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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
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MARK ONE
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED APRIL 30, 1998
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to .
Commission file number 0-19349
SOFTWARE SPECTRUM, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1878002
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
2140 MERRITT DRIVE,
GARLAND, TEXAS
75041
(Address of principal executive offices)
(Zip Code)
972-840-6600
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value on July 24, 1998 of the Registrant's voting
securities held by non-affiliates was $49,443,952.
At July 24, 1998, the Registrant had outstanding 4,268,731 shares of its
Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on Form
10-K certain of the information contained in the registrant's proxy statement
for its annual meeting of shareholders to be held September 17, 1998, which will
be filed by the registrant within 120 days after April 30, 1998.
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PART I
ITEM 1. BUSINESS
Software Spectrum, Inc. (the "Company") is a leading global supplier of
personal computer business software and technology services to organizations.
The Company serves Fortune 500 and Global 500 companies, thousands of mid-sized
customers from every industry and the government and academic market segments.
The Company provides its customers with a wide variety of business software
products, volume software licensing services and technology services and assists
them in the implementation, deployment and ongoing support of their personal
computing strategies. The Company has established supply arrangements with major
personal computer software publishers, including Microsoft, IBM/Lotus, Novell,
Attachmate, Symantec, Netscape and Corel. The Company markets software titles
for IBM, IBM-compatible and Macintosh personal computers, including software for
all major operating systems such as Windows 95, Windows 98, OS/2, Novell NetWare
and Microsoft Windows NT.
The Company was incorporated under the laws of the State of Texas in April
1983. The Company's principal facilities and its executive offices are located
at 2140 Merritt Drive, Garland, Texas 75041, and its telephone number at that
location is (972) 840-6600. Except where the context otherwise requires, the
term "Company" as used herein includes Software Spectrum, Inc. and its
subsidiaries.
FORWARD-LOOKING INFORMATION
The Company or its representatives from time to time may make or may have
made certain forward-looking statements, whether orally or in writing, including
without limitation any such statements made or to be made in the Management's
Discussion and Analysis of Financial Condition and Results of Operations, press
releases and other information contained in its various filings with the
Securities and Exchange Commission. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements, so as to ensure
to the fullest extent possible the protections of the safe harbor established in
the Private Securities Litigation Reform Act of 1995. Accordingly, such
statements are qualified in their entirety by reference to and are accompanied
by the following discussion of certain important factors that could cause actual
results to differ materially from those projected in such forward-looking
statements. The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a rapidly changing business, and new risk
factors emerge from time to time. Management cannot predict every risk factor,
nor can it assess the impact, if any, of all such risk factors on the Company's
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those projected in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results.
RELIANCE ON FINANCIAL INCENTIVES, VOLUME DISCOUNTS AND MARKETING FUNDS
As part of its supply agreements with certain publishers and distributors,
the Company receives substantial incentives in the form of rebates, volume
purchase discounts, cooperative advertising funds and market development funds.
A reduction or discontinuance of these incentives, discounts or advertising
allowances could have a material adverse effect on the Company's business and
financial results.
DEPENDENCE ON VENDORS
A large percentage of the Company's sales are represented by popular
personal computer business software products from a small number of vendors. For
the year ended April 30, 1998, approximately 65% of the Company's net sales were
derived from products published by Microsoft and IBM/Lotus. Most of the
Company's contracts with vendors are terminable by either party, without cause,
upon 30 to 60 days notice. The loss or significant change of the Company's
relationship with these vendors could have a material adverse effect on the
Company's business and financial results. Although the Company believes
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the software products would be available from other parties, the Company may
have to obtain such products on terms that could adversely affect its financial
results.
VOLUME LICENSING AND MAINTENANCE AGREEMENTS
The Company serves as a designated services provider for volume licensing
and maintenance ("VLM") agreements between many of its customers and major
publishers of personal computer software. VLM agreements are typically used by
customers seeking to standardize desktop software applications and,
consequently, typically involve significant quantities of unit sales for each
customer. Although unit volume sales are increased by the use of VLM agreements,
generally lower gross margins are realized on such sales as compared to sales of
full-packaged software products. The Company continues to experience an increase
in the percentage of sales made pursuant to VLM agreements and, consequently,
overall gross margin percentages on the sale of software products should
continue to decline. In addition, the trend toward use of enterprise-wide
licensing agreements, which have lower gross margins and administrative costs
than other VLM programs, could cause further decreases in the Company's product
gross margins.
ECONOMIC CONDITIONS AND GEOGRAPHIC EXPANSION
The Company's business is sensitive to the spending patterns of its
customers, which in turn are subject to prevailing economic and business
conditions. Further, sales to large corporations have been important to the
Company's growth, and its ability to continue its historic rate of growth is
dependent on its continued success in such market. The Company's operations and
geographic expansion outside the United States involve currency exchange risks,
political risks and other risks of conducting business abroad.
HIGHLY COMPETITIVE ENVIRONMENT
The desktop technology marketplace is intensely competitive. The Company
faces competition from a wide variety of sources including other software
suppliers, hardware manufacturers and resellers, technology service providers,
personal computer retail stores (including superstores), mail order, internet
and other discount business suppliers and software publishers. Many of the
Company's competitors, particularly software publishers, have substantially
greater financial resources than the Company. Because of the intense competition
within the personal computer software channel, companies that compete in this
market, including the Company, are characterized by low gross and operating
margins. Consequently, the Company's profitability is highly dependent upon
effective cost and management controls.
NEW DEVELOPMENTS AND RAPID TECHNOLOGICAL CHANGE; RETENTION OF QUALIFIED
PERSONNEL
The market for the Company's products and services is characterized by
rapidly changing technology, evolving industry standards and frequent
introductions of new products and services. The Company's future success will
depend in part on its ability to enhance existing technology services and to
offer new services on a timely basis. Additionally, the Company's business
results can be adversely affected by disruptions in customer ordering patterns
and the impact of new product releases.
The growth and success of the Company's technology services business depends
largely upon its ability to attract, develop, motivate and retain highly-skilled
technical employees in an industry characterized by high employee turnover.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. If the Company is unable to attract
and retain sufficient numbers of highly-skilled technical employees, the
Company's technology services business could be adversely affected.
CHANGING METHODS OF SOFTWARE DISTRIBUTION
The manner in which personal computer software products are distributed and
sold is continually changing, and new methods of distribution may emerge or
expand. Software publishers may intensify their
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efforts to sell their products directly to end-users, including current and
potential customers of the Company. Other products and methodologies for
distributing software to users may be introduced by publishers, present
competitors or other third parties. If personal computer software suppliers'
participation in these programs is reduced or eliminated, or if other methods of
distribution of software, which exclude the personal computer software resale
channel, become common, the Company's business and financial results could be
materially adversely affected.
TELEPHONE SUPPORT SERVICES AGREEMENTS
Certain of the Company's key telephone support contracts generate revenues
based upon the number of support requests received by the Company or the time
spent on such requests. Consequently, the amount of revenues generated is
dependent upon consumers' support needs. With respect to agreements that provide
for pricing on a per-call basis, the Company's profitability may be adversely
affected if the Company receives fewer support requests than expected or the
time spent in resolving inquiries is greater than anticipated.
Certain of the Company's support contracts provide that the contract may be
terminated on short notice if the Company fails to meet specified performance
criteria. Cancellation of, or a significant decrease in, the services provided
under a key support contract could have an adverse effect on the Company's
profitability. In addition, the Company may be required to rapidly expand its
support operations to meet the demands of its customers. Such rapid changes to
the size of the Company's support operations and employee base could involve
significant costs, including costs associated with employee hiring and training,
the purchase of additional workstations, equipment and technology and the
establishment of additional call centers.
YEAR 2000
The Company is currently conducting a review of its core management
information systems to verify compliance with Year 2000 date codes and is also
reviewing and assessing its desktop computers, networks and servers, software
applications and packages, and products and services provided by third parties
for internal operations to determine whether or not they support Year 2000 date
codes. While the Company's review and assessment of its internal systems is
still in process, the Company expects that any required modifications will be
made on a timely basis and that the cost of such modifications will not have a
material effect on the Company's operating results. However, in the event that
the Company's key vendors cannot provide the Company with software products that
meet Year 2000 requirements on a timely basis, or if customers delay or forego
software purchases based upon Year 2000 related issues, the Company's operating
results could be materially adversely affected. In general, as a reseller of
software products, the Company only passes through to its customers the
applicable vendors' warranties. The Company's operating results could be
materially adversely affected, however, if it were held liable for the failure
of software products resold by the Company to be Year 2000 compliant despite its
disclaimer of software product warranties.
OVERVIEW
The Company is a leading global supplier of personal computer business
software and technology services to organizations. The Company's strategy is to
leverage its global infrastructure to provide a high level of customer service,
to maintain a cost-efficient operating structure and to grow its product and
services business around the world. The Company controls its costs by
centralizing its administrative support and customer service operations while
utilizing a geographically dispersed field sales force and technology services
staff strategically located in major business markets worldwide. The majority of
the Company's revenues are derived from sales to large organizations, including
Fortune 500 and Global 500 companies, as well as thousands of mid-sized
customers from every industry, including the government and academic market
segments.
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The Company derives revenues from two primary areas, sales of personal
computer software to organizations and sales of technology services delivered by
its Technology Services Group (the "Technology Services Group" or "TSG").
The largest component of the Company's business is providing personal
computer software, licenses and related services to large organizations with
over 1,000 desktop computers, including companies in the Fortune 500 and Global
500. The Company concentrates on building and expanding these relationships
through personal sales contacts made throughout major global desktop technology
markets. The Company's field sales representatives are divided into two groups:
one sales force which markets primarily personal computer software products to
organizations, and the second sales force which markets primarily fee-based
services provided by the Company's Technology Services Group. Through its
strategically located, centralized operations centers in North America, Europe
and Asia/Pacific, the Company supports the global marketing efforts of these two
sales forces. The Company also serves mid-sized customers through a combined
field sales and outbound calling sales effort. See "Sales and Marketing" below.
The Company's home page on the Internet has an electronic catalog which can
be used by customers to obtain pricing information, check order status, run
purchase activity reports and purchase products. For certain customers, the
Company offers a secure on-line customer-specific catalog, VISTA, which contains
products, prices and other information unique to each customer.
The Company's Technology Services Group provides fee-based services,
including consulting, custom training and technical support for a number of
specific technologies including advanced networking infrastructure, enterprise
messaging and groupware, distributed client/server business solutions,
enterprise software management services and Internet/Intranet services. TSG's
strategy is to focus on select technologies to allow its personnel to develop
in-depth knowledge to support complex customer requirements. TSG provides
services to assist customers in determining where and how technology and
products can be implemented to reduce the cost of managing and supporting
enterprise networks. TSG also provides fee-based telephone support services
through its technology support centers in North America, Europe and
Asia/Pacific. These services are utilized by software publishers that desire to
outsource their technology support services as well as organizations that choose
to outsource their internal help desk function. As of June 30, 1998, TSG had
over 1,400 technical professionals worldwide. For the year ended April 30, 1998,
TSG represented approximately 6% of the Company's revenues but approximately 21%
of its gross margin dollars. See "Global Operations" and "Technology Services
Group" below.
The Company adapts its product-related services to specific customer
requests, consults with customers on developing strategies to efficiently manage
the customer's investment in desktop software and hardware and provides accurate
and timely delivery of products. The Company provides its customers with
information, advice and assistance through its marketing, sales and technical
staff on the wide range of software procurement choices available. For customers
electing to standardize desktop software applications or otherwise take
advantage of right-to-copy arrangements, the Company provides volume licensing
and maintenance agreement services and support. Under VLM agreements, the
Company acts as a designated service provider to sell software licensing rights
that permit customers to make copies of a publisher's software program from a
master disk and distribute this software within a customer's organization for a
fee for each copy made. Maintenance agreements entitle customers to all upgrades
of certain products during a specified period of time, typically two years
following the software purchase. By utilizing VLM agreements, customers are able
to consolidate their worldwide purchases and acquire software under a single
master agreement for a given publisher from a global supplier such as the
Company. One of the latest trends with respect to VLM agreements involves
enterprise-wide licensing agreements which give the customer the right to use an
entire suite of products offered by a publisher on all desktops across its
enterprise. The Company's licensing consultants can assist customers in
selecting the most advantageous form of licensing available based on specific
needs or constraints. Among its other services, the Company offers on-site
consultants for large corporations, custom training and support of complex
technologies,
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strategic planning for information systems departments, software selection
assistance and determination of price and availability of hard-to-find software
products.
The Company serves an important role in the software industry by providing a
service-oriented and cost-effective means for personal computer software
publishers to market, sell, distribute and provide support for their products.
The services provided by the Company assist publishers by building product
awareness, marketing products directly on behalf of publishers to businesses and
other organizations, and providing additional technical support and services for
software products. The Company is also instrumental in the selection, design and
implementation of VLM programs for its customers. The Company believes that
maintaining its relationships with major publishers is important to the
Company's future growth and profitability. The Company will often coordinate
product introductions and marketing programs with publishers, which may involve
joint regional product seminars and cross-selling of selected complementary
products. Due to its volume of purchases, the Company believes it is able to
obtain favorable pricing, avail itself of marketing funds provided by major
publishers and work closely with publisher personnel on various marketing and
selling matters such as the introduction of new products, programs and related
service opportunities.
The Company has continued to experience significant growth in the sale of
software to its customers through VLM agreements. For the year ended April 30,
1998 ("fiscal 1998"), sales through VLM agreements represented approximately 72%
of net sales of the Company, compared to 59% and 46% of net sales for the years
ended April 30, 1997 ("fiscal 1997") and March 31, 1996 ("fiscal 1996"),
respectively. Since individual software packages and documentation may not be
provided to each user, and due to volume pricing incentives and lower
distribution costs, customers utilizing VLM agreements can purchase licenses for
software at a lower cost than by purchasing individual shrink-wrapped software
packages. In general, the Company receives lower gross margins, as a percent of
sales, on sales made through VLM agreements. Lower gross margins are partially
offset by lower operating costs associated with such agreements.
In May 1996, the Company acquired certain operating assets of Egghead,
Inc.'s corporate, government and education division ("CGE"). During fiscal 1997,
the Company integrated the North American sales forces of the two organizations,
stabilized CGE's customer base and expanded its operations to include an
operations center located in Spokane, Washington, which serves several thousand
customers and also provides technology support services.
The Company is one of the world's largest global suppliers of personal
computer business software and technology services to organizations. The
Company's large customer base provides additional opportunities for growth of
its Technology Services Group.
GLOBAL OPERATIONS
Under VLM agreements, multinational customers can consolidate their
worldwide volume software purchases under a single master agreement for a given
publisher. The Company's ability to sell software globally through these
programs was a key factor in its global expansion, which began in fiscal 1993.
The Company's North American operations are based in Garland, Texas, with a
major call center located in Spokane, Washington. The Company's European sales
headquarters is located in The Hague, The Netherlands and its operations center
is located in Dublin, Ireland. The Company augmented its European operations by
establishing a TSG office in London, England in 1996 and another TSG office in
Frankfurt, Germany in early 1997. The Company's April 1996 acquisition of
Essentially Group Limited ("Essentially Group"), a leading information
technology company in Australia and New Zealand, significantly extended Software
Spectrum's geographic coverage by providing an immediate presence in the Asia/
Pacific region. With this acquisition, the Company obtained an established
customer base, management team and services capabilities to provide the Company
with many of the key resources needed to permit further expansion throughout the
Asia/Pacific region. In fiscal 1997, the Company established sales offices
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in Hong Kong and Singapore. During fiscal 1997 and fiscal 1998, the Company
consolidated the administrative and support functions of its Asia/Pacific
operations in Sydney to more closely align these functions with the centralized
structure and operations of the Company's North American and European
operations. The Company also installed information systems that are common to
all of its operations centers. The Company's operations in Asia/Pacific incurred
operating losses of approximately $2.5 million in the fiscal year ended April
30, 1998, which reflects a substantial improvement over operating losses of
approximately $4.9 million in the fiscal year ended April 30, 1997.
In fiscal 1997, the Company entered into a joint venture in Japan, named
Uchida-Spectrum, Inc., with Uchida-Yoko Co., Ltd. Through this joint venture, in
which the Company owns a 45% equity interest, the Company sells software
products and provides technology services to customers in Japan.
In fiscal 1999, the Company plans to open additional TSG sites in key cities
in Europe and Asia/ Pacific to better serve its customers' requirements in these
regions.
With centralized operations centers in North America, Europe and
Asia/Pacific, the Company is able to serve the major desktop technology markets
around the world. Today, Software Spectrum provides software or fulfillment
services to customers located in over 100 countries, provides support services
in 14 languages, invoices customers in many local currencies and provides
consolidated worldwide reporting to customers.
TECHNOLOGY SERVICES GROUP
Through its Technology Services Group, the Company provides fee-based
technology services including consulting, custom training and telephone and
Internet support services.
CONSULTING AND TRAINING SERVICES
The Company's consulting and training service offerings are centered around
a number of specific technologies including advanced networking infrastructure,
enterprise messaging and groupware, distributed client/server business
solutions, enterprise software management ("ESM") services and Internet/
Intranet services. These technologies address customers' needs (i) to provide
access to information at sites throughout the world within their organizations;
(ii) to enable employees at different locations to communicate with each other
in a cost-efficient manner; (iii) to provide more flexible access to mission
critical information; and (iv) to provide strategies for controlling the rising
cost of supporting distributed computing.
To support these service offerings, the Company developed the Institute for
Microsoft Technology and the Institute for IBM/Lotus Technology as a training
medium for its consultants. The Institutes provide introductory and advanced
training for technical certification, as well as service delivery methodology
and advanced consulting skills, enabling consultants to develop and deploy
complex solutions.
The Company is an industry leader in assisting customers in implementing
Microsoft's Systems Management Server ("SMS"). In 1995, the Company founded the
Software Spectrum SMS Alliance, in cooperation with Microsoft, and is its
managing member. Members of the SMS Alliance collectively represent more than
1.5 million desktops and meet regularly to share SMS deployment and management
solutions. Based on the success of the SMS Alliance, during fiscal 1998 the
Company created an Exchange Solutions Alliance in cooperation with Microsoft.
As of April 30, 1998, the Company had Technology Services Group offices in
Chicago, Dallas, Atlanta, Boston, Philadelphia, Houston, San Antonio, San
Francisco, Seattle, Denver, Detroit, Los Angeles, Minneapolis, New York,
Raleigh-Durham, Phoenix, Sydney, Melbourne, Wellington, Toronto, London and
Frankfurt. Through its joint venture in Japan, Uchida-Spectrum, Inc., the
Company also offers TSG services to its customers in Japan.
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The Company is a Microsoft Solutions Provider, Lotus Notes Business Partner,
IBM BESTeam Premium Partner and Tivoli Premier Partner and is authorized to
sell, support, train and develop applications in many complex products. The
Company's advanced networking infrastructure design capabilities cover a broad
range of topologies and protocols, including local area and wide area networks
and the ability to provide interfaces to many mainframes and minicomputers. The
Company also provides sophisticated messaging and information-sharing solutions
to provide a stable communications platform for enterprise-wide connectivity.
The Company's ESM services are designed to help customers with the
evaluation, implementation, operation and support of electronic desktop
management solutions, such as Microsoft's Systems Management Server and Tivoli's
TME 10 product. These services help customers manage and support their software
assets at various sites from a single location. Utilizing these electronic
software distribution products and ESM services, customers can inventory
hardware and software assets, perform software product distribution and provide
electronic help desk services.
In addition, the Company offers education and custom technical training
opportunities for its customers' information technology professionals in the
various advanced technologies supported by the Company, with such seminars and
training provided at the customers' or the Company's location.
TECHNOLOGY SUPPORT
The Company also provides fee-based telephone or Internet support services
on behalf of software publishers and to end-users of business customers that
choose to fully or partially outsource their internal help desk function. The
Company's services cover a number of technologies, including desktop
applications and operating systems and network operating systems.
The Company provides quality technology support for organizations in three
principal business categories. First, it contracts with software publishers to
provide telephone support on their behalf to customers. Second, technology
support analysts handle support calls from the Company's corporate customers'
technical personnel for escalation services. Third, the Company provides
technology support to large organizations to replace the customer's internal
help desk capabilities for the customer's employees. The staff in the Company's
technology support centers are experienced in over 150 major personal computer
software titles and can provide support for software products running on most
major personal computer operating systems and environments, including Windows
95, Windows 98, Macintosh, Microsoft Windows NT, Novell Netware and other
network operating systems. The Company is designated as a Microsoft Authorized
Support Center (one of nine in the United States), a Lotus Premium Business
Partner and a Novell Authorized Service Center. The technology support centers
include large capacity file servers, multiple CD ROM databases and other
resources that enable the Company's support personnel to recreate a customer's
individual problem, develop a solution and guide the customer through the
solution on a step-by-step basis. Customers may utilize the Internet as an
electronic means to forward support questions and receive answers from the
Company.
The Company's technology support business grew rapidly in the 1998 fiscal
year. The growth has been primarily in providing help desk services under
contracts with software publishers, although the Company has also increased its
support business with end-users and organizations. The Company maintains
technology support facilities in Garland, Texas; Spokane, Washington; Dublin,
Ireland and Sydney, Australia.
CUSTOMER SERVICES
LICENSING, PROCUREMENT AND DEPLOYMENT SERVICES
The Company's customers can purchase software applications in a number of
different ways. VLM agreements, or right-to-copy agreements, allow a customer
either to purchase a license for each user in a
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transaction-based process or track and periodically report its software copies,
paying a license fee for each copy made. The Company sells, supports and
services the various VLM arrangements currently utilized by software publishers.
For customers, the overall cost of using one of these methods of acquiring
personal computer software is likely to be substantially less than the
traditional method of purchasing shrink-wrapped full-packaged software products.
Since each major publisher has chosen a different set of procedures for
implementing VLM agreements, businesses are faced with a significant challenge
to sort through all the alternatives and procedures to ensure that they are
utilizing the appropriate agreements, complying with the publishers' licensing
terms and properly reporting and paying for their software licenses. Certain
publishers have recently introduced licensing programs that reduce the reporting
burden of customers and the Company by requiring annual payments over a two to
three year term, provided the customer agrees to standardize certain
applications within its organization. In order to address the wide range of
procurement choices available to its customers, the Company provides
information, analysis, advice and assistance to its customers relating to their
procurement decisions and negotiations through its team of licensing consultants
as well as by means of the Company's marketing and sales staff and through its
publications. See "World Wide Web Site and Publications" and "Sales and
Marketing."
To help customers develop or improve their personal computer software
management programs, the Company developed a software management process and
corresponding implementation services that allow customers to effectively
utilize the benefits associated with VLM programs. The Company provides its
customers with a methodology for evaluating the individual customer's personal
computer software management process and analyzing issues in implementing the
VLM programs offered by various publishers. The service options available from
the Company are designed to assist the customer in implementing its software
management plan, including internal distribution services, communication with
end-users, telephone support and reporting and compliance under VLM agreements.
Increasingly, large corporate customers are electing to standardize desktop
applications and coordinate their enterprise-wide personal computer management
responsibilities. In response to this trend, publishers have developed new types
of enterprise-wide VLM agreements, which simplify the terms, conditions and
administration of VLM arrangements and provide the customer with more
predictable annual costs. The Company works closely with its customers to
educate them regarding the opportunities available under VLM agreements and has
developed the systems needed to provide the global integration and milestone
reporting required under these programs.
The Company's licensing consultants are Software Publishers' Association
("SPA") certified software managers that are trained to provide customers with
advice in the evaluation of the various VLM programs offered by publishers. In
addition to the Company's extensive experience in dealing with VLM agreements,
it has continued to invest in technology-based systems to support the special
requirements necessary to service VLM agreements for its customers. The Company
has developed a custom, client/server-based system which provides individualized
customer contract management data, assists customers in complying with VLM
agreements and provides customers with necessary reporting mechanisms.
Most of the Company's products are ordered by the customer's procurement or
information systems department and may be billed to the department of the
end-user, which may be located at a different site than the procurement or
information systems department. The Company provides customers, upon request,
open-order status and purchase activity reports formatted to each customer's
specifications, or the same information can be obtained directly by the customer
from the Company's Web site. Also, the Company's electronic data interchange
("EDI") capabilities allow customers to submit orders (or other data) from their
computer systems to the Company via modem. EDI improves order accuracy and
reduces administrative costs for corporate customers and the Company.
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MAINTENANCE AND UPGRADE SERVICES
A number of customers who have elected to purchase software licenses through
VLM agreements have also purchased maintenance, which allows customers to
receive new versions, upgrades or updates of software products released during
the maintenance period in exchange for a specified annual fee, which may be paid
in monthly, quarterly or annual installments. Upgrades and updates are revisions
to previously published software that improve or enhance certain features of the
software and correct errors found in previous versions. Customers that have
elected not to purchase maintenance agreements are still able to upgrade
multiple units of specific products through the Company.
ELECTRONIC SERVICES AND CAPABILITIES
The Company offers a number of services and is, on an on-going basis,
implementing new and enhanced systems to support its customers' migration toward
electronic commerce and electronic software distribution ("ESD").
ESD takes two forms; the first is distributing software within an
organization, via a company's internal network. ESD technology within a large
organization is a means to permit an organization to reduce the total cost of
ownership of desktop computing assets. ESD can provide hardware and software
asset management, remote desktop support and automatic installation of packaged
and custom software to the desktop.
Through its 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 through
use of products such as the Microsoft Systems Management Server and Tivoli's TME
10 product.
The second form of ESD is between businesses via electronic links such as
the Internet. This form of ESD supports the fast, convenient delivery of
software products. The Company intends to participate in this method of
distribution as demand for this service by large organizations emerges and as
communication technology improvements enable this form of ESD to become more
widely used.
The Company's World Wide Web site contains an on-line catalog of thousands
of products that can be purchased over the Internet. The Internet catalog
provides information about products through a comprehensive search engine,
extensive product descriptions and third-party reviews. For certain large
customers, the Company offers VISTA, a customer-specific, secure catalog
available over the Internet. Each specialized electronic catalog contains
specific products and pricing unique to that customer as well as information
particular to the VLM agreements in which that customer is enrolled. The
customer is also able to status open orders and order certain standard reports
on-line.
WORLD WIDE WEB SITE AND PUBLICATIONS
The Company's World Wide Web site provides customers with information
concerning the Company, its products and services, and the publishers
represented by the Company. The Company also provides information through
various Company publications. A portion of the marketing funds provided to the
Company by publishers is used to offset the Company's cost of producing these
publications. The Company publishes newsletters, service and product brochures
and product catalogs, and also provides other timely information coincident with
major product releases. IN TOUCH, a new comprehensive online magazine, offers
the latest news and commentary on industry trends, software products, promotions
and Company-sponsored workshops, seminars and other technology-related events.
The Company prepares and distributes an annual publication which includes
more in-depth analyses of various product offerings called the LICENSING AND
SOFTWARE MANAGEMENT GUIDE. This publication provides comprehensive information
on the many facets of software licensing. The Guide provides the purchasing
requirements and qualification restrictions of the numerous VLM publisher
programs. Issues
9
<PAGE>
such as concurrent licensing and copying software on home or portable computers
are identified. Because of the potential savings a corporation can realize by
utilizing alternative procurement methods, customers have expressed a
significant amount of interest in this publication. In addition, the Software
Publishers' Association utilizes this publication in connection with its
certified software manager course curriculum.
SALES AND MARKETING
The Company sells and markets to its existing and potential large customers
through its account executives, professional services account managers
("PSAMs"), customer service representatives and its marketing and support staff.
The Company organizes account management teams to serve and support each of its
customer's needs for product and services. Generally, each team consists of one
account executive and/or PSAM, supported by technical, marketing, customer
service and sales support personnel located at the Company's operations centers
or TSG sites.
The Company assigns to account executives and PSAMs specific accounts and/or
a specific territory, which generally includes major metropolitan areas in one
or more countries, states or provinces. Account executives and PSAMs market the
overall service and advantages of using the Company as the customer's preferred
software and services supplier, and they concentrate on generating new customer
relationships, maintaining and improving existing customer relationships and
increasing the volume of software and services provided to corporate customers.
For national and international accounts, several account executives and/or PSAMs
may work with the customer in different parts of North America, Europe and
Asia/Pacific with all efforts coordinated by a designated national or global
account representative. The number of accounts handled by each account executive
or PSAM depends on the relative size of the accounts and the level of service
required by each customer within the assigned territory.
Account executives work directly with procurement managers, information
system managers and computer support managers of existing and potential
customers to identify the specific needs of each customer and to facilitate the
purchase of software products and services by the customer's organization.
Account executives maintain close contact with customers in order to provide
them with timely communications and assistance with any special or strategic
requests. Account executives are responsible for providing customers with useful
and relevant product information to assist the customer in its selection of
software available for the desired application, providing customers with
information and guidance on software procurement options including VLM
agreements, implementation and deployment of software under VLM agreements and
planning product presentations and seminars by representatives of the Company
and publishers.
