<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO ANNUAL REPORT
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
incorporation or organization) Identification No.)
2140 MERRITT DRIVE, GARLAND, TEXAS 75041
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 840-6600
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 June 26, 1996 of the Registrant's voting
securities held by non-affiliates was $84,437,370.
At June 26, 1996, the Registrant had outstanding 4,357,441 shares of its Common
Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part II of this Annual Report on Form
10-K the information contained in the registrant's proxy statement for its
annual meeting of shareholders to be held August 15, 1996 and in Part II of
this Annual Report the registrant's annual report to shareholders for the
fiscal year ended March 31, 1996.
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<PAGE> 2
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
This Form 10-K/A is being filed to correct an error on page 31 of
Software Spectrum, Inc.'s (the "Company") 1996 Annual Report to Shareholders
filed as an exhibit to the Company's Form 10-K for the fiscal year ended March
31, 1996. The 1996 Annual Report to Shareholders is refiled herewith in its
entirety with the corrected information included.
(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:
2 Asset Purchase Agreement dated as of March 23, 1996 by and
among Software Spectrum, Inc., Egghead, Inc. and DJ&J
Software Corporation, as amended by First Amendment to
Asset Purchase Agreement dated May 13, 1996 (incorporated
by reference to the Company's Current Report on Form 8-K
dated March 26, 1996).
3.1 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).
3.2 Restated Bylaws of the Company, as amended (incorporated by
reference to the Company's Registration Statement No.
33-40794 on Form S-1).
10.1(a) House Account Agreement (U.S.), dated as of September 4,
1986, as amended, between Lotus Development Corporation and
the Company (incorporated by reference to the Company's
Registration Statement No. 33-40794 on Form S-1).
10.1(b) Amendment to House Account Agreements dated as of June 25,
1992, between Lotus Development Corporation and the Company
(incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1993).
10.1(c) Educational House Account Agreement Addendum dated as of
March 23, 1994 between Lotus Development Corporation and
the Company (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March
31, 1994).
10.2 Lotus Passport Reseller Authorization Agreement dated March
31, 1994 between Lotus Development Corporation and the
Company (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31,
1994).
10.3(a) Microsoft 1995/1996 Channel Agreement dated July 1, 1995
between Microsoft Corporation and the Company, including
Addenda dated July 1, 1995 (Appointment as a Direct
Reseller) and Addenda dated July 1, 1995 (Appointment as a
Large Account Reseller) (incorporated by reference to the
Company's Form 10-K for the fiscal year ended March 31,
1996).
10.3(b) Large Account Reseller Rebate Addendum to the 1995/1996
Microsoft Channel Agreement dated July 1, 1995, as amended
by Amendment No.1 dated January 1, 1996 (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended March 31, 1996).
10.3(c) Microsoft Government Select Government Contractor Addendum
to the 1995/1996 Microsoft Channel Agreement dated as of
July 1, 1995 (incorporated by reference to the Company's
Form 10-K for the fiscal year ended March 31, 1996).
<PAGE> 3
10.3(d) Rebate and Marketing Fund Addendum to the 1995/1996
Microsoft Channel Agreement dated as of July 1, 1995, as
amended by Amendment No. 1 dated January 1, 1996
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended March 31, 1996).
10.4 Microsoft Corporation 1995/1996 Authorized Government Large
Account Reseller Agreement dated April 1, 1995 between
Microsoft Corporation and the Company (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended March 31, 1996).
10.5(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).
10.5(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).
10.6(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).
10.6(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).
10.6(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).
10.7 Industrial Building Lease dated as of June 7, 1993 between
LaSalle National Trust, N.A. and the Company (incorporated
by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1993).
10.8 Form of Call Center Lease (Spokane) (incorporated by
reference to the Company's Current Report on Form 8-K dated
March 26, 1996).
10.9 Loan Agreement dated as of September 30, 1994 between the
Company and NationsBank of Texas, N.A. (incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995).
10.10 Promissory Note dated September 30, 1994 executed by the
Company in favor of NationsBank of Texas, N.A.
(incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1995).
10.11 Credit Agreement dated as of May 3, 1996 between the
Company and Texas Commerce Bank, National Association, as
Agent (incorporated by reference to the Company's Current
Report on Form 8-K dated May 23, 1996).
10.12 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).
10.13 Software Spectrum, Inc. Employee Stock Purchase Plan
(incorporated by reference to the Company's Registration
Statement No. 33-53284 on Form S-1).
-2-
<PAGE> 4
10.14 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).
10.15 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).
10.16 Lease Agreement dated March 8, 1996 by and between
Riverport Commerce Center, Inc. and the Company
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended March 31, 1996).
10.17 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 Form 10-K for the fiscal year ended March 31,
1996).
10.18 Non-Employee Directors' Retainer Stock Plan (incorporated
by reference to the Company's Quarterly Report on Form 10-Q
ended December 31, 1995).
11.1 Statement regarding Computation of Primary Earnings Per
Share (incorporated by reference to the Company's Form 10-K
for the fiscal year ended March 31, 1996).
11.2 Statement regarding Computation of Fully Diluted Earnings
Per Share (incorporated by reference to the Company's Form
10-K for the fiscal year ended March 31, 1996).
13 Software Spectrum, Inc.'s 1996 Annual Report to
Shareholders.
16 Letter dated June 29, 1994 from Coopers & Lybrand LLP
addressed to the Securities and Exchange Commission
(incorporated by reference to the Company's Current Report
on Form 8-K/A dated June 11, 1994).
23 Consent of Grant Thornton LLP, Independent Accountants
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended March 31, 1996).
24 Power of Attorney (incorporated by reference to the
Company's Form 10-K for the fiscal year ended March 31,
1996).
27 Financial Data Schedule (incorporated by reference to the
Company's Form 10-K for the fiscal year ended March 31,
1996).
99 Purchase and Sale Agreement dated as of April 2, 1996 by
and among Software Spectrum, Inc., Software Spectrum (NZ)
Limited and Essentially Group 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 (incorporated by reference to the Company's Form
10-K for the fiscal year ended March 31, 1996).
(B) REPORTS ON FORM 8-K
During the three months ended March 31, 1996, a report on Form 8-K was
filed by the Company on March 26, 1996, reporting the Company's entry
into an Asset Purchase Agreement with Egghead, Inc. and DJ&J Software
Corporation.
-3-
<PAGE> 5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SOFTWARE SPECTRUM, INC.
By /s/ Judy O. Sims
-------------------------------------
Judy O. Sims, Chief Executive Officer
and President
Date: July 31, 1996
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Judy O. Sims Chief Executive Officer, President July 31, 1996
- ------------------------- and Director (Principal Executive
Judy O. Sims Officer)
/s/ Richard G. Sims* Senior Vice President and Director July 31, 1996
- -------------------------
Richard G. Sims
/s/ Deborah A. Nugent* Vice President of Fincane, Treasurer July 31, 1996
- ------------------------- and Secretary (Principal Fiancial
Deborah A. Nugent Officer and Principal Accounting
Officer)
/s/ Mellon C. Baird* Director July 31, 1996
- -------------------------
Mellon C. Baird
/s/ Robert D. Graham* Director July 31, 1996
- -------------------------
Robert D. Graham
/s/ Frank Tindle* Director July 31, 1996
- -------------------------
Frank Tindle
*By: /s/ Judy O. Sims Attorney-in-Fact July 31, 1996
---------------------
Judy O. Sims
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
2 Asset Purchase Agreement dated as of March 23, 1996 by and among Software
Spectrum, Inc., Egghead, Inc. and DJ&J Software Corporation, as amended by First
Amendment to Asset Purchase Agreement dated May 13, 1996 (incorporated by
reference to the Company's Current Report on Form 8-K dated March 26, 1996).
3.1 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).
3.2 Restated Bylaws of the Company, as amended (incorporated by reference to the
Company's Registration Statement No. 33-40794 on Form S-1).
10.1(a) House Account Agreement (U.S.), dated as of September 4, 1986, as amended,
between Lotus Development Corporation and the Company (incorporated by reference
to the Company's Registration Statement No. 33-40794 on Form S-1).
