<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 October 31, 1997 .
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19349
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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
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(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 December 8, 1997, the Registrant had outstanding 4,312,928 shares of its
common stock, par value $.01 per share.
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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-
October 31, 1997 and April 30, 1997 4
Consolidated Statements of Operations-
Three and Six Months Ended October 31, 1997
and September 30, 1996 5
Consolidated Statements of Cash Flows-
Six Months Ended October 31, 1997 and
September 30, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
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 16
SIGNATURES 17
</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>
October 31, April 30,
1997 1997
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,317 $ 7,440
Trade accounts receivable, net of
allowance for doubtful accounts 157,583 161,469
Inventories 13,791 18,285
Prepaid expenses 3,691 6,596
Other current assets 1,047 3,015
------------- -------------
Total current assets 179,429 196,805
Furniture, equipment and leasehold
improvements, at cost 35,581 30,627
Less accumulated depreciation and amortization 14,430 11,440
------------- -------------
21,151 19,187
Other assets, consisting primarily of goodwill, net of accumulated
amortization ($4,432 at October 31 and $2,858 at April 30) 52,959 54,449
------------- -------------
$ 253,539 $ 270,441
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 6,375 $ 6,000
Trade accounts payable 123,354 145,260
Other current liabilities 12,767 13,872
------------- -------------
Total current liabilities 142,496 165,132
Long-term debt, less current maturities 36,733 31,370
Shareholders' equity
Preferred stock, par value $.01;
authorized, 1,000,000 shares; issued
and outstanding, none -- --
Common stock, par value $.01;
authorized, 20,000,000 shares; issued
4,379,303 shares at October 31 and
4,363,523 shares at April 30 44 44
Additional paid-in capital 39,251 39,040
Retained earnings 37,448 36,278
Cumulative foreign currency adjustments (1,524) (877)
------------- -------------
75,219 74,485
Less treasury stock, at cost; 54,311 shares at October 31
and 34,311 shares at April 30 909 546
------------- -------------
Total shareholders' equity 74,310 73,939
------------- -------------
$ 253,539 $ 270,441
============= =============
</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
------------------------- -------------------------
October 31, September 30, October 31, September 30,
1997 1996 1997 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales $ 195,025 $ 181,891 $ 406,983 $ 342,770
Cost of sales 171,296 159,938 359,542 302,143
--------- --------- --------- ---------
Gross margin 23,729 21,953 47,441 40,627
Selling, general and
administrative expenses 18,942 20,236 38,307 37,845
Depreciation and amortization expense 2,397 1,844 4,661 3,164
--------- --------- --------- ---------
Operating income (loss) 2,390 (127) 4,473 (382)
Interest expense, net 947 673 1,865 780
--------- --------- --------- ---------
Income (loss) before income taxes 1,443 (800) 2,608 (1,162)
Income tax expense (benefit) 815 (267) 1,439 (373)
--------- --------- --------- ---------
Net income (loss) $ 628 $ (533) $ 1,169 $ (789)
========= ========= ========= =========
Earnings (loss) per share $ 0.14 $ (0.12) $ 0.27 $ (0.18)
========= ========= ========= =========
Weighted average shares
outstanding 4,388 4,288 4,365 4,276
========= ========= ========= =========
</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
--------------------------
October 31, September 30,
1997 1996
----------- -------------
<S> <C> <C>
Operating activities
Net income (loss) $ 1,169 $ (789)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Provision for bad debts 715 937
Depreciation and amortization 4,661 3,164
Deferred income taxes 632 (708)
Changes in operating assets and liabilities
Trade accounts receivable 2,622 (58,001)
Inventories 4,470 (2,927)
Prepaid expenses
and other assets 3,575 735
Trade accounts payable and
other current liabilities (22,199) 34,887
--------- ---------
Net cash used in operating activities (4,355) (22,702)
--------- ---------
Investing activities
Sales of short-term investments, net -- 8,407
Purchase of furniture, equipment and
leasehold improvements (5,224) (6,850)
Purchase of subsidiaries, net of cash acquired -- (44,163)
--------- ---------
Net cash used in investing activities (5,224) (42,606)
--------- ---------
Financing activities
Repayments of long-term debt (167,890) (23,200)
Borrowings on long-term debt 173,559 66,424
Proceeds from stock issuance including tax
benefit related to stock options exercised 211 1,074
Other (424) (16)
--------- ---------
Net cash provided by financing activities 5,456 44,282
--------- ---------
Decrease in cash and cash equivalents (4,123) (21,026)
Cash and cash equivalents at beginning of period 7,440 28,123
--------- ---------
Cash and cash equivalents at end of period $ 3,317 $ 7,097
========= =========
Supplemental disclosure of cash paid
during the period
Income taxes $ 113 $ 671
Interest 2,143 868
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six months ended October 31, 1997
(Unaudited)
NOTE A - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements include the accounts of Software
Spectrum, Inc. (the "Company") and its wholly- owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
In 1997, the Company changed its fiscal year-end from March 31 to April 30.