The Company's licensing consultants work with its customers to provide
advice and consultation on VLM programs and to complete detailed customer
account analysis and reporting. The Company also assigns a team of customer
service representatives to each product account. Customer service
representatives, who are based primarily at the Company's operations centers,
handle all aspects of the day-to-day customer account servicing, including
common presale technical questions, customer order placement, order status
inquiries, requests for a demonstration product for evaluation and searches for
hard-to-find products. This structure enables customer service representatives
to develop close relationships with individuals within the customer's
organization and to better serve them by being familiar with their account. By
assigning a specific team of customer service representatives to specific
customers, the Company adds additional direct contacts that reinforce customer
relationships.
PSAMs work with senior and mid-level information technology professionals of
existing and potential customers to assist them in determining where and how
technology and products can be implemented to reduce the cost of managing and
supporting enterprise networks. They also consult with the Company's technology
specialists and product development professionals to determine how existing and
emerging technologies can best be utilized to meet the business needs of the
Company's customers.
10
<PAGE>
To solicit business from mid-sized organizations, the Company utilizes a
coordinated effort from field sales and outbound calling team members. While
product price and delivery terms are key factors in mid-sized organizations, the
Company also provides a broad range of VLM agreement support and services, as
well as technical services to this category of customers. Initial contact and
sales are made typically through field sales or telephone inquiries.
SUPPORT SYSTEMS
The Company has developed certain proprietary support systems that
facilitate the delivery of product and services to its customers and has
invested in technology-based systems to support the special requirements
necessary to service VLM agreements for its customers. SOLO, a custom,
client/server-based system, provides individualized contract management data,
assists customers in complying with the terms of their VLM agreements and
provides customers with necessary reporting mechanisms. Using individualized
data in SOLO, in conjunction with the Company's contract management database,
the Company representatives can guide a customer through the various purchasing
options and assist in administering VLM agreements. SOLO also provides the
Company's customer service representatives with a customer profile, account
status, order status and product pricing and availability details.
PRODUCTS
In addition to selling, supporting and servicing the various VLM programs
available from software publishers, the Company inventories approximately 1,500
business software titles, ranging in price from approximately $2 to $16,000. In
certain international markets, the Company also sells hardware, peripheral
products and accessories, such as modems, expansion cards and keyboards.
Although the Company maintains an inventory of only the most popular products in
locations where it maintains warehouse facilities, the Company offers more than
27,000 different software and peripheral products to its customers.
The software applications offered by the Company include major business
programs such as spreadsheet, word processing, electronic mail, groupware,
database, and graphics, as well as operating systems, utilities and languages.
For the fiscal year ended April 30, 1998, the top 20 software titles sold by the
Company represented approximately 63% of the Company's net sales.
The Company maintains an extensive database of hard-to-find software
required by customers as well as software available from the Company's major
publishers and vendors. The Company continually adds to its database information
on these types of products and their sources of supply in order to expedite
customer requests.
DISTRIBUTION
A component of the Company's procurement services is its ability to provide
timely delivery of its products to customers by maintaining a sufficient
inventory of the most popular software products. The Company's United States
distribution operations are located in Louisville, Kentucky. The Company also
operates distribution facilities in Sydney, Australia and Auckland, New Zealand.
The Company generally ships products that it carries in inventory the same day
the Company receives the customer order, utilizing independent carriers. In
addition, the Company uses the services of publishers and distributors to ship
products directly to its customers, both in the United States and other
countries. As of April 30, 1998, the Company did not have a significant order
backlog.
CUSTOMERS
In fiscal 1998, the Company handled more than 12,000 active customer
accounts. The Company's customer base includes corporations, government
agencies, educational institutions, non-profit institutions and other business
entities. The Company also has established a presence in the educational market,
and
11
<PAGE>
the Company has software resale authorizations from all major educational
product publishers. Sales contracts with large customers for the procurement of
products generally cover a one to three year period subject to the customers'
rights to terminate the contract upon notice. These contracts usually include
provisions regarding price, availability, payment terms and return policy.
Contracts covering technology services vary in length depending on the services
to be provided and are generally terminable upon 30 days notice. Standard
payment terms with the Company's customers are net 30 days from the date of
invoice or net 10 days in the case of summary periodic billings to customers. In
fiscal 1998, no single customer represented more than 5% of the Company's
revenues and the Company's customer base included 314 of the 1997 Fortune 500
companies and 194 of the Fortune Global 500 companies. The Company does not
believe that the loss of any single customer would have a material adverse
effect on its business.
VENDORS
Substantially all of the Company's sales from software are derived from
products purchased from publishers and distributors. The decision whether to buy
products directly from publishers or through distributors is determined on a
vendor-by-vendor basis based on publisher requirements, cost, availability,
return privileges and demand for a particular product. For fiscal 1998,
approximately 82% of the Company's sales represented products purchased from its
ten largest vendors. For each of the fiscal years ended April 30, 1998 and 1997,
products from Microsoft accounted for approximately 55% of net sales, and
products from IBM/Lotus accounted for approximately 10% of net sales.
The Company has contractual relationships with all its major vendors
covering price, payment terms and return privileges. These contracts are
non-exclusive and non-territorial and are generally terminable by either party
without cause upon 30 to 60 days notice. The Company's contracts with its major
vendors are generally for one or two year terms, and the majority contain no
provision for automatic renewal.
Publisher contracts generally permit the Company to return or dispose of
products within certain specified time periods in exchange for credit against
future purchases in the event that a product is defective or made obsolete,
whether through the development of upgrades, new releases or otherwise. In
addition, such contracts permit the Company to stock balance its inventory,
generally on a quarterly basis, by allowing returns for credit against future
purchases of a limited portion (usually 3% to 15%) of the products previously
purchased by the Company. Publisher contracts also generally permit the Company
to submit adjustment reports for licensing and maintenance transactions within a
certain time period after the transaction is reported. The agreements typically
provide that the Company may obtain credit against future purchases if the
vendor subsequently lowers its prices on products that have been purchased by
the Company within a 30 to 90 day period prior to such price decrease. The
purpose of the foregoing stock balancing and price protection provisions is to
permit the Company to maintain an inventory of products that is sufficient to
meet its customers' needs while reducing the obsolescence risks associated
therewith. Such contracts do not typically require the Company to ensure
end-user compliance with its publishers' licensing and copyright or patent right
protection provisions. Certain of the Company's contracts with vendors provide
for early payment discounts. Under the terms of its vendor contracts, the
Company is not generally required to meet any minimum purchase or sales
requirements, except to the extent that the Company's level of purchases or
sales may affect the amount or availability of financial incentives, advertising
allowances and marketing funds. The reduction in amount, discontinuance of or
the Company's inability to meet requirements established by vendors for
achieving financial incentives, advertising allowances and marketing funds could
have an adverse effect on the Company's business and financial results.
12
<PAGE>
COMPETITION
The personal computer software market is intensely competitive. The Company
faces competition from a wide variety of sources, including traditional software
resellers, hardware dealers and aggregators and large systems integrators.
Current competitors from the software reseller category would include Corporate
Software and Technology, Inc., ASAP Corporate Express, Softmart and
Softwarehouse International. The Company believes that it possesses a number of
significant differentiating features from this group. These features include the
Company's global presence and capabilities, extensive technology services
capabilities and offerings, VLM expertise, services and systems that support the
Company's business and knowledgeable, industry-experienced personnel.
Competitors also include hardware dealers and aggregators. These companies
compete in the large organization market with marketing efforts to provide
customers with complete software and hardware services. Other competitors
include Dell Computer Corporation, a hardware manufacturer that also sells
software, and large systems integrators such as GE Capital Corporation, Digital
Equipment Corporation and Electronic Data Systems. These companies do have a
global presence and offer technology services. The Company believes its VLM
expertise and services, custom computing systems specifically designed to
support the Company's business and knowledgeable industry-experienced personnel
are differentiating factors in this group of competitors.
In the technology services market, there are a significant number of
competitors, ranging from small local consulting services practices to large
companies such as Whittman-Hart, the technology services divisions of major
hardware resellers such as VanStar Corporation, ENTEX Information Services, Inc.
and Compucom Systems, Inc. and the consulting divisions of national accounting
firms such as Andersen Consulting. The Company believes that its concentration
on high-end enterprise architectural planning and consultation covering multiple
key specific technologies helps to differentiate the Company from other
competitors in the technology services area of its business, as well as its
global presence.
The manner in which personal computer software products are distributed and
sold is continually changing and new methods of distribution may emerge or
expand. Software publishers may intensify their efforts to sell their products
directly to end-users, including current and potential customers of the Company.
In the past, direct sales from software publishers to end-users have not been
significant, although end-users have traditionally been able to purchase
upgrades directly from publishers. From time to time, some publishers have
instituted programs for the direct sale of single large order quantities of
software to major corporate accounts, and the Company anticipates that these
types of transactions will continue to be used by various publishers in the
future. The Company could be adversely affected if major software publishers
successfully implement programs for the direct sale of software through volume
purchase agreements or other arrangements intended to exclude the resale
channel. The Company believes that the total range of services it provides to
its customers cannot be easily substituted by publishers, particularly because
publishers do not offer the scope of services or product offerings required by
most of the Company's customers. However, there can be no assurance that
publishers will not increase their efforts to sell substantial quantities of
software directly to end-users. In addition, the acceptance of VLM agreements by
organizations as a method to purchase software has continued to expand over the
past year. Should publishers permit others to sell VLM agreements, or should
additional competitors develop the capabilities required to service and support
large licensing programs, the Company's competitive advantage could be
negatively impacted. If the resale channel's participation in VLM agreements is
reduced or eliminated or if other methods of distribution of software become
common, the Company's business and financial results could be materially
adversely affected. Management believes that greater acceptance of VLM
agreements will be one of the factors that over time will lead to electronic
distribution of software. The Company intends to participate in this method of
software distribution as demand for this service by large organizations emerges
and as communications technology improvements permit electronic software
distribution to be made securely and efficiently. The Company's continuing
investment in electronic software distribution and electronic commerce reflects
the Company's commitment to meeting
13
<PAGE>
the changing needs of its customers. There continues to be an increase in the
sale of personal computers to homes and small businesses with many popular
software application programs bundled with the hardware. If bundling of software
with hardware becomes accepted by large corporate customers in the future, such
bundling could have an adverse effect on the Company's business.
EMPLOYEES
As of April 30, 1998, the Company had approximately 1,700 employees in North
America, Europe and Asia/Pacific. Over 550 additional employees were added by
June 30, 1998, as a result of a large support contract won by the Company. The
Company has entered into non-competition agreements and/or non-solicitation
agreements with substantially all of its sales and Technology Services Group
personnel. None of the Company's employees are represented by a union.
ITEM 2. PROPERTIES
The Company currently leases approximately 211,000 square feet of space in
Garland, Texas (a suburb of Dallas) for its corporate headquarters. The Garland
leases have current monthly payments of approximately $79,000 and, pursuant to
recent extensions, have remaining terms of seven to nine years. The Company
leases approximately 71,000 square feet of office space in Spokane, Washington
with current monthly payments of approximately $55,000. As of April 30, 1998,
the Spokane lease had a remaining term of three years. The Company's
distribution facility in Louisville, Kentucky consists of approximately 62,500
square feet of space which is leased for approximately $18,000 per month. The
remaining term of the Louisville lease is approximately three years. Within
North America, the Company also leases office space in various markets for its
Technology Services Group.
With respect to its European-based operations, the Company currently leases
space for its operations center in Dublin, Ireland, and leases office space in
three other markets. In Asia/Pacific, the Company occupies leased office space
in seven markets.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The ultimate disposition of these matters will not
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended April 30, 1998.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded over the counter and is listed on The
Nasdaq Stock Market under the symbol SSPE. The following table sets forth the
range of high and low last reported sales prices for the Company's common stock
for the last eight fiscal quarters.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year 1998 Quarter Ended:
July 31.............................................................................. $ 15.00 $ 10.50
October 31........................................................................... 19.13 12.75
January 31........................................................................... 15.75 11.19
April 30............................................................................. 22.56 15.38
Fiscal Year 1997 Quarter Ended:
July 31.............................................................................. 25.00 21.50
October 31........................................................................... 30.50 23.00
January 31........................................................................... 33.50 22.50
April 30............................................................................. 24.25 13.00
</TABLE>
On July 24, 1998, the last reported sales price of the Company's common
stock as reported on The Nasdaq Stock Market was $19.88 per share. On July 24,
1998 there were 558 holders of record (representing approximately 2,000
beneficial owners) of the Company's common stock. The Company has never paid
cash dividends on its common stock. The Board of Directors presently intends to
retain all earnings for use in the Company's business and does not anticipate
paying cash dividends in the near term.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this document.
STATEMENT OF OPERATIONS DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, YEAR ENDED MARCH 31,(1)
---------------------- ----------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ 884,087 $ 796,285 $ 398,501 $ 352,141 $ 283,063
Gross margin......................................... 100,310 94,330 54,438 48,328 38,142
Operating income..................................... 11,149 1,816 10,163 12,938 10,562
Net income (loss).................................... 4,487 (845) 7,366 8,788 7,004
Earnings (loss) per share (2)
Basic.............................................. 1.04 (.20) 1.76 2.11 1.69
Diluted............................................ 1.03 (.20) 1.73 2.08 1.66
Weighted average shares outstanding
Basic.............................................. 4,318 4,314 4,196 4,169 4,145
Diluted............................................ 4,351 4,314 4,260 4,217 4,216
</TABLE>
15
<PAGE>
BALANCE SHEET DATA
(In thousands)
<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF MARCH 31,
---------------------- ---------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Working capital....................................... $ 11,908 $ 31,673 $ 59,052 $ 58,407 $ 50,619
Total assets.......................................... 258,631 270,441 150,180 124,698 94,255
Total debt............................................ 8,206 37,370 -- -- --
Shareholders' equity.................................. 76,270 73,939 73,363 65,834 57,041
</TABLE>
- ------------------------
(1) In fiscal 1997, the Company changed its fiscal year-end from March 31 to
April 30.
(2) The earnings per share amounts prior to 1998 have been restated to comply
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's revenues are derived primarily from the sale of PC software
products and technology services in North America, Europe and Asia/Pacific.
The Company sells PC software through volume licensing and maintenance
("VLM") agreements, or right-to-copy arrangements, and full-packaged PC software
products either from its distribution centers or through third-party
distributors. With the continued increase in sales of software applications
through VLM agreements, the third month of each calendar quarter generally
represents 40% to 60% of the Company's quarterly sales volume. Accordingly, in
1997, the Company changed its fiscal year-end from March 31 to April 30 to
better match the Company's fiscal periods with its business cycles.
In April 1996, the Company acquired substantially all of the assets of
Essentially Group Limited and all of the outstanding shares of capital stock of
Essentially Group (Australia) Limited, privately-held information technology
companies, at a purchase price of $6.3 million. 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
serve the major worldwide desktop technology markets and the needs of customers
who do business globally.
In May 1996, the Company acquired certain operating assets of the corporate,
government and education ("CGE") division of Egghead, Inc. for $45 million. With
the CGE acquisition, the Company significantly increased its market presence in
North America. For fiscal 1997 and 1996, the pro forma combined sales of the
Company and the CGE division were $808 million and $762 million, respectively.
The change in the Company's year-end also provides enhanced comparability
between fiscal 1997 and 1998, as the financial impact of the Company's May 1996
acquisition of the CGE division--which doubled the size of the Company--is now
reflected across each quarter of fiscal 1997.
Throughout this discussion, "fiscal 1998" and "fiscal 1997" refer to the
fiscal years ended April 30, 1998 and 1997. "Fiscal 1996" refers to the fiscal
year ended March 31, 1996.
16
<PAGE>
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
FOR YEAR ENDED
--------------------------------------
APRIL 30, APRIL 30, MARCH 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net sales.............................................................. 100.0% 100.0% 100.0%
Cost of sales.......................................................... 88.7 88.2 86.3
----- ----- -----
Gross margin........................................................... 11.3 11.8 13.7
Selling, general and administrative expenses........................... 9.0 10.6 10.4
Depreciation and amortization.......................................... 1.1 1.0 .7
----- ----- -----
Operating income....................................................... 1.2 .2 2.6
Interest expense (income), net......................................... .3 .3 (.2)
----- ----- -----
Income (loss) before income taxes...................................... .9 (.1) 2.8
Income tax expense..................................................... .4 -- 1.0
----- ----- -----
Net income (loss)...................................................... .5% (.1)% 1.8%
----- ----- -----
----- ----- -----
</TABLE>
NET SALES
Sales have increased each year since the Company's inception in 1983.
Increases in sales of PC software and technology services have resulted from the
Company's market share growth, geographic expansion and strategic acquisitions.
Sales increases also reflect overall growth in the PC software and technology
services industries.
For the year ended April 1998, sales of PC software increased 9%. Software
sales increased 100% for the year ended April 1997 due to the CGE acquisition.
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 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 72%, 59% and
46% of net sales for fiscal 1998, 1997 and 1996, respectively.
For the years ended April 1998 and 1997, revenue from technology services
provided through the Company's Technology Services Group ("TSG") increased 63%
and 138%, respectively. The Company increased its technology services locations
from ten at March 31, 1996, to 23 worldwide locations at April 30, 1998. The
Company plans to open additional international sites during fiscal 1999. In
fiscal 1998 and 1997, fee-based technology services represented approximately 6%
and 4% of the Company's overall sales; however, such revenue generated
approximately 21% and 16% of the Company's gross margin dollars. During fiscal
1998, the Company saw continued improvement in the contribution to overhead from
its consulting sites and expanding technology support centers, which provide
fee-based telephone support on behalf of software publishers and corporate
customers. As more of the consulting offices mature over time, the impact of TSG
on the Company's consolidated operating results should continue to improve.
The Company believes that 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 Group
and to capitalize on continued growth in desktop technology markets around the
world.
17
<PAGE>
INTERNATIONAL OPERATIONS
For fiscal 1998 and 1997, sales outside of the United States totaled $128
million and $106 million as compared to $27 million for fiscal 1996, when the
Company's international operations were limited to the Canadian and European
markets.
Sales in Europe increased 100% to $55.3 million in fiscal 1998 as compared
to $27.7 million in the prior year. The increase is primarily due to increased
sales of software under VLM agreements.
In fiscal 1998, the Company's operating loss in Asia/Pacific was
approximately $2.5 million, a reduction from the $4.9 million operating loss
reported in the prior year. In recent quarters, the Company has adjusted its
Asia/Pacific business model to mirror the lower-cost, more centralized structure
in the Company's North American and European operations. Recently installed
information systems have allowed the Company to complete its consolidation into
a centralized operations center in Sydney, Australia. In addition, the Company
has reduced expenses by closing smaller unprofitable offices and reducing the
number of employees in the region.
Fluctuations in foreign currencies against the U.S. dollar did not have a
significant effect on the Company's operating results for the periods presented.
GROSS MARGIN
Overall gross margin as a percentage of net sales was 11.3%, 11.8% and 13.7%
in fiscal 1998, 1997 and 1996, respectively. The decline in overall gross margin
as a percentage of net sales reflects the decline in gross margin on the sale of
PC software, discussed below. In addition, gross margin was negatively impacted
by the change in the Company's sales mix as a result of the CGE acquisition.
Substantially all revenue from former CGE customers was derived from PC software
sales, which have lower gross margins than do the Company's technology services
offerings.
In fiscal 1998, gross margins on PC software sales declined to 9.5%, as
compared to 10.4% in fiscal 1997 and 11.9% in fiscal 1996. The decline in
product gross margins reflects the increasing percentage of VLM product sales
and lower levels of financial incentives available from suppliers. The Company
generally realizes lower gross margins on sales of software through VLM
agreements, as compared to sales of full-packaged software products.
The decline in software margins in fiscal 1998 was partially offset by
growth in revenue from fee-based services, which have higher gross margins as a
percent of net sales than sales of software. The contribution from these
services represented approximately 21% of overall gross margin dollars in fiscal
1998 as compared to 16% and 17% of gross margin dollars in fiscal 1997 and 1996,
respectively.
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 further 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 technology services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include the costs of the
Company's sales and marketing organization as well as purchasing, distribution
and administrative costs. The Company incurs a significant amount of marketing
and advertising costs based upon available advertising and cooperative marketing
funds received from software publishers and vendors. These funds are offset
against related selling, general and administrative expenses.
For fiscal 1998, 1997 and 1996, selling, general and administrative
expenses, as a percentage of net sales, were 9.0%, 10.6% and 10.4%,
respectively. Selling, general and administrative expenses in fiscal 1997
18
<PAGE>
reflected certain transition costs, including temporary staffing, excess travel
and telephone expenses and costs associated with systems implementation,
totaling approximately $3.7 million, primarily in connection with the Company's
CGE acquisition. Excluding these identifiable transition costs, selling, general
and administrative expenses as a percentage of net sales would have been 10.2%
for fiscal 1997. The decline in selling, general and administrative expenses as
a percentage of net sales is due in part to the Company's ongoing efforts to
reduce its operating costs, as well as operating efficiencies realized as a
result of the Company's larger size.
DEPRECIATION AND AMORTIZATION
The increases in depreciation and amortization for fiscal 1998 and 1997 as
compared to fiscal 1996 reflect depreciation on the higher level of fixed assets
and amortization of goodwill recorded in connection with the Company's business
acquisitions. Most of the purchase price for these acquisitions represents
goodwill, which the Company is amortizing over a 20-year period.
INCOME TAX EXPENSE
The Company's effective tax rates for fiscal 1998, 1997 and 1996 were 45%,
45% and 35%, respectively. The increase in the effective tax rates since fiscal
1996 reflects the impact of foreign operations and an increase in non-deductible
expenses, primarily goodwill amortization in Asia/Pacific.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company had approximately $7.1 million in cash and
cash equivalents. In fiscal 1998, the Company amended its bank financing
arrangements by restructuring its $30 million term loan and $60 million
revolving line of credit as a $100 million secured revolving credit facility
(the "Amended Facility"). The Amended Facility, which is secured by accounts
receivable, inventory and a pledge of the stock of certain of the Company's
subsidiaries, permits the Company to borrow up to $100 million, subject to
availability under its borrowing base. As of April 30, 1998, the Company had no
outstanding borrowings under the Amended Facility. The Amended Facility requires
the Company to maintain certain financial covenants and ratios and places
limitations on dividend payments, capital expenditures and certain other
borrowings. The Amended Facility bears interest at a variable rate and expires
in March 2001. In addition, the Company had approximately $7.3 million
outstanding under its $8 million foreign revolving credit facilities. These
facilities are secured by letters of credit issued by the Company and expire in
April 1999. The Company intends to refinance the outstanding amounts through
borrowings under the Amended Facility.
In September 1997, the Company announced the adoption of a Stock Repurchase
Plan, which allows the Company to purchase up to $2.5 million of the Company's
common stock in the open market or through privately negotiated transactions.
The Company funds such purchases with cash or borrowings under its credit
facility. As of June 30, 1998, the Company had repurchased 130,300 shares of
common stock, for a total of $2.2 million, under the Stock Repurchase Plan. In
July 1998, the Company announced the extension of the Stock Repurchase Plan to
include an additional $2.5 million.
The increase in trade accounts receivable from April 30, 1997 to April 30,
1998 reflects the increase in net sales for fiscal 1998 offset by improved
collections. At April 30, 1998 and 1997, accounts receivable represented
approximately 61 and 75 days of historical sales, respectively. The Company
generally carries inventory adequate to meet product sales levels for a period
of less than one month. The decrease in inventory as of April 30, 1998 compared
to April 30, 1997 resulted from the increasing percentage of product sales under
VLM agreements as well as a shift toward shipping product directly from the
Company's vendors.
19
<PAGE>
Net cash provided by operations was $37.7 million in fiscal 1998, as opposed
to $13.1 million of cash used in operations in fiscal 1997. The increase in cash
provided by operations reflects the Company's improved profitability, reduced
inventory levels and increased collections on accounts receivable. In addition,
the Company used a higher level of cash in its operations in fiscal 1997 as it
financed the growth in its receivables resulting from increased sales following
the CGE acquisition. In fiscal 1996, $16.7 million of cash was provided by
operations. The Company realized cash from operations in fiscal 1996 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 did not increase its
inventory balances in proportion to its sales growth.
The increase in furniture, equipment and leasehold improvements in fiscal
1998 reflects approximately $8.1 million of capital expenditures relating to the
ongoing upgrade of the Company's computer systems and expansion of its
operations centers in Garland, Texas and Dublin, Ireland. The increase in
furniture, equipment and leasehold improvements in fiscal 1997 reflected
approximately $2 million of capital assets included in the Company's
acquisitions and approximately $11.6 million of capital expenditures related to
installation of computer and telephone systems to support these acquisitions,
ongoing upgrade of the Company's existing computer and telephone systems,
expansion of its technology services offices, and relocation and consolidation
of its United States distribution facilities in Louisville, Kentucky. The
Company's capital expenditures for fiscal 1999 are expected to exceed $9
million, including expenditures to further upgrade the Company's computer
systems and to expand its U.S. operations facilities.
The Company expects that its cash requirements for fiscal 1999 will be
satisfied from cash flow from operations and borrowings under its credit
facility.
YEAR 2000
Over the last three years, the Company has replaced or upgraded most of the
core management information systems used in the Company's business. The Company
is currently conducting a review of these systems to verify their compliance
with Year 2000 date codes. In addition, the Company is conducting an inventory,
review and assessment of its desktop computers, networks and servers, software
applications and packages, and products and services provided by third parties
for internal operations to determine whether or not they support Year 2000 date
codes. The Company is also developing an overall plan outlining the tasks,
resources and target dates necessary to ensure the ongoing operation of the
Company's systems through the turn of the century and beyond. The Company plans
to complete remediation of the systems that are not currently in compliance and
to begin testing all of its systems in fiscal 1999. While the Company's
inventory, review and assessment is still in process, the Company expects that
the required modifications will be made on a timely basis and that the cost of
such modifications will not have a material effect on the Company's operating
results.
The Company's Year 2000 initiative also provides for contacting key software
vendors to determine whether they have effective plans to address the Year 2000.
In the event that the Company's key vendors cannot provide the Company with
software products that meet Year 2000 requirements on a timely basis, or if
customers delay or forego software purchases based upon Year 2000 related
issues, the Company's operating results could be materially adversely affected.
In general, as a reseller of software products, the Company only passes through
to its customers the applicable vendors' warranties. The Company's operating
results could be materially adversely affected, however, if it were held liable
for the failure of software products resold by the Company to be Year 2000
compliant despite its disclaimer of software product warranties.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Other than statements of historical fact, this Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as the
accompanying Annual Report on Form 10-K, includes
20
<PAGE>
certain forward-looking statements of the Company, including future market
trends, estimates regarding the economy and the software industry in general and
key performance indicators that impact the Company. In developing any
forward-looking statements, the Company makes a number of assumptions, including
expectations for continued market growth, anticipated revenue and gross margin
levels, and cost savings and efficiencies, which includes the ability of the
Company to develop electronic strategies. Although the Company believes these
assumptions are reasonable, no assurance can be given that they will prove
correct. The Company's ability to continue to grow product sales and develop its
technology consulting practice, improve its operating results in international
markets and improve operational efficiencies will be key to its success in the
future. If the industry's or the Company's performance differs materially from
these assumptions or estimates, Software Spectrum's actual results could vary
significantly from the estimated performance reflected in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results. The cautionary statements under "Forward-Looking
Information" in Item I identify factors that could cause the Company's actual
results to differ materially from those in the forward-looking statements in
this document. All forward-looking statements in this document are expressly
qualified in their entirety by the cautionary statements in this paragraph and
under "Forward-Looking Information."
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the current directors of the Company, and the
persons nominated for election as directors of the Company at its Annual Meeting
of Shareholders to be held on September 17, 1998, will appear in the Company's
definitive Proxy Statement relating to the Annual Meeting of Shareholders under
the caption "Election of Directors" to be filed pursuant to Regulation 14A. Such
information is incorporated herein by reference.
21
<PAGE>
EXECUTIVE OFFICERS
Officers are elected annually by the Board of Directors and serve until
their successors are elected and qualified. The current executive officers of
the Company are as follows:
<TABLE>
<CAPTION>
OFFICER
NAME POSITION SINCE AGE
- ---------------------- ---------------------------------------------------------------- ----------- ---
<S> <C> <C> <C>
Judy O. Sims Chairman and Chief Executive Officer 1983 45
Keith R. Coogan President and Chief Operating Officer 1990 46
Roger J. King Executive Vice President of Sales and Marketing 1990 45
Richard G. Sims Senior Vice President 1983 44
James W. Brown Vice President and Chief Financial Officer 1998 41
Robert D. Graham Vice President of Strategic Relationships and General Counsel, 1997 43
Secretary
Robert B. Mercer Vice President and Chief Information Officer 1994 46
Lisa M. Stewart Vice President of Customer Operations 1996 36
Lorraine Castorina Vice President of North American Sales 1998 52
Link W. Simpson Vice President of Services 1998 44
Melissa D. Womack Vice President of Marketing 1998 40
</TABLE>
Judy O. Sims has served as Chief Executive Officer of the Company since
April 1988 and Chairman of the Board since July 1992. Ms. Sims is a co-founder
of the Company and has been a director of the Company since its inception in
1983. Ms. Sims served as Treasurer of the Company from 1983 to October 1990, as
Vice President from April 1987 to April 1988 and as President from April 1996 to
May 1998. Ms. Sims was employed by the national accounting firm of Grant
Thornton LLP from 1977 to 1985, where she last served as an audit partner. Ms.
Sims is a Certified Public Accountant and is married to Richard Sims.