10.1(b) Amendment to House Account Agreements dated as of June 25, 1992, between Lotus
Development Corporation and the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.1(c) Educational House Account Agreement Addendum dated as of March 23, 1994 between
Lotus Development Corporation and the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
10.2 Lotus Passport Reseller Authorization Agreement dated March 31, 1994 between
Lotus Development Corporation and the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
10.3(a) Microsoft 1995/1996 Channel Agreement dated July 1, 1995 between Microsoft
Corporation and the Company, including Addenda dated July 1, 1995 (Appointment
as a Direct Reseller) and Addenda dated July 1, 1995 (Appointment as a Large
Account Reseller) (incorporated by reference to the Company's Form 10-K for
the fiscal year ended March 31, 1996).
10.3(b) Large Account Reseller Rebate Addendum to the 1995/1996 Microsoft Channel
Agreement dated July 1, 1995, as amended by Amendment No.1 dated January 1, 1996
(incorporated by reference to the Company's Form 10-K for the fiscal year ended
March 31, 1996).
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
SEQUENTIAL
NUMBERING
EXHIBIT PAGE NO.
- ------- ----------
<S> <C> <C>
10.3(c) Microsoft Government Select Government Contractor Addendum to the 1995/1996
Microsoft Channel Agreement dated as of July 1, 1995 (incorporated by reference
to the Company's Form 10-K for the fiscal year ended March 31, 1996).
10.3(d) Rebate and Marketing Fund Addendum to the 1995/1996 Microsoft Channel Agreement
dated as of July 1, 1995, as amended by Amendment No. 1 dated January 1, 1996
(incorporated by reference to the Company's Form 10-K for the fiscal year ended
March 31, 1996).
10.4 Microsoft Corporation 1995/1996 Authorized Government Large Account Reseller
Agreement dated April 1, 1995 between Microsoft Corporation and the Company
(incorporated by reference to the Company's Form 10-K for the fiscal year ended
March 31, 1996).
10.5(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).
10.5(b) Amendment to Lease Agreement dated March 31, 1995 between CIIF Associates II
Limited Partnership and the Company (incorporated by reference to theCompany's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
10.6(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).
10.6(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).
10.6(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).
10.7 Industrial Building Lease dated as of June 7, 1993 between LaSalle National
Trust, N.A. and the Company (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993).
10.8 Form of Call Center Lease (Spokane) (incorporated by reference to the Company's
Current Report on Form 8-K dated March 26, 1996).
</TABLE>
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<PAGE> 8
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
10.9 Loan Agreement dated as of September 30, 1994 between the Company and NationsBank
of Texas, N.A. (incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1995).
10.10 Promissory Note dated September 30, 1994 executed by the Company in favor of
NationsBank of Texas, N.A. (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995).
10.11 Credit Agreement dated as of May 3, 1996 between the Company and Texas Commerce
Bank, National Association, as Agent (incorporated by reference to the Company's
Current Report on Form 8-K dated May 23, 1996).
10.12 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).
10.13 Software Spectrum, Inc. Employee Stock Purchase Plan (incorporated by reference
to the Company's Registration Statement No. 33-53284 on Form S-1).
10.14 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).
10.15 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).
10.16 Lease Agreement dated March 8, 1996 by and between Riverport Commerce Center,
Inc. and the Company (incorporated by reference to the Company's Form 10-K for
the fiscal year ended March 31, 1996).
10.18 Non-Employee Directors' Retainer Stock Plan (incorporated by reference to the
Company's Quarterly Report on Form 10-Q ended December 31, 1995).
10.17 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 Form 10-K for the fiscal year ended March 31, 1996).
11.1 Statement regarding Computation of Primary Earnings Per Share (incorporated by
reference to the Company's Form 10-K for the fiscal year ended March 31, 1996).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
11.2 Statement regarding Computation of Fully Diluted Earnings Per Share (incorporated
by reference to the Company's Form 10-K for the fiscal year ended March 31,
1996).
13 Software Spectrum, Inc.'s 1996 Annual Report to Shareholders.
16 Letter dated June 29, 1994 from Coopers & Lybrand LLP addressed to the Securities
and Exchange Commission (incorporated by reference to the Company's Current
Report on Form 8-K/A dated June 11, 1994).
23 Consent of Grant Thornton LLP, Independent Accountants (incorporated by reference
to the Company's Form 10-K for the fiscal year ended March 31, 1996).
24 Power of Attorney (incorporated by reference to the Company's Form 10-K for the
fiscal year ended March 31, 1996).
27 Financial Data Schedule (incorporated by reference to the Company's Form 10-K for
the fiscal year ended March 31, 1996).
99 Purchase and Sale Agreement dated as of April 2, 1996 by and among Software
Spectrum, Inc., Software Spectrum (NZ) Limited and Essentially Group 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 (incorporated by reference to the Company's
Form 10-K for the fiscal year ended March 31, 1996).
</TABLE>
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EXHIBIT 13
[SOFTWARE SPECTRUM LOGO]
[PICTURE]
FPO
Annual Report 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . 1
Letter to Our Shareholders . . . . . . . . . . . . . . . . . . . . . 2
Operations Review . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Questions and Answers . . . . . . . . . . . . . . . . . . . . . . . 14
Selected Consolidated Financial Data . . . . . . . . . . . . . . . 17
Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . 18
Audited Financial Statements . . . . . . . . . . . . . . . . . . . 22
Report of Independent Certified Public Accountants . . . . . . . . 30
Quarterly Financial Data and Market Information . . . . . . . . . . 31
Corporate Directory . . . . . . . . . . . . . . . . . inside back cover
</TABLE>
[SOFTWARE SPECTRUM LOGO]
<PAGE> 3
CORPORATE PROFILE
Software Spectrum is a leading worldwide supplier of microcomputer
software and technology services to organizations. Focused on delivering the
future of desktop technology, Software Spectrum is committed to providing
superior customer service while maintaining a cost-efficient operating
structure. The Company provides customers with a wide variety of business
software products, volume software licensing services and technology support,
and assists them in the implementation, deployment, and ongoing support of
their personal computing strategies. Software Spectrum, with headquarters in
Garland, Texas, has sales locations, operations centers and technology services
offices in North America, Europe, and Asia/Pacific.
FINANCIAL HIGHLIGHTS
For the years ended March 31,
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales $ 398,501 $ 352,141 $ 283,063 $ 219,471 $ 158,905
Net income 7,366 8,788 7,004 6,282 3,817
Earnings per share 1.73 2.08 1.66 1.70 1.28
BALANCE SHEET DATA
Working capital $ 60,920 $ 58,407 $ 50,619 $ 46,712 $ 20,316
Total assets 150,180 124,698 94,255 69,387 36,404
Shareholders' equity 73,363 65,834 57,041 49,801 22,935
</TABLE>
EARNINGS
NET SALES NET INCOME PER SHARE
(In Millions) (In Millions) (In Dollars)
[GRAPH] [GRAPH] [GRAPH]
1
<PAGE> 4
[PICTURE]
FPO
TO OUR
SHAREHOLDERS
Software Spectrum has entered a new era in our Company's history-- an era
of expanded services and global growth. Several factors have contributed to
this new level of achievement. First, Software Spectrum has made two very
strategic acquisitions: the corporate, government and education division of
Egghead, Inc., and Essentially Group, a technology services company in
Asia/Pacific. Second, we have kept our singular focus--to provide personal
computer software and technology services to organizations worldwide within a
cost-effective operating structure. Finally, we have continued to benefit from
both the talent and expertise of our people and substantial resources that have
kept Software Spectrum's business sound and profitable.
Software Spectrum enters this new era of global expansion and services
growth with the same strong commitment to our customers that has been the
foundation upon which the Company has been built. It is this unsurpassed
dedication to our customers that has allowed us to achieve years of consistent
performance, and to become a leading worldwide provider of PC software and
technology services to organizations.
For the year ended March 31, 1996, we achieved a 13% increase in sales to
$398,501,000 as compared to 1995. Earnings per share were $1.73 for 1996.
As in recent years, we saw revenue growth in all three components of our
business: sales to large organizations; telesales to mid-sized and small
customers; and in our Technology Services Group. Our continued investment in
the expansion of our Technology Services Group and global presence was
reflected in our decreased profitability for fiscal 1996.