Recasting the quarterly financial information for fiscal 1997 is not cost
justified. Accordingly, the Company has elected to present comparative
information for the three and six months ended September 30, 1996, as allowed
under the transition reporting rules of the Securities and Exchange Commission.
The Company does not have seasonal trends that would impact the comparability
of the quarters presented.
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 October
31, 1997, and the consolidated results of operations for the three and six
months ended October 31, 1997 and September 30, 1996 and the consolidated cash
flows for the six months ended October 31, 1997 and September 30, 1996 have
been made. In addition, all such adjustments made, in the opinion of
management, are of a normal recurring nature. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the interim reporting rules of the
Securities and Exchange Commission. The interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended April 30, 1997,
included in the Company's 1997 Annual Report on Form 10-K.
On May 13, 1996, the Company acquired certain operating assets of the
corporate, government and educational ("CGE") division of Egghead, Inc. for
approximately $45 million in cash. The acquisition has been accounted for
using the purchase method of accounting.
7
<PAGE> 8
NOTE B - BUSINESS ACQUISITION
The operating results of the acquired business have been included in the
consolidated statements of operations from the date of acquisition. Unaudited
pro forma summary consolidated results of operations of the Company and the CGE
division for the six months ended September 30, 1996 as if the acquisition had
occurred at April 1, 1996 are approximately: net sales of $382 million, net
loss of $1.1 million and loss per share of $.26. 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 this date or of
results which may occur in the future.
8
<PAGE> 9
ITEM 2. MANAGEMENT 'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW:
The Company's revenues are derived primarily from the sale of PC software
products and technology services in North America, Europe and the Asia/Pacific
region. The Company also sells peripheral and hardware products in the
Asia/Pacific region.
The Company sells PC software applications through volume license and
maintenance ("VLM") agreements, or right to copy arrangements, and
full-packaged PC software products. With the continued increase in sales of
software applications through VLM agreements, the third month of each calendar
quarter generally represents from 40% to 50% of the Company's quarterly sales
volume. In 1997, the Company changed its fiscal year-end from March 31 to
April 30 in order to better match the Company's fiscal year- and quarter-ends
with its business cycles.
Due to the cost and administrative difficulty involved, the Company has elected
not to recast its quarterly financial information for fiscal 1997.
Accordingly, this discussion focuses on the three and six months ended October
31, 1997 and September 30, 1996. The Company does not have seasonal trends
that would impact the comparability of the quarters presented.
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 Sales for
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
October 31, September 30, October 31, September 30,
1997 1996 1997 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.8 87.9 88.3 88.1
----------- ------------- ----------- -------------
Gross margin 12.2 12.1 11.7 11.9
Selling, general and
administrative expenses 9.7 11.1 9.4 11.1
Depreciation and amortization 1.3 1.0 1.2 0.9
----------- ------------- ----------- -------------
Operating income (loss) 1.2 0.0 1.1 (0.1)
Interest expense, net 0.5 0.4 0.5 0.2
----------- ------------- ----------- -------------
Income (loss) before income taxes 0.7 (0.4) 0.6 (0.3)
Income tax expense (benefit) 0.4 (0.1) 0.3 (0.1)
----------- ------------- ----------- -------------
Net income (loss) 0.3% (0.3)% 0.3% (0.2)%
=========== ============= =========== =============
</TABLE>
NET SALES:
Increases in the Company's sales of software and technology services have
resulted from the Company's market share growth and geographic expansion. The
increases also reflect overall growth in the software and technology services
industries.