Keith R. Coogan was named President in May 1998 and has been Chief Operating
Officer since April 1996. Mr. Coogan served as Executive Vice President of the
Company from April 1996 to May 1998 and had been a Vice President of the Company
since October 1990. Mr. Coogan served as Secretary of the Company from May 1991
through July 1992 and as Treasurer from October 1990 to March 1992. From May
1989 until joining the Company, Mr. Coogan served as Vice President of Finance
for Leather Center Holdings, Inc., a privately-held manufacturer and retailer of
leather furniture. From January 1986 to May 1989, he was Vice President and
Chief Financial Officer of Trinity Texas Corporation and Ward Hunt Investments,
both of which were privately-held real estate sales and development
organizations. Mr. Coogan is a Certified Public Accountant.
Roger J. King was named Executive Vice President of Sales and Marketing in
May 1998, having held the title of Vice President of Sales and Marketing since
April 1996. From September 1990 to March 1996, Mr. King served as Vice President
of Sales of the Company. Mr. King was employed by Lotus Development Corporation
from September 1987 to September 1990, where he last served as Regional Manager
for the software business group and was responsible for product sales in a
14-state region. From July 1985 to September 1987, Mr. King was a Vice President
of the banking software group of Sterling Software, Inc., a software development
company. Prior thereto, he spent nine years with IBM in various sales and sales
management positions.
Richard G. Sims is a co-founder of the Company and has been a director of
the Company since 1983. In April 1996, Mr. Sims assumed the title of Senior Vice
President with responsibility for the Company's Asia/Pacific expansion and
operations. He is also involved with internal information systems design. From
22
<PAGE>
1983 to March 1996, Mr. Sims served as President of the Company. Prior to 1983,
Mr. Sims served as controller for various companies. Mr. Sims is a Certified
Public Accountant and is married to Judy Sims.
James W. Brown joined the Company in February 1998 as Vice President and
Chief Financial Officer. From November 1991 until joining the Company, Mr. Brown
served as Vice President of Corporate Accounting for Affiliated Computer
Services, Inc., a publicly-held information technology outsourcing provider. Mr.
Brown is a Certified Public Accountant.
Robert D. Graham was elected Vice President of Strategic Relationships and
General Counsel in January 1997 and Secretary in February 1997. Mr. Graham
served on the Board of Directors of the Company from 1991 until February 1997.
From 1980 through January 1997, Mr. Graham was in the private practice of law
with the law firm of Locke Purnell Rain Harrell (A Professional Corporation) and
its predecessor, in Dallas, Texas.
Robert B. Mercer has been a Vice President and the Chief Information Officer
of the Company since January 1994. Mr. Mercer is responsible for internal
software application development and information systems processing for the
Company. From March 1992 until joining the Company, Mr. Mercer was the Vice
President and Chief Information Officer of Lechters, Inc., a publicly-held
specialty retailer. From 1988 to March 1992, he served as Senior Vice President
and Chief Information Officer of KG Men's Store, a privately-held clothing store
chain.
Lisa M. Stewart has been Vice President of Customer Operations since April
1996. From January 1994 through March 1996, Ms. Stewart served as Director of
Customer Operations for the Company after having served in various sales, sales
management and operations positions. Prior to joining the Company in 1988, Ms.
Stewart was employed by Fox T.V. and Hilton Services Corporation.
Lorraine Castorina was promoted to Vice President of North American Sales in
May 1998. Ms. Castorina joined the Company in February 1987 and has served in
various sales positions, most recently as Director of North American
Sales--West.
Link W. Simpson was promoted to Vice President of Services in May 1998. Mr.
Simpson also serves as President of the Company's Technology Services Group, a
position he has held since February 1992. From 1985 until February 1992, Mr.
Simpson managed Info-Pro, Inc., a network integration and applications
development services company, which was acquired by the Company in February
1992. Before forming Info-Pro, Mr. Simpson was employed by Rockwell,
International for nine years, where he held various positions in systems
engineering and business development.
Melissa D. Womack was promoted to Vice President of Marketing in May 1998.
From May 1997 through April 1998, Ms. Womack served as Director of Marketing for
the Company. Ms. Womack was previously Director of Sales and Marketing for SABRE
Interactive and served in other marketing and sales positions for the SABRE
Group since 1987.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on September 17,
1998, under the caption "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on September 17,
1998, under the captions "Stock Ownership of Principal Shareholders" and "Stock
Ownership of Management," which information is incorporated herein by reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(1) and (2)--Index to Financial Statements and Schedules--The information
required by this portion of Item 14 is set forth in a separate section
following Part IV of this Report.
(3)--The following documents are filed or incorporated by reference as
exhibits to this Report:
<TABLE>
<C> <S>
3.1(a) Restated Articles of Incorporation of the Company, filed with the
Secretary of State of Texas on May 12, 1989, as amended (incorporated by
reference to the Company's Registration Statement No. 33-40794 on Form
S-1).
3.1(b) Statement of Designation of Series A Junior Participating Preferred Stock
(incorporated by reference to the Company's Current Report on Form 8-K
dated December 13, 1996).
3.1(c) Articles of Amendment to Restated Articles of Incorporation, filed with
the Secretary of State of Texas on November 25, 1996 (incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1997).
3.1(d) Statement of Cancellation of Treasury Shares, filed with the Secretary of
State of Texas on March 21, 1997 (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended April 30,
1997).
3.2 Restated Bylaws of the Company, as amended (incorporated by reference to
the Company's Registration Statement No. 33-40794 on Form S-1).
3.3 Rights Agreement between the Company and KeyCorp Shareholder Services,
Inc., (the "Rights Agreement") dated December 13, 1996, (incorporated by
reference to the Company's Current Report on Form 8-K dated December 13,
1996).
3.4 Letter of Substitution of Rights Agent under Rights Agreement, dated June
7, 1997 (appointing ChaseMellon Shareholders Services, L.L.C. as
successor rights agent).
10.1 IBM Business Partner Agreement between the Company, IBM Corporation and
Lotus Development Corporation dated June 30, 1997 (incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1997).
10.2 Microsoft Corporation Channel Agreement dated July 1, 1997 between
Microsoft Corporation and the Company, including Addendum dated July 1,
1997 (Appointment as a Direct Reseller); Addendum dated July 1, 1997
(Appointment as a Large Account Reseller); and Addendum dated July 1,
1997 (Rebate and Marketing Fund).
10.3 [intentionally omitted]
10.4(a) Commercial Lease Agreement, dated May 1, 1990, between CIIF Associates II
Limited Partnership and the Company (incorporated by reference to the
Company's Registration Statement No. 33-40794 on Form S-1).
10.4(b) Amendment to Lease Agreement dated March 31, 1995 between CIIF Associates
II Limited Partnership and the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1995).
</TABLE>
24
<PAGE>
<TABLE>
<C> <S>
10.4(c) Third Amendment to Lease Agreement dated effective as of April 20, 1998
between CIIF Associates II Limited Partnership and the Company.
10.5(a) Commercial Lease Agreement dated as of April 19, 1993, between Kancro,
L.P. and the Company (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993).
10.5(b) Amendment #2--Expansion Agreement to Lease Agreement dated as of June 20,
1994 between Kancro, L.P. and the Company (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1994).
10.5(c) Third Amendment to Commercial Lease Agreement dated effective April 1,
1995 between Kancro, L.P. and the Company (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1995).
10.5(d) Fourth Amendment to Commercial Lease Agreement dated effective as November
25, 1996 between Kancro, L.P. and the Company (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1997).
10.5(e) Fifth Amendment to Commercial Lease Agreement dated effective as of March
9, 1998 between Kancro, L.P. and the Company.
10.6 Lease Agreement between Spokane Teachers Credit Union and the Company
dated May 1, 1998.
10.7 Lease Agreement dated March 8, 1996 by and between Riverport Commerce
Center, Inc. and the Company (incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1996).
10.8 Lease Agreement dated April 26, 1996 by and between Beneficiaries of
American National Bank Trust Number 104601-03 and the Company
(incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996).
10.9 1989 Stock Option Plan of the Company, as amended (incorporated by
reference to the Company's Registration Statement No. 33-40794 on Form
S-1).
10.10 Software Spectrum, Inc. Employee Stock Purchase Plan, as amended
(incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended April 30, 1997).
10.11 The Software Spectrum, Inc. 1993 Long Term Incentive Plan (incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1994).
10.12 Employees' Profit Sharing Plan of the Company, Adoption Agreement dated
December 14, 1994 (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995).
10.13 Management Continuity Agreement ("Continuity Agreement") between the
Company and James W. Brown, dated March 1, 1998, together with schedule
identifying additional executive officers that are parties to Continuity
Agreements.
10.14 Non-Employee Directors' Retainer Stock Plan (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the Quarter ended
December 31, 1995).
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.15 Limited Waiver Agreement, dated July 31, 1997, between the Company and
Private Capital Management, Inc. (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 1997).
10.16 Amended and Restated Credit Agreement dated March 11, 1998 among the
Company, the Chase Manhattan Bank, as Administrative Agent, Chase Bank
of Texas, National Association, as Collateral Agent and other
participating financial institutions (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 1998).
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP, Independent Accountants
24 Power of Attorney (included on the signature page of this Form 10-K).
27 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter ended April 30,
1998.
26
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Certified Public Accountants
<TABLE>
<S> <C>
Financial Statements (Item 14(a) (1))
Consolidated Balance Sheets as of April 30, 1998 and 1997
Consolidated Statements of Operations for the two years ended April 30, 1998, the
month ended April 30, 1996 and the year ended March 31, 1996
Consolidated Statements of Shareholders' Equity for the two years ended April 30,
1998, the month ended April 30, 1996 and the year ended March 31, 1996
Consolidated Statements of Cash Flows for the two years ended April 30, 1998, the
month ended April 30, 1996 and the year ended March 31, 1996
Notes to Consolidated Financial Statements
Financial Statement Schedule (Item 14 (a) (2))
Report of Independent Certified Public Accountants on Schedules
Schedule II--Valuation and Qualifying Accounts for the two years ended April 30,
1998, the month ended April 30, 1996 and the year ended March 31, 1996
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required or are
inapplicable and therefore have been omitted. Individual financial statements of
Software Spectrum, Inc. have been omitted since consolidated financial
statements are being filed and no significant amount of the assets of the
subsidiaries included in the consolidated financial statements being filed are
restricted as to transfer to Software Spectrum, Inc.
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Software Spectrum, Inc.
We have audited the accompanying consolidated balance sheets of Software
Spectrum, Inc. and subsidiaries as of April 30, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended April 30, 1998 and 1997, the month ended April 30, 1996, and the
year 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 April 30, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for the years
ended April 30, 1998 and 1997, the month ended April 30, 1996, and the year
ended March 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
- -------------------------------
Grant Thornton LLP
Dallas, Texas
June 24, 1998
28
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents............................................................... $ 7,129 $ 7,440
Trade accounts receivable, net of allowance for doubtful accounts of $3,050 in 1998 and
$2,421 in 1997........................................................................ 171,460 161,469
Inventories............................................................................. 4,564 18,285
Prepaid expenses........................................................................ 2,279 6,596
Other current assets.................................................................... 1,024 3,015
---------- ----------
Total current assets.................................................................. 186,456 196,805
Furniture, equipment and leasehold improvements, at cost.................................. 37,951 30,627
Less accumulated depreciation and amortization.......................................... 17,538 11,440
---------- ----------
20,413 19,187
Other assets, consisting primarily of goodwill, net of accumulated amortization of $5,661
in 1998 and $2,858 in 1997.............................................................. 51,762 54,449
---------- ----------
$ 258,631 $ 270,441
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt.................................................... $ 393 $ 6,000
Trade accounts payable.................................................................. 160,331 145,260
Other current liabilities............................................................... 13,824 13,872
---------- ----------
Total current liabilities............................................................. 174,548 165,132
Long-term debt, less current maturities................................................... 7,813 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, 4,397,678 shares in
1998 and 4,363,523 shares in 1997..................................................... 44 44
Additional paid-in capital.............................................................. 39,496 39,040
Retained earnings....................................................................... 40,765 36,278
Currency translation adjustments........................................................ (2,627) (877)
---------- ----------
77,678 74,485
Less treasury stock at cost--92,111 shares in 1998 and 34,311 shares in 1997............ 1,408 546
---------- ----------
Total shareholders' equity............................................................ 76,270 73,939
---------- ----------
$ 258,631 $ 270,441
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH
APRIL 30, ENDED YEAR ENDED
---------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales......................................................... $ 884,087 $ 796,285 $ 28,380 $ 398,501
Cost of sales..................................................... 783,777 701,955 24,260 344,063
---------- ---------- --------- ----------
Gross margin.................................................... 100,310 94,330 4,120 54,438
Selling, general and administrative expenses...................... 79,510 84,734 4,667 41,459
Depreciation and amortization..................................... 9,651 7,780 297 2,816
---------- ---------- --------- ----------
Operating income (loss)......................................... 11,149 1,816 (844) 10,163
Interest expense (income)
Interest expense................................................ 3,279 2,956 42 53
Interest income................................................. (332) (358) (122) (1,175)
---------- ---------- --------- ----------
2,947 2,598 (80) (1,122)
---------- ---------- --------- ----------
Income (loss) before income taxes............................... 8,202 (782) (764) 11,285
Income tax expense (benefit)...................................... 3,715 63 (269) 3,919
---------- ---------- --------- ----------
Net income (loss)............................................... $ 4,487 $ (845) $ (495) $ 7,366
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Earnings (loss) per share
Basic........................................................... $ 1.04 $ (.20) $ (.12) $ 1.76
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Diluted......................................................... $ 1.03 $ (.20) $ (.12) $ 1.73
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Weighted average shares outstanding
Basic........................................................... 4,318 4,314 4,263 4,196
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Diluted......................................................... 4,351 4,314 4,263 4,260
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CURRENCY TREASURY STOCK
---------------------- PAID-IN RETAINED TRANSLATION ----------------------
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS SHARES AMOUNT
--------- ----------- ----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 1, 1995............... 4,209,550 $ 42 $ 35,979 $ 30,252 $ 63 (32,238) $ (502)
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $165............................... 31,834 -- 415 -- -- -- --
Purchase of treasury stock.............. -- -- -- -- -- (1,788) (36)
Net income.............................. -- -- -- 7,366 -- -- --
Currency translation adjustments........ -- -- -- -- (216) -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at March 31, 1996.............. 4,241,384 42 36,394 37,618 (153) (34,026) (538)
Stock issued pursuant to employee
benefit plans......................... 776 -- 14 -- -- -- --
Stock issued in connection with
acquisition of Essentially Group...... 55,363 1 1,136 -- -- -- --
Net loss................................ -- -- -- (495) -- -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at April 30, 1996.............. 4,297,523 43 37,544 37,123 (153) (34,026) (538)
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $103............................... 66,000 1 1,496 -- -- -- --
Purchase of treasury stock.............. -- -- -- -- -- (285) (8)
Net loss................................ -- -- -- (845) -- -- --
Currency translation adjustments........ -- -- -- -- (724) -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at April 30, 1997.............. 4,363,523 44 39,040 36,278 (877) (34,311) (546)
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $5................................. 34,155 -- 456 -- -- -- --
Purchase of treasury stock.............. -- -- -- -- -- (57,800) (862)
Net income.............................. -- -- -- 4,487 -- -- --
Currency translation adjustments........ -- -- -- -- (1,750) -- --
--------- --- ----------- ----------- ------------- --------- -----------
Balances at April 30, 1998.............. 4,397,678 $ 44 $ 39,496 $ 40,765 $ (2,627) (92,111) $ (1,408)
--------- --- ----------- ----------- ------------- --------- -----------
--------- --- ----------- ----------- ------------- --------- -----------
<CAPTION>
TOTAL
---------
<S> <C>
Balances at April 1, 1995............... $ 65,834
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $165............................... 415
Purchase of treasury stock.............. (36)
Net income.............................. 7,366
Currency translation adjustments........ (216)
---------
Balances at March 31, 1996.............. 73,363
Stock issued pursuant to employee
benefit plans......................... 14
Stock issued in connection with
acquisition of Essentially Group...... 1,137
Net loss................................ (495)
---------
Balances at April 30, 1996.............. 74,019
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $103............................... 1,497
Purchase of treasury stock.............. (8)
Net loss................................ (845)
Currency translation adjustments........ (724)
---------
Balances at April 30, 1997.............. 73,939
Stock issued pursuant to employee
benefit plans, including related tax
benefit
of $5................................. 456
Purchase of treasury stock.............. (862)
Net income.............................. 4,487
Currency translation adjustments........ (1,750)
---------
Balances at April 30, 1998.............. $ 76,270
---------
---------
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MONTH YEAR
APRIL 30, ENDED ENDED
------------------------ APRIL 30, MARCH 31,
1998 1997 1996 1996
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss).............................................. $ 4,487 $ (845) $ (495) $ 7,366
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Provision for bad debts...................................... 1,747 2,001 46 633
Depreciation and amortization................................ 9,651 7,780 297 2,816
Deferred income taxes........................................ (140) (1,402) (9) 435
Changes in operating assets and liabilities
Trade accounts receivable.................................. (13,040) (90,065) 8,313 (4,427)
Inventories................................................ 13,705 (1,324) (3,354) 755
Prepaid expenses and other assets.......................... 4,357 7,164 (1,452) (6,251)
Trade accounts payable and other current
liabilities.............................................. 16,980 63,585 1,917 15,367
----------- ----------- --------- -----------
Net cash provided by (used in) operating activities............ 37,747 (13,106) 5,263 16,694
----------- ----------- --------- -----------
Investing activities
Sales of short-term investments, net........................... -- 7,370 1,037 6,321
Purchase of furniture, equipment and leasehold improvements.... (8,091) (12,726) (502) (4,166)
Purchase of subsidiaries, net of cash acquired................. -- (41,188) (4,803) (2,377)
----------- ----------- --------- -----------
Net cash used in investing activities.......................... (8,091) (46,544) (4,268) (222)
----------- ----------- --------- -----------
Financing activities
Borrowings on long-term debt................................... 266,381 257,985 -- --
Repayments of long-term debt................................... (295,663) (220,615) -- --
Proceeds from stock issuance, including tax benefit related to
stock options exercised...................................... 456 1,497 14 415
Purchase of treasury stock..................................... (862) (8) -- (36)
----------- ----------- --------- -----------
Net cash provided by (used in) financing activities............ (29,688) 38,859 14 379
----------- ----------- --------- -----------
Effect of exchange rate changes on cash.......................... (279) (725) (176) (271)
----------- ----------- --------- -----------
Increase (decrease) in cash and cash equivalents................. (311) (21,516) 833 16,580
Cash and cash equivalents at beginning of period................. 7,440 28,956 28,123 11,543
----------- ----------- --------- -----------
Cash and cash equivalents at end of period....................... $ 7,129 $ 7,440 $ 28,956 $ 28,123
----------- ----------- --------- -----------
----------- ----------- --------- -----------
Supplemental disclosure of cash paid during the period
Income taxes................................................... $ 2,004 $ 2,020 $ 11 $ 3,776
Interest....................................................... 3,730 2,459 6 35
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
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 global supplier of
personal computer software and technology services to organizations. In fiscal
1998 and 1997, the Company's revenues were derived primarily from the sale of
personal computer software and technology services in North America, Europe and
Asia/Pacific.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All inter-company accounts and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform to the current period presentation.
In 1997, the Company changed its fiscal year end from March 31 to April 30.
The financial statements for the period from April 1, 1996 to April 30, 1996 are
also presented herein. The amounts reflected for the one-month period ended
April 30, 1996 should not be considered indicative of results that would have
been obtained for a full fiscal quarter or year.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investments with maturities of three months or
less when purchased to be cash equivalents.
CREDIT RISK
Trade accounts receivable are generally due from a diverse group of
companies and, accordingly, do not include any specific concentrations of credit
risk.
FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments, consisting of cash
and cash equivalents, accounts receivable, accounts payable and long-term debt,
approximate their carrying values.
INVENTORIES
Inventories, which consist primarily of purchased personal computer software
programs, are stated at cost, not in excess of market value. Cost is determined
by the moving weighted average method.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation of furniture and equipment is provided primarily on the
straight-line method over the estimated useful lives ranging from
33
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
2 to 10 years. Amortization of leasehold improvements is provided on the
straight-line method over the terms of the corresponding leases.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. Assets and liabilities of the foreign subsidiaries
are translated to U.S. dollars at year-end exchange rates. Income and expense
items are translated at the rates of exchange prevailing during the year. The
adjustments resulting from translating the financial statements of foreign
subsidiaries are reflected in shareholders' equity.
REVENUE RECOGNITION
The Company recognizes revenue from software sales at the time of product
shipment, or in accordance with terms of licensing contracts. Historically, the
Company has recognized maintenance revenue ratably over the terms of the related
contracts. While the contracts provide for cancellation by the customer, the
Company has experienced limited refunds of maintenance payments. Since the
Company has no material costs associated with future performance under these
contracts, the Company began recognizing this revenue when invoiced in fiscal
1998. The cumulative impact of this policy change and the impact of the change
on the 1998 fiscal year were not material. Service revenue is recognized as the
services are provided. Advance billings are recorded as deferred revenue.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (SFAS 123), ACCOUNTING
FOR STOCK-BASED COMPENSATION, encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations
and to apply SFAS 123 on a disclosure basis only.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER SHARE. SFAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share. Earnings per share amounts for all
periods have been restated to conform to the requirements of SFAS 128.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board released Statement
No. 130 (SFAS 130), REPORTING COMPREHENSIVE INCOME and Statement No. 131 (SFAS
131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS
130 addresses the manner in which certain adjustments to shareholders' equity
are displayed in the financial statements, but does not affect reported assets
or net income. SFAS 131 requires disclosure of certain information about
operating segments and geographic
34
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
areas of operation. The new pronouncements are effective for the Company's
fiscal year ending April 30, 1999.
NOTE B--LONG-TERM DEBT
Long-term debt consisted of (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Secured $100 million revolving credit facility..................................... $ -- $ --
Floating rate term loan due March 2001............................................. -- 30,000
Notes payable to foreign banks..................................................... 7,300 7,307
Capital lease obligations.......................................................... 877 --
Other.............................................................................. 29 63
--------- ---------
8,206 37,370
Less current maturities............................................................ 393 6,000
--------- ---------
$ 7,813 $ 31,370
--------- ---------
--------- ---------
</TABLE>
In fiscal 1998, the Company amended its domestic bank financing arrangements
to restructure its $30 million term loan and $60 million revolving credit
facility as a $100 million secured revolving credit facility (the "Amended
Facility"). The Amended Facility, which is secured by accounts receivable,
inventory and a pledge of the stock of certain of the Company's subsidiaries,
permits the Company to borrow up to $100 million, subject to availability under
its borrowing base. At April 30, 1998, $92 million was available under the
Amended Facility. The Amended Facility bears interest at a variable rate (7.375%
at April 30, 1998) and provides for an annual commitment fee equal to a variable
percentage of the unused line of credit. The Amended Facility, which expires in
March 2001, requires the Company to maintain certain financial covenants and
ratios and places limitations on dividend payments, capital expenditures and
certain other borrowings.
Certain of the Company's foreign subsidiaries have revolving credit
facilities with local banks totaling $8 million. Borrowings bear interest at
floating rates (approximately 5.8% at April 30, 1998) and are secured by letters
of credit issued by the Company. The facilities expire in April 1999. The
Company intends to refinance the outstanding amounts through borrowings under
the Amended Facility.
Computer equipment totaling $877,000 was acquired in 1998 under a two-year
agreement classified as a capital lease. The lease has an effective interest
rate of 4.15% and includes a purchase option at its termination in May 2000.
Annual maturities of long-term debt are $393,000, $461,000 and $7,352,000 for
the years ending April 30, 1999, 2000 and 2001, respectively.
35
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--INCOME TAXES
The Company's provision (benefit) for income taxes is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
FEDERAL FOREIGN STATE TOTAL
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Year ended April 30, 1998
Current......................................................... $ 3,531 $ (87) $ 411 $ 3,855
Deferred........................................................ (282) 142 -- (140)
--------- ----- --------- ---------
$ 3,249 $ 55 $ 411 $ 3,715
--------- ----- --------- ---------
--------- ----- --------- ---------
Year ended April 30, 1997
Current......................................................... $ 1,234 $ 78 $ 153 $ 1,465
Deferred........................................................ (523) (879) -- (1,402)
--------- ----- --------- ---------
$ 711 $ (801) $ 153 $ 63
--------- ----- --------- ---------
--------- ----- --------- ---------
Month ended April 30, 1996
Current......................................................... $ (191) $ (65) $ (4) $ (260)
Deferred........................................................ 19 (28) -- (9)
--------- ----- --------- ---------
$ (172) $ (93) $ (4) $ (269)
--------- ----- --------- ---------
--------- ----- --------- ---------
Year ended March 31, 1996
Current......................................................... $ 3,109 $ -- $ 375 $ 3,484
Deferred........................................................ 435 -- -- 435
--------- ----- --------- ---------
$ 3,544 $ -- $ 375 $ 3,919
--------- ----- --------- ---------
--------- ----- --------- ---------
</TABLE>
A reconciliation of income tax expense (benefit) using the statutory federal
income tax rate of 34% to the actual income tax expense (benefit) follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, MONTH ENDED YEAR ENDED
-------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax at statutory rate................................... $ 2,789 $ (266) $ (260) $ 3,837
State and local income taxes, net of federal benefit........... 271 101 (4) 259
Differences between foreign and U.S. tax rates, including
foreign losses without tax benefits.......................... 327 7 (15) --
Tax-exempt interest............................................ -- (17) (5) (282)
Non-deductible goodwill amortization........................... 165 137 9 8
Other.......................................................... 163 101 6 97
--------- --------- ----- -----------
Income tax expense (benefit)................................... $ 3,715 $ 63 $ (269) $ 3,919
--------- --------- ----- -----------
--------- --------- ----- -----------
</TABLE>
36
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities as of April 30, 1998 and 1997 consist of
the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Accounts receivable.................................................................. $ 561 $ 352
Inventories.......................................................................... 541 432
Accrued expenses..................................................................... 586 338
Deferred revenue..................................................................... 11 137
Foreign net operating loss carryforward.............................................. 569 752
--------- ---------
Deferred tax assets................................................................ 2,268 2,011
--------- ---------
Depreciation and amortization........................................................ (603) (563)
Other................................................................................ (110) (113)
--------- ---------
Deferred tax liabilities........................................................... (713) (676)
--------- ---------
$ 1,555 $ 1,335
--------- ---------
--------- ---------
</TABLE>
At April 30, 1998, the Company's foreign subsidiaries had net operating loss
carryforwards of approximately $2.7 million. Utilization of these carryforwards
is limited to income of the respective subsidiaries.
NOTE D--EMPLOYEE BENEFIT PLANS
In July 1989, the Company adopted the 1989 Stock Option Plan, in which
non-incentive stock options were granted. In August 1993, the shareholders
approved the adoption of the 1993 Long Term Incentive Plan and the Company then
ceased granting new options under the 1989 Stock Option Plan. 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
the quoted market price of the Company's stock at the date of grant, become
exercisable over periods of up to five years and expire on various dates from
1998 through 2004. At April 30, 1998, 142,400 shares of common stock were
reserved for future grant under the 1993 Long Term Incentive Plan.
The Company has adopted only the disclosure provisions of SFAS 123 for
employee stock options and continues to apply APB 25 for recording stock options
granted. If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for options granted subsequent to March 31,
1995, consistent with the methodology prescribed by SFAS 123, net income (loss)
and earnings
37
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EMPLOYEE BENEFIT PLANS (CONTINUED)
(loss) per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, MONTH ENDED YEAR ENDED
-------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss)--as reported............................... $ 4,487 $ (845) $ (495) $ 7,366
Net income (loss)--pro forma................................. 4,069 (1,127) (505) 7,276
Earnings (loss) per share--as reported
Basic...................................................... 1.04 (.20) (.12) 1.76
Diluted.................................................... 1.03 (.20) (.12) 1.73
Earnings (loss) per share--pro forma
Basic...................................................... .94 (.26) (.12) 1.73
Diluted.................................................... .94 (.26) (.12) 1.71
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before fiscal 1996. The fair value of these options was estimated at
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in fiscal 1998, 1997 and
1996, respectively: dividend yield of 0% for all periods; volatility of 45%, 42%
and 43%; risk-free interest rates of 6.2%, 6.2% and 6.1% and expected lives of
four years for all periods. The weighted average fair values of options granted
were $5.76, $9.55 and $7.28 per share during fiscal 1998, 1997 and 1996,
respectively.
