months ended September 30, 1996 a report form 8-K/A was filed by
the Company on July 25, 1996, disclosing the Financial Statements of the CGE
Division of Egghead, Inc.
</TABLE>
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOFTWARE SPECTRUM, INC.
Date: November 14, 1996 By: /s/ Deborah A. Nugent
---------------------------
Deborah A. Nugent, Vice President of Finance
(Principal Financial Officer and Principal
Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Pages
------
<S> <C> <C>
Exhibit 10.1 First Amendment to Purchase and Sale Agreement dated September, 1996 by and
among Software Spectrum, Inc., Software Spectrum (NZ) Limited, Essentially
Group (NZ) Limited, Essentially Software (Wellington) Limited, The McNabb
Family Trust, McNabb No. 2 Family Trust, McNabb No. 3 Family Trust, RMAD
Trust, David Colvin and Gary McNabb
Exhibit 11.1 Computation of Primary Earnings (Loss) Per Share
Exhibit 11.2 Computation of Fully Diluted Earnings (Loss) Per Share
Exhibit 27 Financial Data Schedule
</TABLE>
19
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT
THIS FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT (the "First
Amendment") is made and entered into as of the _____ day of September, 1996, by
and among Software Spectrum, Inc., a Texas corporation ("SSI"), Software
Spectrum (NZ) Limited, duly incorporated under the laws of New Zealand
("Hybrid") (SSI and Hybrid are, jointly and severally, referred to herein as
"Buyer"), Essentially Group Limited, duly incorporated under the laws of New
Zealand (the "Company"), Essentially Group (NZ) Limited, duly incorporated
under the laws of New Zealand and a wholly-owned subsidiary of the Company
("NZ"), Essentially Software (Wellington) Limited, duly incorporated under the
laws of New Zealand and a wholly-owned subsidiary of NZ ("Wgtn"), McNabb No. 2
Family Trust dated November 1, 1990, McNabb No. 3 Family Trust dated November
1, 1990, The McNabb Family Trust dated July 1, 1986 (collectively, the "McNabb
Family Trusts"), RMAD Trust dated May 23, 1993 ("RMAD"), David Colvin,
individually ("Colvin"), Gary McNabb, individually ("McNabb") (the Company, NZ
and Wgtn are sometimes referred to herein individually as a "Seller" and
collectively as the "Sellers") (the Company, NZ, Wgtn, the McNabb Family
Trusts, RMAD, Colvin and McNabb are sometimes referred to herein collectively
as the "Selling Group") and Gary McNabb as Sellers' Representative. This First
Amendment amends that certain Purchase and Sale Agreement (the "Purchase
Agreement") dated April 2, 1996 by and among the parties hereto.
R E C I T A L S
WHEREAS, pursuant to the Purchase Agreement, Buyer acquired the
Australia Shares and Assets and assumed certain liabilities of Sellers;
WHEREAS, certain issues have arisen with respect to (i) the
finalization of the Audit required by the Purchase Agreement, and (ii) the
determination of the Total Consideration payable under the Purchase Agreement;
WHEREAS, the parties desire to fully resolve all claims of any party
under the Purchase Agreement relating to these matters; and
WHEREAS, Robert Parkinson has resigned as Sellers' Representative and
Gary McNabb has been appointed to serve as Sellers' Representative by each
member of the Selling Group;
NOW, THEREFORE, in consideration of the recitals and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties do
hereby agree as follows:
1. Defined Terms. All capitalized terms used herein and not
otherwise defined in this First Amendment shall have the respective meanings
set forth in the Purchase Agreement.
2. Determination of Total Consideration; Obligations. (a) Buyer
and Sellers have determined that the Total Consideration to be paid by Buyer
for the Australia Shares and
<PAGE> 2
the Assets pursuant to Article II of the Purchase Agreement shall be equal to
$9.2 million (NZ). Buyer and Sellers' Representative, promptly following the
execution of this First Amendment, will instruct the Escrow Agent: (i) to
return to Buyer (a) all of the Purchase Shares held pursuant to the Escrow
Agreement, and (b) $3.5 million (NZ) of the Cash Portion together with any and
all interest earned on the escrowed funds; and (ii) to disburse $500,000 (NZ)
to Selling Group, less any amount necessary to satisfy the Sellers' obligations
under Section 2(b) hereof, in such manner as is directed by the Sellers'
Representative.