9
<PAGE> 10
For the three and six months ended October 31, 1997, net sales increased by 7%
and 19% respectively, over sales for the three and six months ended September
30, 1996. The increase for the six month period reflects the impact of the May
1996 acquisition of certain operating assets of the corporate, government and
educational ("CGE") division of Egghead, Inc. With the CGE acquisition, the
Company significantly increased its market presence in North America. For the
six months ended September 30, 1996, the pro forma combined sales of the
Company and the CGE division were $382 million.
For the three and six months ended October 31, 1997, sales of PC software
increased 4% and 16%, respectively, over sales for the three and six months
ended September 30, 1996. The Company serves as a designated service provider
for VLM agreements which are frequently used by customers seeking to
standardize desktop software applications and, consequently, may involve
significant quantities of unit sales for each customer at lower per unit prices
than full- packaged software products. The increased popularity of VLM
agreements has contributed to the increase in unit volume sales, as well as the
reduction in average unit prices of desktop software in recent years. Sales of
software through VLM agreements represented approximately 65% of sales for the
three and six months ended October 31, 1997, as compared to approximately 50%
for each of the comparable periods in the prior year.
For the three and six months ended October 31, 1997, revenue from technology
services provided through the Company's Technology Services Group increased by
approximately 95%, as compared to the three and six months ended September 30,
1996. As of October 31, 1997, the Company had technology services offices in 24
worldwide locations. 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 represented 6% of the Company's overall sales; however, such
revenue generated 21% of the Company's gross margin dollars, for the six months
ended October 31, 1997. The Company's maturing consulting sites and expanding
Technology Support Center, which provides fee-based telephone support on behalf
of software publishers and corporate customers have continued to provide
contributions to offset corporate overhead. The Company anticipates that as
more consulting offices mature over time, their contribution to offset
corporate overhead should increase and the Technology Services Group's impact
on the Company's consolidated operating results should improve.
The Company believes future increases in sales will depend upon the Company's
ability to maintain and increase its customer base, to continue to increase its
market share, to develop and expand its technology services and to capitalize
on continued growth in desktop technology markets around the world.
INTERNATIONAL OPERATIONS:
For the three and six months ended October 31, 1997, sales outside of the
United States increased 7% and 10% to $25 million and $55 million,
respectively, as compared to $24 million and $50 million for the three and six
months ended September 30, 1996.
10
<PAGE> 11
For the three months ended October 31, 1997, the Company's operating loss in
Asia/Pacific was $925,000, reflecting a reduction from the operating loss of
$1.6 million realized in the comparable period in the prior year. In recent
quarters, the Company has adjusted its Asia/Pacific business model to more
closely mirror the lower cost, more centralized structure in the Company's
North American operations. Recently installed information systems have allowed
the Company to complete its consolidation efforts into its centralized
operations center in Sydney. In addition, the Company has reduced expenses by
closing smaller, non-profitable offices in the region. For the six months
ended October 31, 1997, the Company's operating loss in Asia/Pacific was
approximately $1.6 million, in line with the loss realized for the six months
ended September 30, 1996.
For the three and six months ended October 31, 1997, 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 12.2% and 11.7% for the
three and six months ended October 31, 1997, respectively, as compared to 12.1%
and 11.9% for the comparable periods of the prior year.