38
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EMPLOYEE BENEFIT PLANS (CONTINUED)
Option activity for the period from April 1995 to April 1998 is summarized
as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
UNDERLYING OPTIONS EXERCISE PRICE
------------------ -----------------
<S> <C> <C>
Outstanding at April 1, 1995...................................... 324,175 $ 18.69
Granted........................................................... 121,250 17.62
Exercised......................................................... (25,445) 5.50
Canceled/forfeited................................................ (19,790) 18.72
--------
Outstanding at March 31, 1996..................................... 400,190 19.20
Granted........................................................... 10,000 19.75
--------
Outstanding at April 30, 1996..................................... 410,190 19.21
Granted........................................................... 159,550 23.56
Exercised......................................................... (54,850) 21.25
Canceled/forfeited................................................ (31,350) 20.47
--------
Outstanding at April 30, 1997..................................... 483,540 20.34
Granted........................................................... 222,000 13.48
Exercised......................................................... (2,600) 12.34
Canceled/forfeited................................................ (220,000) 21.48
--------
Outstanding at April 30, 1998..................................... 482,940 16.65
--------
--------
Exercisable at March 31, 1996..................................... 124,620 22.12
--------
--------
Exercisable at April 30, 1997..................................... 146,560 20.02
--------
--------
Exercisable at April 30, 1998..................................... 211,650 18.84
--------
--------
</TABLE>
Further information regarding options outstanding and options exercisable at
April 30, 1998 is summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
- ----------------- --------- ------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 10.00 to 15.00 246,290 3.73 $ 12.65 71,960 $ 12.44
15.01 to 20.00 124,300 3.58 17.38 48,140 17.39
20.01 to 25.00 70,650 1.45 23.83 56,750 23.86
25.01 to 30.00 41,700 1.52 25.88 34,800 25.89
- ----------------- --------- --- ----------- --------- -----------
$ 10.00 to 30.00 482,940 3.17 $ 16.65 211,650 $ 18.84
- ----------------- --------- --- ----------- --------- -----------
- ----------------- --------- --- ----------- --------- -----------
</TABLE>
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
39
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--EMPLOYEE BENEFIT PLANS (CONTINUED)
participant's compensation. At April 30, 1998, a total of 96,000 shares of
common stock were reserved for issuance under the plan. For the years ended
April 30, 1998, April 30, 1997 and March 31, 1996 and the month ended April 30,
1996, 30,929, 10,656, 6,260 and 702 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 pre-tax contributions in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. Employer contributions to the plan
are at the discretion of the Board of Directors and are reduced by forfeited
contributions. The Company's contributions to the employee profit sharing plan
for the years ended April 30, 1998 and March 31, 1996, net of reductions for
forfeitures, were $202,000 and $207,000, respectively. No contributions were
made for the year ended April 30, 1997, or the month ended April 30, 1996.
NOTE E--EARNINGS PER SHARE
The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted earnings per share. Outstanding options that
were not included in the computation of diluted earnings per share because their
effect would be antidilutive totaled approximately 119,000, 483,000 and 182,000
shares for the years ended April 30, 1998, April 30, 1997 and March 31, 1996,
respectively, and approximately 410,000 shares for the month ended April 30,
1996.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
MONTH ENDED YEAR ENDED
-------------------- APRIL 30, MARCH 31,
1998 1997 1996 1996
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss)....................................................... $ 4,487 $ (845) $ (495) $ 7,366
--------- --------- ----------- -----------
Weighted average shares outstanding (basic)............................. 4,318 4,314 4,263 4,196
Effect of dilutive employee and director stock options.................. 33 -- -- 64
--------- --------- ----------- -----------
Weighted average shares outstanding (diluted)........................... 4,351 4,314 4,263 4,260
--------- --------- ----------- -----------
Earnings per share (basic).............................................. $ 1.04 $ (.20) $ (.12) $ 1.76
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Earnings per share (diluted)............................................ $ 1.03 $ (.20) $ (.12) $ 1.73
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
40
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LEASES
The Company leases various office and distribution facilities as well as
certain office and computer equipment under leases classified as operating
leases. Future minimum rental payments under all long-term, noncancelable
operating leases at April 30, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Year Ending April 30:
- -----------------------------
1999....................... $ 3,452
2000....................... 3,301
2001....................... 2,558
2002....................... 1,151
2003....................... 493
Thereafter................. 5,998
-------
$ 16,953
-------
-------
</TABLE>
Rent expense for operating leases totaled $4.2 million, $3.3 million and
$1.3 million for fiscal 1998, fiscal 1997 and fiscal 1996, respectively, and
$165,000 for the month ended April 30, 1996.
NOTE G--BUSINESS ACQUISITIONS
On April 2, 1996, the Company acquired substantially all of the assets of
the New Zealand business operations of Essentially Group Limited and all of the
outstanding shares of capital stock of Essentially Group (Australia) Limited,
privately-held information technology companies in New Zealand and Australia.
The purchase price was $6.3 million, including cash of $5.1 million and the
issuance of 55,363 shares of the Company's common stock. The acquisition has
been accounted for using the purchase method of accounting. The estimated fair
values of the assets acquired, liabilities assumed and stock issued in
connection with the purchase were $17.4 million, $11.1 million and $1.2 million,
respectively. Goodwill was $7.4 million and is being amortized using the
straight-line method over 20 years.
On May 13, 1996, the Company acquired certain operating assets of the
corporate, government and educational ("CGE") division of Egghead, Inc., a
leading supplier of personal computer software to organizations in North
America, for approximately $45 million in cash. The acquisition has been
accounted for using the purchase method of accounting. The estimated fair values
of the assets acquired and liabilities assumed were $51 million and $6 million,
respectively. Goodwill was $45 million and is being amortized using the
straight-line method over 20 years.
The operating results of the acquired businesses have been included in the
consolidated statements of operations from the dates of acquisition.
Identifiable transition costs totaling $3.7 million are included in selling,
general and administrative expenses for the year ended April 30, 1997. These
costs relate primarily to temporary staffing, excess travel and telephone
expenses, and costs associated with systems implementation for the CGE
acquisition.
NOTE H--FOREIGN OPERATIONS
The Company operates in one business segment. Prior to April 1996, the
Company's foreign operations were not material, and therefore, information for
foreign operations for the year ended
41
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--FOREIGN OPERATIONS (CONTINUED)
March 31, 1996 has not been presented. Information for foreign operations for
the years ended April 30, 1998 and 1997, and the month ended April 30, 1996,
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
INCOME
NET SALES (LOSS)
------------ -----------
<S> <C> <C>
Year Ended April 30, 1998
Domestic..................................................................... $ 756,155 $ 12,201
Foreign...................................................................... 127,932 (1,052)
------------ -----------
$ 884,087 $ 11,149
------------ -----------
------------ -----------
Year Ended April 30, 1997
Domestic..................................................................... $ 690,641 $ 7,742
Foreign...................................................................... 105,644 (5,926)
------------ -----------
$ 796,285 $ 1,816
------------ -----------
------------ -----------
Month Ended April 30, 1996
Domestic..................................................................... $ 22,910 $ (256)
Foreign...................................................................... 5,470 (588)
------------ -----------
$ 28,380 $ (844)
------------ -----------
------------ -----------
<CAPTION>
IDENTIFIABLE
ASSETS
------------
<S> <C> <C>
As of April 30, 1998
Domestic..................................................................... $ 221,888
Foreign...................................................................... 36,743
------------
$ 258,631
------------
------------
</TABLE>
NOTE I--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited quarterly financial data for
the years ended April 30, 1998 and 1997 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------
FISCAL 1998 FISCAL 1997
------------------------------------------ ------------------------------------------
APRIL 30, JAN. 31, OCT. 31, JULY 31, APRIL 30, JAN. 31, OCT. 31, JULY 31,
1998 1998 1997 1997 1997 1997 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $ 230,509 $ 246,595 $ 195,025 $ 211,958 $ 200,818 $ 220,523 $ 188,097 $ 186,847
Gross margin................... 25,792 27,077 23,729 23,712 24,970 24,782 22,823 21,755
Net income (loss).............. 1,380 1,938 628 541 104 (119) (839) 9
Earnings (loss) per share
Basic........................ .32 .45 .14 .12 .02 (.03) (.20) --
Diluted...................... .32 .45 .14 .12 .02 (.03) (.20) --
</TABLE>
42
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Software Spectrum, Inc., a Texas
corporation, and the undersigned directors and officers of Software Spectrum,
Inc., hereby constitutes and appoints Judy O. Sims its or his true and lawful
attorney-in-fact and agent, for it or him and in its or his name, place and
stead, in any and all capacities, with full power to act alone, to sign any and
all amendments to this Report, and to file each such amendment to this Report,
with all exhibits thereto, and any and all other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorney-in-fact and agent full power and authority to do and perform any
and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as it or he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SOFTWARE SPECTRUM, INC.
By: /s/ JUDY O. SIMS
-----------------------------------------
Judy O. Sims
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Date: July 28, 1998
43
<PAGE>
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
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer
/s/ JUDY O. SIMS and Chairman of the
- ------------------------------ Board (Principal July 28, 1998
Judy O. Sims Executive Officer)
/s/ RICHARD G. SIMS
- ------------------------------ Senior Vice President and July 28, 1998
Richard G. Sims Director
Vice President and Chief
/s/ JAMES W. BROWN Financial Officer
- ------------------------------ (Principal Financial July 28, 1998
James W. Brown Officer and Principal
Accounting Officer)
/s/ MELLON C. BAIRD
- ------------------------------ Director July 28, 1998
Mellon C. Baird
/s/ CARL S. LEDBETTER
- ------------------------------ Director July 28, 1998
Carl S. Ledbetter
/s/ FRANK TINDLE
- ------------------------------ Director July 28, 1998
Frank Tindle
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Shareholders and Board of Directors
Software Spectrum, Inc.
In connection with our audit of the consolidated financial statements of
Software Spectrum, Inc. and subsidiaries referred to in our report dated June
24, 1998, we have also audited Schedule II for the years ended April 30, 1998
and 1997, the month ended April 30, 1996 and the year ended March 31, 1996. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
- -------------------------------
Grant Thornton LLP
Dallas, Texas
June 24, 1998
45
<PAGE>
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DEDUCTIONS
BALANCE AT CHARGED TO WRITE-OFFS BALANCE
BEGINNING COSTS AND NET OF AT END
OF YEAR EXPENSES RECOVERIES OF YEAR
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended April 30, 1998: $ 2,421,000 $ 1,747,000 $ (1,118,000) $ 3,050,000
Year ended April 30, 1997: 1,247,000 2,001,000 (827,000) 2,421,000
Month ended April 30, 1996: 1,201,000 46,000 -- 1,247,000
Year ended March 31, 1996: 1,371,000 633,000 (803,000) 1,201,000
Inventory Valuation Account:
Year ended April 30, 1998: $ 1,903,000 $ 2,158,000 $ (1,872,000) $ 2,189,000
Year ended April 30, 1997: 805,000 2,219,000 (1,121,000) 1,903,000
Month ended April 30, 1996: 997,000 57,000 (249,000) 805,000
Year ended March 31, 1996: 1,123,000 1,249,000 (1,375,000) 997,000
</TABLE>
46
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- ----------
<S> <C> <C>
3.1(a) Restated Articles of Incorporation of the Company, filed with the Secretary of State of Texas
on May 12, 1989, as amended (incorporated by reference to the Company's Registration Statement
No. 33-40794 on Form S-1).
3.1(b) Statement of Designation of Series A Junior Participating Preferred Stock (incorporated by
reference to the Company's Current Report on Form 8-K dated December 13, 1996).
3.1(c) Articles of Amendment to Restated Articles of Incorporation, filed with the Secretary of State
of Texas on November 25, 1996 (incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1997).
3.1(d) Statement of Cancellation of Treasury Shares, filed with the Secretary of State of Texas on
March 21, 1997 (incorporated by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1997).
3.2 Restated Bylaws of the Company, as amended (incorporated by reference to the Company's
Registration Statement No. 33-40794 on Form S-1).
3.3 Rights Agreement between the Company and KeyCorp Shareholder Services, Inc., (the "Rights
Agreement") dated December 13, 1996, (incorporated by reference to the Company's Current Report
on Form 8-K dated December 13, 1996).
3.4 Letter of Substitution of Rights Agent under Rights Agreement, dated June 7, 1997 (appointing
ChaseMellon Shareholders Services, L.L.C. as successor rights agent).
10.1 IBM Business Partner Agreement between the Company, IBM Corporation and Lotus Development
Corporation dated June 30, 1997 (incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1997).
10.2 Microsoft Corporation Channel Agreement dated July 1, 1997 between Microsoft Corporation and
the Company, including Addendum dated July 1, 1997 (Appointment as a Direct Reseller); Addendum
dated July 1, 1997 (Appointment as a Large Account Reseller); and Addendum dated July 1, 1997
(Rebate and Marketing Fund).
10.3 [intentionally omitted]
10.4(a) Commercial Lease Agreement, dated May 1, 1990, between CIIF Associates II Limited Partnership
and the Company (incorporated by reference to the Company's Registration Statement No. 33-40794
on Form S-1).
10.4(b) Amendment to Lease Agreement dated March 31, 1995 between CIIF Associates II Limited
Partnership and the Company (incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995).
10.4(c) Third Amendment to Lease Agreement dated effective as of April 20, 1998 between CIIF Associates
II Limited Partnership and the Company.
10.5(a) Commercial Lease Agreement dated as of April 19, 1993, between Kancro, L.P. and the Company
(incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1993).
10.5(b) Amendment #2--Expansion Agreement to Lease Agreement dated as of June 20, 1994 between Kancro,
L.P. and the Company (incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).
10.5(c) Third Amendment to Commercial Lease Agreement dated effective April 1, 1995 between Kancro,
L.P. and the Company (incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995).
10.5(d) Fourth Amendment to Commercial Lease Agreement dated effective as November 25, 1996 between
Kancro, L.P. and the Company (incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1997).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- ----------
<S> <C> <C>
10.5(e) Fifth Amendment to Commercial Lease Agreement dated effective as of March 9, 1998 between
Kancro, L.P. and the Company.
10.6 Lease Agreement between Spokane Teachers Credit Union and the Company dated May 1, 1998.
10.7 Lease Agreement dated March 8, 1996 by and between Riverport Commerce Center, Inc. and the
Company (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996).
10.8 Lease Agreement dated April 26, 1996 by and between Beneficiaries of American National Bank
Trust Number 104601-03 and the Company (incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996).
10.9 1989 Stock Option Plan of the Company, as amended (incorporated by reference to the Company's
Registration Statement No. 33-40794 on Form S-1).
10.10 Software Spectrum, Inc. Employee Stock Purchase Plan, as amended (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997).
10.11 The Software Spectrum, Inc. 1993 Long Term Incentive Plan (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
10.12 Employees' Profit Sharing Plan of the Company, Adoption Agreement dated December 14, 1994
(incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995).
10.13 Management Continuity Agreement ("Continuity Agreement") between the Company and James W.
Brown, dated March 1, 1998, together with schedule identifying additional executive officers
that are parties to Continuity Agreements.
10.14 Non-Employee Directors' Retainer Stock Plan (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the Quarter ended December 31, 1995).
10.15 Limited Waiver Agreement, dated July 31, 1997, between the Company and Private Capital
Management, Inc. (incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended July 31, 1997).
10.16 Amended and Restated Credit Agreement dated March 11, 1998 among the Company, the Chase
Manhattan Bank, and Administrative Agent, Chase Bank of Texas, National Association, as
Collateral Agent and other participating financial institutions (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1998).
21 Subsidiaries of the Company.
23 Consent of Grant Thornton LLP, Independent Accountants
24 Power of Attorney (included on the signature page of this Form 10-K).
27 Financial Data Schedule
</TABLE>
<PAGE>
[LETTERHEAD]
June 7, 1997
ChaseMellon Shareholders Services, L.L.C. as Rights Agent,
as successor to KeyCorp Shareholder Services, Inc.
2323 Bryan Street, Suite 2300
Dallas, Texas 75201-2656
Re: Substitution of Rights Agent under Rights Agreement
Ladies and Gentlemen:
Pursuant to Section 21 of the Rights Agreement by and between Software Spectrum,
inc. and KeyCorp Shareholder Services, Inc., dated December 13, 1996 (the
"Agreement"), ChaseMellon Shareholder Services, L.L.C. is hereby appointed
successor rights agent and ChaseMellon Shareholder Services, L.L.C. (the
"Successor Agent") accepts such appointment.
In executing this amendment, the Successor Agent shall be entitled to all the
privileges and immunities afforded to the Rights Agent under the terms and
conditions of the Rights Amendment.
SOFTWARE SPECTRUM, INC.
By: /s/ Robert D. Graham
--------------------------------------
Name: Robert D. Graham
Title: Vice President & General Counsel
----------------------------------
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
as successor Rights Agent
By: /s/ R. John Davis, VP
--------------------------
Name: R. John Davis
------------------------
Title: Vice President
-----------------------
<PAGE>
MICROSOFT CORPORATION
CHANNEL AGREEMENT
This Microsoft Corporation Channel Agreement ("Agreement") is entered into as of
the 1st day of July, 1997 (the "Effective Date") between MICROSOFT CORPORATION
("MS"), having its principal place of business at One Microsoft Way, Redmond, WA
98052-6399 and SOFTWARE SPECTRUM, INC. ("COMPANY"), having its principal place
of business at 2140 Merritt Drive, Garland, TX 75041.
1. DEFINITIONS
Except as set forth above, all capitalized terms included in this Agreement are
as defined in Schedule A, attached hereto and incorporated herein by reference.
2. ADDENDUM TO THE AGREEMENT
COMPANY's rights and obligations with respect to the distribution of Product
under this Agreement are subject to the terms of any Addendum which the parties
have signed. Each Addendum is incorporated into and made a part of this
Agreement. In the event of inconsistency, the terms of any applicable Addendum
shall prevail over this Agreement. The terms of this Agreement, including any
Addenda, shall prevail over any provisions in purchase orders or set-up forms.
3. TERM AND TERMINATION
3.1 TERM
This Agreement shall take effect on the Effective Date and shall continue until
June 30, 1998.
3.2 TERMINATION
Either MS or COMPANY may terminate this Agreement in its entirety and/or any
individual Addendum at any time, with or without cause, upon thirty (30)
calendar days prior written notice. If this Agreement is terminated without
cause, neither party shall be responsible to the other for any costs or damages
resulting from such termination.
3.3 RIGHTS UPON EXPIRATION OR TERMINATION
Any amounts which have accrued prior to termination or expiration shall become
immediately due and payable. Any Product acquired by COMPANY pursuant to this
Agreement as of the termination of this Agreement may be distributed in
accordance with the terms of this Agreement until fully liquidated. All orders
received from COMPANY but not shipped by MS prior to the effective date of any
expiration or termination, at MS' option, may be shipped or canceled. COMPANY
shall make a final report to MS within ninety (90) days of termination of this
Agreement.
4. COMPANY RIGHTS AND OBLIGATIONS
4.1 FINANCIAL STATEMENT
COMPANY will provide to MS' credit management, quarterly Financial Statements
within forty-five (45) days after the end of each calendar quarter. COMPANY
Financial Statements will be used by MS' credit department solely for the
purpose of establishing and reviewing COMPANY's credit. Financial Statements
should be forwarded to Microsoft, Attn. Senior Credit Analyst, Worldwide Credit
Services, Building 8, at the address set forth in Section 17 below.
<PAGE>
4.2 NO OTHER PRODUCT WARRANTIES BY COMPANY
Neither COMPANY nor any of its employees or agents shall have any right to make
any other warranties or promises for the use of Product which are not contained
in the written warranty document accompanying the Product. COMPANY may, however,
give instructions for the use of the Product which are contained on the Product
label or container, or End User documentation provided with the manual or MS
product literature denoted by a MS part number or authorized in writing by MS.
4.3 NO ALTERATIONS OF PRODUCT
COMPANY shall not alter the Product or Product packaging, and shall have no
authority to make copies of MS diskettes or documentation without the prior
written consent of MS. COMPANY shall distribute Product to its customers in
unopened packages.
4.4 USE OF TRADEMARKS
COMPANY shall use the appropriate trademark symbol "-TM-" or "-Registered
Trademark-" in a superscript and clearly indicate MS' ownership of the
trademark(s) whenever the Product name is first mentioned in any
advertisement, brochure, or other manner in connection with the Product. MS'
current trademark list is available upon request.
4.5 AUTHORIZED DISTRIBUTION
Product acquired under this Agreement shall be distributed within the Territory
only and only in accordance with the terms of this Agreement and any applicable
Addendum. COMPANY shall not, without the prior written consent of MS, distribute
Product to any Reseller or End User whom they have reason to believe may
re-distribute such Product outside of the Territory.
4.6 TAXES
4.6(a) COMPANY TAXES
All amounts to be paid by COMPANY to MS herein are exclusive of any federal,
state, municipal or other governmental taxes, including income, franchise,
excise, sales, use, gross receipts, value added, goods and services, property or
similar tax, now or hereafter imposed on COMPANY. Such charges shall be the
responsibility of COMPANY and may not be passed on to MS, unless they are owed
solely as a result of entering into this Agreement and are required to be
collected from MS under applicable law.
4.6(b) BILLING AND COLLECTION
COMPANY will bill, collect and remit sales, use, value added, and other
comparable taxes determined by COMPANY to be due with respect to the
distribution of the Product. MS is not liable for any taxes, including without
limitation, income taxes, withholding taxes, value added, franchise, gross
receipt, sales, use, property or similar taxes, duties, levies, fees, excises or
tariffs incurred in connection with or related to the distribution of the
Product. COMPANY takes full responsibility for all such taxes, including
penalties, interest and other additions thereon.
4.6(c) WITHHELD TAXES
If, after a determination by foreign tax authorities, any taxes are required to
be withheld, on payments made by COMPANY to MS, COMPANY may deduct such taxes
from the amount owed MS and pay them to the appropriate taxing authority,
provided however, that COMPANY shall promptly secure and deliver to MS an
official receipt for any such taxes withheld or other documents necessary to
enable MS to claim a U.S. Foreign Tax Credit. COMPANY will make certain that any
taxes withheld are minimized to the extent possible under applicable law.
COMPANY shall indemnify, defend and hold MS harmless from any claims or
liabilities arising from or related to any failure by COMPANY to comply with
Subsection 4.6.
PAGE 2
<PAGE>
4.7 ANTI-PIRACY
COMPANY shall take all commercially reasonable steps to prevent unauthorized
distribution, duplication or pirating of the Product.
4.8 COMPLIANCE WITH APPLICABLE LAWS
COMPANY shall ensure that its distribution of Product complies with any and all
applicable laws and regulations in the Territory.
5. MS OBLIGATIONS
5.1 ASSISTANCE WITH REPORTING
Upon COMPANY'S written request, MS shall use reasonable efforts to assist
COMPANY in data reporting, and will work with COMPANY's Information Management
department to facilitate the data reporting process.
5.2 NO WARRANTIES FOR PRODUCT NOT MANUFACTURED BY MS
MS makes no warranties as to items distributed under a third party name,
copyright, trademark or tradename which may be included within the retail
package of a Product sold hereunder.
5.3 AUDITS
During the term of this Agreement and for a period of two (2) years following
its termination or expiration, MS or its designated representative, at its own
cost, may audit the applicable books, records and operations of COMPANY as is
reasonable to verify COMPANY's compliance with the terms of this Agreement.
COMPANY shall promptly correct any errors and omissions disclosed by such audit.
Any audit will be conducted during COMPANY's normal business hours in such a
manner as not to unreasonably interfere with COMPANY's normal business
activities. If any complete financial audit uncovers material discrepancies
COMPANY shall bear the out of pocket costs for the audit. For purposes of this
Section, "material discrepancies" shall mean a fraudulent discrepancy of one
hundred thousand U.S. dollars (US$100,000) or more in monthly revenue or sales
reporting. Additionally, MS or its designated representative, at its own cost,
may audit any portion of COMPANY's books, records, and operations as is
reasonable to verify COMPANY's compliance with the specific terms, policies and
procedures of any addenda to this Agreement.
6. COMPANY AND MS OBLIGATIONS
6.1 PRODUCT WARRANTY; LIMITATION OF LIABILITY
(a) MS warrants its software and hardware Product to End Users as
defined in the written limited warranty document accompanying each Product. All
replacement Product is delivered subject to the terms of the MS limited Product
warranty. THE ABOVE LIMITED WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, OR STATUTORY, INCLUDING IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER OBLIGATIONS OR
LIABILITIES ON MS' PART.
(b) NEITHER MS NOR ANY THIRD PARTIES WHO HAVE BEEN INVOLVED IN THE
CREATION, PRODUCTION, OR DELIVERY TO THE COMPANY OF ANY MICROSOFT PRODUCT WHICH
IS THE SUBJECT OF THIS AGREEMENT SHALL BE LIABLE FOR ANY DIRECT, INDIRECT,
CONSEQUENTIAL, OR INCIDENTAL DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS
PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE)
ARISING OUT OF THE USE OR INABILITY TO USE ANY PRODUCT EVEN IF MS HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
PAGE 3
<PAGE>
(c) IN ANY CASE, THE LIABILITY OF MS (i) UNDER ANY PROVISION OF THIS
AGREEMENT; (ii) FOR ANY DAMAGES CAUSED BY A PROGRAM DEFECT OR FAILURE IN ANY
PRODUCT OR (iii) ARISING FROM A COURT OF PROPER JURISDICTION HOLDING ANY OF THE
ABOVE WARRANTIES OR DISCLAIMERS OF WARRANTIES INADEQUATE OR INVALID SHALL BE
LIMITED TO THE AMOUNT ACTUALLY PAID BY COMPANY TO MS UNDER THIS AGREEMENT. MS'
LIMITATION OF LIABILITY IS CUMULATIVE WITH ALL OF MS' EXPENDITURES BEING
AGGREGATED TO DETERMINE SATISFACTION OF THE LIMIT. THE EXISTENCE OF CLAIMS OR
SUITS AGAINST MORE THAN ONE PRODUCT DISTRIBUTED UNDER THIS AGREEMENT WILL NOT
ENLARGE OR EXTEND THE LIMIT. COMPANY RELEASES MS FROM ALL OBLIGATIONS,
LIABILITY, CLAIMS OR DEMANDS IN EXCESS OF THE LIMITATION.
6.2 SEMESTER PROGRAMS
(a) MARKETING FUNDS
Each Semester, MS may allow COMPANY to participate in programs which provide the
opportunity to earn marketing funds. COMPANY's participation in such programs
shall be governed by COMPANY's then current Microsoft Rebate and Marketing Fund
Addendum to this Agreement or other Rebate and Marketing Fund Agreement, and
Microsoft's Marketing Fund Guidelines, as such may be promulgated and modified
by MS, in its sole discretion, from time to time.
(b) REBATES
Each Semester, MS may allow COMPANY to participate in programs which provide the
opportunity to earn rebates as described in COMPANY's current Microsoft Rebate
and Marketing Fund Addendum to this Agreement or other Rebate and Marketing Fund
Agreement, and COMPANY's Rebate Program Guidelines, as such may be promulgated
and modified by MS, in its sole discretion, from time to time.
(c) ELECTRONIC DATA INTERCHANGE
MS shall require COMPANY to provide weekly and monthly sales reporting during
the term of this Agreement. Such sales reporting shall be submitted to MS in
accordance with the Electronic Data Interchange (EDI) Guidelines as provided to
COMPANY by MS, from time to time.
7. INDEMNIFICATION
7.1 BY MS
MS shall indemnify and defend COMPANY its subsidiaries and affiliated companies
from and against any claims, losses, and damages relating to any (i) claims of
infringement of any United States patent, copyright, trademark and/or service
mark with respect to a Product, provided that the Product has not been altered,
or (ii) any default or breach of MS' obligations, promises, representations,
warranties or agreement hereunder. MS' obligation to indemnify and defend
COMPANY shall only apply provided that MS is notified promptly in writing of
such a claim and COMPANY tenders sole control over its defense or settlement to
MS. COMPANY shall provide reasonable assistance in the defense of any claim.
7.2 BY COMPANY
COMPANY shall indemnify and defend MS, its subsidiaries, and affiliated
companies from and against any claims, losses, and damages relating to any
default or breach of COMPANY's obligations, promises, representations,
warranties or agreements hereunder. COMPANY's obligation to indemnify and
defend MS shall only apply provided that COMPANY is immediately notified in
writing of any such claim. MS shall provide reasonable assistance in the
defense of any claim.
PAGE 4
<PAGE>
8. INSURANCE
8.1 COMPANY
Throughout the Term and for thirty (30) days thereafter, COMPANY shall maintain,
at its sole expense, Commercial General Liability Insurance written on an
Occurrence Form, with policy limits of not less than three million dollars
(US$3,000,000) combined single limit each occurrence for personal injury
(including bodily injury and death) and property damage which may arise from or
in connection with the performance of COMPANY's obligations hereunder or out of
any negligent act or omission of COMPANY, its officers, directors, agents, or
employees. Upon MS' request, COMPANY shall provide proof of its compliance with
this section. Notwithstanding the foregoing, COMPANY shall have the right to
self-insure.
8.2 MS
Throughout the Term and for thirty (30) days thereafter, MS shall maintain, at
its sole expense, Commercial General Liability Insurance written on an
Occurrence Form, with policy limits of not less thin three million dollars
(US$3,000,000) combined single limit each occurrence for personal injury
(including bodily injury and death) and property damage which may arise from or
in connection with the performance of MS's obligations hereunder or out of any
negligent act or omission of MS, its officers, directors, agents, or employees.
Upon COMPANY's request, MS shall provide proof of its compliance with this
section. Notwithstanding the foregoing, MS shall have the right to self-insure.