(b) Except as expressly set forth herein, Sellers hereby
confirm that Sellers are solely responsible for any and all expenses, costs and
other charges relating to the Audit (including all amounts owed to Coopers &
Lybrand) and to the engagement of Brown Woolley Graham. Sellers shall provide
Buyer, at or prior to any disbursement to Sellers from the Escrowed Amount, of
evidence satisfactory to Buyer of payment of such fees; provided, however,
Buyer agrees that it will reimburse Sellers for the following:
(i) an amount equal to $5,000 (NZ) payable by Sellers to
Brown Woolley Graham for fees relating to work performed by Brown
Woolley Graham at Buyer's request subsequent to Closing;
(ii) 50% of the fees incurred by Sellers, not to exceed in
the aggregate $30,000 (NZ), that exceed the amount accrued on the
Sellers' financial statements attached as Exhibit "A" hereto for the
fiscal year ended March 31, 1996 relating to any services performed by
Coopers & Lybrand, Brown Woolley Graham and Cort & Co. in connection
with the preparation of the Audit required under the Purchase
Agreement.
(c) Sellers acknowledge that pursuant to the Asset
Agreement, any and all receivables of any type or character of the Company, NZ
and Wgtn, including all federal tax refunds, if any, have been assigned to the
Buyer as of the Closing Date, and Sellers acknowledge that they have no right
or interest therein.
3. Audit. Sellers acknowledge that Sellers to date have been
unable to deliver to Buyer the Audit required to be delivered pursuant to
Section 2.1 of the Purchase Agreement. Buyer waives any breach or violation of
the Purchase Agreement arising out of the Sellers' failure to deliver the
Audit, however, Sellers and each member of the Selling Group hereby covenants
to Buyer that the final draft of the financial statements of Sellers for the
year ended March 31, 1996 attached hereto as Exhibit "A" will be approved and
adopted by each of the boards of directors of the Sellers at a duly called and
convened meeting of each of the Sellers on or before disbursement of the Escrow
Fund by the Escrow Agent. The Sellers and the Selling Group represent and
warrant to Buyer that the financial statements of Sellers for the year ended
March 31, 1996 delivered to Buyer prior to the date hereof attached hereto as
Exhibit "A" are true, complete and correct in all respects and have been
prepared in accordance with GAAP and there are no liabilities relating to the
business previously conducted by the Sellers (whether accrued, contingent or
otherwise) that are not set forth in such financial statements. Sellers will
use their commercially reasonable best efforts to have the Audit completed and
delivered to Buyer promptly following the date hereof. Notwithstanding the
foregoing, in no event shall the disbursement from the Escrow
-2-
<PAGE> 3
occur until Sellers deliver to Buyer audited financial statements of Australia
and its subsidiaries.
4. Sale of Purchase Shares. SSI directly or through one of its
subsidiaries agrees to repurchase an aggregate of 25,000 of the Purchase Shares
from the members of the Selling Group in the following amounts at a price set
forth below:
<TABLE>
<CAPTION>
Number of Purchase Price Total Purchase
Name Shares Per Share Price
-------- ----------- -------------- ----------
<S> <C> <C> <C>
Gary McNabb 20,000 $29.70(NZ) $594,000(NZ)
David Colvin 5,000 $29.70(NZ) $148,500(NZ)
Total 25,000 $29.70(NZ) $742,500(NZ)
</TABLE>
In consideration of the foregoing, Buyer and the Selling Group hereby
acknowledge and agree that, except as set forth below, SSI shall have no
obligation to register under the United States Securities Act of 1933, as
amended, the Purchase Shares delivered to the Selling Group at Closing, and
Section 5.7 of the Purchase Agreement is hereby deleted from the Purchase
Agreement provided that subsections 5.7(f) and (h) shall remain in full force
and effect. Each member of the Selling Group reaffirms its representations and
agreements with respect to the acquisition of such Purchase Shares as set forth
in the Purchase Agreement.