For the three and six months ended October 31, 1997, gross margin on the sale
of PC software declined to 10.1% and 9.8%, respectively, as compared to 10.8%
and 10.5% for the three and six months ended September 30, 1996. For the three
and six months ended October 31, 1997, the percentage of sales of software
through VLM agreements significantly increased to approximately 65% of net
sales, compared to approximately 50% of net sales in each of the comparable
periods in the prior year. The Company generally realizes lower gross margin
as a percent of sales on sales of software through VLM agreements, as compared
to sales of full-packaged software products.
The decline in software margins for the three and six months ended October 31,
1997 was partially offset by growth in revenue from fee-based services which
have substantially higher gross margins as a percent of sales than sales of
software. The contribution from these services in the three and six months
ended October 31, 1997 represented approximately 22% and 21%, respectively, of
overall gross margin dollars, an increase from approximately 14% of gross
margin dollars for the comparable periods in the prior year.
The Company believes its gross margin percentage on sales of software may
continue to decline if the volume of software product sales by the Company
through VLM agreements continues to increase or if publishers respond to
continued market pressures by reducing financial incentives available to
resellers. The Company believes that this potential decrease in product gross
margin percentage may be partially offset by anticipated increases in revenue
from its technology services.
11
<PAGE> 12
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. 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
related selling, general and administrative expenses. For the three and six
months ended October 31, 1997, selling, general and administrative expenses, as
a percentage of net sales, decreased to 9.7% and 9.4%, respectively, compared
to 11.1% for each of the comparable periods in the prior year. Selling,
general and administrative expenses in the prior year reflected certain
transition costs primarily associated with the CGE acquisition, including
temporary staffing, travel expense and costs associated with systems
implementation, totaling approximately $1.4 million and $3.2 million for the
three and six months ended September 30, 1996. Excluding these identified
transition costs, selling, general and administrative expenses as a percentage
of sales would have been 10.4% and 10.1% for these periods. The remaining
decline in selling, general and administrative expenses as a percentage of net
sales is primarily due to the Company's efforts to reduce its operating costs
and realize operating efficiencies in its product business as a result of the
Company's larger size.
DEPRECIATION AND AMORTIZATION:
The increase in depreciation and amortization for the three and six months
ended October 31, 1997, as compared to the corresponding periods in the
preceding year, reflects additional depreciation on the higher level of fixed
assets and amortization of goodwill recorded in connection with the Company's
CGE acquisition. Most of the purchase price for this acquisition represents
goodwill which the Company began amortizing over a 20-year period in the June
1996 quarter.
INCOME TAX EXPENSE (BENEFIT):
The Company's effective tax rate for the three and six months ended October 31,
1997 was approximately 56% and 55%, respectively, as compared to approximately
33% and 32% in the comparable periods in the prior year. This increase in the
Company's effective tax rate reflects the impact of its operations in foreign
countries and state and local taxes in the United States.
LIQUIDITY AND FINANCIAL CONDITION:
At October 31, 1997, the Company had approximately $3.3 million in cash and
cash equivalents and had $27 million outstanding under its term loan and $16
million outstanding under its $60 million revolving credit line. The term loan
and credit line are 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 through March 2001,
increasing from $1.5 million to $2.25 million. The revolving credit line
expires in May 1999.
12
<PAGE> 13
On September 8, 1997, the Company announced the adoption of a Stock Repurchase
Plan. Under the Stock Repurchase Plan, the Company may purchase up to $2.5
million of the Company's Common Stock from time to time in the open market or
through privately negotiated transactions. The Company will fund any purchases
with cash or borrowings under the Company's credit facility. In connection
with its credit agreement, the Company may expend the greater of $500,000 or
50% of excess cash flow, as defined in the Company's credit agreement, each
quarter through April 30, 1998, to fund stock repurchases and dividends.
Thereafter, the Company may expend 50% of excess cash flow to fund stock
repurchases and dividends. As of December 8, 1997, the Company had repurchased
35,000 shares of Common Stock under the Stock Repurchase Plan for total
expenditures of approximately $575,000.
The decrease in trade accounts receivable from April 30, 1997 to October 31,
1997, reflects the results of the Company's continued focus on collection
efforts. At October 31, 1997, accounts receivable represented approximately 70
days of sales, a reduction from 75 days of sales outstanding at April 30, 1997.