Software Spectrum has broadened its business to include technology
services in order to diversify its offerings. That strategy has proven
successful and we have continued to capitalize on it by rapidly growing our
Technology Services Group locations this year. We began fiscal 1996 with four
technology services offices, all located in the United States. Today we have 20
offices in North America, Europe and Asia/Pacific.
<PAGE> 5
Customers' additional service needs are the logical progression of our
business, and they result from increasingly complex computing technologies
which demand that large organizations better manage their desktop assets and
their related lifecycle costs. Our services focus enables us to provide better
support and develop more strategic relationships with existing customers, and
assists us in attracting new customers. One way in which Software Spectrum has
added to the value of our services is by integrating our licensing capabilities
with our technology expertise when providing our enterprise software management
services.
As a result of our European expansion and our recent acquisitions,
Software Spectrum is now able to service major markets and multinational
organizations around the globe. The acquisition of Essentially Group completes
our global operations center strategy by providing an operations center in the
Asia/Pacific region. Together with our existing North American and European
operations centers, we can now provide seamless, "follow the sun" service.
Customers have access to any one of the Company's operations centers for
information about their licensing contracts, to place an order for product, or
to receive technical support anywhere in the world.
Software Spectrum has always invested in new technology and uses its
position within the industry to bring customers the most up-to-date electronic
commerce products and electronic software distribution (ESD) services. We
understand how effective ESD can be as an alternative delivery method, both in
terms of delivering product within an organization, as well as delivering
product to customers via electronic links such as the Internet. The future
will see increases in both electronic commerce and electronic distribution of
software applications.
When it comes to our own, in-house technology, this year we developed and
deployed SOLO 95, Software Spectrum's custom, client/server-based system that
provides intelligent handling of volume licensing and maintenance (VLM)
contracts and transactions. SOLO 95 displays critical customer-specific VLM
contract information by interfacing with our Contract Management Database
(CMD). Our customers continually benefit from the automated exchange of
information between their CMD data and daily account activity on their VLM
agreements.
Also, we are pleased to announce new executive officer appointments. Keith
Coogan has been promoted to Executive Vice President and Chief Operating
Officer, a new position at Software Spectrum. Lisa Stewart, a talented,
long-term employee, was promoted to the newly created position of Vice
President of Customer Operations. We are pleased to promote two such qualified
individuals and welcome Lisa to our executive officer team.
In the coming year, Software Spectrum's opportunities are significant. We
have a larger customer base in which to sell licensing and technology services.
Our investment in technology services will enable us to provide additional,
higher margin services. We will be able to expand our Asia/Pacific presence,
as well as serve multinational organizations seamlessly around the globe with
worldwide licensing and technology support--a benefit no competitor can deliver
as effectively.
I am pleased with both our success and our new stature within the
industry, and the Company remains committed to creating increased value for its
customers, shareholders and employees. We have significant challenges ahead as
we enter this new era of growth and worldwide technology services. But we
enter this era, and this world marketplace, with a great deal of excitement and
confidence about the future.
/s/ JUDY O. SIMS
Judy O. Sims
Chief Executive Officer and President
3
<PAGE> 6
[PICTURE]
FPO
SOFTWARE SPECTRUM
BEGINS A NEW ERA
<PAGE> 7
LEADERS IN DESKTOP TECHNOLOGY
Software Spectrum has accomplished a number of significant service and
global expansion goals that will have long term effects on the Company. These
achievements have made Software Spectrum the world's largest PC software
reseller to organizations: an accomplishment that demands a continued
commitment to meeting the needs of a much larger customer base.
Software Spectrum has maintained a singular focus--desktop
technology--whether selling product, offering volume licensing contracts or
providing technology services on advanced products. The Company's strength is
in the range of services supplied, such as providing on-site consultants for
large corporations, training and support on complex technologies, strategic
planning for corporate IS departments, worldwide volume licensing contract
consulting and reporting, or determining price and availability of hard-to-find
software programs. This distinguishes the Company from those competitors that
dilute their focus by marketing software as a sideline to their primary
business. Software Spectrum sells, deploys, maintains, and supports desktop
technology--the mainstay of today's business computing environments.
To help organizations achieve maximum returns on their desktop technology
investments, the Company has established Technology Services Group (TSG)
offices around the world. Today we have 20 offices on three continents and our
future plans are to continue to expand our TSG presence geographically.
Through the acquisition of Essentially Group, Software Spectrum has been
able to complete its global operations center strategy by securing operations
in Asia/Pacific to supplement those previously established in North America and
Europe. Worldwide access provides multinational organizations, as well as
local businesses and government entities, the opportunity to draw from the
Company's service expertise.
As the Company increased its reach through new office locations, Software
Spectrum also added the Internet to its list of convenient customer purchasing
options. Users can browse through the online catalog, look up product
offerings, place orders, take advantage of promotions and request additional
information.
The Company promotes electronic software distribution (ESD) methods,
selling and supporting software management products that facilitate electronic
distribution and management of client/server software within the enterprise.
In the future, the Company anticipates ESD will also be implemented widely as a
means to distribute software via the Internet and other media.
Maintaining a cost-efficient operating structure is essential to continued
success. The Company continues to strive for greater efficiencies. For
example, the Company recently consolidated its United States distribution
facilities into Louisville, Kentucky. By centralizing fulfillment, costs are
kept down, efficiencies in shipping deadlines are gained, and the Company is
able to provide improved service to its customers from this single location.
The Company owes its solid growth, consistent profitability, and global
services strategies to a stable management team and exceptional employees.
With the depth and breadth of its talented people, Software Spectrum always
keeps an eye to the future, anticipates customer needs and positions itself to
be an able leader in the industry.
[PICTURE]
FPO
Software Spectrum has a singular focus--
to sell, deploy, maintain and support
desktop technology.
5
<PAGE> 8
[PICTURE]
SOFTWARE SPECTRUM
TECHNOLOGY SERVICES GROUP
<PAGE> 9
THE VALUE EQUATION
Software Spectrum believes our future lies in providing services that help
large organizations successfully deploy their PC computing strategies around
the world. The Company is committed to offering services and products that
improve customer business processes and maximize the return on their technology
investments.
Software Spectrum is an undisputed industry leader when it comes to
certification by major software publishers of advanced applications. The
diversified technical certifications of our people allow our customers to
receive comprehensive product support and training. And the Company continues
to add training sites to bring these services closer to customers.
Over the years, Software Spectrum has made a significant investment in
technology and services to adapt to the changing needs of customers. In 1991,
the fee-based technology services business was established to provide customers
with assistance in the implementation, deployment and ongoing support of their
personal computing strategies. Technology services, offered through the
Technology Services Group (TSG) fall within three categories: consulting,
training and support.
Today, Software Spectrum focuses on five key technologies: advanced
networking infrastructure, enterprise messaging and groupware, client/server
application development, enterprise software management services, and Internet
services. These technologies address customers' needs for providing their
employees access to information stored at sites throughout their organizations
around the globe; to enable their employees at different locations to
communicate with each other in a cost-efficient manner; to provide more
flexible access to mission-critical information; and to provide strategies for
controlling the spiraling costs of supporting distributed computing.
Software Spectrum provides additional value to organizations by
concentrating on developing applications that improve the most critical
business processes. This brings organizations early, consistent returns on
their technology investments.
Software Spectrum launched a significant geographic expansion of TSG in
fiscal 1996. Today, TSG has offices in more than 20 major markets in North
America, Europe, and Asia/Pacific. The Company plans to continue to expand its
locations in the future.
In addition to consulting and technical expertise, the Company offers
education and technical training opportunities for information technology
professionals in all the technologies supported. A broad portfolio of courses
is offered that can be tailored to meet any organization's needs, and courses
are held at the customers' offices or at Software Spectrum locations.
SmartLine is Software Spectrum's telephone support service. It is
available for a number of focus technologies, including client/server
applications or network operating systems. Software Spectrum contracts with
major organizations and publishers to augment or replace their end-user
telephone support for individual products or entire product lines.
Software Spectrum is delivering solutions to customers today that will
form the foundation of their businesses for years to come. By focusing on this
specific set of technologies, the Company is able to develop the resources
necessary to support consistent, high-quality global solutions.
[PICTURE]
Software Spectrum is committed to providing services
that help organizations maximize the return on their
technology investments.