5. McNabb Employment Agreement; Non-competition. SSI and McNabb
have determined that McNabb's Employment Agreement with Software Spectrum (NZ)
Limited dated April 2, 1996 shall be terminated effective as of September 30,
1996. McNabb, SSI and SSI (NZ) hereby agree that the non-competition
provisions set forth in Section 3.5(a)(i) and (ii) of the McNabb Employment
Agreement shall be limited to 18 months and that with respect to McNabb only,
the provisions of Section 5.2(a) of the Purchase Agreement shall be modified
and amended such that any time period set forth in Section 5.2(a) with greater
than 18 months remaining thereon shall in no event be deemed to exceed 18
months from the Closing Date. McNabb hereby acknowledges that Buyer, and each
of Buyer's affiliates has no further obligation to McNabb for any severance,
termination, vacation, leave, bonus or any other payment of any type or
character whatsoever arising out of McNabb's Employment Agreement or his
employment arrangement with SSI (NZ), other than the payment of McNabb's base
salary and a pro rata share of any bonuses actually earned by McNabb pursuant
to the McNabb Employment Agreement through September 30, 1996.
6. Release of Buyer. In consideration of the foregoing
agreements concerning the determination of the final Total Consideration, each
of the Sellers and the Selling Group, their representatives, trustees,
successors and assigns does hereby release and forever discharge Buyer, their
agents, officers, directors, employees, representatives and all persons natural
or corporate in privity with them or any of them from any and all claims or
causes
-3-
<PAGE> 4
of action of any kind whatsoever, arising under contract, at common law,
statutory or otherwise, which any of them has or might have, known or unknown,
now existing or that might arise hereafter, directly or indirectly attributable
to the Purchase Agreement or any transaction set forth in or contemplated by
the Purchase Agreement of any kind or character whatsoever. The purpose of the
foregoing release is to relinquish and surrender all claims of any type or
character for payment or compensation of any kind, past, present or future,
which any Seller or member of the Selling Group might have against those hereby
released, whether known or unknown, arising under or pursuant to the Purchase
Agreement.
7. Release of Sellers and Selling Group. In consideration of the
foregoing agreement concerning the determination of the final Total
Consideration, Buyer and its successors and assigns does hereby release and
forever discharge Sellers and each member of the Selling Group, their agents,
trustees and employees and all persons natural or corporate in privity with
them or any of them from any and all claims or causes of action of any kind
whatsoever, arising under contract, at common law, statutory or otherwise,
which either Buyer has or might have, known or unknown, now existing or that
might arise hereafter, directly or indirectly attributable to method of
determination of the Total Consideration as set forth in Article II of the
Purchase Agreement and the failure to deliver the Audit pursuant to the
Purchase Agreement, provided the foregoing shall not relieve or release the
Sellers or the Selling Group from any of their representations, warranties or
other obligations under the Purchase Agreement or otherwise.
8. RELEASE OF MCNABB FROM GUARANTEES. BUYER AGREES TO INDEMNIFY
AND HOLD MCNABB HARMLESS FROM ANY AND ALL LIABILITY ARISING FROM ANY
OUTSTANDING PERSONAL GUARANTY EXECUTED BY MCNABB IN FAVOR OF EITHER TRADE
SUPPLIERS OR LESSORS OF REAL PROPERTY FOR WHICH BUYER HAS ASSUMED THE
OBLIGATIONS THEREFOR UNDER THE PURCHASE AGREEMENT AND WHICH WERE SIGNED BY
MCNABB ON OR PRIOR TO THE CLOSING DATE.
9. Status of Purchase Agreement. Except as expressly modified
hereby, the Purchase Agreement and all obligations, liabilities, covenants,
representations and warranties of each of the parties thereto shall remain in
full force and effect and shall not be affected, modified or limited hereby.