9. DELAY IN PERFORMANCE
If as a result of fire, casualty, act of God, riot, war, labor dispute,
government regulation, or decree of any court or any other event beyond the
control of COMPANY or MS, either of the parties shall be unable to perform its
obligations hereunder, such inability shall not constitute a breach of this
agreement, and such obligations shall be performed as soon as the cause of the
inability ceases or is removed. Strikes or other labor difficulties which are
not capable of being terminated on terms acceptable to the party affected shall
not be considered circumstances within the control of such party. In the event
of Product shortages, MS shall have the right to allocate available supplies of
the Product in its sole discretion.
10. NO WAIVER
None of the provisions of this Agreement shall be deemed to have been waived by
any act or acquiescence on the part of MS, COMPANY or their respective agents or
employees, but may be waived only by an instrument in writing signed by an
authorized officer of the waiving party. No waiver of any provision of this
Agreement shall constitute a waiver of any other provision or of the same
provision on another occasion.
11. NO PARTNERSHIP OR AGENCY
Nothing in this Agreement shall be deemed to create or constitute a partnership,
joint venture, franchise, agency, or contract of employment between MS and
COMPANY.
12. ATTORNEY'S FEES; GOVERNING LAW
In the event an action is commenced to enforce a party's rights under this
Agreement, the prevailing party in such action shall be entitled to recover its
costs and attorneys' fees. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Washington. COMPANY consents to
jurisdiction and venue in King County, Washington.
PAGE 5
<PAGE>
13. ENTIRE AGREEMENT
This Agreement and all attached Amendments and Addenda constitute the entire
agreement between MS and COMPANY, and supersedes and terminates any and all
prior agreements or contracts, written or oral, entered into between the parties
relating to the subject matter hereof. Any representations, promises, or
conditions in connection therewith not in writing signed by both parties shall
not be binding upon either party. This Agreement shall control any provisions in
purchase orders which are inconsistent with this Agreement.
14. U.S. GOVERNMENT RESTRICTED RIGHTS
All Products delivered to the U.S. Government other than the Department of
Defense on solicitations issued on or after December 1, 1995, shall be delivered
with commercial license rights only. All Products delivered to the Department
of Defense on solicitations issued on or after September 29, 1995, shall be
delivered with commercial license rights only. COMPANY shall be responsible for
ensuring that all Products delivered to the U.S. Government other than the
Department of Defense on solicitations issued prior to December 1, 1995, are
marked with the "Restrictive Rights" legend as set forth in FAR, 48 C.F.R.
52.227-14 (June 1987). COMPANY shall be responsible for ensuring that all
Products delivered to the Department of Defense on solicitations issued prior to
September 29, 1995, are marked with the "Restrictive Rights" legend as set forth
in FAR, 48 C.F.R. 252.227-7013 (October 1998).
15. CONFIDENTIALITY
COMPANY expressly undertakes to retain in confidence the terms and conditions of
this Agreement and any applicable Addenda and all information and know-how
transmitted to it by MS and make no use of such information and know-how except
under the terms and during the existence of this Agreement. COMPANY shall
guarantee and ensure its employees' compliance with this paragraph. COMPANY's
obligations under this paragraph shall survive any termination of this Agreement
and shall extend to the earlier of such time as the information is public domain
or five (5) years following the termination of this Agreement. This Section
shall not prohibit the parties from disclosing such information as is
specifically required by any Federal or state authorities. Notwithstanding the
foregoing, COMPANY may disclose confidential information in accordance with any
judicial or other governmental order or request, provided that COMPANY shall
immediately notify MS in writing upon its receipt of such order or request and
shall assist MS as is reasonable in seeking any protective order or its
equivalent or in limiting the scope of disclosure of any Confidential
Information.
16. NO ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, provided that COMPANY may
not assign its rights or obligations under this Agreement in any way without the
prior written consent of MS.
17. NOTICES
All notices required or contemplated by this Agreement shall be in writing,
delivered by U.S. certified mail (return receipt requested), or via overnight
courier (e.g., Federal Express, or DHL), and addressed as follows:
If to MS: Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attn.: Director, Channel Policies
With cc to: Law and Corporate Affairs
PAGE 6
<PAGE>
If to COMPANY:
Software Spectrum, Inc.
2140 Merritt Drive
Garland, TX 75041
Attn.: Robert D. Graham
Such notices shall be deemed given three (3) business days after being deposited
in the United States mail or one business day after being delivered with an
overnight carrier.
18. SURVIVAL
Sections 3.3, 4.6, 5.3, 6.1, 8.1, 8.2, 14, 15 and 18 shall survive any
termination of this Agreement.
IN WITNESS WHEREOF, the parties have signed this Agreement on the dates
indicated below. This Agreement is not binding until executed by MS.
MICROSOFT CORPORATION ("MS") SOFTWARE SPECTRUM, INC.
("COMPANY")
By: /s/ Lori Moore By: /s/ Robert D. Graham
--------------------------- --------------------------------
Lori Moore Robert D. Graham
- ------------------------------ -----------------------------------
Name (please print) Name (please print)
Director Field Strategy &
Sales Ops V.P. and General Counsel
- ------------------------------ -----------------------------------
Title Title
9/22/97 September 16, 1997
- ------------------------------ -----------------------------------
Date Date
PAGE 7
<PAGE>
SCHEDULE A
DEFINED TERMS
"DISTRIBUTOR" shall mean any business entity which purchases MS Product
directly from MS, and is authorized by MS to distribute said Product to
Resellers.
"ELECTRONIC DATA INTERCHANGE" or "EDI" shall mean the ANSI-ASCII X.12
standard, adopted by CompTIA, by which COMPANY shall submit sales reporting to
MS.
"END USER" shall mean the ultimate consumer of Product.
"FINANCIAL STATEMENT" shall mean a Balance Sheet as of the last day of the
calendar quarter, and an Income Statement and Statement of Cash Flows for the
quarter and year-to-date, prepared in accordance with Generally Accepted
Accounting Principles ("GAAP"). Any deviation from GAAP in the quarterly
statements shall be clearly noted. These statements must be signed by an officer
of COMPANY as being representative of the books and accounts of COMPANY.
"PRODUCT" shall mean any MS Stock Keeping Unit ("SKU") listed on COMPANY's
then current Price List.
"PURCHASE CREDIT" shall mean a dollar amount credited to COMPANY's account
with MS, which amount may only be used by COMPANY in the manner set forth in
this Agreement.
"RESELLER" shall mean any software retailer which purchases Product from MS
or a MS authorized Distributor.
"SEMESTER" shall mean a six month period. During the Term there shall be
two (2) Semesters, one running from July 1 through December 31, and the second
Semester running from January 1 through June 30.
"TERM" shall mean the term of this Agreement which shall run from the
Effective Date to and including June 30, 1998.
"TERRITORY" shall mean the geographic boundaries of the United States of
America, excluding all United States territories, possessions, or protectorates.
PAGE A-1
<PAGE>
LARGE ACCOUNT RESELLER
ADDENDUM TO THE MICROSOFT
CHANNEL AGREEMENT
This Addendum ("Addendum") entered into this 1st day of July, 1997 supplements
that certain Channel Agreement ("Agreement") between MICROSOFT CORPORATION
("MS") having its principal place of business at One Microsoft Way, Redmond, WA
98052 and SOFTWARE SPECTRUM, INC. ("COMPANY") having its principal place of
business at 2140 Merritt Drive, Garland, TX 75041. The Agreement is hereby
supplemented as follows:
1. PURPOSE
The purpose of this Addendum is to set forth the framework by which MS appoints
COMPANY as a non-exclusive Large Account Reseller in the Territory and Canada
with the right to acquire Microsoft Select Software Products from MS and to
distribute such Select Software Products and their associated license rights to
Select Customers which have designated COMPANY in their Enrollment Form as their
Large Account Reseller
2. DEFINITIONS
For purposes of this Addendum, capitalized terms are as defined in Schedule A
attached hereto and incorporated herein by reference. Any capitalized terms not
otherwise defined herein, shall have the same meaning as set forth in the
Agreement.
3. COMPANY RIGHTS AND OBLIGATIONS
3.1 DISTRIBUTION OF SELECT SOFTWARE PRODUCTS
COMPANY may only distribute Select Software Products to Select Customers located
in the Territory and Canada, and, in accordance with Subsection 3.1(a) below at
the direction of its Select Customer's, outside of the Territory. However,
should a Select Customer desire to initiate an Enrollment Form in a country
outside of the Territory and Canada, the Select Customer is required by the
terms of the Microsoft Select Program to locate a Large Account Reseller in the
desired country and acquire Select Software Products from that Large Account
Reseller.
3.1 (a): If the Select Customer is a business entity established
under the laws of the United States or Canada and existing in the Territory, it
may designate the COMPANY on an Enrollment Form as its Large Account Reseller
for itself and other related companies which may exist outside of the Territory.
COMPANY shall distribute Select Software Products outside the Territory in
accordance with the terms and conditions of this Agreement and in accordance
with applicable laws.
3.1(b): If the Select Customer is a business entity established under
the laws of a foreign country and existing outside of the Territory, then it
must designate a Large Account Reseller in the same country on an Enrollment
Form. In this case, COMPANY is not authorized to distribute Select Software
Products for such Select Customer. Select Customers are entitled to distribute
the rights associated with their Select Software Products outside of the
Territory if they so elect, in accordance with the Master Agreement and all
applicable laws. However, in the event a Select Customer wants to initiate an
Enrollment Form in a country outside of the Territory, the Select Customer is
required by the terms of the Microsoft Select Program to locate a Large Account
Reseller in the desired country and acquire Select Software Products from that
Large Account Reseller.
<PAGE>
3.2 DOCUMENTATION
COMPANY shall be authorized to purchase Documentation Products from MS World
Wide Fulfillment for resale to MS licensing customers only. A validation process
must be implemented by COMPANY to ensure that only MS licensing customers
receive Documentation Products. Price protection is not available for
Documentation Products purchased from MS World Wide Fulfillment.
COMPANY may request authorization to return Documentation Products purchased
from MS World Wide Fulfillment within * calendar days from the date of
invoice. Returns requested after * calendar days of invoice shall not be
accepted. Upon request, MS will provide COMPANY with a Return Authorization
Form. COMPANY must complete the Return Authorization Form and send it to MS. MS
will issues a return authorization number for Documentation Product meeting
return criteria. Documentation Products must be returned within thirty (30)
calendar days of the issuance of the return authorization number. MS shall issue
COMPANY a purchase credit in the amount of the authorized return.
3.3 DISTRIBUTION RESTRICTIONS
MS's authorization of the Large Account Reseller to acquire and distribute
Select Software Products as set forth herein shall not include the authorization
for the Large Account Reseller to use Select Software Products internally or to
distribute or otherwise transfer Select Software Products to any entity which
owns, controls, is owned or controlled by, or under common ownership or control
with the Large Account Reseller ("Large Account Reseller Affiliates") without
the prior written consent of MS.
3.4 COMPANY ACCEPTANCE OF ENROLLMENT AGREEMENTS
In order to remain authorized to purchase Select Licenses and Documentation
Product from MS for resale to a given Select Customer, an authorized
representative of COMPANY must review and acknowledge the Select Customer's
Enrollment Agreement. COMPANY's signature on the Enrollment Agreement shall
constitute COMPANY's agreement to pay MS as set forth in Section 3.6 below for
all copies of Select Software Products made by the Select Customer pursuant to
the Select License Agreement.
3.5 COMPANY SELECT PRICE SCHEDULE
COMPANY's prices are set forth on the COMPANY Select Price Schedule attached
hereto and incorporated herein by reference as Schedule B. MS may modify the
COMPANY Select Price Schedule at any time by providing thirty (30) days written
notice to COMPANY.
* Information omitted pursuant to a request for confidential treatment.
Page 2
<PAGE>
3.6 COMPANY'S REPORTING AND/OR ORDERING AND PAYMENT TO MS
(a) MICROSOFT SELECT 1.x AND 2.x ENROLLMENT AGREEMENT REPORTING
For each executed Microsoft Select version 1.x or version 2.x Enrollment
Agreement, the Select Customer is obligated by the terms of the Microsoft Select
Program to deliver to MS within fifteen (15) days of the end of each calendar
quarter, a written verified report for each Select Software Product acquired
from COMPANY pursuant to the terms of this Agreement. Following receipt of a
report from a given Select Customer, MS shall invoice COMPANY and COMPANY shall
be obligated to pay MS the fees set forth on Schedule B for each unit reported
by the Select Customer. If the Select Customer delivers written verified reports
at intervals shorter than the quarterly requirement, MS shall invoice COMPANY
immediately following receipt of such report, and COMPANY shall be obligated to
pay MS pursuant to the terms of this Section 3.6. In the event COMPANY wants to
receive copies of its Select Customers' quarterly reports, COMPANY shall
negotiate with its Select Customers for the right to receive such copies.
(b) MICROSOFT SELECT 3.0 AND 4.0 SELECT CONSUMPTION REPORTING
For each of its executed Microsoft Select version 3.0 and 4.0 Enrollment
Agreements, COMPANY shall deliver to MS via Electronic Data Interchange ("EDI")
no later than the fifteenth (15th) day of each calendar month, a purchase order
for each Select Software Product ordered and acquired in the previous month from
COMPANY by the Select Customer pursuant to the terms of this Agreement.
Following receipt of such purchase order, MS shall invoice COMPANY and COMPANY
shall be obligated to pay MS the fees set forth on Schedule B for each MS part
number and quantity indicated on the purchase order, along with any applicable
quarterly Maintenance fees. If the Select Customer elects to pre-pay any or all
of its Maintenance commitment, COMPANY shall immediately report such pre-payment
to MS, and MS shall invoice COMPANY immediately following receipt of such
report, and COMPANY shall be obligated to pay MS pursuant to the terms of this
Section 3.6.
(c) PAYMENT TERMS
All amounts are due and owing net thirty (30) days of date of invoice. All
payments not received by MS from COMPANY within the required time frame may be
assessed a finance charge of two percent (2%) of the invoice amount per month or
the legal maximum, which ever is less. COMPANY shall be obligated to pay MS any
and all amounts due regardless of whether COMPANY has received payment from the
Select Customer. All payments shall be in the form of bank wire transfer or
electronic funds transfer through an Automated Clearinghouse ("ACH") with
electronic remittance detail attached. Payments shall be remitted to:
Microsoft North American Collections #844505
Account #3750771767
ABA: #11100001-2
NationsBank of Texas, N.A.
Remittance detail must be received by NationsBank by 10:00AM Central time/8:00AM
Pacific time to ensure same-day credit to COMPANY's account.
Effective January 1, 1998, all payments must be sent to NationsBank at the
address indicated above using the 820 Remittance EDI transaction set or other
form of ACH payment with electronic remittance detail attached.
Page 3
<PAGE>
(d) REPORT REVISIONS
COMPANY shall use its best efforts to process all returns of Microsoft Select
License within sixty (60) days from the original invoice date. All revised
reports must provide detailed back-up as required by MS. MS reserves the right
to assess up to a five percent (5%) service charge for credit granted after
ninety (90) days from the original MS invoice date. In no case shall MS impose
such service charge when the late reporting is the result of MS error. MS
reserves the right to review the circumstance of all claims submitted more than
one hundred eighty (180) days from the original invoice date, and may determine
that such revised report is not eligible for credit.
(e) EDI TRANSACTION SETS
COMPANY shall utilize EDI transaction sets 855 - Purchase Order Acknowledgment,
856 - Advance Ship Notice, 832 - Price Catalog, and 810 - Invoices. MS may
elect, during the term of this Addendum, to require COMPANY to implement EDI
transaction set 870 - Backorder Report and/or other EDI transaction sets or
forms of electronic commerce. Should MS require such transaction sets, MS shall
provide COMPANY with no less than one hundred twenty (120) days prior written
notice. All required EDI transaction shall be submitted in accordance with the
EDI Guidelines as provided to COMPANY by MS.
3.7 SALES TAXES
COMPANY shall either provide MS with a bona fide resale certificate for all
Select Software Products delivered to COMPANY by MS pursuant to the terms of
this Addendum, or shall pay to MS all applicable sales, use or other excise
taxes due on such Select Software Products. COMPANY shall indemnify, defend and
hold harmless MS from any tax liabilities arising from or related to any failure
by COMPANY to comply with this Section 3.7 to the Addendum.
3.8 AGREEMENTS BETWEEN COMPANY AND ITS SELECT CUSTOMERS
With the exception of the terms contained in this Addendum and the terms
relating to the exercise of the intellectual property rights set forth in the
applicable Select Software Products, the applicable License Agreement for such
Select Software Products, Master Agreement and Enrollment Form, COMPANY shall
have complete discretion to establish with each Select Customer the pricing and
all other terms and conditions regarding COMPANY's provision of Select Software
Products and their associated license rights to COMPANY's Select Customers. The
negotiation of these terms between COMPANY and its Select Customers shall not be
subject to approval or review by MS in any way.
Page 4
<PAGE>
3.9 ROLE OF THE SELECT PROGRAM ADMINISTRATOR
COMPANY agrees to appoint a representative to serve as COMPANY's Select
Program Administrator. COMPANY agrees to promptly make that individual, as
well as COMPANY's other sales employees, available for training on the
Microsoft Select Program and on the licensing policies related to such
products at such times and places as MS reasonably requests. The individual
appointed by COMPANY as its Select Program Administrator shall be an
individual generally knowledgeable of MS products and of Microsoft's Select
Program. The Select Program Administrator shall be responsible for
administering all of COMPANY's Select Customer billings, for general
administration of COMPANY's Select Customers, disseminating all program
information as necessary within COMPANY's organization, and for working with
the Microsoft Select Account Manager (or local MS Contact) in regard to any
problems relevant to a given Select Customer. COMPANY's Select Program
Administrator shall be:
Warren Talbot
----------------------------
2140 Merritt Drive
----------------------------
Garland, TX 75041
----------------------------
----------------------------
----------------------------
COMPANY shall provide MS with at least ten (10) days advance written notice
of any change in the individual serving as its Select Program Administrator.
3.10 ENROLLMENT OF NEW SELECT CUSTOMERS
COMPANY's solicitation of new Select customers shall be on such terms and
conditions as MS specifies from time to time. MS reserves the right to accept or
reject in its sole discretion any proposed customer.
3.11 COMPANY'S REPRESENTATIONS AND WARRANTIES
COMPANY hereby represents and warrants that:
(a) It will use its best efforts to service and support its Select
Customers and will promptly inform the appropriate Microsoft Select contact of
any difficulties it encounters in servicing its Select Customers;
(b) It will not alter in any way or form the Select Software
Products or their packaging;
(c) It will deliver the Select Software Products only to the Select
Customer specified on the outside of the Select Software Product packaging and
will deliver CD-ROMs and program materials and information only to the Select
Customer named on each such CD-ROM or materials; and
(d) It will promptly inform MS of any known or suspected violations
by a Select Customer of the terms and conditions of the Master Agreement,
Enrollment Agreement, Enrollment Form, or its Select Software Products and/or
the applicable License Agreement.
Page 5
<PAGE>
3.12 CONFIDENTIALITY
COMPANY expressly undertakes to retain in confidence the terms and conditions of
this Addendum, and the terms and conditions of all executed Select Master
Agreements and Select Enrollment Forms which are made available to COMPANY.
Should COMPANY disclose the terms and conditions of any executed Select Master
Agreement or Select Enrollment Form, this Addendum shall immediately terminate.
COMPANY shall guarantee and ensure its employees' compliance with this
paragraph. COMPANY's obligations under this paragraph shall survive any
termination of this Agreement and shall extend to the earlier of such time as
the information is in the public domain or five (5) years following the
termination of this Agreement. This section shall not prohibit COMPANY from
disclosing such information as is specifically required by any Federal or state
authorities. Notwithstanding the foregoing, COMPANY may disclose confidential
information in accordance with any judicial or other governmental order or
request, provided that COMPANY shall immediately notify MS in writing upon its
receipt of such order or request and shall assist MS as is reasonable in seeking
any protective order or its equivalent or in limiting the scope of disclosure of
any confidential information.
3.13 COMPANY TERMINATION OF ENROLLMENT AGREEMENT/FORM
At anytime during the Term, COMPANY shall be able to terminate its rights and
obligations related to any Enrollment Agreement/Form currently administered by
COMPANY. In order for such termination to be effective, COMPANY must notify the
other party in writing of its desire to terminate its rights and obligations.
Such notification shall include the Select Customer's name and current contact
information, Select Agreement Number, and date of execution. All notification
shall be sent via a courier service able to track package delivery. COMPANY's
rights and obligations shall terminate thirty (30) days upon receipt of the
required notice.
3.14 MICROSOFT SELECT OPERATIONS POLICIES AND PROCEDURES
COMPANY shall materially perform its obligations pursuant to this Addendum in
accordance with the MS Select Operations Policies and Procedures. The MS Select
Operations Policies and Procedures may be modified by MS upon thirty (30) days
notice to COMPANY.
4. COMPANY AND MS OBLIGATIONS
4.1 DELIVERY OF SELECT SOFTWARE PRODUCTS AND SELECT CD-ROMS.
Within fifteen (15) days of MS's approval of a given Enrollment Agreement or
Form, MS agrees to deliver to COMPANY the Select Software Products identified on
such Enrollment. Each Select Software Product delivered to COMPANY will be a
custom package specific to the named Select Customer and will set forth the
Customer's Select Agreement Number and any special conditions relevant to the
named Select Customer. Select Software Products are provided in order that
COMPANY may provide the Select Software Products and their associated license
rights to the named Select Customer on such pricing and payment terms and
conditions as COMPANY and the Select Customer agree. COMPANY agrees to pay MS
for Select Software Products as set forth in Section 3.6 above. From time to
time during the term of this Addendum, MS will provide COMPANY with CD-ROMs
containing upgraded copies of the Select Software Products covered by a Select
Customer's Select Agreement. COMPANY agrees to immediately deliver all CD-ROMs
and any additional MS supplied program information and materials to the named
Select Customer.
Page 6
<PAGE>
4.2 RESERVATION OF RIGHTS
MS expressly reserves the right at any time during the Term to terminate any
Select Customer's status as a Select Customer in the event the Select Customer
fails to comply with the terms of either the Master Agreement, the Enrollment
Form or the applicable License Agreement. MS agrees to promptly notify COMPANY
of the termination of any Select Customer to whom COMPANY has distributed Select
Software Products. Following such a notice, COMPANY shall immediately cease the
distribution of any Select Software Products, licenses, CD-ROMs or any
additional program information and materials to the terminated Select Customer.
Termination shall not, however, affect the Select Customer's obligation to file
the next due order/report and MS's right to invoice COMPANY in regard to such
order. If MS terminates a given Select Customer, COMPANY shall not have any
claim against MS or the Select Customer for damages or lost profits resulting
from such termination. COMPANY shall, however, be entitled to invoice the Select
Customer for copies of Select Software Products reproduced by the Select
Customer as set forth in the Select Customer's final order, such invoice to be
on the terms and conditions previously agreed to between COMPANY and the Select
Customer.
4.3 OBLIGATIONS ON TERMINATION
Promptly following termination or expiration of this Addendum, MS shall inform
each of COMPANY's Select Customers that COMPANY is no longer a Large Account
Reseller and shall request that each Select Customer appoint a new Large Account
Reseller. COMPANY may invoice any and all Select Customer orders received
before the Select Customer is required to submit its next verified invoice for
Select Software Products to MS for orders placed under Microsoft Select version
1.x and 2.x and may invoice any orders it has received from Select Customers
under Microsoft Select version 3.0 and 4.0 prior to the effective date of the
termination or expiration. COMPANY shall invoice these remaining orders subject
to the terms and conditions of this Agreement. For purposes of this Section, the
terms and conditions of the Agreement shall survive until COMPANY completes its
wind down obligations. In the event this Addendum is terminated for cause, MS
shall be entitled to direct all of COMPANY's Select Customers to report/order
and pay to MS or to the Select Customer's newly designated Select Large Account
Reseller any and all payments due after termination. In such an event, COMPANY
shall not under any circumstances be entitled to any portion of, or any
compensation for, the Select Customer's next orders and payments or any future
orders and payments.
4.4 ESSENTIAL ELEMENT
Both COMPANY and MS acknowledge that this Addendum is essential to any agreement
it enters into with a Select Customer. Except as is specifically provided in
Section 4.3 related to COMPANY's right to collect any outstanding payment
following termination of this Addendum, COMPANY's rights to acquire and/or
distribute Select Software Products, Select CD-ROMs and/or any additional
program information and materials, and to collect payment from its Select
Customers are conditional upon this Addendum being in full force and effect.
COMPANY acknowledges further that, if and when it is the subject of a bankruptcy
filing (under any Chapter of 11 United States Code Section 101 ET SEQ. including
any future amendments), then assumption of any contract with a Select Customer
is conditional upon the assumption of this Addendum.
Page 7
<PAGE>
5. EXPORT RESTRICTIONS
All Product distributed by COMPANY pursuant to this Agreement is subject to the
export control laws and regulations of the United States. COMPANY agrees that
neither COMPANY nor its customers intend to or will, directly or indirectly: (i)
export or transmit any Product to any country to which such export or
transmission is restricted by any applicable U.S. regulation or statute
(currently including, but not limited to Cuba, the Federal Republic of
Yugoslavia (Serbia and Montenegro, U.N. Protected Areas and areas of Republic of
Bosnia and Herzegovina under the control of Bosnian Serb forces), Iran, Iraq,
Libya, North Korea, and Syria), without the prior written consent, if required,
of the Bureau of Export Administration of the U.S. Department of Commerce, or
such other governmental entity as may have jurisdiction over such export or
transmission; (ii) provide any Product in any manner to any Reseller or End User
whom COMPANY or its customer knows or has reason to know will utilize such
Product in the design, development or production of nuclear, chemical or
biological weapons, or (iii) to any End User who has been prohibited from
participating in U.S. export transactions by any federal agency of the U.S.
government.
6. AGREEMENT AND ADDENDUM TERMS
If any terms and conditions in this Addendum conflict with the term and
conditions in the Agreement, with respect to COMPANY's authorization as a Large
Account Reseller only, the terms and conditions of this Addendum shall control.
7. SURVIVAL
Sections 3.6, 3.7, 3.12, 4.3, 5 and 6 shall survive any termination of this
Addendum.
IN WITNESS WHEREOF, the parties have signed this Addendum on the date indicated
below. This Addendum is hereby made part of the Agreement. All terms and
conditions of the Agreement not supplemented herein shall remain in full force
and effect. This Addendum is not binding until executed by MS.
MICROSOFT CORPORATION SOFTWARE SPECTRUM, INC.
("MS") ("COMPANY")
By: /s/ Lori Moore By: /s/ Robert D. Graham
----------------------------------- --------------------------
Lori Moore Robert D. Graham
- -------------------------------------- -----------------------------
Name (please print) Name (please print)
Director, Field Strategy & Sales Ops. V.P. and General Counsel
- -------------------------------------- -----------------------------
Title Title
9/22/97 September 16, 1997
- -------------------------------------- ------------------------------
Date Date
Page 8
<PAGE>
SCHEDULE A
DEFINITIONS
"DOCUMENTATION PRODUCTS" is defined as supplemental disk sets and Product
documentation available from Microsoft World Wide Fulfillment.
"ENROLLMENT AGREEMENT" is defined as the Microsoft Select Enrollment
Agreement in the form provided by MS to be signed by each Select Customer and
MS, and approved by COMPANY.
"ENROLLMENT AGREEMENT NUMBER" is defined as the number assigned by MS to a
given Enrollment Agreement.
"ENROLLMENT FORM" is defined as the Microsoft Select Enrollment Form in the
form provided by MS to be signed by each Select Customer and MS.
"LARGE ACCOUNT RESELLER" is defined as any reseller which MS has authorized
to distribute licenses to Select Customers.
"LARGE ACCOUNT RESELLER AFFILIATE" is defined as any entity which owns,
controls, is owned or controlled by, or under common ownership or control with
the Large Account Reseller. For the purposes of this Addendum, an entity is
"controlled" by another if that other company or legal entity, either directly
or through its control of another company or legal entity: (i) holds the
majority of voting rights in it; (ii) is a member of it and has the right to
appoint or remove a majority of its board of directors; or (iii) is a member of
it and controls alone or under an agreement with other shareholders or members,
the majority of the voting rights in it.
"LEAD CUSTOMER" is defined as the company or entity signing a Master
Agreement.
"LEAD CUSTOMER AFFILIATE" is defined as a company or legal entity which
owns and controls, is owned or controlled by, or is under common ownership and
control with, the Lead Customer.
"LICENSE AGREEMENT(S)" is defined as the license agreement attached to the
Enrollment Form.
"MASTER AGREEMENT" is defined as the Microsoft Select Master Agreement in
the form provided by MS to be signed by a given Select Customer or an entity
acting on behalf of the Select Customer.
"MASTER AGREEMENT NUMBER" is defined as the number assigned by MS to a
given Master Agreement.
"SELECT CUSTOMER" is defined as the Lead Customer, any Lead Customer
Affiliate and /or identifiable division, business unit or office location of the
Lead Customer or Lead Customer Affiliate identified as the Select Customer on an
Enrollment Form or identified as an "Enrollment Customer", as that term is
defined in the Microsoft Select version 4.0 or in any Enrollment Agreement. This
definition shall also include "Enrollment Customers" as such terms are defined
in the Microsoft Select version 4.0.
"SELECT PROGRAM ADMINISTRATOR" is defined as the individual appointed by
COMPANY to act as COMPANY's primary contact with respect to the Microsoft Select
Program.