7
<PAGE> 10
[PICTURE]
FPO
SEAMLESSLY SERVING CUSTOMERS
WORLDWIDE
<PAGE> 11
"FOLLOW THE SUN" STRATEGY
Software Spectrum now has offices on four continents, with the ability to
provide the same exceptional service in numerous languages across a diverse
group of cultures.
Rather than build a corporation that is a loose consortium of companies or
a multi-company alliance across borders as many of our competitors have done,
Software Spectrum chose to adopt a single global strategy. Wherever a customer
is located in the world, they can reach an operations center that shares the
same commitment to service and the same customer information. Multinational
companies are supplied with a seamless interface to Software Spectrum, and the
Company can leverage its buying power around the world.
Software Spectrum began its global expansion by opening a Canadian office
in Toronto in 1993, and continued in 1994 by establishing a European
headquarters in The Hague and an operations center in Dublin. The Company
augmented European operations by establishing a Technology Services Group
office in London in 1996. Today, Software Spectrum does business in over 40
countries around the world, provides support services in 15 languages, and
invoices customers in many local currencies.
The Company's recent acquisition of the assets of Egghead's corporate,
government and education (CGE) division, one of its largest competitors, was a
strategic move to increase Software Spectrum's market presence and provide the
opportunity to realize operating efficiencies of a larger organization. This
significant event in the Company's recent history effectively doubles Software
Spectrum's market presence, increases its critical mass to deal with suppliers
and customers, and expands the opportunities to market technology services and
volume licensing services to its larger customer base.
The Company's acquisition of Essentially Group, Ltd., a leading
information technology company in Australia and New Zealand, significantly
extends Software Spectrum's global expansion by providing an immediate presence
in the Asia/Pacific region. Essentially Group's established customer base,
qualified management team, strong services capabilities, and large account
penetration provide Software Spectrum a solid foundation upon which to launch
further expansion throughout the Asia/Pacific region.
The Essentially Group acquisition completes the Company's "follow the sun"
strategy, providing operations centers around the globe--in North America,
Europe and Asia/Pacific. With this expansion, Software Spectrum will be able
to service multinational companies with local offices and assist them in
implementing corporate-wide computing strategies around the world.
Software Spectrum prepared to enter the world market by developing
extensive expertise in volume licensing and maintenance (VLM) agreements and by
investing in systems that provide accurate information for consolidated
reporting. This year, Software Spectrum developed SOLO 95, a custom,
client/server-based system, which keeps accurate, up-to-date records on
customers' purchases worldwide, helps customers comply with the terms of their
volume licensing agreements and provides them with an accurate reporting
mechanism. Using individualized data in SOLO 95 in conjunction with the
Company's contract management database, Software Spectrum can guide a customer
to the best purchasing options for their company and properly administer their
licensing agreements.
Software Spectrum's licensing consultants are Software Publishers
Association (SPA) certified software managers, fully equipped to provide
customers with expert decision support and customer activity analysis. With
its volume licensing services, the Company is well positioned to provide
multinational organizations with exceptional VLM expertise, as well as
worldwide volume purchasing services, multi-currency invoicing, multi-lingual
support, global account management, and worldwide consolidated reporting.
[PICTURE] [PICTURE]
FPO FPO
EUROPEAN DIRECTORS: ASIA/PACIFIC DIRECTORS:
Left: Jim Duster, Left: Gary McNabb,
Right: Pim van Oorde Right: David Colvin
9
<PAGE> 12
[PICTURE]
FPO
THE NEXT PHASE
IN DESKTOP COMPUTING
<PAGE> 13
BUSINESS VIA THE INTERNET
Early on, Software Spectrum realized the customer and competitive
advantages of electronic commerce and electronic software distribution (ESD).
ESD takes two forms: one is distributing software within an organization,
via a company's internal network. Software Spectrum recognized the importance
of ESD technology within the large organization as a means to reduce the total
cost of ownership of desktop computing assets. ESD is more than merely an
alternative software distribution method: this technology provides hardware and
software asset management, remote desktop support and automatic installation of
operating systems, packaged and custom applications, and their related
upgrades, to the desktop.
Through its Technology Services Group, the Company supplies enterprise
software management services for customers who adopt ESD within their
organizations. These services help manage distributed PC environments using
cost-efficient approaches. One solution is the Microsoft Systems Management
Server. This solution is supported through the Software Spectrum Systems
Management Server Alliance, an organization founded by Software Spectrum with
the cooperation of Microsoft. The Alliance is a consortium of customers who
collectively represent over one million PCs. The Alliance meets regularly to
discuss the successful planning, implementing and deploying of asset management
software. Software Spectrum's role is to develop valuable add-on tools and
advise and assist these large organizations in their deployment of Microsoft
Systems Management Server.
The second form of electronic software distribution is between businesses
via electronic links such as the Internet. This form of ESD supports Software
Spectrum's strategy of providing customers with fast, convenient delivery of
software products. The Company strongly endorsed Microsoft's recent
announcement allowing Microsoft applications to be made available for ESD by
selected channel partners. Software Spectrum plans to actively participate in
this method of distribution now and in the future, as communication technology
improvements enable ESD.
Software Spectrum opened its World Wide Web site on the Internet in 1995
to provide customers with links to useful information about the Company, its
products and services, and publishers the Company represents. Software
Spectrum also offers a complete Internet online catalog that includes thousands
of products. This electronic catalog economically provides a wider range of
products for customers to choose from than can be provided with other mass
marketing vehicles. In order to help customers determine their best buying
option, Software Spectrum supplies information about products through a
comprehensive search engine, extensive product descriptions, and third-party
reviews.
Software Spectrum prides itself on having invested in new technologies
throughout the years. The Company's early and continuing investment in
electronic software distribution and electronic commerce underscores its
commitment to meeting the changing needs of customers.
[GRAPH]
Software Spectrum offers a WorldWideWeb Site
with pertinent Company information
and a complete online catalog. [GRAPH]
[GRAPH]
11
<PAGE> 14
[PICTURE]
FPO
OUR CUSTOMERS TODAY
AND TOMORROW
<PAGE> 15
EXPANDING GLOBAL PRESENCE
Fortune 1000 companies throughout North America and large organizations
throughout the rest of the world comprise Software Spectrum's primary
multinational customer base. As the world's largest PC software reseller,
Software Spectrum anticipates growth in its product and services sales,
particularly throughout new regions, such as Asia/Pacific, the fastest growing
market for PC technology. The Company also expects to see greater penetration
in European accounts, both in software sales and technology services offered by
the Technology Services Group.
With global expansion comes the ability to better service multinational
companies. The Company is realizing increased worldwide sales to individual
organizations. Also, more and more enterprises are adopting client/server
technology as a means to make mission-critical information readily available to
end users. Software Spectrum is strongly positioned to capitalize on the
increased need for effective PC computing strategies and volume licensing
management that such client/server deployment demands.
Our customers are becoming more varied. While Software Spectrum has
serviced government customers in the past, its recent acquisitions greatly
increase the government agency segment of the Company's customer base. The
Company has enhanced opportunities to offer both the products and support
services that federal, state and foreign governments require.
The same is true for educational institutions. The Company has firmly
established a presence in the educational market. Software Spectrum serves a
sector of the marketplace that strives to keep current on technology while
requiring a great deal of planning assistance. The education market has growth
potential and plans are to continue providing dedicated services to this market
segment.
Software Spectrum has always stayed focused on providing products and
technology services to large organizations. Many of the large organizations that
have recently been added to the Company's customer base did not have a
comparable level of service from their previous vendors. Therefore, this
customer group provides enhanced opportunities for growth of Software Spectrum's
licensing and technology service capabilities.
In recent years, mid-tier customers have been targeted through the
Company's TeleSales group and catalogs. This calendar year alone, Software
Spectrum plans to mail over five million catalogs. Publishers are also
supporting mid-tier customers by extending volume licensing agreements to them,
which more widely promotes the Company's licensing services. As a customer
segment, this mid-size group is also looking for easier software management,
cost-effective technical support, as well as hard-to-find products.
Throughout the last year, the Internet market has developed rapidly.
Through its Internet catalog, Software Spectrum is ready to exploit the massive
potential of this emerging market. The Internet is not one large, general
market, but many smaller specific markets. Internet offerings will allow
Software Spectrum to expand on what it does best--fulfilling the unique needs
of individual customers.