10. Counterparts. This First Amendment may be executed in
counterparts, each of which shall be an original, but such counterparts
together shall constitute one and the same instrument.
11. Governing Law. This Amendment shall be construed in
accordance with the internal laws of New Zealand.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
IN THE PRESENCE OF: ESSENTIALLY GROUP LIMITED
/s/ LEANNE BIRT By: /s/ GARY McNABB
- --------------------------------- ----------------------------------
PA Name: Gary McNabb
33 College Hill, -------------------------------
Ponsonby Title: Director
-------------------------------
/s/ C. O'CONNER BY: /S/ ROBERT PARKINSON
- --------------------------------- ----------------------------------
Secretary Name: Robert Parkinson
198 Federal St., -------------------------------
Auckland Title: Director
-------------------------------
ESSENTIALLY GROUP (NZ) LIMITED
/s/ LEANNE BIRT By: /s/ GARY McNABB
- --------------------------------- ----------------------------------
PA
33 College Hill, Name: Gary McNabb
Ponsonby -------------------------------
Title: Director
-------------------------------
/s/ C. O'CONNER By: /s/ ROBERT PARKINSON
- --------------------------------- ----------------------------------
Secretary Name: Robert Parkinson
198 Federal St., -------------------------------
Auckland Title: Director
-------------------------------
ESSENTIALLY SOFTWARE (WELLINGTON)
LIMITED
/s/ LEANNE BIRT By: /s/ GARY McNABB
- --------------------------------- ----------------------------------
PA Name: Gary McNabb
33 College Hill, -------------------------------
Ponsonby Title: Director
-------------------------------
/s/ C. O'CONNER By: /s/ ROBERT PARKINSON
- --------------------------------- ----------------------------------
Secretary Name: Robert Parkinson
198 Federal St., -------------------------------
Auckland Title: Director
-------------------------------
-5-
<PAGE> 6
IN THE PRESENCE OF: THE MCNABB FAMILY TRUST
/s/ C. O'CONNER By: /s/ ROBERT PARKINSON
- --------------------------------- ----------------------------------
Secretary Robert Parkinson, Trustee
198 Federal St.,
Auckland
/s/ LEANNE BIRT By: /s/ GARY JOHN McNABB
- --------------------------------- ----------------------------------
PA Gary John McNabb, Trustee
33 College Hill,
Ponsonby
MCNABB NO. 2 FAMILY TRUST
/s/ LEANNE BIRT By: /s/ ANNA LOUISE McNABB
- --------------------------------- ----------------------------------
PA Anna Louise McNabb, Trustee
33 College Hill,
Ponsonby
/s/ C. O'CONNER By: /s/ ROBERT PARKINSON
- --------------------------------- ----------------------------------
Secretary Robert Parkinson, Trustee
198 Federal St.,
Auckland
/s/ LEANNE BIRT By: /s/ GARY JOHN McNABB
- --------------------------------- ----------------------------------
PA Gary John McNabb, Trustee
33 College Hill,
Ponsonby
MCNABB NO. 3 FAMILY TRUST
/s/ LEANNE BIRT By: /s/ ANNA LOUISE McNABB
- --------------------------------- ----------------------------------
PA Anna Louise McNabb, Trustee
33 College Hill,
Ponsonby
/s/ LEANNE BIRT By: /s/ GARY JOHN McNABB
- --------------------------------- ----------------------------------
PA Gary John McNabb, Trustee
33 College Hill,
Ponsonby
/s/ C. O'CONNER By: /s/ ROBERT PARKINSON
- --------------------------------- ----------------------------------
Secretary Robert Parkinson, Trustee
198 Federal St.,
Auckland
-6-
<PAGE> 7
IN THE PRESENCE OF: RMAD TRUST
/s/ LEANNE BIRT By: /s/ GARY JOHN McNABB
- --------------------------------- ----------------------------------
PA Gary John McNabb, Trustee
33 College Hill,
Ponsonby
/s/ C. O'CONNER By: /s/ ROBERT PARKINSON
- --------------------------------- ---------------------------------
Secretary Robert Parkinson, Trustee
198 Federal Street,
Ackland
/s/ LEANNE BIRT /s/ DAVID COLVIN
- -------------------------------- -------------------------------------
PA David Colvin, Individually
33 College Hill,
Ponsonby
/s/ LEANNE BIRT /s/ GARY JOHN McNABB
- --------------------------------- -------------------------------------
PA Gary John McNabb, Individually
33 College Hill,
Ponsonby
/s/ LEANNE BIRT /s/ GARY McNABB
- --------------------------------- ---------------------------------------
PA Gary McNabb,
33 College Hill, as Seller's Representative
Ponsonby
SOFTWARE SPECTRUM, INC.