"SELECT SOFTWARE PRODUCT" is defined as the MS software as designated from
time to time by Microsoft which may be reproduced pursuant to an Enrollment
Form, excluding Documentation Products.
Page A-1
<PAGE>
SCHEDULE B
COMPANY SELECT PRICE SCHEDULE
Page B-1
<PAGE>
DIRECT RESELLER ADDENDUM TO THE
MICROSOFT CORPORATION
CHANNEL AGREEMENT
This Addendum ("Addendum") entered into as of the 1st day of July, 1997,
supplements that certain Microsoft Corporation Channel Agreement
("Agreement") between MICROSOFT CORPORATION ("MS") having its principal place
of business at One Microsoft Way Redmond, WA 98052 and SOFTWARE SPECTRUM,
INC. ("COMPANY") having its principal place of business at 2140 Merritt
Drive, Garland, TX 75041. The Agreement is supplemented as follows:
1. PURPOSE
The purpose of this Addendum is to set forth the framework by which MS
appoints COMPANY as a non-exclusive Direct Reseller in the United States of
America for the MS Product listed on the COMPANY Price List attached hereto
and incorporated herein by reference as Schedule B
2. DEFINITIONS
For purposes of this Addendum, capitalized terms are as defined in Schedule A
attached hereto and incorporated herein by reference. Any capitalized terms
not otherwise defined herein, shall have the same definition as set forth in
the Agreement.
3. TERM
This Addendum shall take effect as of the date indicated above and shall
continue until September 30, 1997.
4. COMPANY OBLIGATIONS
4.1 DISTRIBUTION TO END USERS ONLY
MS authorizes COMPANY to distribute Product to End Users in the Territory only,
and not to resellers of any kind.
4.2 LICENSING PROVISIONS
COMPANY acknowledges that Product is distributed to End Users subject to the
terms of the applicable Microsoft End User License Agreement. COMPANY shall make
commercially reasonable efforts to prevent distribution of Product to End Users
who intend to copy or reproduce the Product in violation of the Microsoft End
User License Agreement.
<PAGE>
4.3 PAYMENT TERMS
Payment terms are net thirty (30) days from the date of MS' invoice, subject to
approval of open terms by MS. All invoices outstanding over thirty (30) days
past term may be assessed a finance charge of two percent (2%) of the invoice
amount due per month or the legal maximum, whichever is less. Failure by COMPANY
to meet payment terms may result in a hold by MS of all pending COMPANY orders.
All payments to MS by COMPANY pursuant to this Addendum shall be in the form
of a bank wire transfer, or electronic funds transfer through an Automated
Clearinghouse ("ACH") with electronic remittance detail attached. Payments
shall be remitted to::
Microsoft North America Collections #844505
Account #3750771767
ABA: #11100001-2
NationsBank of Texas, N.A.
Remittance detail must be received at NationsBank by 10:00AM Central time/8:00AM
Pacific time to ensure same-day credit to COMPANY's account with MS.
Effective January 1, 1998, payments must be sent to NationsBank, at the address
indicated above, using the 820 Remittance EDI transaction set or other form of
ACH payment with electronic remittance detail attached.
4.4 SHIPMENT SHORTAGE CLAIMS AND FREIGHT DAMAGE
(a) COMPANY shall submit all claims for shortages and/or variances in
shipments to MS in writing within fifteen (15) days of COMPANY's receipt of such
shipment. All such claims not submitted in writing to MS within fifteen (15) day
period may be deemed waived by COMPANY. Any claims for shortages and/or
variances must be noted on the carrier's receiving documents.
(b) If COMPANY participates in the MS Account Forecasting System
Program, described more fully in Section 6.2 below, COMPANY may submit claims
for freight damage to MS in writing within fifteen (15) days of MS' invoice
date. Freight damage must be noted on the carrier's receiving documents. COMPANY
shall be responsible for all claims made with respect to freight collect
shipments, and shall not withhold payment to MS as a result of such claims.
COMPANY may take a remittance deduction for the Shipping Claims, provided that a
deduction notice identifying the claim (e.g., freight damage or shortage)
accompanies the remittance. If, upon MS' investigation of such Shipping Claims
MS rejects the claim, then COMPANY shall remit the amount due with respect to
the rejected claim with the next remittance. MS, at its sole discretion,
reserves the right to accept any Shipping Claims submitted by COMPANY over sixty
(60) days from receipt of shipment provided that COMPANY may be assessed a
fifteen percent (15%) handing fee. Credit will not be granted for claims
submitted over one hundred eighty (180) days from receipt of shipment.
4.5 PRODUCT FORECASTING
MS may require Product forecasting for COMPANY. COMPANY shall comply with all
Product forecasting requirements which MS may, from time to time, designate.
Page 2
<PAGE>
5. MS OBLIGATIONS
5.1 NEW PRODUCTS; PROMOTIONAL PRODUCTS
In the event MS elects to announce new or Promotional Product, MS shall use
commercially reasonable efforts to provide COMPANY with thirty (30) days prior
notice of such announcement. MS reserves the right to determine, at its sole
discretion, how the new or Promotional Product will be distributed.
5.2 INVENTORY PRICE PROTECTION
During the Term, MS shall grant COMPANY a price adjustment against Product price
reductions made and implemented by MS for an indefinite period of time. Price
adjustments shall be available on all inventory which COMPANY reports as being
in its possession as of the day of the reduction. Such price adjustment shall be
in the form of a Purchase Credit equal to the difference between the lowest
price paid by COMPANY during the six (6) months prior to the price reduction and
the reduced price. All claims accompanied with the appropriate proof of
inventory must be submitted to MS within sixty (60) days of the date the price
reduction takes effect. Adjustments shall be paid no later than thirty (30) days
after COMPANY provides proof of inventory. Special temporary prices and
promotional offerings, which may include price reductions or free goods, shall
not be considered a price reduction to which this Section applies.
6. COMPANY AND MS OBLIGATIONS
6.1 PRICE LIST
COMPANY prices are set forth on the COMPANY Price List. MS reserves the right to
modify the COMPANY Price List for Products which are currently being shipped, at
any time upon thirty (30) days written notice to COMPANY. MS may offer, without
prior notice, temporary "special" prices on any or all Product. Notwithstanding
the foregoing, MS may change, with or without prior notice, prices on new
Products which have not yet shipped.
6.2 DELIVERY AND PRODUCT DISTRIBUTION
Product shall be invoiced and shipped Free On Board ("FOB") Origin, and COMPANY
shall be responsible for freight charges. If COMPANY desires to specify its own
carrier, delivery shall then be "freight collect." COMPANY shall assume all risk
of loss and pay all costs of insurance for Products upon MS' delivery of the
Products to the point of origin.
In any month COMPANY participates in the MS Account Forecasting System ("AFS")
Program as outlined in MS' then current AFS Program Guidelines, for which MS is
allowed to choose the freight carrier and a mutually agreed-upon guaranteed
delivery window is established whereby Product is unloaded from the carrier
within four (4) hours of arrival, one hundred percent (100%) of the freight cost
of delivery of Product to each COMPANY warehouse, excluding consolidation
centers, will be paid by MS.
Page 3
<PAGE>
6.3 ORDER PROCESSING
COMPANY shall order Product from MS via EDI purchase order. All orders by
COMPANY shall be in Master Pack quantities only. MS shall have ten (10) days
from receipt to reject any purchase order. MS shall fulfill unconditional
EDI purchase orders from COMPANY subject to COMPANY's credit limits, current
payment status, and approved Average Payment Days ("APD") guidelines as
determined by MS. Rejected EDI purchase orders must be re-transmitted using
an unconditional EDI purchase order. Any terms present in any COMPANY
purchase order that is inconsistent with the terms of this Agreement shall be
null and void and the terms of this Agreement shall govern.
Except as provided herein, COMPANY shall have the right to change or cancel any
purchase order, provided that COMPANY notifies MS of the change or cancellation
no later than seventy-two (72) hours prior to the order shipment to COMPANY by
MS. Should COMPANY choose to change or cancel a purchase order, COMPANY must
contact its Microsoft Account Management Specialist with such change or
cancellation request. MS expressly reserves the right to limit order
quantities.
6.4 DEFECTIVE PRODUCT CREDIT
At MS' sole discretion, MS may determine that a Product or Product shipment is
defective. COMPANY shall immediately notify MS of any customer complaints or
returns relating to defects in the Product. Should MS determine that a Product
or Product shipment is defective, MS shall instruct COMPANY to return all
Defective Product to MS and, MS shall provide COMPANY with replacement Product
for returned Defective Products and shall pay freight costs of Product returned
to MS by COMPANY as well as for shipment of replacement Product from MS to
COMPANY.
6.5 PRIOR VERSION CREDIT
When MS ships a new version of a Product or discontinues an existing Product
where no replacement supersedes such Product, MS shall provide notification to
COMPANY. COMPANY shall receive a Purchase Credit for prior version of the
Product and/or Discontinued Product, provided COMPANY complies with all of the
following:
(a) Product for which COMPANY receives a Purchase Credit must be
offset by an order for the new version of the Product for which the Purchase
Credit was received or, in the case of a Discontinued Product, an order for
Product. Orders must be in an aggregate dollar amount equal to or greater than
the aggregate dollar amount of the Purchase Credit
(b) COMPANY shall be eligible to receive a Purchase Credit for up to
three hundred (300) days from the date the new version of such Product first
ships from MS to COMPANY or until the expiration of this Addendum, whichever
occurs first;
(c) Promotional Product is not eligible for credit pursuant to this
Section;
(d) Product must only include Product purchased by COMPANY from MS;
(e) Unresaleable Product is not eligible for credit pursuant to this
Section;
(f) This credit is available only for the Product version number
immediately prior to the new Product version or for the Discontinued Product;
and
Page 4
<PAGE>
(g) COMPANY must submit its Prior Version requests electronically
using MS' then current electronic Returns Authorization Form. COMPANY must
provide all required information, including, but not limited to, MS part number,
Product description, quantity, unit price, and extended price as defined in the
then current Return Processing Guidelines. Freight costs shall be paid by
COMPANY.
MS shall use commercially reasonable efforts to notify COMPANY within thirty
(30) days prior to the shipment of any new Product version, or the existence of
a Discontinued Product which would be subject to this Section.
It the foregoing conditions have been met, Product shall be returned to MS
pursuant to the terms of MS' then current Return Processing Guidelines. Prior
Version Returns shall be authorized once per month.
MS may, at its sole discretion, allow COMPANY to return Prior Version Product
for Purchase Credit for the period of three hundred one (301) days to three
hundred sixty-five (365) days from the date the new version of such Product
first ships from MS to COMPANY, provided that all such returns shall be subject
to a fifteen percent (15%) handling fee. In no event shall MS accept returns of
Prior Version Product after three hundred sixty-five (365) days. All Product
returned for Prior Version Credit must be in resalable condition.
6.6 UNRESALEABLE PRODUCT ALLOWANCE
Every other Month COMPANY shall be eligible to return current version or
immediately prior version Unresaleable Product and receive a Purchase Credit of
up to (*) percent (*) of COMPANY's net purchases, excluding Microsoft Variable
Licenses, Microsoft Enterprise Licenses, and Microsoft Maintenance, for the
previous two (2) Months. All Unresaleable Product shall be audited by MS.
COMPANY must submit its Unresaleable Product Allowance request electronically
using MS' then current electronic Returns Authorization Form. COMPANY must
provide all required information, including, but not limited to, MS part number,
Product description, quantity, unit price, and extended price in accordance with
the timeline as defined in the then current Return Processing Guidelines.
Freight costs shall be paid by COMPANY. Unresaleable Product may not be resold
or donated.
6.7 PRODUCT AUTHORIZATION CATEGORY PROCEDURES
From time to time, MS may classify certain of its Products by a Product
Authorization Category (e.g. Academic Edition Product) which Product may only be
obtained and distributed by COMPANY upon written authorization from MS. Such
written authorization from MS may be specific to the particular COMPANY outlet
location. COMPANY may apply for such authorization by completing the applicable
Reseller Authorization Application and/or Agreement process required by MS. MS
may by prior written notification terminate COMPANY's authorization to obtain
and distribute Product Authorization Category Product with respect to one or
more COMPANY outlets. For each Product Authorization Category Product
distributed, COMPANY shall complete and return to MS all requested COMPANY
registration documents.
- ---------------------
* Information omitted pursuant to a request for confidential treatment.
Page 5
<PAGE>
7. EXPORT RESTRICTIONS
All Product distributed by COMPANY pursuant to this Agreement is subject to the
export control laws and regulations of the United States. COMPANY agrees that
neither COMPANY nor its customers intend to or will, directly or indirectly: (i)
export or transmit any Product to any country to which such export or
transmission is restricted by any applicable U.S. regulation or statute
(currently including, but not limited to Cuba, the Federal Republic of
Yugoslavia (Serbia and Montenegro, U.N. Protected Areas and areas of Republic of
Bosnia and Herzegovina under the control of Bosnian Serb forces), Iran, Iraq,
Libya, North Korea, and Syria), without the prior written consent, if required,
of the Bureau of Export Administration of the U.S. Department of Commerce, or
such other governmental entity as may have jurisdiction over such export or
transmission; (ii) provide any Product in any manner to any Reseller or End User
whom COMPANY or its customer knows or has reason to know will utilize such
Product in the design, development or production of nuclear, chemical or
biological weapons; or (iii) to any End User who has been prohibited from
participating in U.S. export transactions by any federal agency of the U.S.
government.
8 SURVIVAL
Section 7 shall survive any termination of this Addendum.
IN WITNESS WHEREOF, the parties have signed this Addendum on the dates indicated
below. All terms and conditions of the Agreement not amended herein shall remain
in full force and effect. This Addendum is not binding until executed by MS.
AGREED AND ACCEPTED TO BY AGREED AND ACCEPTED TO BY
MICROSOFT CORPORATION ("MS") SOFTWARE SPECTRUM, INC.
("COMPANY")
By: /s/ Lori Moore By: /s Robert D. Graham
- -------------------------------------- ----------------------------------
Lori Moore Robert D. Graham
- -------------------------------------- ----------------------------------
Name (please print) Name (please print)
Director, Field Strategy & Sales Ops. V.P. and General Counsel
- -------------------------------------- ----------------------------------
Title Title
9/22/97 September 16, 1997
- -------------------------------------- ----------------------------------
Date Date
Page 6
<PAGE>
SCHEDULE B
COMPANY PRICE LIST
*
- ------------------------
* Information omitted pursuant to a request for confidential treatment.
Page B-1
<PAGE>
SCHEDULE C
MS CALENDAR
MICROSOFT - FISCAL CALENDAR FY '98
[CALENDAR - JULY '97 TO JUNE '98]
Page C-1
<PAGE>
REBATE AND MARKETING FUND
ADDENDUM TO THE MICROSOFT
CHANNEL AGREEMENT
This Addendum ("Addendum") entered into as of the 1st day of July, 1997,
supplements that certain Microsoft Channel Agreement ("Agreement") between
MICROSOFT CORPORATION ("MS") having its principal place of business at One
Microsoft Way Redmond, WA 98052 and SOFTWARE SPECTRUM, INC. ("COMPANY") having
its principal place of business at 2140 Merritt Drive, Garland, TX 75041. The
Agreement is hereby supplemented as follows:
1. PURPOSE
The purpose of this Addendum is to set forth the framework by which COMPANY may
earn Rebates and Marketing Funds.
2. TERM AND TERMINATION
This Addendum shall be effective as of the date indicated above, and shall
expire on September 30, 1997. Either party may terminate this Addendum, with or
without cause, upon thirty (30) days prior written notice. This Addendum is not
valid unless both MS and COMPANY have executed a Microsoft Channel Agreement,
and the Addendum to The Microsoft Channel Agreement (Appointment As a Direct
Reseller).
3. DEFINITIONS
For purposes of this Addendum, capitalized terms not otherwise defined herein,
shall have the same definitions as set forth in the Agreement. Additional
capitalized terms included in this Addendum are as defined in Schedule A
attached hereto.
4. REBATES
4.1 PACKAGED PRODUCT REBATE
COMPANY is eligible to receive up to a (*) percent (*) Rebate on its Qualified
Sales, excluding Open License sales, made during the Rebate and Marketing Fund
Period. The Rebate shall be paid provided COMPANY complies with the Rebate
Program Guidelines outlined in Schedule B.
4.3 PROVISION FOR EARLY PAYMENT OF REBATES
Notwithstanding such Rebate Program Guidelines, MS may, at its sole discretion,
pay all or any portion of the Rebate prior to the end of the Rebate and
Marketing Fund Period. The Rebate so paid may be adjusted subsequently based
upon compliance with the Rebate Program Guidelines..
5. MARKETING FUNDS
5.1 OPPORTUNITY FUNDS
Periodically, MS at its discretion may allow COMPANY to participate in MS
programs which provide the opportunity to earn Opportunity Marketing Funds.
COMPANY's participation in such programs shall be governed by this Addendum.
Grant of Opportunity Marketing Funds is subject to prior approval by MS.
5.2 USE OF MARKETING FUNDS
Acquisition, use of, and proof of expenditures of Opportunity Marketing Funds
shall be in accordance with this Addendum, and the terms of each Opportunity
Fund Proposal approved by COMPANY's MS Account Manager. Without limiting the
foregoing, COMPANY shall abide by the Spending Period dates as outlined in the
then-current Microsoft Marketing Fund Guidelines. Marketing Fund Claims
exceeding the then-current balance in COMPANY's Marketing Fund account at MS'
Marketing Fund vendor or submitted in excess of the pre-approved dollar amount
shall not be granted to COMPANY.
(*) Information omitted pursuant to a request for a confidential treatment.
<PAGE>
COMPANY must obtain MS approval from a MS representative prior to claiming
Marketing Funds. COMPANY agrees to report any suspected error or discrepancy in
the amount of Marketing Funds received by COMPANY within thirty (30) days of
receipt thereof. Failure to provide such notice within the specified period
shall mean that COMPANY forfeits the opportunity to request a re-audit. MS
reserves the right at any time to adjust COMPANY's Marketing Fund balance should
MS discover that an error or discrepancy has occurred.
5.3 MARKETING FUND AND REBATE AUDIT
During the term of this Addendum and for a period of two (2) years following its
termination, MS may audit the applicable records and operations of COMPANY as is
reasonable to verify COMPANY's compliance with the terms of this Addendum.
Additionally, MS may audit specific Opportunity Marketing Fund claims submitted
by COMPANY as outlined in COMPANY's then current Marketing Fund Guidelines. Any
audit shall be conducted during COMPANY's normal business hours in such a manner
as not to unreasonably interfere with COMPANY's normal business activities.
Audit expenses shall be paid by MS unless material discrepancies are disclosed
by such audit, in which case audit expenses shall be paid by COMPANY. For
purposes of this Section, "material discrepancies" shall mean ten thousand U.S.
dollars (US$10,000) or more in each Rebate or Marketing Fund payment.
If the results of any audit show that COMPANY used Marketing Funds in any manner
other than as authorized under this Addendum, MS shall be entitled to recover
from COMPANY any and all Marketing Funds so used, in addition to any other
remedies available to MS under law or equity plus injunctive relief and/or any
other damages as may be permitted by law. Further, if any such audit shows that
COMPANY has submitted incorrect sales reporting, and such reporting was the
basis of any rebate payment, MS shall have the right to recover any and all
rebate paid.
6. REPORTING REQUIREMENTS
COMPANY shall submit reports to MS as outlined in COMPANY's Rebate Program
Guidelines in accordance with the then current EDI Implementation Guide provided
by MS. Failure by COMPANY to comply with the terms of the Guidelines shall
result in COMPANY's loss of its monthly Compliance Rebate total for each month
reporting is non-compliant.
IN WITNESS WHEREOF, the parties have signed this Addendum on the date indicated
below. This Addendum is hereby made part of the Agreement. All terms and
conditions of the Agreement not supplemented herein shall remain in full force
and effect. This Addendum is not binding until executed by MS.
AGREED AND ACCEPTED TO BY AGREED AND ACCEPTED TO BY
MICROSOFT CORPORATION ("MS"): SOFTWARE SPECTRUM, INC.
("COMPANY"):
By:/s/ Lori Moore By: /s/ Robert D. Graham
--------------------------- -------------------------------
Lori Moore Robert D. Graham
--------------------------- -------------------------------
Name (please print) Name (please print)
Director, Field Strategy & V.P. and General Counsel
Sales Ops.
--------------------------- -------------------------------
Title Title
9/22/97 September 16, 1997
--------------------------- -------------------------------
Date Date
PAGE 2
<PAGE>
SCHEDULE A
DEFINITIONS
"DEFECTIVE PRODUCT" is defined as a manufacturer's defect in materials or
media.
"DISCONTINUED PRODUCT" is defined as Product that MS has stopped
manufacturing and discontinued from the COMPANY Price List.
"INVENTORY BALANCING" is defined as the return of eligible MS Product for
the purpose of reducing COMPANY's stock of such Product as is more fully
described in Section 5.5 of this Addendum.
"MONTH" is defined as a MS fiscal month as outlined in the calendar
attached hereto as Schedule C.
"PROMOTIONAL PRODUCT" is defined as a special Product SKU which may be
available to COMPANY for resale for a limited time. Free Product promotions are
not considered Promotional Product.
"RETURN AUTHORIZATION NUMBER" is defined as the unique number assigned to
COMPANY by MS for the purpose of Product returns for COMPANY to MS.
"SHIPPING CLAIMS" shall mean any shipping shortage or freight damage claim
COMPANY may submit pursuant to Section 4.4 of this Addendum.
"UNRESALEABLE PRODUCT" is defined as any current or immediately prior
version Product held in COMPANY's inventory, including damaged Product and
Product returned by COMPANY's customers which is no longer fit for resale, and
is ineligible for return to MS. In no event shall COMPANY be eligible to receive
a Unresaleable Product Allowance for any version prior to the version
immediately prior to the current version, or obsolete Product no longer eligible
for return in accordance with the terms of Section 6.5. For purposes of this
Addendum, Unresaleable Product shall not include that Product which has
sustained solely shrink wrap damage.
Page A-1
<PAGE>
SCHEDULE B
JULY - SEPTEMBER, 1997
REBATE GUIDELINES
PROGRAMS: Microsoft offers three (3) rebate programs for the July - September,
1997 Rebate period. The total available Rebate is divided as follows:
<TABLE>
<CAPTION>
MAXIMUM PERCENTAGE
REBATE PROGRAM AVAILABLE
-----------------------------------------------------------
<S> <C>
Total Sales-out Program *
-----------------------------------------------------------
Business Systems Sales-out Program *
(excluding Windows NT(TM)
Server and Windows NT(TM)
Client Access Licenses
-----------------------------------------------------------
32-Bit Office Sales-out Program *
-----------------------------------------------------------
TOTAL *
-----------------------------------------------------------
</TABLE>
REBATE CALCULATIONS AND PAYMENTS: Rebates will be paid in the form of a
Microsoft Purchase Credit forty-five (45) days after the end of the quarterly
Rebate Period (November 15th). Rebates are calculated by multiplying the
achieved Rebate percentage by the total Qualified Sales for the Rebate Period.
Revenue generated from Microsoft Select Enrollment Forms executed by MS on or
after July 1, 1994, shall be included in calculating COMPANY's achievement
toward the Sales-out goal, but shall not be included in COMPANY's final total
Qualified Sales for purposes of Rebate payment. Revenue generated from Microsoft
Select Enrollment Forms executed by MS prior to July 1, 1994 will be included in
calculating COMPANY's achievement towards the sales-out goal and will also be
eligible for a Grandfathered rebate. Rebate payment for such Select Enrollment
Forms shall be in the form of a purchase credit forty-five (45) days after the
end of each quarter of the Rebate Period.
PURCHASES THROUGH DISTRIBUTION: COMPANY's full packaged product and MLP
purchases through distribution during the month of July, 1997 will be subtracted
from COMPANY's Qualified Sales for purposes of Rebate payment. Full packaged
product and MLP purchases through distribution during the remainder of the term
of this Addendum shall be included in COMPANY's Qualified Sales for purposes of
Rebate payment.
PRODUCT AVAILABILITY: If Microsoft is unable to ship a current version of a
product for any ten (10) consecutive business days, COMPANY's purchases through
distribution of those SKUs will count toward COMPANY's Qualified Sales for
purchases of Rebate payment.
All copies of eligible purchase orders placed through distribution along with a
copy of the Microsoft Stock Out Report must be sent to Microsoft no later than
fifteen (15) days following the quarter end. Please send purchase order copies
and the Microsoft Stock Out Report to the following address:
MICROSOFT CORPORATION
ONE MICROSOFT WAY
BLDG. 22/2054
REDMOND, WA 98052
ATTN.: REBATE MANAGER, CHANNEL POLICIES
ANY ISSUES REGARDING REBATES SHOULD BE SENT IN WRITING TO REBATE MANAGER,
CHANNEL POLICIES, NO LATER THAN THIRTY (30) DAYS FOLLOWING RECEIPT OF REBATE
PAYMENT. If such written notice is not provided within thirty (30) days, COMPANY
shall have no further right to dispute Rebate payment.
CONTRACT COMPLIANCE: In order to receive rebates from Microsoft, COMPANY must
comply with Microsoft's established payment terms, Street Date requirements, EDI
reporting requirements, and Microsoft Select transaction requirements.
Compliance with these terms will be measured on a monthly basis, and COMPANY's
failure to comply will result in a loss of up to one fourth of its available
monthly rebate. At the time of rebate payment, COMPANY's entire rebate payment
shall be withheld until COMPANY is in compliance with the terms of this section.
Contract compliance obligations are outlined below.
1. MICROSOFT PAYMENT REQUIREMENTS:
Microsoft requires its customers to pay its invoices within terms. In order to
maintain compliance one hundred percent (100%) of the gross invoice value for
non-Select must be current as of Microsoft's fiscal month end, no less than
eighty-five percent (85%) of the gross invoice value for Select must be current
as of the end of Microsoft's
- -----------------------
* Information omitted pursuant to a request for confidential treatment.
PAGE B1
<PAGE>
fiscal months July, August, October and November, and no less than ninety (90%)
of the gross invoice value for Select must be current as of the end of
Microsoft's fiscal months September and December. Additionally, no less than
ninety percent (90%) of unapplied credits must be current as of Microsoft's
fiscal month-end, and no greater than one percent (1%) of the gross value for
Select invoices shall be past net 60 days. Unapplied credits will be excluded
from the calculation. Beginning in January, 1998 no less thin ninety percent
(90%) of Select invoices must be current as of Microsoft's fiscal month end for
all months.
2. MS STREET DATE-REQUIREMENTS:
From time to time, MS may announce a new product or new versions of an existing
Product for which MS shall set a Street Date. The Street Date Program requires
Resellers to sell Product no sooner than the date specified as the "Street
Date". MS' Street Date Requirements are as follows:
RETAIL DELIVERY OF PRODUCT, COMPANY SHALL NOT:
- Ship or deliver the Product to any End User prior to the Street
Date. Proof of violation is an early-dated sales slip.
- Accept any End User payment for the Product prior to the Street
Date. Checks and/or credit card numbers may be accepted by
COMPANY, but can only be processed when product is delivered to
the End User on or after the Street Date.
MALL ORDER DELIVERY OF PRODUCT, COMPANY SHALL NOT:
- Deliver the Product to any End User customer prior to the Street
Date. If COMPANY wishes, COMPANY may ship Product by public
carrier up to 2 days early provided the carrier provides proof of
delivery and guarantees no End User will receive the Product
before street date. Proof of violation is an early-dated carrier
slip.
- Accept any End User payment for the Product prior to Product
shipment. Checks and/or credit card numbers may be accepted by
COMPANY, but can only be processed when Product is shipped to the
End User for arrival on or after the Street Date.
ELECTRONIC SOFTWARE DISTRIBUTION OF PRODUCT, COMPANY SHALL NOT:
- Ship or deliver an un-lock key for Product to any desktop package
or End User prior to the Street Date. (ESD RESELLER IS
RESPONSIBLE FOR MAKING SURE AGREEMENTS WITH CLEARINGHOUSES ARE
CLEAR ON THIS POINT.) Proof of violation is an early-dated
un-lock key.
- Accept any End User payment for the Product prior to the Street
Date. Checks and/or credit card numbers may be accepted by
COMPANY, but can only be processed when the un-lock key for the
Product is delivered to the End User on or after the Street Date.
ADDITIONALLY, COMPANY SHALL NOT:
- Advertise, merchandise, or promote the Product to End User
customers until MS' officially announced "Coming Soon" date.
(Appearance on a WEB page is considered an advertisement.) If the
Product is advertised, merchandised and/or promoted beginning
with "Coming Soon" Date and before Street Date, all such
promotions must clearly state that the Product is not yet
available for purchase.
- Allow it's distribution centers and/or warehouses to distribute,
for a period of up to twelve months, a Street Date Product to any
individual sales office, retail store, or outlet which MS in its
sole discretion has determined to be in violation of the Street
Date Requirements.
In the event COMPANY violates the Street Date for any special Products specified
in a MS Street Date letter, COMPANY shall forfeit up to * percent * of its
eligible Rebate percentage for the six month Rebate Period in which the
violation occurred.
Should COMPANY fail to comply with the Street Date Requirements, MS may also,
for a period of up to twelve (12) months, withhold shipments to COMPANY of
future Product until the Street Date of such Product.