Software Spectrum has ended another profitable year and has embarked on a
new era in business. With the Company's growth comes a renewed commitment to
providing superior service to each and every customer around the globe.
[PICTURE]
FPO
Software Spectrum services a varied customer base around the world that
includes large multinational organizations and mid-tier businesses as well as
the government and education markets.
13
<PAGE> 16
QUESTIONS & ANSWERS
[PICTURE]
FPO
OUR ACQUISITIONS:
ENTERING A NEW ERA
An Interview with Judy Sims,
Chairman, CEO and President
and Keith Coogan,
Executive Vice President and COO
- WHAT WAS YOUR STRATEGY IN PURCHASING THE CORPORATE, GOVERNMENT AND
EDUCATION DIVISION OF EGGHEAD? WHAT BENEFITS WILL YOU SEE FROM THAT
ACQUISITION?
Our strategy in this acquisition was to increase our customer base and
realize the operating efficiencies of a larger, combined organization. In
addition, we saw the opportunity to capitalize on areas of our greatest
expertise, including: volume licensing of PC software to major corporations,
institutions and mid-tier business customers.
Other key benefits of the expanded customer base is that it provides
enhanced opportunities for growth of Software Spectrum Technology Services
Group (TSG) and a larger base of multinational customers to advance our global
expansion. We will be able to service these organizations with our North
American, European and Asia/Pacific operations centers and sales and marketing
locations, and TSG sites worldwide.
- HOW DOES YOUR RECENT ACQUISITION OF THE ESSENTIALLY GROUP, A LEADING
INFORMATION TECHNOLOGY COMPANY IN AUSTRALIA AND NEW ZEALAND, ENHANCE YOUR
GLOBAL PRESENCE AND IMPACT YOUR PLANS TO EXPAND INTO ASIA?
The strategic value of purchasing Essentially Group is profound.
First, we have entered the Asia/Pacific market quickly and efficiently, by
purchasing an established business in this region. Second, since Essentially
Group has been a profitable business throughout Australia and New Zealand, the
company has incoming revenue that will help fund our further expansion in other
Asian markets. Third, it completes our global operations center strategy,
which is to have centralized servicing centers in North America, Europe and
Asia/Pacific to service the needs of multinational customers around the world.
We believe the future lies in providing services that help large
organizations successfully deploy their PC computing strategies around the
world. This acquisition allows us to leapfrog our competition into the
Asia/Pacific region, and it solidifies Software Spectrum's role as a global
provider of PC technology and services.
<PAGE> 17
- YOU HAVE NOW COMPLETED TWO ACQUISITIONS IN A SHORT TIME; HOW ARE YOU
HANDLING THE GROWTH RESULTING FROM THESE PURCHASES?
We have proven ourselves in the past with solid growth, a focus on
effective cost management and exceptional volume licensing and technology
services. Software Spectrum also has the management depth and continuity and
financial resources to support these acquisitions and the new combined
organization.
The CGE division acquisition includes a direct sales force and operations
center which represent areas that were easily blended with our existing sales
and servicing teams.
The Essentially Group comes with a qualified management team that shares
with us a common vision for success in the Asia/Pacific market. The two
principals of the Essentially Group, Gary McNabb and David Colvin, have joined
our overseas management team. Therefore, the drain on existing key personnel
should be less than it would have been, had we expanded into the Asia/Pacific
market through internal growth only.
- HOW HAVE THE RECENT ACQUISITIONS CHANGED SOFTWARE SPECTRUM'S PROFILE?
WHAT IMPACT HAVE THEY HAD ON YOUR MARKET PRESENCE AND STRATEGIC FOCUS?
These acquisitions have made Software Spectrum one of the world's largest
providers of PC software and technology services: we have virtually doubled our
market presence. The CGE acquisition brings to us additional large-, medium-
and small-sized customers, and increases our number of multinational customers
and government presence as well. Today, we believe there is no software
reseller and service provider that can provide the scope of our global
services, as effectively.
Our strategy is to meet the software technology requirements of customers
in major markets throughout North America, Europe and Asia/Pacific. We are
also targeting Asia/Pacific for additional sales and marketing locations to
take advantage of that region's expected rapid growth in software procurement,
licensing management and technology services.
- WHAT IS THE STATUS OF WINDOWS 95 AND WINDOWS NT SALES? HAVE YOUR
CUSTOMERS ADOPTED THE 32-BIT OPERATING ENVIRONMENT AND WHAT IMPACT HAS THIS NEW
TECHNOLOGY HAD ON SOFTWARE SPECTRUM'S OPERATING RESULTS?
Throughout fiscal 1996, these new operating systems did not have a
significant impact on our business. As expected, large organizations have been
relatively slow to migrate to the Windows 95 operating system. However,
Microsoft recently announced more flexible offerings designed to encourage the
large organizations to move to 32-bit architectures more rapidly this year.
Both operating systems offer significant advantages for desktop computing
and each has specific reasons for deployment. Many large organizations are
completing their analysis testing and deployment planning, and we expect sales
of 32-bit operating systems and applications to increase steadily over the next
12-18 months.
15
<PAGE> 18
CORPORATE DIRECTORY
DIRECTORS
Judy O. Sims
Chairman, Chief Executive Officer and President
Software Spectrum, Inc.
Mellon C. Baird
Chairman, Chief Executive Officer and
President of Delfin Systems
Robert D. Graham
Shareholder, Locke Purnell Rain Harrell,
A Professional Corporation
Richard G. Sims
Senior Vice President, Software Spectrum, Inc.
Frank Tindle
Retired Founder, Software Spectrum, Inc.
EXECUTIVE OFFICERS
Judy O. Sims
Chairman, Chief Executive Officer and President
Richard G. Sims
Senior Vice President
Keith R. Coogan
Executive Vice President and Chief Operating Officer
Roger J. King
Vice President, Sales and Marketing
Robert B. Mercer
Vice President and Chief Information Officer
Deborah A. Nugent
Vice President of Finance and Chief Financial Officer
Lisa M. Stewart
Vice President, Customer Operations
[PICTURE]
FPO
Standing (L-R): Lisa Stewart, Roger King, Bob Mercer, Deborah Nugent
Seated (L-R): Richard Sims, Judy Sims, Keith Coogan
<PAGE> 19
SELECTED CONSOLIDATED
FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended March 31,
STATEMENT OF INCOME DATA --------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
--------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 398,501 $ 352,141 $ 283,063 $ 219,471 $ 158,905
Gross margin 54,438 48,328 38,142 30,211 21,313
Operating income 10,163 12,938 10,562 9,594 6,318
Net income $ 7,366 $ 8,788 $ 7,004 $ 6,282 $ 3,817
=============== ============== ============ ============= ============
Earnings per share $ 1.73 $ 2.08 $ 1.66 $ 1.70 $ 1.28
=============== ============== ============ ============= ============
Weighted average shares outstanding 4,260 4,217 4,216 3,690 2,988
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
BALANCE SHEET DATA --------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
--------------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Working capital $ 60,920 $ 58,407 $ 50,619 $ 46,712 $ 20,316
Total assets 150,180 124,698 94,255 69,387 36,404
Shareholders' equity 73,363 65,834 57,041 49,801 22,935
</TABLE>
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth, for each of the years indicated, the
percentage which each item listed below represents of the Company's net sales
for the years specified and the percentage increase (decrease) of each item as
compared to the immediately preceding year.
<TABLE>
<CAPTION>
Percentage of Net Sales Year to Year Change
For Years Ended March 31, For Years Ended March 31,
------------------------------- ---------------------------
1996 1995 1994 1995 to 1996 1994 to 1995
-------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 13.2% 24.4%
Cost of sales 86.3 86.3 86.5 13.2 24.0
------- ------- -------
Gross margin 13.7 13.7 13.5 12.6 26.7
Selling, general and administrative
expenses 11.1 10.0 9.7 25.1 28.3
------- ------- -------
Operating income 2.6 3.7 3.8 (21.4) 22.5
Interest income, net .2 .1 .1 107.8 41.4
------- ------- -------
Income before income taxes 2.8 3.8 3.9 (16.3) 23.2
Federal and state income taxes 1.0 1.3 1.4 (16.4) 19.0
------- ------- -------
Net income 1.8% 2.5% 2.5% (16.2) 25.5
======= ======= =======
</TABLE>
NET SALES
In fiscal 1996, the Company's revenues were derived primarily from the
sale of PC software and technology services in North America and Europe. The
Company's sales have increased in each year since the Company's inception in
1983. Increases in sales of PC software and technology services correspond to
the Company's market share growth and geographic expansion, combined with the
increase in demand for the major software products and technology services
offered by the Company. This increased demand has resulted from the continued
growth in the installed base of microcomputers, the introduction of new more
powerful microcomputer hardware systems, new software introductions and
upgrades, and customers' increased focus on the desktop for critical business
applications.