The Company generally carries inventory adequate to meet product sales levels
for a period of less than one month. The decrease in trade accounts payable
from April 30, 1997 to October 31, 1997 corresponds to the decline in inventory
and reflects a reduction in the number of days of purchases outstanding.
For the six months ended October 31, 1997, the Company used $4.4 million of
cash in its operations compared to $22.7 million of cash used in operations in
the six months ended September 30, 1996. The decrease in cash used in
operations reflects the Company's improved profitability. In addition, for the
six months ended September 30, 1996, the Company used a higher level of cash in
its operations as it financed the growth in its receivables resulting from
increased sales following the CGE acquisition.
The increase in furniture, equipment and leasehold improvements at October 31,
1997 reflects approximately $5.2 million of capital expenditures related to the
ongoing upgrade of the Company's computer systems and the recent expansion of
its operations centers in Garland, Texas and Dublin, Ireland.
The Company expects that its cash requirements for the remainder of the fiscal
year 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 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
13
<PAGE> 14
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 April 30, 1997 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 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 September 18, 1997, the Company held its Annual Meeting of
Shareholders (the "Meeting"). At the Meeting, Judy Sims and Frank
Tindle were re-elected as directors to serve three-year terms expiring
at the Company's Annual Meeting of Shareholders to be held in
the year 2000.
A total of 3,483,019 shares of common stock were voted for the
re-election of Judy Sims and 20,512 shares of common stock abstained
from such vote. A total of 3,483,219 shares of common stock were voted
for the re-election of Frank Tindle and 20,312 shares of common
stock abstained from such vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: Exhibit 10.1 - Sixth Amendment to Credit
Agreement dated October 31,
1997 among the Company, Texas
Commerce Bank, National
Association, as Agent, and other
participating financial
institutions
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
No reports on Form 8-K were filed during the three-month
period ended October 31, 1997.
16
<PAGE> 17
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: December 15, 1997 By: /s/ Deborah A. Nugent
--------------------------------------------
Deborah A. Nugent, Vice President of Finance
(Principal Financial Officer and Principal
Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Pages
------------
<S> <C>
Exhibit 10.1 Sixth Amendment to Credit Agreement dated October 31, 1997 among the Company,
Texas Commerce Bank, National Association, as Agent, and other participating
financial institutions
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>
18
<PAGE> 1
EXHIBIT 10.1
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as
of October 31, 1997, is among SOFTWARE SPECTRUM, INC. (the "Borrower"), each of
the banks or other lending institutions which are a party hereto (individually
a "Bank" and collectively, the "Banks") and TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, individually as a Bank (in its individual capacity and not as
agent, herein "TCB") and as agent for itself and the other Banks (in such
capacity as agent, together with its successors in such capacity, the "Agent").
RECITALS:
A. Borrower, TCB and the Agent have entered into that certain
Credit Agreement dated May 3, 1996 (as amended by that certain First Amendment
to Credit Agreement and Master Assignment and Acceptance dated as of June 28,
1996, that certain Second Amendment to Credit Agreement dated as of June 28,
1996, that certain Amendment Letter dated as of September 30, 1996, that
certain Fourth Amendment to Credit Agreement dated as of December 31, 1996, and
that certain Fifth Amendment to Credit Agreement dated March 31, 1997, herein
the "Agreement").
B. Pursuant to Section 14.8 of the Agreement, TCB assigned
certain of its rights and obligations under the Agreement and the other Loan
Documents to the other Banks.
C. The Borrower, the Banks and the Agent desire to amend the
Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.1 Definitions. Capitalized terms used in this
Amendment, to the extent not otherwise defined herein, shall have the same
meanings as in the Agreement, as amended hereby.