Should COMPANY wish to report a Street Date violation, COMPANY may fax a copy of
a dated sales receipt to STREET DATE VIOLATIONS AT MICROSOFT AT (206) 936-7329.
Once a violation has been reported, MS shall investigate the violation, and take
remedial action as appropriate. Please note, in order to confirm a suspected
violation, MS must receive proof of violation as indicated above.
- -----------------------
* Information omitted pursuant to a request for confidential treatment.
PAGE B2
<PAGE>
3. MICROSOFT REPORTING REQUIREMENTS
ALL EDI REPORTING MUST BE TIMELY, ACCURATE, AND COMPLETE. FOR PURPOSES OF THIS
AGREEMENT, "TIMELY" IS DEFINED AS MS RECEIPT OF REPORTING BY THE DUE DATE AND
TIME INDICATED, "ACCURATE" IS DEFINED AS THE CORRECT POPULATION OF ALL REPORTING
FIELDS, AND "COMPLETE" IS DEFINED AS THE POPULATION OF ALL REQUIRED REPORTING
FIELDS.
MICROSOFT PRODUCT REPORTING RULES
Reporting includes, but is not limited to, reports sent to Microsoft via
Electronic Data Interchange format ("EDI") of weekly Sales, Inventory, and
Internal Market Share. COMPANY must make the EDI Sales, Inventory and Market
Share reports available to MS' EDI mailbox each Monday by Noon (Pacific time).
These reports shall cover the seven-day period (Saturday through Friday EOB).
Please refer to the EDI Reporting Guidelines for details on reporting
requirements.
MS reserves the right to modify the EDI Reporting Guidelines. MS shall provide
COMPANY with sixty (60) days prior written notice of changes to existing EDI
Guidelines. COMPANY's failure to implement changes with sixty (60) days shall
result in forfeiture of c of COMPANY's total eligible Rebate for each month
in which changes are not implemented.
- Each unit of Microsoft single license Full Package Product should
be reported as one (1) unit.
EXAMPLE: MICROSOFT(R) WORD FOR WINDOWS (R) FPP- REPORT AS ONE (I) UNIT.
- Any single Microsoft Multiple License Pack (MLP) should be
reported as one (1) unit.
EXAMPLE: MICROSOFT(R) WINDOWS NT(TM) WORKSTATION LICENSE PACK 20 USER -
REPORT AS ONE (1) UNIT.
- All Microsoft Volume Licensing Agreements (such as Open Licenses,
Select Variable Licenses and Enterprise Licenses) should be
reported as one unit for each license sold.
EXAMPLE: MICROSOFT SELECT MVLP LEVEL B (MIN 8000 LICENSES) AGREEMENT -
CUSTOMER BUYS 9356 WORD - REPORT 9356 WORD UNITS.
Accounts are required to report units sold (Sales) and units in inventory
(Inventory) for each Microsoft SKU, but are required only to report the
aggregate total license count for competitive products sold for each Market
Share (Internal Market Share) category. All SKUs for these titles should be
counted, including full packaged product, upgrades, license packs, initial sale
of new maintenance and education and government SKUs of the foregoing. Please
refer to the EDI Reporting Guidelines for details on reporting requirements.
MARKET SHARE REPORTING
The following table outlines the Market Share product categories for EDI
reporting. The table also specifies the top competitive products that must be
included in the aggregated market share reporting. All competitive products
within a given category must be reported. The products listed below are just
examples, not a comprehensive list. For a comprehensive competitive SKU list
please contact your Microsoft Channel Measurement Specialist. MS reserves the
right to add or delete categories with sixty (60) days prior written notice to
COMPANY.
A comprehensive competitive SKU list shall be provided to COMPANY at the
beginning of each quarter. COMPANY must implement use of the list no later
than thirty (30) days after receiving the list. To the extent that COMPANY
sells any of the products contained on the list, COMPANY's Internal Market
Share reporting will include those SKUs. If between quarters there are any
new major releases of competitive products that fall under the competitive
product categories or upgrades to products already listed on the competitive
SKU list, COMPANY shall include those SKUs in COMPANY's Internal Market Share
reporting immediately upon release of new products.
PAGE B3
<PAGE>
Windows-based competitive products summaries:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DATABASE VENDOR DESCRIPTION
<S> <C> <C>
BORLAND DBASE, PARADOX
LOTUS APPROACH
CLARIS FILEMAKER PRO
DATAEASE DATAEASE
SAPPHIRE SQL CONNECT
SYMANTEC Q & A
- ------------------------------------------------------------------------------------------------------------------------
DEVELOPER VENDOR DESCRIPTION
BORLAND DELPHI
GUPTA SQL WINDOWS
ORACLE DEVELOPER 2000, POWEROBJECTS
POWERSOFT POWERBUILDER
- ------------------------------------------------------------------------------------------------------------------------
MESSAGING SERVERS
VENDOR DESCRIPTION (Servers only. Do not report clients.)
BANYAN BEYOND MAIL
LOTUS CC:MAIL, NOTES, NOTESUITE
NETSCAPE MAIL SERVER
NOVELL GROUPWISE
- ------------------------------------------------------------------------------------------------------------------------
SUITE VENDOR DESCRIPTION
COREL OFFICE PRO, WORDPERFECT SUITE
LOTUS SMARTSUITE
NOVEL PERFECT OFFICE
- ------------------------------------------------------------------------------------------------------------------------
WORDPROCESSOR VENDOR DESCRIPTION
LOTUS WORD PRO, AMI PRO
NOVELL WORDPERFECT
SOFTKEY WORDSTAR, PFS:WRITE
SOFTWARE PUBLISHER OFFICE WRITER, PROFESSIONAL WRITE PLUS
XYQUEST XYWRITE
- ------------------------------------------------------------------------------------------------------------------------
SPREADSHEET VENDOR DESCRIPTION
COMPUTER ASSOCIATES SUPERCALC
COREL QUATTRO PRO
LOTUS 1-2-3
NOVELL QUATTRO PRO
- ------------------------------------------------------------------------------------------------------------------------
NOS SERVERS VENDOR DESCRIPTION (Servers only. Do not report clients)
BANYAN VINES, SERVER
IBM OS/2, OS/2 LAN SERVER, OS/2 WARP, OS/2 WARP CONNECT
NOVELL NETWARE, NETWARE FOR SAA:AS400, INTRANETWARE, MPR,
MANAGEWISE W/NETWARE
SANTA CRUZ OPEN SERVER, UNIXWARE
OPERATION
- ------------------------------------------------------------------------------------------------------------------------
BROWSERS VENDOR DESCRIPTION
NETMANAGE CHAMELEON
NETSCAPE NETSCAPE BROWSER
SPRY SPRY MOSAIC; INTERNET IN-A-BOX
IBM WEB EXPLORER
QUARTERDECK MOSAIC
NCSA MOSAIC
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE B4
<PAGE>
COMPETITIVE PRODUCT MARKET SHARE REPORTING RULES
- Each unit of COMPETITIVE single license FULL PACKAGE PRODUCT should be
reported as one (1) unit.
EXAMPLE: LOTUS SMARTSUITE FOR WINDOWS FPP-REPORT AS 1 UNIT
- Any single COMPETITIVE product that is a MULTIPLE LICENSE PACK (MLP)
should be reported as the exact number of licenses contained in the
MLP. Examples of these products include competitive 10 User Packs, 20
User Packs, and 100 User Packs. Unlike MS Products, competitive MLPs
are not reported as a single unit, but instead as the exact number of
licenses included in the MLP. If the MLP is a Network Operating System
or Messaging Server MLP, count only server licenses contained in the
MLP.)
EXAMPLE: WORDPERFECT V6.0 FOR WINDOWS 20-USER LICENSE PACK - REPORT AS 20
UNITS
- All SKUs (with the exception of Mail clients and Network Operating
System clients) contained in COMPETITIVE VOLUME LICENSING AGREEMENTS
should be reported as one (1) unit for each license sold within the
volume license agreement.
EXAMPLE: LOTUS VPO-LEVEL E 1-2-3)OR WINDOWS (CUSTOMER BUYS 7421 UNITS)
- REPORT AS 7421 UNITS
- COMPETITIVE MAIL SERVERS and NETWORK OPERATING SYSTEMS must be
reported as one (1) unit for each SERVER LICENSE SOLD. DO NOT REPORT
CLIENT LICENSES IN FPP, MLP, OR VOLUME LICENSE AGREEMENTS.
- Report MAINTENANCE only at the time the maintenance SKU is sold.
- Product Support for any competitive SKU should NOT be reported.
- Documentation-only SKUs should NOT be reported.
- Only US versions of competitive SKUs should be reported. Do not report
non-English, International English, or International versions of
competitive SKUs.
- Promotional competitive SKUs should be reported.
4. MICROSOFT SELECT TRANSACTION REQUIREMENTS:
Microsoft Select Electronic Data Interchange format ("EDI") transactions
include, but are not limited to 850/855 EDI transactions and all other EDI
reporting requirements which may be required by MS and in the EDI Implementation
Guide provided by MS from time to time. COMPANY must place Select EDI
transaction orders at a minimum of once per month per Enrollment Site if product
is purchased during said month.
SALES-OUT REBATE PROGRAMS
PROGRAM OBJECTIVE: The objective of all Sales-out Rebate Programs is to increase
the sales of Microsoft products. All license types (Select, Microsoft Open
License, Full Package Product, MLPs ESD) are included in measuring performance
against this goal, however, the Rebate is paid on full packaged product sales
only.
REBATE GOALS: COMPANY's performance for first three months of quarter will be
measured against the quarter Sales-out goals. At the end of first quarter,
COMPANY will receive the percentage of the eligible Rebates earned based on
performance against the quarter goals.
SALES-OUT DEFINITIONS/MEASUREMENT: MS Product Sales-out is defined as those
MS net (sales less returns) Product units sold through COMPANY's outlet
locations. COMPANY's full packaged product, Microsoft Open License, and
upgrade sales-out units will be measured from the sales-out reported by
COMPANY to MS. Licensing sales (Select, Microsoft Maintenance) are captured
and generated by MS' financial systems and included in total sales-out used
to measure product sales-out Rebate performance.
PAYMENT: At the end of the quarter, COMPANY will be paid Sales-out Rebates based
on performance against the quarter goals. If COMPANY achieves greater than *
percent * of each quarter Sales-out goal, COMPANY will receive the exact
achieved percentage of the eligible Sales-out Rebate up to one hundred percent
(100%). If COMPANY achieves less than * percent * of any Sales-out Rebate goal,
COMPANY will not receive any portion of that Sales-out Rebate.
Although MS pays the Sales-out Rebate ultimately based on performance against an
annual Sales-out goal, Microsoft also pays a Sales-out Rebate at the end each
quarter based on performance against the quarter goal. Microsoft pays a portion
of the Rebate after each quarter to provide incentive for COMPANY to focus on
Sales-out throughout the entire year. However, should COMPANY's total quarterly
Rebate payments exceed the final Rebate total as calculated at the end of the
year, MS reserves the recover from COMPANY any such Rebate overpayment.
- --------------------------------
* Information omitted pursuant to a request for confidential treatment.
PAGE B5
<PAGE>
- -------------------------------------------------------------------------------
SALES-OUT REBATE PROGRAM GOALS
- -------------------------------------------------------------------------------
COMPANY's Total Sales-out Rebate Program goals are as follows:
- Quarter Goal (July - September, 1997): *
COMPANY's Business Systems (excluding Windows NT-TM- Server and Windows NT-TM-
Client Access Licenses) Sales-out Rebate Program goals are as follows:
- Quarter Goal (July - September, 1997): *
COMPANY's 32 bit Office Sales-out Rebate Program goals are as follows:
- Quarter Goal (July - September, 1997): *
- --------------------------------
* Information omitted pursuant to a request for confidential treatment.
PAGE B6
<PAGE>
THIRD AMENDMENT TO LEASE AGREEMENT
This Third Amendment to Lease Agreement (this "Third Amendment") is entered
into by and between CIIF ASSOCIATES II LIMITED PARTNERSHIP, a Delaware limited
partnership (hereinafter called "Landlord") and SOFTWARE SPECTRUM, INC., a Texas
corporation formerly known as The Software Store, Inc. (hereinafter called
"Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Lease Agreement
dated May 1, 1990 (the "Original Lease"), wherein Landlord leased to Tenant
approximately fifty-one thousand one hundred forty-five (51,145) square feet of
rentable area in the building known as 2140 Merritt Drive, Garland, Texas (the
"Building"), all as more fully described in the Lease (the "Premises"); and
WHEREAS, Landlord and Tenant amended the Original Lease pursuant to the
terms and provisions of that certain First Amendment to Lease Agreement dated
March 31, 1995 (the "First Amendment") executed by Landlord and Tenant; and
WHEREAS, Landlord and Tenant further amended the Original Lease pursuant to
the terms and provisions of that certain First Addendum to Lease Agreement dated
July 31, 1996 (the "Second Amendment") executed by Landlord and Tenant (the
Original Lease, as amended by the First Amendment and the Second Amendment, is
herein referred to as the "Lease"); and
WHEREAS, desire to further amend the Lease in accordance with the terms and
conditions set forth below;
NOW, THEREFORE, for and in consideration, of the sum of Ten and No/100
Dollars ($10.00) and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows (capitalized terms used herein having the meanings ascribed to them
in the Lease unless specifically defined herein):
1. The term of the Lease is hereby extended to expire on March 31, 2007.
Tenant has no further options to renew or extend the term of the Lease.
2. Effective as of April 1, 1998, the monthly installments of Base Rent
due and payable under the Lease shall be as follows:
(a) from April 1, 1998 through March 31, 2000, the monthly Base
Rental shall equal Seventeen Thousand Six Hundred Two and 40/100 Dollars
($17,602.40);
<PAGE>
(b) from April 1, 2000 through March 31, 2004, the monthly Base
Rental shall equal Twenty-One Thousand Ninety-Seven and 31/100 Dollars
($21,097.31); and
(c) from April 1, 2004 through March 31, 2007, the monthly Base
Rental shall equal Twenty-two Thousand Eight Hundred Two and 15/100 Dollars
($22,802.15).
3. The parking area for the Premises is hereby increased to include the
area described on EXHIBIT A attached hereto (the "Leased Parking Area"). From
and after May 1, 1998, in addition to the Base Rent due under Paragraph 2.A. of
the Lease, Tenant shall pay to Landlord monthly as Additional Rent due under the
Lease, One Thousand Five Hundred Nineteen and 41/100 Dollars ($1,519.41) per
month. Landlord and Tenant hereby acknowledge that the parties have estimated
that the Leased Parking Area will include approximately 77,587 square feet of
parking area. Upon completion by Tenant of the Additional Parking Improvements
(as hereinafter defined), the parties agree that they shall determine the actual
square footage of parking area included in the Leased Parking Area. If the
parties determine that the Leased Parking Area contains more than 77,587 square
feet of parking area, then such monthly additional parking rent shall be
increased by an amount equal to 1/12th of the product of $0.235 multiplied by
the number of square feet of parking area actually utilized by Tenant which is
in excess of 77,587 square feet. Tenant shall not be entitled to a decrease in
the monthly additional parking rent if the Leased Parking Area contains less
than 77,587 square feet of parking area. Tenant's use of the Leased Parking Area
shall be subject to the following terms and conditions:
(a) After Tenant's completion of the Additional Parking Improvements,
Tenant shall maintain the Leased Parking Area in good condition.
(b) Tenant shall pay all Taxes, utility costs, insurance costs, and
maintenance costs regarding the Leased Parking Area; accordingly, Tenant's
proportionate share for purposes of calculating Tenant's obligations under
Paragraph 2.C under the Lease as to the Leased Parking Area shall be 100%.
(c) Tenant shall defend, indemnify, and hold Landlord harmless from
and against all liabilities, claims, and expenses (including, without
limitation, reasonable attorney's fees and expenses) arising as a result of
Tenant's use of the Leased Parking Area, except for those arising from
Landlord's negligence or wilful misconduct.
(d) Tenant may not construct any alteration or place any signs on the
Leased Parking Area without Landlord's prior written consent, which consent
shall not be unreasonably withheld; provided, however, Tenant may install
signage on the Leased Parking Area to the extent such signage is reasonably
necessary to identify Tenant's use of the Leased Parking Area and provided
such signage is approved by Landlord and complies with all applicable laws,
ordinances and restrictions affecting the Leased Parking Area.
-2-
<PAGE>
(e) The Leased Parking Area shall only be used for the parking of
motor vehicles by Tenant, Tenant's employees, customers and visitors. In no
event will any boat, camper, trailer, truck larger than a one-ton pickup or
any other vehicle be parked or stored on the Leased Parking Area. The
Leased Parking Area shall not be used for the repair or restoration of any
motor vehicle, boat, camper, trailer or other vehicle, except for emergency
repairs, and then only to the extent necessary to enable is movement to a
proper repair facility. Tenant's use of the Leased Parking Area shall
comply at all times with all deed restrictions, zoning ordinances and other
laws applicable to Tenant's use of the Leased Parking Area.
(f) Tenant may not assign its right to use the Leased Parking Area or
assign its rights under this Paragraph 3, other than in connection with an
assignment of the entire Lease.
4. Landlord shall provide Tenant with an allowance (the "Improvement
Allowance") in an amount of One Hundred Fifty-Three Thousand Four Hundred
Thirty-Five and No/100 Dollars ($153,435.00) to be applied to the reimbursement
of the cost of constructing additional parking improvements (the "Additional
Parking Improvements") in the Leased Parking Area. The Additional Parking
Improvements shall include, without limitation, increasing the number of parking
spaces on the Leased Parking Area by a minimum of 160 parking spaces and paving
at least 60,000 square feet of additional parking area in the Leased Parking
Area. The Additional Parking Improvements shall be constructed of materials
that are substantially similar to the materials used in constructing the
existing parking improvements currently utilized by Tenant. The Additional
Parking Improvements shall be completed on or before December 31, 1998. Landlord
shall advance the Improvement Allowance to Tenant for reimbursements of the
Additional Parking Improvements constructed by Tenant within thirty (30) days
following delivery by Tenant to Landlord of sufficient documentation and lien
releases to evidence payment in full of all work related to such Additional
Parking Improvements. All such improvements shall be constructed by Tenant in
accordance with the terms and provisions of the Lease. In addition, Tenant shall
pay Landlord a construction management fee equal to five percent (5%) of the
cost of the Additional Parking Improvements. In the event the Improvement
Allowance is not fully advanced by Landlord by January 31, 1999, any unadvanced
portion of the Improvement Allowance may be utilized by Tenant to reimburse
Tenant for actual costs and expenses incurred in connection with the completion
of any leasehold improvements installed by Tenant in the Premises by Tenant, but
only to the extent such leasehold improvements are approved by Landlord.
5. Except for Tenant's preferential right to lease additional space in
the Building as set forth on EXHIBIT B attached hereto, Landlord has no further
rights to lease additional space in the Building.
6. Tenant shall have the right to lease additional parking area in
accordance with the terms and conditions of EXHIBIT C attached hereto.
-3-
<PAGE>
7. By its execution of this Third Amendment, Tenant acknowledges and
agrees that all leasehold improvements and tenant finish in the Premises are in
good and satisfactory condition acceptable to Tenant. Tenant acknowledges that
it accepts the Premises in their present condition, i.e. "AS IS" and "WITH ALL
FAULTS," subject to any latent defects of which Tenant is unaware as of the date
of Tenant's execution of this Third Amendment. Notwithstanding the foregoing,
Landlord shall remain responsible for any subsequent repairs required to
portions of the Building for which Landlord is responsible under the terms of
the Lease.
8. Landlord agrees to pay to The Industrial Group ("Landlord's Broker") a
real estate brokerage commission as set forth in a separate listing agreement
between Landlord and Landlords' Broker and agrees to pay The Staubach Company
("Tenant's Broker") a real estate brokerage commission as set forth in a
separate commission agreement between Landlord and Tenant's Broker. Tenant
hereby represents and warrants to Landlord that it has not employed any other
agents, brokers or other such parties in connection with the extension of the
lease term pursuant to the terms and conditions of this Third Amendment, and
Tenant agrees that it shall hold Landlord harmless from and against any and all
claims of all agents, brokers or other such parties claiming by, through or
under Tenant.
9. The Lease, as amended by this Third Amendment, is hereby ratified and
affirmed and, except as expressly amended hereby, all other items and provisions
of the Lease remain unchanged and continue to be in full force and effect. The
terms of this Third Amendment shall control over any conflicts between the terms
of the Lease and the terms of this Third Amendment.
10. The Lease, as amended by this Third Amendment, constitutes the entire
agreement and understanding between the parties hereto relating to the subject
matter hereof and all prior agreements, proposals, negotiations, understandings
and correspondence between the parties in this regard, whether written or oral,
are hereby superseded and merged herewith.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, this Third Amendment may be executed by the parties
hereto on separate multiple counterparts, each of which shall be deemed to be an
original, executed to be effective as of the 20th day of April, 1998.
"Landlord"
CIIF ASSOCIATES II LIMITED PARTNERSHIP,
a Delaware limited partnership
By: AEW Advisors, Inc., a Massachusetts corporation,
its managing general partner
By: /s/ Mark A. Albertson
-------------------------------------------
Name: Mark A. Albertson
-------------------------------------------
Title: Vice President
------------------------------------------
"Tenant"
SOFTWARE SPECTRUM, INC.,
a Texas corporation
By: /s/ Robert D. Graham
-------------------------------------------
Name: Robert D. Graham
-------------------------------------------
Title: Vice President & General Counsel
------------------------------------------
-5-
<PAGE>
EXHIBIT A
DESCRIPTION OF LEASED PARKING AREA
A-1
<PAGE>
EXHIBIT "A"
LEASING PARKING AREA
SOFTWARE SPECTRUM, INC.
[PARKING AREA LAYOUT]
<PAGE>
EXHIBIT B
TENANT'S PREFERENTIAL RIGHT TO LEASE
1. Subject to the preferential rights of other tenants in the Building
which are included in any lease executed hereafter as to which Tenant fails or
elects not to exercise its Preferential Rights under this EXHIBIT B, during the
term of the Lease, and subject to the terms and conditions set forth below,
Tenant shall have a right of first opportunity (the "Preferential Right") to
lease that certain space identified on EXHIBIT B-1 attached hereto ("Additional
Space"), prior to the Additional Space being leased to any third party other
than Coats Aloe. Landlord shall deliver written notice (the "Offer Notice") to
Tenant when Landlord enters or intends to enter serious negotiations with a
third party to lease all or any portion of the Additional Space (and Landlord's
good faith determination of whether serious negotiations have been entered or
are about to be entered shall be conclusive and binding upon the parties). The
Offer Notice shall include a floor plan of the subject Additional Space, and
shall state the date on which the Additional Space shall be included in the
Premises, the Base Rental Rate for such space, and the other basic terms and
conditions upon which Landlord is willing to lease such space (including,
without limitation, the term, renewal and expansion options, and other
preferential rights, the number of parking spaces and rates therefor, the basis
upon which operating expenses will be charged to the tenant, and if Tenant's
right to the subject Additional Space will be subject to expansion or renewal
rights held by other tenants). The Preferential Right shall apply only with
respect to the entire Additional Space offered by Landlord to Tenant, and may
not be exercised with respect to only a portion thereof. Tenant shall notify
Landlord in writing whether Tenant elects to lease the entire Additional Space,
within ten days after Landlord delivers to Tenant the Offer Notice. If Tenant
timely elects to lease the Additional Space, then Landlord and Tenant shall
execute an amendment to the Lease, effective as of the date the Additional Space
is to be included in the Premises including the Additional Space in the
Premises, on the same terms as the Lease except that:
(a) the monthly Base Rent for such space shall be the monthly Base
Rent identified in the Offer Notice; and
(b) the lease term for the Additional Space shall be for the lease
term identified in the Offer Notice.
If Tenant fails or is unable to timely exercise its right hereunder, then such
right shall lapse, time being of the essence with respect to the exercise
thereof, and Landlord shall have a period of one hundred eighty (180) days after
delivery of the Offer Notice to lease the Additional Space to third parties on
such terms as Landlord may elect, in its sole and absolute discretion, except
that in no event shall the effective rental rate (taking into consideration all
amounts to be paid by Tenant to Landlord thereunder, such as annual Base Rent
and additional, together with all allowances and monetary concessions (such as
tenant improvement allowance and free rent) to be provided by Landlord to
Tenant) in such lease be less than ninety-five percent (95%) of the effective
rental rate
B-1
<PAGE>
offered to Tenant in the Offer Notice, and the foregoing preferential right
shall be of no further force or effect with respect to such portion of the
Additional Space until such lease and any renewal or extension rights thereunder
expire or are terminated. If Landlord does not enter into such a lease of the
Additional Space within said one hundred eighty (180) day period, then Tenant
shall again have a Preferential Right as set forth in this EXHIBIT B. If
Landlord enters into a lease with a third party for the Additional Space, then
the parking spaces designated as the "New Tenant Parking" on the second page of
this EXHIBIT B shall be available for the exclusive use of such third party, and
Tenant shall no longer have any rights to use such parking spaces.
2. The Preferential Right of Tenant to lease the Additional Space as
provided for herein can be exercised only if, at the time of such exercise of
the Preferential Right and upon the date the portion of the Additional Space
referenced in the Offer Notice is to be included in the Premises, (a) Tenant is
not in default under the Lease beyond any applicable grace period and (b) Tenant
is in possession of the entire Premises. In the event that either of such
conditions is not satisfied and is not waived by Landlord in its sole and
absolute discretion, Tenant's Preferential Right shall be terminated and of no
further force and effect. Tenant's Preferential Right shall terminate if (1) the
Lease or Tenant's right to possession of the Premises is terminated or (2)
Tenant assigns any of its interest in the Lease or sublets any portion of the
Premises.
3. Notwithstanding the foregoing, Tenant's preferential right under this
EXHIBIT B shall be subject and subordinate to any renewal or extension of the
occupancy of the existing tenant of the Additional Space, Coats Aloe.
B-2
<PAGE>
EXHIBIT C
EXPANSION PARKING OPTION
1. Subject to the terms and conditions of this EXHIBIT C, Tenant shall
have the additional option ("Expansion Parking Option"), by providing written
notice thereof to Landlord (the "Expansion Parking Election Notice"), at any
time on or before October 1, 2006, to include under the Lease all or any portion
of the land identified on EXHIBIT C-1 attached hereto (the "Expansion Parking
Area"). The amount of the Expansion Parking Area to be included under the Lease
pursuant to the Expansion Parking Option shall be identified by Tenant in the
Expansion Parking Election Notice. The actual portion of the EXHIBIT C-1 land to
be included under the Lease pursuant to the Expansion Parking Option shall be
designated by Landlord, provided, however, it shall have access to Merritt Drive
and shall have a reasonable configuration (the "Expansion Parking Space"). If
Tenant timely delivers the Expansion Parking Election Notice, then (a) Landlord
shall promptly pave the Expansion Parking Area so that it may be used for the
parking of motor vehicles and (b) Tenant and Landlord shall execute an amendment
to the Lease acknowledging Tenant's leasing of the Expansion Parking Area on the
terms and conditions of the Lease, except as follows:
(a) the monthly Base Rent for the Expansion Parking Space shall equal
the sum of (1) the product of the number of square feet in the Expansion
Parking Space and 235 divided by 12 and (2) the amount of the monthly
installment of principal and interest that would be payable on a
hypothetical loan whose principal balance equaled all hard and soft costs
incurred by Landlord in paving the Expansion Parking Space (including,
without limitation, geotechnical studies, survey costs, and consultant
costs), whose interest rate is 12%, and which is payable in equal monthly
installments for purposes of making such calculation, the number monthly
installments of the hypothetical loan shall equal the number of full
calendar months remaining in the Term after the Expansion Parking Space
Commencement Date (as hereinafter defined). Tenant's obligation to commence
paying monthly Base Rent on such Expansion Parking Space shall commence
upon substantial completion of Landlord's paving of the Expansion Parking
Space (the "Expansion Parking Space Commencement Date").
(b) After completion of the paving to the Expansion Parking Space,
Landlord shall maintain the Expansion Parking Space in good condition;
however Landlord shall have no obligation to make any repairs with respect
to the Expansion Parking Space unless and until Tenant has delivered to
Landlord notice of the need therefor.
(c) Tenant shall pay all Taxes, utility costs, insurance costs, and
maintenance costs regarding the Expansion Parking Space; accordingly,
Tenant's proportionate share for
C-1
<PAGE>
purposes of calculating Tenant's obligations under Paragraph 2.C under the
Lease as to the Expansion Parking Space shall be 100%.
(d) Tenant shall defend, indemnify, and hold Landlord harmless from
and against all liabilities, claims, and expenses (including, without
limitation, reasonable attorney's fees and expenses), except for those
arising from Landlord's negligence or wilful misconduct.
(e) Tenant may not construct any alteration or place any signs on the
Expansion Parking Space without Landlord's prior written consent, which
consent shall not be unreasonably withheld; provided, however, Tenant may
install signage on the portion of the Expansion Parking Space then being
leased by Tenant to the extent such signage is reasonably necessary to
identify Tenant's use of such Expansion Parking Space and provided such
signage is approved by Landlord and complies with all applicable laws,
ordinances and restrictions affecting the Expansion Parking Space.