For the years ended March 1996 and 1995, sales of PC software
increased 12% and 22%, respectively. The Company sells PC software applications
through volume license and maintenance ("VLM") agreements, or right to copy
arrangements, and ships full-packaged PC software products from its
distribution centers or through 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. 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 46%, 35%
and 15% of sales for the years ended March 1996, 1995 and 1994, respectively.
18
<PAGE> 21
NET SALES (continued)
For the years ended March 1996 and 1995, revenue from technology
services provided through the Company's Technology Services Group, increased
90% and 80%, respectively. In fiscal 1996, the Company increased the number of
its technology service offices from four in the United States to ten in North
America and Europe. In February 1996, the Company ceased the fulfillment
services it had been providing to a customer. Because the Company's revenue
from fee-based services has grown from a relatively small revenue base, as
compared to the Company's net sales of PC software, fee-based services
continued to represent less than 5% of the Company's overall sales for fiscal
1996.
In October 1995, the Company acquired Software Alternatives Inc., a
leading PC software supplier to business organizations in Canada. This
acquisition significantly increased the Company's market presence in Canada. In
April 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,
information technology companies in New Zealand and Australia. The acquisition
of Essentially Group provides the Company with a business presence in the
Asia/Pacific market and completes the Company's global operations strategy
which includes maintaining operations centers in North America, Europe and
Asia/Pacific to 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 to organizations in North America. For fiscal
1996, the pro forma combined revenue of the Company and the CGE division was
$762 million. The Company believes that increases in revenue depend upon the
Company's ability to maintain the customer base of the acquired businesses, to
continue to grow its market share and to capitalize on continued growth in
desktop technology markets around the world.
In fiscal 1996, fluctuations in foreign currencies against the U.S.
dollar, did not have a significant effect on the Company's operations.
GROSS MARGIN
Overall gross margin as a percentage of sales was 13.7% in fiscal 1996
and 1995, as compared to 13.5% in fiscal 1994. The stability in overall gross
margin in fiscal 1996, as compared to fiscal 1995, and the improvement in
fiscal 1995, as compared to fiscal 1994, resulted from the growth in revenue
from fee-based services. The contribution from these services represented
approximately 17% of overall gross margin for fiscal 1996, an increase from
approximately 13% for fiscal 1995 and 8% for fiscal 1994. Had the Company not
increased its revenues from services in each of fiscal 1996 and 1995, its
overall margins would have declined as compared to each of the preceding years.
Gross margins on PC software sales declined by .4% as a percentage of sales in
fiscal 1996 as compared to fiscal 1995 and .8% in fiscal 1995 as compared to
fiscal 1994. These declines were primarily attributable to the growth in sales
of software through VLM agreements in each year because the Company generally
realizes lower gross margins on sales of software through VLM agreements, as
compared to sales of full-packaged software products.
The Company anticipates that its overall gross margin, as a percentage
of sales, may decline in fiscal 1997 as a result of recent acquisitions, which
shift the Company's sales mix between products and services, if the percentage
of PC software sales made through VLM agreements continues to increase, or if
publishers respond to continued market pressure by reducing incentive funds
available to their channel partners.
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
administrative costs. The Company has capitalized on the increased demand for
PC software and technology services by expanding its sales and support staff in
each of the last three fiscal years. The Company incurs a significant amount
of marketing and advertising costs based upon available advertising and
cooperative marketing funds received from software publishers. These funds are
offset against selling, general and administrative expenses.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED)
Selling, general and administrative expenses, as a percentage of
sales, increased in fiscal 1996 compared to fiscal 1995. This increase was
primarily due to the expansion of the Company's Technology Services Group and
development of the Company's global operations. Selling, general and
administrative expenses, as a percentage of sales, increased in fiscal 1995 as
compared to fiscal 1994, primarily due to investment in the Company's European
operations and costs associated with the upgrade of the Company's computer
systems.
The Company anticipates that its operating results in fiscal 1997 may
be negatively impacted by the costs associated with integrating its recent
business acquisitions into the Company's overall operating structure.
Thereafter, the Company believes it may realize operating efficiencies as a
result of its larger size and increased market presence.
FEDERAL AND STATE INCOME TAXES
The modest decrease in the Company's effective tax rate for fiscal
1996 to 34.7%, as compared to 34.8% for fiscal 1995, is primarily due to an
increase in tax-exempt interest income. The effective tax rate for fiscal 1995
decreased as compared to the effective tax rate of 36% in fiscal 1994, as a
result of an increase in tax exempt interest income and decrease in state and
local taxes as a percent of income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had approximately $36.5 million in
cash, cash equivalents and short term interest-bearing investments and an
unsecured $20 million credit facility under which no amounts were outstanding.
In May 1996, the Company replaced its $20 million credit facility with a new
facility including a $30 million term loan and a $60 million revolving credit
line. The new facility is initially secured by accounts receivable and
inventory and a pledge of the stock of the Company's domestic and foreign
subsidiaries. In May 1996, the Company utilized a portion of its existing cash
and its term loan to fund the acquisition of the CGE division of Egghead, Inc.
The principal amount of the term loan is due in quarterly installments
beginning in June 1997 through March 2001, increasing from $1,500,000 to
$2,250,000. The revolving credit line expires in May 1999.
The Company generally carries inventory adequate to meet full-packaged
PC software product sales for a period of approximately one month. 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 March 31,
1996 and 1995, accounts receivable represented approximately 63 and 57 days of
historical sales, respectively. The increase in the number of days of
historical sales is primarily due to the increase in the percentage of
receivables represented by sales made through VLM agreements, which, in
general, require detailed reporting and, as a result, have lengthened both the
billing and collection cycles.
20
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In fiscal 1996 and 1995, $16.7 million and $15.5 million of cash,
respectively, were provided by operations. The Company realized cash from
operations in fiscal 1996 and 1995, as compared to fiscal 1994, as a result of
reduced inventory levels and management of vendor payments related to VLM
agreements. Because sales of software through VLM agreements represent sales of
licensed products not held in inventory, the Company has not increased its
inventory balances in proportion to its sales growth. In addition, certain
software suppliers' VLM programs allow for periodic payments; therefore, cash
flow from operations has improved as sales of software through VLM agreements
have increased.
The increase in furniture, equipment and leasehold improvements at
March 31, 1996, reflects capital expenditures related to the Company's
geographic expansion of its Technology Services Group, the ongoing upgrade of
its computer systems, expansion of its office facilities at the Garland, Texas,
headquarters and the acquisition of Software Alternatives Inc. The Company's
capital expenditures for fiscal 1997 are expected to total approximately $11
million, including expenditures to further upgrade and expand the Company's
computer and telephone systems in its operations centers, expand its office
facilities in Garland, Texas, and to continue to grow its Technology Services
Group division.
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
This Management's Discussion and Analysis of Financial Condition, as
well as the accompanying Company's Annual Report, includes certain
forward-looking statements of the Company including future market trends,
estimates regarding the economy and the software industry in general and key
performance indicators which impact the Company. In developing any
forward-looking statements, the Company makes a number of assumptions including
expectations for continued market growth, anticipated revenue and gross margin
levels, and cost savings and efficiencies. If the industry's or the Company's
performance differs materially from these assumptions or estimates, Software
Spectrum's actual results could vary significantly from the estimated
performance reflected in any forward-looking statements. Accordingly, forward-
looking statements should not be relied upon as a prediction of actual results.
The Company's Form 10-K for the March 31, 1996 fiscal year, contains certain
cautionary statements that identify factors that could cause the Company's
actual results to differ materially from those in the forward looking
statements in this report.
INFLATION
The Company believes that inflation has not had a material impact on
its operations or liquidity to date.