ARTICLE 2
Amendments
Section 2.1 Amendment to Section 1.1. Effective as of the date
hereof, (a) the definitions of "Adjusted Debt Ratio" and "Average Funded Debt"
are deleted in their entirety from Section 1.1 of the Agreement; (b) the phrase
"unless the Security Interest of the Agent therein is
SIXTH AMENDMENT TO CREDIT AGREEMENT- Page 1
<PAGE> 2
released in accordance with the provisions of Section 5.12" is deleted from
part (h) of the definition of "Eligible Accounts" in Section 1.1 of the
Agreement; and (c) the definition of "Excess Cash Flow" in Section 1.1 of the
Agreement is amended in its entirety to read as follows:
"Excess Cash Flow" means, for any period, the total of the
following for the Borrower and its Subsidiaries on a consolidated
basis, each calculated for such period (without duplication): (a)
EBITDA; less (b) any cash income or franchise taxes included in the
determination of Net Income; less (c) the unfinanced portion of
Capital Expenditures (including those funded with advances under the
Revolving Loan); less (d) scheduled amortization of Debt actually
paid; less (e) the aggregate of all voluntary prepayments of the Term
Loans made in accordance with Section 5.4; less (f) Interest Expense.
Section 2.2 Amendments to Article 5. Effective as of the date
hereof, (a) the phrase "twenty-five percent (25%)" is deleted from Section
5.4(a)(ii) of the Agreement and is replaced with "fifty percent (50%)"; (b)
Section 5.12 of the Agreement is deleted in its entirety; and (c) the phrase
"may otherwise be provided in Section 5.12 or as" is deleted in its entirety
from Section 5.13 of the Agreement.
Section 2.3 Amendments to Section 10.4. Effective as of the date
hereof, Section 10.4 of the Agreement is amended in its entirety to read as
follows:
Section 10.4 Restrictions on Dividends and other
Distributions. The Borrower will not and will not permit any
Subsidiary to directly or indirectly declare, order, pay, make or set
apart any sum for (a) any dividend or other distribution, direct or
indirect, on account of any shares of any class of stock of the
Borrower or any Subsidiary now or hereafter outstanding, except a
dividend payable solely in shares of stock; (b) any redemption,
conversion, exchange, retirement, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, of any
shares of any class of stock of the Borrower or any Subsidiary now or
hereafter outstanding; or (c) any payment made to retire, or to obtain
the surrender of, any outstanding warrants, options, or other rights
to acquire shares of any class of stock of the Borrower or any of its
Subsidiaries now or hereafter outstanding; except that:
(i) Subsidiaries of the Borrower may make, declare,
and pay dividends and make other distributions to Borrower or
to other Subsidiaries with respect to their common or ordinary
stock in the ordinary course of business and to allow Borrower
to pay dividends permitted hereunder; and
(ii) Borrower may make, declare and pay cash
dividends out of earned surplus in accordance with applicable
law and may purchase and set apart sums to purchase any of its
capital stock as long as no Default exists or would otherwise
result therefrom and:
SIXTH AMENDMENT TO CREDIT AGREEMENT- Page 2
<PAGE> 3
(A) the aggregate amount expended for such dividends
and purchases during the Fiscal Quarters ending
January 31, 1998 and April 30, 1998, shall not exceed
in each such Fiscal Quarter an aggregate amount equal
to the greater of:
(1) Five Hundred Thousand Dollars
($500,000); or
(2) Fifty percent (50%) of Excess Cash
Flow, calculated for the applicable Fiscal
Quarter based on the immediately preceding
four (4) Fiscal Quarters; and
(B) the aggregate amount expended for such dividends
and purchases during any Fiscal Quarter ending after
April 30, 1998, shall not exceed in each such Fiscal
Quarter an aggregate amount equal to Fifty percent
(50%) of Excess Cash Flow, calculated for the
applicable Fiscal Quarter based on the immediately
preceding four (4) Fiscal Quarters.