/s/ LEANNE BIRT By: /s/ RICHARD SIMS
- --------------------------------- ----------------------------------
PA Name: Richard Sims
33 College Hill, ------------------------------
Ponsonby Title: Senior Vice President
------------------------------
SOFTWARE SPECTRUM (NZ) LIMITED
/s/ LEANNE BIRT By: /s/ RICHARD SIMS
- --------------------------------- ----------------------------------
PA Name: Richard Sims
33 College Hill, -----------------------------
Ponsonby Title:
-----------------------------
/s/ LEANNE BIRT By: /s/ DAVID COLVIN
- --------------------------------- ----------------------------------
PA Name: David Colvin
33 College Hill, ------------------------------
Ponsonby Title: Director
------------------------------
-7-
<PAGE> 1
Exhibit 11.1
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $(533,000) $1,788,000 $(789,000) $3,403,000
========= ========== ========= ==========
Shares as adjusted:
Average number of shares
outstanding 4,288,277 4,195,712 4,275,903 4,186,938
Incremental shares
from outstanding stock
options as determined
under the treasury stock
method, using the
average market price -- * 95,060 -- * 71,865
Shares as adjusted 4,288,277 4,290,772 4,275,903 4,258,803
========= ========== ========= ==========
Primary earnings (loss) per share $ (.12) $ .42 $ (.18) $ .80
========= ========== ========= ==========
</TABLE>
* No incremental shares from outstanding stock options are included as they
would be anti-dilutive.
20
<PAGE> 1
Exhibit 11.2
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY-DILUTED EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $(533,000) $1,788,000 $(789,000) $3,403,000
========= ========== ========= ==========
Shares as adjusted:
Average number of shares
outstanding 4,288,277 4,195,712 4,275,903 4,186,938
Incremental shares
from outstanding stock
options as determined
under the treasury stock
method, using the higher
of ending or average
market price -- * 96,730 -- * 83,732
--------- ---------- --------- ----------
Shares as adjusted 4,288,277 4,292,442 4,275,903 4,270,670
========= ========== ========= ==========
Fully-diluted earnings (loss) per share $ (.12) $ .42 $ (.18) $ .80
========= ========== ========= ==========
</TABLE>
* No incremental shares from outstanding stock options are included as they
would be anti-dilutive.
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 7,097
<SECURITIES> 0
<RECEIVABLES> 141,120
<ALLOWANCES> (1,745)
<INVENTORY> 17,729
<CURRENT-ASSETS> 177,925
<PP&E> 25,701
<DEPRECIATION> 9,722
<TOTAL-ASSETS> 248,123
<CURRENT-LIABILITIES> 144,853
<BONDS> 28,500
0
0
<COMMON> 43
<OTHER-SE> 74,727
<TOTAL-LIABILITY-AND-EQUITY> 248,123
<SALES> 342,770
<TOTAL-REVENUES> 342,770
<CGS> 302,143
<TOTAL-COSTS> 302,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 937
<INTEREST-EXPENSE> (860)
<INCOME-PRETAX> (1,162)
<INCOME-TAX> (373)
<INCOME-CONTINUING> (789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (789)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