21
<PAGE> 24
SOFTWARE SPECTRUM, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 28,123 $ 11,543
Short - term investments 8,407 14,728
Trade accounts receivable, net of allowance for
doubtful accounts ($1,201 at 1996 and $1,371 at 1995) 73,875 67,859
Inventories 12,937 13,665
Prepaid expenses 10,092 6,194
Other current assets 2,435 2,169
-------- --------
Total current assets 135,869 116,158
Furniture, equipment and leasehold improvements, at cost 17,033 12,696
Less accumulated depreciation and amortization 7,866 5,179
-------- --------
9,167 7,517
Intangibles and other assets 5,144 1,023
-------- --------
$150,180 $124,698
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 61,231 $ 47,539
Other current liabilities 13,718 10,212
-------- --------
Total current liabilities 74,949 57,751
Other liabilities 1,868 1,113
Shareholders' equity
Preferred stock, par value $.01; authorized, 400,000 shares;
issued and outstanding, none - -
Common stock, par value $.01; authorized, 10,000,000 shares;
issued 4,241,384 shares at 1996
and 4,209,550 shares at 1995 42 42
Additional paid-in capital 36,394 35,979
Retained earnings 37,465 30,315
-------- --------
73,901 66,336
Less treasury stock at cost; 34,026 shares at 1996 and
32,238 shares at 1995 538 502
-------- --------
Total shareholders' equity 73,363 65,834
-------- --------
$150,180 $124,698
======== ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 25
SOFTWARE SPECTRUM, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31,
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $398,501 $352,141 $283,063
Cost of sales 344,063 303,813 244,921
-------- -------- --------
Gross margin 54,438 48,328 38,142
Selling, general and administrative expenses 44,275 35,390 27,580
-------- -------- --------
Operating income 10,163 12,938 10,562
Interest income (expense)
Interest income 1,175 587 423
Interest expense (53) (47) (41)
-------- -------- --------
1,122 540 382
-------- -------- --------
Income before income taxes 11,285 13,478 10,944
Federal and state income taxes 3,919 4,690 3,940
-------- -------- --------
Net income $ 7,366 $ 8,788 $ 7,004
======== ======== ========
Earnings per share $ 1.73 $ 2.08 $ 1.66
======== ======== ========
Weighted average shares outstanding 4,260 4,217 4,216
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 26
SOFTWARE SPECTRUM, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
For the years ended March 31, 1996, 1995 and 1994
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
----------------------- Paid-In Retained -------------------
Shares Amount Capital Earnings Shares Amount Total
----------- -------- ---------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 1, 1993 4,138,668 $ 41 $ 35,282 $ 14,478 - $ - $49,801
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $44 17,227 1 258 - - - 259
Net income - - - 7,004 - - 7,004
Foreign currency
translation adjustment - - - (23) - - (23)
----------- ----- -------- -------- -------- ------- -------
Balances at March 31, 1994 4,155,895 42 35,540 21,459 - - 57,041
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $171 53,655 - 439 - - - 439
Purchase of treasury stock - - - - (32,238) (502) (502)
Net income - - - 8,788 - - 8,788
Foreign currency
translation adjustment - - - 68 - - 68
----------- ----- -------- -------- -------- ------- -------
Balances at March 31, 1995 4,209,550 42 35,979 30,315 (32,238) (502) 65,834
Stock issued pursuant to employee
benefit plans, including related
tax benefit of $165 31,834 - 415 - - - 415
Purchase of treasury stock - - - - (1,788) (36) (36)
Net income - - - 7,366 - - 7,366
Foreign currency
translation adjustment - - - (216) - - (216)
----------- ----- -------- -------- -------- ------- -------
Balances at March 31, 1996 4,241,384 $ 42 $ 36,394 $ 37,465 (34,026) $ (538) $73,363
=========== ===== ======== ======== ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 27
SOFTWARE SPECTRUM, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the years ended March 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities
Net income $ 7,366 $ 8,788 $ 7,004
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for bad debts 633 238 240
Depreciation and amortization 2,816 2,285 1,441
Changes in operating assets and liabilities
Increase in accounts receivable (4,427) (21,382) (17,487)
Decrease (increase) in inventories 755 5,314 (5,682)
Increase in prepaid expenses and other assets (5,897) (1,393) (5,740)
Increase in accounts payable and other current liabilities 15,448 21,656 17,582
-------- -------- --------
Net cash provided by (used in) operating activities 16,694 15,506 (2,642)
-------- -------- --------
Investing activities
Sales (purchases) of short-term investments, net 6,321 (9,696) (5,032)
Purchase of furniture, equipment and leasehold improvements (4,166) (3,515) (4,422)
Purchase of subsidiary, net of cash acquired (2,377) - -
-------- -------- --------
Net cash used in investing activities (222) (13,211) (9,454)
-------- -------- --------
Financing activities
Proceeds from stock issuance including tax benefit
related to stock options exercised 415 439 259
Purchase of treasury stock (36) (502) -
-------- -------- --------
Net cash provided by (used in) financing activities 379 (63) 259
-------- -------- --------
Effect of exchange rate changes on cash (271) 68 (23)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 16,580 2,300 (11,860)
Cash and cash equivalents at beginning of year 11,543 9,243 21,103
-------- -------- --------
Cash and cash equivalents at end of year $ 28,123 $ 11,543 $ 9,243
======== ======== ========
Supplemental disclosure of cash paid during the year
Income taxes $ 3,776 $ 4,308 $ 3,711
Interest 35 32 29
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 28
SOFTWARE SPECTRUM, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Software Spectrum, Inc. (the "Company"), is a leading worldwide
supplier of microcomputer software and technology services to organizations. In
fiscal 1996, the Company's revenues were derived primarily from the sale of PC
software and technology services in North America and Europe.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Spectrum Integrated Services, Inc.
(d.b.a. Software Spectrum Technology Services Group), Software Spectrum Canada,
Ltd., Software Alternatives Inc., Software Spectrum Limited, and Software
Spectrum B.V. All intercompany accounts and transactions have been eliminated
in consolidation.
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
disclosures 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.
SHORT-TERM INVESTMENTS
Short-term investments consist of debt securities issued by
municipalities and U.S. government agencies. These investments are classified
as available for sale and are recorded at fair value. At March 31, 1996, fair
value approximated amortized cost.
TRADE ACCOUNTS RECEIVABLE
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 value of the Company's financial instruments, consisting of
cash and cash equivalents, investments, accounts receivable and accounts
payable, approximate their carrying values.
INVENTORIES
Inventories, which consist primarily of purchased microcomputer
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 terms of the corresponding leases.
26
<PAGE> 29
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 average 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 product sales at the time of
shipment. Maintenance and service revenue are recognized ratably over the
contractual period or as the services are provided. Advance billings are
recorded as deferred revenue.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding during the year increased by incremental shares included from
outstanding stock options as determined under the treasury stock method.
NOTE B -- FINANCING ARRANGEMENTS WITH BANK
As of March 31, 1996, the Company had a $20,000,000 revolving line of
credit facility under which no amounts were outstanding at March 31, 1996 or
1995. This line of credit facility was replaced on May 3, 1996 by the credit
arrangement described in Note H.
NOTE C -- OTHER CURRENT LIABILITIES
Other current liabilities includes deferred revenue of $9,463,000 and
$6,092,000 at March 31, 1996 and 1995, respectively.
NOTE D -- EMPLOYEE BENEFIT PLANS
In July 1989, the Company adopted the 1989 Stock Option Plan in which
non-incentive stock options were granted. In August 1993, the shareholders
approved the adoption of the 1993 Long Term Incentive Plan and the Company then
ceased granting new options under the 1989 Stock Option Plan. Under the terms
of the 1993 Long Term Incentive Plan, awards may be presented in the form of
incentive or non-qualified stock options, restricted shares of common stock, or
units valued on the basis of Company performance.
Stock options are granted at fair market value at the date of grant,
become exercisable over periods of up to five years and expire on various dates
from 1996 through 2002. At March 31, 1996, 312,000 shares of common stock were
reserved for future grant under the 1993 Long Term Incentive Plan.