Section 2.4 Amendment to Section 11.3. Effective as of the date
hereof, Section 11.3 of the Agreement is amended in its entirety to read as
follows:
Section 11.3 Fixed Charge Coverage. As of each date
identified below, the Borrower shall not permit the ratio of Cash Flow
to Fixed Charges computed on the basis of the Cash Flow and Fixed
Charges for the twelve (12) month period then ended to be less than
the ratio set forth in the table below opposite the applicable date:
<TABLE>
<CAPTION>
Date Ratio
=============================================================
<S> <C>
October 31, 1997 1.80
-------------------------------------------------------------
January 31, 1998 1.95
-------------------------------------------------------------
April 30, 1998 2.25
-------------------------------------------------------------
July 31, 1998 and each Fiscal Quarter end 2.00
thereafter
=============================================================
</TABLE>
The phrase "Cash Flow" means, for any period, the total of the
following for the Borrower and the Subsidiaries calculated on
a consolidated basis without duplication for such period: (A)
Adjusted EBITDA; minus (B) any provision for
SIXTH AMENDMENT TO CREDIT AGREEMENT- Page 3
<PAGE> 4
(or plus any benefit from) cash income or franchise taxes
included in determining Net Income. The phrase "Fixed
Charges" means, for any period, the total of the following for
the Borrower and the Subsidiaries calculated on a consolidated
basis without duplication for such period: (A) Interest
Expense; plus (B) scheduled amortization of Debt paid or
payable (excluding, to the extent included, nonpermanent
principal repayments under the Revolving Loans); plus (C) cash
dividends and other cash distributions made by Borrower on
account of its capital stock.
ARTICLE 3
Miscellaneous
Section 3.1 Ratifications. The terms and provisions set forth in
this Amendment shall modify and supersede all inconsistent terms and provisions
set forth in the Agreement, and except as expressly modified and superseded by
this Amendment, the terms and provisions of the Agreement and the other Loan
Documents are ratified and confirmed and shall continue in full force and
effect. Borrower, Spectrum Integrated Services, Inc. (by its execution below),
the Banks and Agent agree that the Agreement, as amended hereby, and the other
Loan Documents shall continue to be legal, valid, binding and enforceable in
accordance with their respective terms.
Section 3.2 Reference to Agreement. Each of the Loan Documents,
including the Agreement, are hereby amended so that any reference in such Loan
Documents to the Agreement shall mean a reference to the Agreement as amended
hereby.
Section 3.3 Severability. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 3.4 Applicable Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and the applicable
laws of the United States of America.
Section 3.5 Successors and Assigns. This Amendment is binding upon
and shall inure to the benefit of Borrower, Agent, the Banks and their
respective successors and assigns, except Borrower may not assign or transfer
any of its rights or obligations hereunder without the prior written consent of
the Banks.
Section 3.6 Counterparts. This Amendment may be executed in one or
more counterparts and on telecopy counterparts, each of which when so executed
shall be deemed to be an original, but all of which when taken together shall
constitute one and the same agreement.
SIXTH AMENDMENT TO CREDIT AGREEMENT- Page 4
<PAGE> 5
Section 3.7 Headings. The headings, captions, and arrangements used
in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 3.8 ENTIRE AGREEMENT. THIS AMENDMENT EMBODIES THE FINAL,
ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR
COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR
ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS
OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO.
Section 3.9 Amendment Fee. Borrower agrees to pay an amendment fee
to each Bank that executes this Amendment on or before November 7, 1997. The
amendment fee payable to each such Bank will be equal to fifteen (15) basis
points multiplied by the sum of (a) the principal amount of the outstanding
Term Loans owed to such Bank and (b) the Revolving Commitment of such Bank,
each calculated as of October 31, 1997. Borrower agrees to pay the amendment
fee due to each Bank on or before November 10, 1997 in immediately available
funds.
Executed as of the date first written above.
BORROWER:
SOFTWARE SPECTRUM, INC.
By: /s/ DEBORAH A. NUGENT
-------------------------------------
Deborah A. Nugent
Vice President
Accepted and agreed to:
SPECTRUM INTEGRATED SERVICES, INC.
By: /s/ DEBORAH A. NUGENT
-------------------------------------
Deborah A. Nugent
Secretary/Treasurer
SIXTH AMENDMENT TO CREDIT AGREEMENT- Page 5
<PAGE> 6
AGENT:
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, individually as a Bank and
as the Agent
By: /s/ ANALAURA MOREIRA
------------------------------------
Analaura Moreira
Vice President
OTHER BANKS:
BANQUE PARIBAS
By: /s/ LARRY ROBINSON
------------------------------------
Name: Larry Robinson
Title: Vice President
By: /s/ TIMOTHY A. DONNON
------------------------------------
Name: Timothy A. Donnon
Title: Managing Director
NATIONAL CITY BANK, KENTUCKY
By: /s/ DON PULLSO
-------------------------------------
Name: Don Pullso
Title: V.P.
COMERICA BANK
By: /s/ REGINALD M. GOLDSMITH, III
------------------------------------
Name: Reginald M. Goldsmith, III
Title: Vice President
PNC BANK, N.A.
By: /s/ PHILIP K. LIEBSCHER
------------------------------------
Name: Philip K. Liebscher
Title: Vice President
SIXTH AMENDMENT TO CREDIT AGREEMENT- Page 6
<PAGE> 7
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By: /s/ LISA M. AUTRY
------------------------------------
Name: Lisa M. Autry
Title: Vice President
NBD BANK
By: /s/ PHILLIP D. MARTIN
------------------------------------
Name: Phillip D. Martin
Title: Vice President
SIXTH AMENDMENT TO CREDIT AGREEMENT- Page 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
------------------------------- ----------------------------------
October 31, September 30, October 31, September 30,
1997 1996 1997 1996
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 628,000 $ (533,000) $ 1,169,000 $ (789,000)
=========== ============= ============= ============
Shares as adjusted:
Average number of shares
outstanding 4,331,338 4,288,277 4,331,810 4,275,903
Incremental shares
from outstanding stock
options as determined
under the treasury stock
method, using the
average market price 56,693 -- (*) 32,728 -- (*)
----------- ------------- ------------- ------------
Shares as adjusted 4,388,031 4,288,277 4,364,538 4,275,903
=========== ============= ============= ============
Primary earnings (loss) per share $ 0.14 $ (0.12) $ 0.27 $ (0.18)
=========== ============= ============= ============
</TABLE>
(*) No incremental shares from outstanding stock options are included, as they
would be anti-dilutive.
<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
------------------------------- -----------------------------------
October 31, September 30, October 31, September 30,
1997 1996 1997 1996
----------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 628,000 $ (533,000) $ 1,169,000 $ (789,000)
=========== ============= ============== =============
Shares as adjusted:
Average number of shares
outstanding 4,331,338 4,288,277 4,331,810 4,275,903
Incremental shares from
outstanding stock options
as determined under the
treasury stock method,
using the higher of ending
or average market price 56,693 -- (*) 35,168 -- (*)
----------- ------------- -------------- -------------
Shares as adjusted 4,388,031 4,288,277 4,366,978 4,275,903
=========== ============= ============== =============
Fully-diluted earnings (loss)
per share $ 0.14 $ (0.12) $ 0.27 $ (0.18)
=========== ============= ============== =============
</TABLE>
(*) No incremental shares from outstanding stock options are included, as they
would be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<CASH> 3,317
<SECURITIES> 0
<RECEIVABLES> 159,800
<ALLOWANCES> 2,217
<INVENTORY> 13,791
<CURRENT-ASSETS> 179,429
<PP&E> 35,581
<DEPRECIATION> 14,430
<TOTAL-ASSETS> 253,539
<CURRENT-LIABILITIES> 142,496
<BONDS> 36,733
0
0
<COMMON> 44
<OTHER-SE> 74,266
<TOTAL-LIABILITY-AND-EQUITY> 253,539
<SALES> 406,983
<TOTAL-REVENUES> 406,983
<CGS> 359,542
<TOTAL-COSTS> 359,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 715
<INTEREST-EXPENSE> 1,990
<INCOME-PRETAX> 2,608
<INCOME-TAX> 1,439
<INCOME-CONTINUING> 1,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,169
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