<TABLE>
<CAPTION>
Number of
Shares
Underlying Price Range
Stock Options Options Per Share
------------- ---------- -----------
<S> <C> <C>
Outstanding at April 1, 1993 162,549 $ 1.20 to $ 25.50
Granted 148,350 16.00 to 28.00
Exercised (7,800) 1.20 to 22.50
Canceled/forfeited (6,400) 20.75 to 28.00
--------
Outstanding at March 31, 1994 296,699 1.20 to 28.00
Granted 105,250 12.00 to 18.03
Exercised (46,099) 1.20 to 16.00
Canceled/forfeited (31,675) 4.67 to 25.50
--------
Outstanding at March 31, 1995 324,175 3.75 to 28.00
Granted 121,250 17.25 to 23.25
Exercised (25,445) 3.75 to 22.25
Canceled/forfeited (19,790) 12.00 to 28.00
--------
Outstanding at March 31, 1996 400,190 4.67 to 28.00
========
Exercisable at March 31, 1996 124,620 4.67 to 28.00
========
</TABLE>
27
<PAGE> 30
SOFTWARE SPECTRUM, INC.
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 March 31, 1996, a total of 139,000 shares of common stock were reserved for
issuance under the plan. For the years ended March 31, 1996, 1995 and 1994,
6,260, 7,556 and 9,427 shares, respectively, were issued under the plan.
The Company's employee profit sharing plan covers all employees who
are 19 years of age or older and have one or more years of service with the
Company. The plan includes an employee savings plan component which allows
participants to make voluntary pretax 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 March 31, 1996, 1995 and 1994,
prior to reductions for forfeitures, were $372,000, $447,000, and $362,000,
respectively.
NOTE E -- LEASES
The Company leases various office and distribution facilities as well
as certain office equipment under leases classified as operating leases.
Minimum rental payments under all long-term, noncancellable operating leases at
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Years ending March 31:
<S> <C>
1997 $ 908,000
1998 799,000
1999 778,000
2000 750,000
2001 275,000
Thereafter 36,000
----------
$3,546,000
==========
</TABLE>
Rent expense for operating leases for the years ended March 31, 1996,
1995 and 1994 totaled $1,321,000, $1,275,000 and $908,000, respectively. These
leases are subject to renewal at the Company's option upon expiration.
NOTE F -- INCOME TAXES
The Company's provision for income taxes is comprised of the
following:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $3,109,000 $4,049,000 $3,227,000
State 375,000 335,000 425,000
Deferred 435,000 306,000 288,000
---------- ---------- ----------
$3,919,000 $4,690,000 $3,940,000
========== ========== ==========
</TABLE>
28
<PAGE> 31
NOTE F -- INCOME TAXES (Continued)
The effective income tax rate varies from the federal statutory rate
as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate 34.1% 34.2% 34.0%
State and local income
taxes, net of federal
benefit 2.3 2.5 3.9
Tax-exempt interest (2.5) (1.4) ( .9)
Other .8 ( .5) (1.0)
------- ------- ------
Effective tax rate 34.7% 34.8% 36.0%
======= ======= ======
</TABLE>
Deferred tax assets and liabilities as of March 31, 1996 and 1995,
consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Allowance for bad debts $ 177,000 $ 263,000
Depreciation and amortization (371,000) (290,000)
Other 118,000 386,000
--------- ---------
$ (76,000) $ 359,000
========= =========
</TABLE>
NOTE G -- BUSINESS ACQUISITION
On October 13, 1995, Software Spectrum Canada, Ltd. acquired all of
the outstanding shares of capital stock of Software Alternatives Inc., a
privately-held supplier of personal computer software to Canadian
organizations, for approximately $2,500,000 in cash. The acquisition has been
accounted for as a purchase transaction. The estimated fair market value of the
assets acquired and liabilities assumed was $5,208,000 and $2,708,000,
respectively. The excess of the purchase price over the estimated fair market
value of the net assets acquired is amortized on the straight-line method over
20 years. 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 are not materially different than the Company's actual
results.
NOTE H -- SUBSEQUENT EVENTS
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 approximated $9 million including cash of $6.75
million and 113,502 shares of the Company's common stock, subject to
adjustment. The acquisition will be accounted for as a purchase transaction.
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 will be
accounted for as a purchase transaction. The Company also entered into an
agreement to lease certain facilities from Egghead through May 1999, for annual
amounts increasing from approximately $390,000 to $480,000.
In May 1996, the acquisitions were partially financed through a term
bank loan in the amount of $30 million, due in quarterly installments beginning
June 30, 1997, through March 31, 2001, ranging from $1,500,000 to $2,250,000.
The financing arrangement also includes a $60 million revolving credit facility
which expires in May 1999. Until certain financial ratios are maintained for
specified periods, borrowings under the financing arrangements 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.
29
<PAGE> 32
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 March 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Software
Spectrum, Inc. and subsidiaries as of March 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended March 31, 1996, in conformity with
generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Dallas, Texas
June 6, 1996
30
<PAGE> 33
QUARTERLY FINANCIAL DATA AND
MARKET INFORMATION (UNAUDITED)
The following table summarizes the unaudited quarterly financial data
for the years ended March 31, 1996 and 1995, and the quarterly range of high
and low quotations for the Company's common stock as reported by the Nasdaq
National Market System (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Common Stock
Price Per Share
Net Gross Net Earnings -------------------
Period Sales Margin Income Per Share High Low
------ --------- ---------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1996
Quarter ended:
June 30 $ 91,397 $ 12,432 $1,615 $.38 $21.00 $14.88
September 30 89,748 12,545 1,788 .42 26.50 20.25
December 31 117,751 15,591 2,773 .65 25.25 18.00
March 31 99,605 13,870 1,190 .28 23.50 17.00
Fiscal 1995
Quarter ended:
June 30 79,207 10,599 1,483 .35 16.00 9.25
September 30 86,164 11,454 1,748 .41 15.00 11.50
December 31 101,463 14,121 3,459 .82 18.50 12.00
March 31 85,307 12,154 2,098 .50 21.50 14.00
</TABLE>
The Company's common stock is traded over the counter and is listed on
the Nasdaq National Market System under the symbol SSPE.
On June 18, 1996, there were 162 holders of record 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.
31
<PAGE> 34
CORPORATE HEADQUARTERS
2140 Merritt Drive
Garland, Texas 75041
214-840-6600
CANADIAN HEADQUARTERS
Software Spectrum Canada, Ltd.
10 Kingsbridge Garden Circle
Suite 301
Mississauga, Ontario L5R 3K6
416-675-1060
EUROPEAN HEADQUARTERS
Software Spectrum B.V.
Dutch Business Center
Lange Voorhout 58
2514 EG The Hague
The Netherlands
31-70-346-2936
EUROPEAN OPERATIONS CENTRE
Software Spectrum Limited
1 Richview Office Park
Clonskeagh
Dublin 14
Ireland
353-1-260-1788
ASIA/PACIFIC OPERATIONS CENTER
Software Spectrum
2-6 Orion Road
Lane Cove
NSW 2066
Australia
61-2-418-3811
NEW ZEALAND HEADQUARTERS
Software Spectrum
33 College Hill
Ponsonby
Auckland
New Zealand
64-9-309-7777
CORPORATE COUNSEL
Locke Purnell Rain Harrell P.C.
Dallas, Texas
AUDITORS
Grant Thornton LLP
Dallas, Texas
REGISTRAR/TRANSFER AGENT
Society National Bank
c/o KeyCorp Shareholder Services, Inc.
Dallas, Texas
COMMON STOCK
Software Spectrum's common stock is traded over the counter on the Nasdaq
National Market System under the symbol SSPE.
ANNUAL REPORT ON FORM 10-K
Shareholders may obtain a copy, free of charge, of Software Spectrum, Inc.'s
1996 Annual Report on Form 10-K (excluding exhibits) upon request to Investor
Relations, Software Spectrum, Inc. at Corporate Headquarters.
ANNUAL MEETING
The Annual Meeting of the Shareholders of Software Spectrum, Inc. will be held
at the Company's corporate headquarters, at 10:00 a.m. on August 15, 1996. All
shareholders are cordially invited to attend.
INVESTOR RELATIONS
Investor Relations Department
214-840-6600
Software Spectrum, Diamond, Assurance, and SmartLine are trademarks and service
marks of the Company.
32
<PAGE> 35
Inside Back Cover