(f) The Expansion Parking Space shall only be used for the parking of
motor vehicles by Tenant, Tenant's employees, customers and visitors. In no
event will any boat, camper, trailer, truck larger than a one-ton pickup or
any other vehicle be parked or stored on the Expansion Parking Spaces. The
Expansion Parking Space shall not be used for the repair or restoration of
any motor vehicle, boat, camper, trailer or other vehicle, except for
emergency repairs, and then only to the extent necessary to enable is
movement to a proper repair facility. Tenant's use of the Expansion Parking
Space shall comply at all times with all deed restrictions, zoning
ordinances and other laws applicable to Tenant's use of the Expansion
Parking Space.
(g) The term for the Expansion Parking Space shall be coterminous
with the Term.
(h) Tenant may not assign its right to use the Expansion Parking
Space or assign its rights under this Exhibit, other than in connection
with an assignment of the entire Lease.
2. The Expansion Parking Option of Tenant as provided for herein can be
exercised only if, at the time of such exercise of the Expansion Parking Option,
Tenant is not in default under the Lease beyond any applicable grace period. In
the event that such condition is not satisfied and is not waived by Landlord in
its sole and absolute discretion, Tenant's Expansion Option shall be terminated
and of no further force and effect. Tenant's Expansion Option shall terminate if
(a) the Lease or Tenant's right to possession of the Premises is terminated, or
(b) Tenant fails to timely exercise its Expansion Parking Option under this
EXHIBIT C, time being of the essence with respect to Tenant's exercise thereof.
Tenant shall not have the right to assign its Expansion Parking Option to any
sublessee of the Premises, nor may any such sublessee exercise such Expansion
Parking Option.
C-2
<PAGE>
3. Tenant may exercise its Expansion Parking Option on one or more
occasions, provided that any Expansion Parking Election Notice must be delivered
to Landlord on or before October 1, 2006. Each exercise of Tenant's Expansion
Parking Option shall be treated independently of any previous exercise by Tenant
of the Expansion Parking Option for all purposes hereunder, including, without
limitation, the determination of the monthly Base Rent and the Expansion Parking
Space Commencement Date attributable to the portion of the Expansion Parking
Area identified in the Expansion Parking Election Notice.
C-3
<PAGE>
EXHIBIT "C"
EXPANSION PARKING AREA
SOFTWARE SPECTRUM, INC.
[PARKING AREA LAYOUT]
<PAGE>
FIFTH AMENDMENT TO COMMERCIAL LEASE AGREEMENT
THIS FIFTH AMENDMENT TO COMMERCIAL LEASE AGREEMENT, (the "Amendment") is
entered into by and between KANCRO, L.P., a Delaware limited partnership (the
"Lessor") and SOFTWARE SPECTRUM, INC., a Texas corporation (the "Lessee"),
effective as of the 9th day of March, 1998.
W I T N E S S E T H:
WHEREAS, pursuant to the terms of that certain Commercial Lease Agreement
dated April 19, 1993, as amended by that certain Third Amendment to Commercial
Lease Agreement dated to be effective April 1, 1995 and that certain Fourth
Amendment to Commercial Lease Agreement dated to be effective November 25, 1996
(collectively, the "Lease"), Lessee has heretofore leased from the Lessor
certain premises located within the industrial warehouse project commonly known
as Northgate IV, Garland, Texas (the "Project") and containing (a) approximately
70,390 square feet of space, more or less, within Building 15 at 2220 Merritt
Drive, Garland, Texas; and (b) approximately 38,286 square feet of space, more
or less, within Building 14 at 2260 Merritt Drive, Garland, Texas;
WHEREAS, the parties desire to further amend certain provisions of the
Lease, all as more particularly set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto
in the Lease, except to the extent that the meaning of such term is
specifically modified by the provisions hereof. In addition, other
terms not defined in the Lease, but defined herein shall when
delineated with initial capital letters have the meaning ascribed
thereto in this Amendment. Terms and phrases which are not delineated
by initial capital letters shall have the meaning commonly ascribed
thereto.
2. AMENDMENTS TO THE LEASE.
(a) SECTION 1 of the Lease shall be modified in its entirety as
follows:
"Section 1 PREMISES AND TERM.
(A) In consideration of the mutual obligations of Lessor and
Lessee set forth herein, Lessor leases to Lessee, and Lessee
hereby takes from Lessor certain leased premises (the "Original
Page 1
<PAGE>
Premises"), consisting of 70,390 square feet of space, more or
less, in Building 15 situated within the Project, and being more
particularly described on EXHIBIT "A-1" attached hereto and
incorporated herein for all purposes, together with all rights,
privileges, easements, appurtenances and amenities granted to the
Lessee in this Lease, to have and to hold, subject to the terms,
covenants and conditions of this Lease. The term of this Lease
shall commence on April 1, 1995 (the "Commencement Date") and
shall end on the last day of the month that is one hundred twenty
(120) months after the Commencement Date (the "Lease Term");
provided, that if the Commencement Date is a date other than the
first day of a calendar month, the Lease Term shall be extended
for the remainder of the calendar month in which the Commencement
Date occurs.
(B) In consideration of the mutual obligations of Lessor and
Lessee set forth herein, Lessor leases to Lessee, and Lessee
hereby takes from Lessor certain leased premises (the "Initial
Expansion Premises"), consisting of 38,286 square feet of space,
more or less, in Building 14 situated within the Project, and
being more particularly described on EXHIBIT "A-2" attached
hereto and incorporated for all purposes, together with all
rights, privileges, easements, appurtenances and amenities
granted to the Lessee in this Lease, to have and to hold subject
to the terms, covenants and conditions of this Lease. The term
of the Lease of the Initial Expansion Premises shall commence on
December 1, 1996, and shall end on the last day of the month that
is coterminous with the date of expiration of the term of the
lease of the Original Premises.
(C) In consideration of the mutual obligations of Lessor and
Lessee set forth herein, Lessor leases to Lessee, and Lessee
hereby takes from Lessor certain leased premises (the "Expansion
Premises"), consisting of approximately 24,561 square feet of
space, more or less, in Building 14 situated within the Project
and being more particularly described on EXHIBIT "A-3" attached
hereto and incorporated herein for all purposes, together with
all rights, privileges, easements, appurtenances and amenities
granted to the Lessee in this Lease, to have and to hold subject
to the terms, covenants and conditions of this Lease. The term of
the Lease of the Expansion Premises shall commence on July 1,
1998, and shall end on the last day of the month that is
coterminous with the date of expiration of the term of the lease
of the Original Premises and the Initial Expansion Premises. The
Original Premises, Initial
Page 2
<PAGE>
Expansion Premises and the Expansion Premises are hereinafter
sometimes collectively referred to as the "Premises".
(b) The last sentence of SECTION 2(c) of the Lease is hereby amended
in its entirety as follows:
"The amount of the monthly rental and the initial monthly escrow
payments for the Original Premises and the Initial Expansion
Premises are as follows:
<TABLE>
<CAPTION>
Months Months
1-60 61-120
---------- ----------
<S> <C> <C>
Base Rent (Original Premises) $21,996.88 $32,086.11
Base Rent (Initial Expansion Premises) 12,762.00 17,452.04
Tax Escrow Payment (Original Premises) 3,519.50 *
Tax Escrow Payment (Initial Expansion
Premises) 2,252.19 *
Insurance Escrow Payment (Original Premises) 410.61 *
Insurance Escrow Payment (Initial
Expansion Premises) 233.07 *
Common Area Expenses (Original Premises) 1,055.85 *
Common Area Expenses (Initial Expansion
Premises) 708.80 *
---------- ----------
Monthly Payment Total: $42,938.90 $
</TABLE>
The amount of the monthly rental and the initial monthly escrow payment for
the Expansion Premises is as follows:
<TABLE>
<CAPTION>
Months Months
1-21 22-82
---------- ----------
<S> <C> <C>
Base Rent (Expansion Premises) $ 9,210.38 $11,195.72
Tax Escrow Payment (Expansion Premises) 1,473.66 *
Insurance Escrow Payment (Expansion
Premises) 81.87 *
Common Area Expenses (Expansion
Premises) 450.29 *
---------- ----------
Monthly Payment Total: $11,216.20 $
</TABLE>
- ---------------------
* To be determined as of April 1, 2000
Page 3
<PAGE>
(c) A new SECTION 27 shall be added to the Lease, and shall read in its
entirety as follows:
"27. CONSTRUCTION OF IMPROVEMENTS TO PREMISES: CONSTRUCTION ALLOWANCE.
Lessee shall proceed to construct certain improvements within the
Premises in compliance with certain plans and specifications prepared
on behalf of the Lessee (the "Plans"). The Plans for the construction
of the improvements to the Premises shall be mutually approved by the
parties in writing prior to commencement of construction. The
improvements to the Premises shall include all costs associated with
the interior finish-out construction, construction of a backup
generator and related screening at a location adjacent to the Premises
as depicted on EXHIBIT "A-4" attached hereto and incorporated herein,
any architectural drawings prepared on behalf of the Lessee, and a fee
payable to Compass Management and Leasing, Inc. ("Compass") as the
co-construction manager to be retained by the Lessor to supervise the
construction, in an amount equal to four percent (4%) of the
Construction Allowance (as hereinafter defined). Lessee has retained
The Staubach Company ("TSC") as a co-construction manager. Compass and
TSC shall jointly manage the construction of the improvements to the
Premises. The parties shall mutually endeavor to complete the
construction of the improvements on or before May 1, 1998. The design
and materials to be utilized for the screening surrounding the backup
generator shall be subject to the written approval of the Lessor, such
approval not to be unreasonably withheld or delayed. Such screening
shall include, at a minimum, the construction of bollards and
aggregate tilt walls surrounding the generator. Lessee shall be solely
responsible for the removal of the generator and screening upon the
expiration or earlier termination of this Lease, and shall repair all
damages to the Premises or the surrounding areas occasioned by such
removal. Lessee shall not permit Lessee's contractors or any
subcontractor to commence any work in connection with the construction
of the improvements to the Premises until appropriate insurance has
been obtained and certificates evidencing such insurance coverage have
been delivered to and approved by Lessor. Lessee agrees to indemnify,
defend and hold Lessor harmless from and against all claims,
liabilities, costs, damages and expenses of whatever nature, including
those to the property of Lessee, arising out of or in conjunction with
the performance of the construction of the improvements to the
Premises.
Page 4
<PAGE>
Lessor shall provide the Lessee with a Construction Allowance (herein
so called) in an amount equal to the lesser of (a) the actual cost of
construction of the improvements to the Premises; or (b) the sum of
$400,000.00. Lessor's obligation to pay the Construction Allowance
shall be subject to the Lessor's prior receipt of invoices and lien
waivers from any third parties providing construction services to the
Premises, together with such other documentation as the Lessor shall
reasonably require. Lessor shall have the option of either paying
amounts due to such third parties either to the Lessee or directly to
such third parties. Lessee shall be responsible for the timely payment
of all construction costs in excess of the Construction Allowance.
Lessee shall have sole responsibility for compliance with all
applicable statutes, codes, ordinances and other regulations for all
construction performed on behalf of Lessee within the Premises,
including without limitation, any applicable environmental regulations
related thereto. In addition, the improvements to be constructed by
the Lessee within the Premises shall be constructed and installed in
compliance with the requirements of the Americans With Disabilities
Act of 1990, as amended, any applicable state statute, and all rules
and regulations promulgated thereunder (collectively, the "ADA").
Lessee, at Lessee's sole cost and expense, shall be responsible for
compliance with all provisions of the ADA with respect to the use,
occupation or alteration of the Expansion Premises. Lessor, at
Lessor's sole cost and expense, shall be responsible for compliance
with the ADA with respect to all common areas of the Project and with
respect to the exterior of the Expansion Premises, to the extent, but
only to the extent that such compliance is not caused by Lessee's use,
occupation or alteration of the Expansion Premises.
Lessee acknowledges that (i) it has inspected and accepts the
Expansion Premises, (ii) the buildings and improvements comprising the
same are suitable for the purpose for which the Expansion Premises are
leased, (iii) the Expansion Premises are in good and satisfactory
condition, and (iv) no representations as to the condition of the
Expansion Premises, nor any other promises to alter, remodel or
improve the Expansion Premises have been made by the Lessor (unless
otherwise expressly set forth in this Amendment. The taking of
possession of the Expansion Premises by the Lessee shall be deemed
evidence that the Expansion Premises were in a satisfactory condition
at the time of possession; provided, however, that nothing herein
shall relieve the Lessor of
Page 5
<PAGE>
its obligations under SECTION 4 of the Lease with respect to the
Premises."
(d) A new SECTION 28 shall be added to the Lease, and shall read in its
entirety as follows:
"28. LETTER OF CREDIT IN ADDITION TO SECURITY DEPOSIT. Lessee agrees
to provide, in addition to the Security Deposit provided by the terms
of SECTION 2B of the Lease, an irrevocable unconditional letter of
credit in the amount of $150,000.00 (the "Letter of Credit"), as
security for the performance of the Lessee's monetary obligations
under the Lease. The Letter of Credit shall be in a form and issued
by a bank or other financial institution reasonably acceptable to the
Lessor. The term of the Letter of Credit shall expire seventeen (17)
months after the commencement date of the term of the Expansion
Premises (the "Expiration Date"). The Letter of Credit shall be
delivered to the Lessor three (3) business days prior to the
commencement of the term of the Expansion Premises. In the event of an
uncured monetary default under the terms of this Lease, Lessor shall
deliver a statement to the Financial institution issuing the Letter of
Credit certifying that (a) the Lease is in full force and effect; (b)
a monetary default has occurred under the Lease; and (c) the Lessor is
entitled to payment under the Letter of Credit. Upon delivery of such
statement, Lessor shall be entitled to draw upon the Letter of Credit.
The proceeds of the Letter of Credit shall be applied by Lessor first
to cure any monetary default by the Lessee under the terms of the
Lease, and the balance of the proceeds shall be utilized to prepay the
Lessee's base rent obligations accruing under the terms of this Lease.
In the event Lessee fully satisfies all of its obligations to pay base
rent under this Lease as provided in this SECTION 28, Lessor shall
deliver the original Letter of Credit to the lessee on the Expiration
Date."
3. EFFECT OF AMENDMENT. Except as specifically amended by the provisions
hereof, the terms, covenants and provisions of the Lease shall continue to
govern the rights and obligations of the parties thereunder, and all
rights, covenants and provisions of the Lease shall remain in full force
and effect as stated therein. This Amendment and the Lease shall be
construed as one instrument. The terms, covenants and provisions of this
Amendment shall inure to the benefit and be binding upon the parties hereto
and their respective successors and permitted assigns.
Page 6
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have executed this Amendment in
multiple counterparts as of the day and year first above written.
LESSOR:
KANCRO, L.P.,
A DELAWARE LIMITED PARTNERSHIP
By: KPERS Realty Holding #23, Inc.,
a Kansas corporation, general partner
By: /s/ Stephen S. Williams
------------------------------------------
Title: STEPHEN S. WILLIAMS
---------------------------------------
VICE PRESIDENT
LESSEE:
SOFTWARE SPECTRUM, INC.
A TEXAS CORPORATION
By: /s/ Robert D. Graham
------------------------------------------
Title: Vice President and General Counsel
---------------------------------------
Page 7
<PAGE>
EXHIBIT "A-1"
Site Plan of Original Premises
<PAGE>
[SITE PLAN]
<PAGE>
EXHIBIT "A-2"
Site Plan of Initial Expansion Premises
<PAGE>
[SITE PLAN]
<PAGE>
EXHIBIT "A-3"
Site Plan of Expansion Premises
<PAGE>
[SITE PLAN]
<PAGE>
EXHIBIT "A-4"
Location of Back-up Generator
<PAGE>
[LOCATION]
<PAGE>
[LOCATION]
<PAGE>
LEASE AGREEMENT
THIS LEASE (this "Lease"), made this 1st day of May, 1998, between
SPOKANE TEACHERS CREDIT UNION ("Landlord"), and SOFTWARE SPECTRUM, INC. a
Texas corporation ("Tenant").
AS PARTIES HERETO, Landlord and Tenant agree as follows:
1. LEASE DATE AND EXHIBITS
The terms used herein shall have the following meanings unless
otherwise specifically modified by provisions of this Lease.
1.1 BUILDING 1
"Building 1" shall mean office building number 1, located at
22705 East Mission, Liberty Lake, Washington, situated on the real property
("property") more particularly described in EXHIBIT A, as outlined on the site
plan attached hereto as EXHIBIT B-1.
1.2 BUILDING 2
"Building 2" shall mean office building number 2, located at
22705 East Mission, Liberty Lake, Washington, situated on the Property, and
outlined on the site plan attached hereto as EXHIBIT B-1.
1.3 BUILDINGS
"Buildings" shall mean Building 1 and Building 2, together with
the enclosed passageway that connects Buildings 1 and 2.
1.4 COMPLEX
"Complex" shall mean the Buildings, the Common Area and the
Parking Area.
1.5 CAFETERIA
"Cafeteria" shall mean the cafeteria servicing the Buildings and
located within Building 1, as outlined on the site plan attached hereto as
EXHIBIT B-1.
1.6 PREMISES
"Premises" shall mean approximately 71,160 rentable square feet
in Building 1 and 2, as outlined on the floor plan attached hereto as EXHIBIT
B-2.
1.7 COMMON AREA
"Common Area" shall mean all areas of the Buildings designated
by Landlord as common areas for the use generally of Landlord and other tenants
of the Buildings, including, but not limited to, hallways, the enclosed
passageway between the Buildings and the Cafeteria (but excluding Landlord's
lobby area, as outlined on EXHIBIT B-1, which shall be for Landlord's exclusive
use.)
-1-
<PAGE>
1.8 PARKING AREA
"Parking Area" shall mean the unreserved parking spaces in the
parking area adjacent to the Buildings, as such parking area is outlined on the
site plan attached hereto as EXHIBIT B-1.
1.9 TENANT'S PERCENTAGE OF THE COMPLEX
"Tenant's Percentage of the Complex" shall mean sixty one and
two-tenths percent (61.2%), calculated on the basis of a total 71,160 rentable
square feet in the Premises and a total of 116,262 rentable square feet in the
Buildings at the time of the Commencement Date of this Lease. It is understood
and agreed by the parties that Tenant's Percentage of the Complex shall be
verified by actual measurements to be taken by an architect, engineer or similar
professional mutually agreed upon by Landlord and Tenant within sixty (60) days
after the Commencement Date, and recomputed accordingly in the event the total
rentable square feet leased by Tenant increases or decreases, or in the event
the total rentable square feet in the Buildings increases or decreases.
1.10 COMMENCEMENT DATE AND EXPIRATION DATE
"Commencement Date" shall mean May 1, 1998. If Tenant shall
occupy the Premises prior to the Commencement Date first stated herein, then the
Commencement Date shall be the date of such occupancy.
"Expiration Date" shall mean April 30, 2001.
1.11 RENT
"Rent" shall mean Basic Rent and Additional Rent as hereinafter
defined:
1.11.1 BASIC RENT
<TABLE>
<CAPTION>
<S> <C> <C>
"Basic Rent" shall mean: Months 1 - 2 $38,844.51 per month NNN
Months 3 - 12 $41,374.39 per month NNN
Months 13 - 24 $47,202.80 per month NNN
Months 25 - 36 $49,066.24 per month NNN
</TABLE>
1.11.2 ADDITIONAL RENT
"Additional Rent" shall mean the Actual Costs Allocable
to the Premises (as hereinafter defined) for a Lease Year (as hereinafter
defined), payable in equal monthly installments based on the Estimated Costs
Allocable to the Premises (as hereinafter defined) and using the following
definitions:
(a) "Operating Costs" shall mean all reasonable expenses normally or
customarily paid or incurred by Landlord, and not otherwise reimbursed by any
Tenant, for maintaining, operating and repairing the Complex and the personal
property used in conjunction therewith, including, without limitation, the costs
of:
(i) refuse collection;
(ii) water, sewer and utilities services;
(iii) emergency power backup;
(iv) light replacement service and parts;
(v) supplies;
(vi) janitorial and cleaning services;
-2-
<PAGE>
(vii) window washing;
(viii) landscape maintenance;
(ix) maintenance of telephone switching and related equipment;
(x) services of independent contractors;
(xi) premiums for insurance, including, without limitation, policies
of casualty and liability insurance of such types and in such amounts
as Landlord deems necessary or desirable in the exercise of Landlord's
reasonable judgment and which Tenant is named an additional insured
under;
(xii) licenses, permits and inspection fees; and
(xiii) any other reasonable expense or charge, whether or not
hereinabove described, which in accordance with generally accepted
accounting principles would be considered an expense normally incurred
for maintaining, operating or repairing the Complex.
Provided, however, that to the extent Tenant pays directly for any such
expenses with respect to the Premises (for example; electrical service
separately metered to the Premises or custodial services separately contracted
for the Premises), then, "Operating Costs" shall mean the Tenant's prorata share
of the cost of providing such goods or services to the Common Area only.
(b) "Real Property Taxes" shall mean taxes on real property and personal
property, including all Tenant improvements for which Landlord is not otherwise
entitled to reimbursement by any Tenant or other occupant, charges and
assessments levied with respect to the Property, the Buildings, any
improvements, fixtures and equipment used directly in the operation of the
Complex and located in the Buildings or on the Property; and any taxes levied or
assessed in addition to or in lieu of, in whole or in part, such real property
or personal property taxes; and any tax on Landlord's gross receipts unless such
tax cannot be charged to Tenant pursuant to applicable law.
(c) "Lease Year" shall mean the 12 month period commencing on May 1.
(d) "Actual Costs" shall mean the actual expenses paid or incurred by
Landlord for Operating Costs and Real Property Taxes during any Lease Year of
the term hereof.
(e) "Actual Costs Allocable to the Premises", shall mean the Actual Costs
multiplied by Tenant's Percentage of the Complex.
(f) "Estimated Costs Allocable to the Premises" shall mean Landlord's
estimate of Actual Costs allocable to the Premises for the following Lease Year
as reasonably determined by Landlord.
1.12 PERMITTED USES
"Permitted Uses" shall mean use of the Premises by Tenant only
for general office purposes and for no other business or purpose without the
prior written consent of Landlord.
1.13 DEFAULT RATE
"Default Rate" shall mean a rate equal to four percent (4%) per
annum over the prime rate of Bank of America (or its successors), as announced
from time to time.
-3-
<PAGE>
1.14 EXHIBITS
The following exhibits are made a part of this Lease:
EXHIBIT A Legal Description
EXHIBIT B-1 Site Plan of Property
EXHIBIT B-2 Floor Plan of Premises
In the event of any inconsistency in the provisions of this Section and more
specific provisions set forth elsewhere in this Lease, the more specific
provision shall control.
2. PREMISES
Landlord does hereby lease the Premises to Tenant, and Tenant does
hereby lease the Premises from Landlord, in their "as is" condition, upon the
terms and conditions herein set forth.
The parties acknowledge that Landlord owns and will continue to occupy
Building 1 and that, accordingly, Landlord and Tenant will share the use of the
Cafeteria and the enclosed passageway between the Buildings. Landlord will also
have rights of access through the Premises, for ingress and egress to and from
the electrical room and the security room in Building 2, as more fully described
in Section 16 below.
3. TERM
The term of this Lease ("Lease Term" shall be a period extending for
36 months commencing on the Commencement Date and expiring on the Expiration
Date, subject to Tenant's renewal options as set forth in Section 4.
4. OPTION TO RENEW
4.1 OPTION
Landlord grants Tenant the option to extend the Lease Term for
one (1) renewal term of three years commencing immediately upon the Expiration
Date (each, a "Renewal Term"). This option to renew is expressly conditioned on
Tenant's being, on both the date Tenant exercises its option and the first day
of the applicable Renewal Term, in full and faithful compliance in all material
respects with each and every one of its obligations contained in this Lease.
4.2 EXERCISE OF OPTION; LANDLORD'S RIGHT TO CANCEL EXERCISE
To exercise its option, Tenant must give written notice
("Renewal Notice") thereof to Landlord at least one hundred twenty (120) days
prior to the first day of the applicable Renewal Term. Landlord is under no
obligation to notify Tenant of this deadline. Tenant understands and agrees that
time is of the essence and unless so exercised by the deadline specified above,
the renewal options herein granted will terminate.
4.3 RENEWAL TERMS
During the applicable Renewal Term, each and every provision of
this Lease will remain unchanged and in full force and effect except that the
Basic Rent will be adjusted as of the first day of the applicable Renewal Term
to the then fair market rental rate as of such date (the "Market Rate"). The
"Market Rate" for the Premises will be specified by Landlord, acting in good
faith, and will be the then
-4-
<PAGE>
current base rental rate being offered by Landlords owning similar office space
in the vicinity of the Property, adjusted to reflect the location of the
Premises in the Building and the desirability of the Premises versus the
location and desirability of such other space, if materially different.
4.4 DETERMINATION OF MARKET RATE
Landlord will notify Tenant in writing of the Market Rate at
least sixty (60) days prior to the first day of the applicable Renewal Term. If
Tenant disagrees with the Market Rate specified by Landlord, it will so notify
Landlord immediately and they will meet a soon as possible thereafter in a good
faith effort to resolve theft disagreement.
If the parties are still in disagreement forty five (45) days
prior to the first day of the applicable Renewal Term, the Market Rate will be
determined by a panel of three arbitrators, one to be selected by Landlord
within thirty (30) days before the first day of the applicable Renewal Term (or
by the Tenant if Landlord fails to appoint an arbitrator within the time
provided above), one to be selected by Tenant (or by Landlord if Tenant fails to
do so within five (5) days after demand from Landlord), and one to be selected
by the first two arbitrators. Each such arbitrator will be an independent MAI
appraiser with at least ten (10) years' experience in appraising commercial real
estate in the vicinity of the Property. The cost of the arbitrator selected by
Tenant will be borne by Tenant, the cost of the arbitrator selected by Landlord
shall be borne by Landlord, and the cost of the third arbitrator will be shared
equally by Tenant and Landlord. The arbitrators will meet within five (5) days
of their appointment and will render a decision within ten (10) days thereafter.
The Market Rate determined by the arbitrators will be binding upon both parties.
Until the Market Rate is determined as provided herein, Tenant
will pay Basic Rent based on the Market Rate specified by Landlord, and if the
Market Rate if subsequently determined to be different from the Market Rate
specified by Landlord, Landlord or Tenant, as the case may be, will reimburse
the other for such difference within twenty (20) days of the date of final
determination of the Market Rate.
5. PAYMENT OF BASIC RENT
Commencing on the Commencement Date, Tenant shall pay Landlord Basic
Rent in lawful money of the United States in advance on or before the first day
of each month without offset or deduction at the offices of Landlord, at 106
West Nora Avenue, P. O. Box 5264, Spokane, Washington 99205-0264, or such other
place as may be designated by Landlord. Basic Rent for any period during the
Lease Term which is less than one month shall be a pro rata portion of the
monthly installment
6. PAYMENT OF ADDITIONAL RENT
Commencing on the Commencement Date, Tenant shall pay Landlord as
Additional Rent 1/12 (8.33%) of the Estimated Costs Allocable to the Premises in
lawful money of the United States in advance on or before the first day of each
month, without deduction or offset, at the address specified in Section 5. Prior
to the commencement of each Lease Year during the Lease Term, Landlord shall
furnish Tenant a written statement of the Estimated Costs Allocable to the
Premises for such Lease Year, together with the calculation of the estimated
monthly Additional Rent payable during such Lease Year. If at any time or times
during such Lease Year it appears to Landlord that the Actual Costs Allocable to
the Premises will vary from Landlord's estimate by more than five percent (5%)
on an annual basis, Landlord may, by written notice to Tenant, revise Landlord's
estimate for such Lease Year, and subsequent Additional Rent payments by Tenant
for such Lease Year shall be recalculated based on Landlord's revised Estimated
Costs Allocable to the Premises.
-5-
<PAGE>
Within ninety (90) days after the close of each Lease Year during the
Lease Term, or as soon thereafter as practicable, but not later than one hundred
twenty (120) days after the close of such Lease Year, Landlord shall deliver to
Tenant a written statement setting forth the Actual Costs Allocable to the
Premises during the preceding Lease Year. If such costs for any Lease Year
exceed Estimated Costs Allocable to the Premises paid by Tenant to Landlord,
Tenant shall pay the amount of such excess to Landlord as Additional Rent within
forty-five (45) days after receipt of such statement by Tenant. If such
statement shows such costs to be less than the amount paid by Tenant to
Landlord, then the amount of such overpayment by Tenant shall be credited by
Landlord to the next immediate Rent payable by Tenant. Tenant shall have the
right, at Tenant's sole expense, to audit Landlord's books regarding Actual
Costs, provided that (i) such right shall not be exercised more than once each
calendar year, and (ii) such right must be exercised, if at all, by delivery of
written notice to Landlord on or before thirty (30) days after Landlord's
delivery of the written statement setting forth Actual Costs Allocable to the
Premises during the preceding Lease Year. If the audit reveals that Landlord's
statement is determined to be in error by more than five percent (5%), the
amount of Additional Rent payable by Tenant attributable to Actual Costs
Allocable to the Premises shall be recalculated based upon the results of any
such audit.
If the Expiration Date is a day other than the last day of a Lease
Year, the amount of any adjustment between Actual Costs and Estimated Costs
Allocable to the Premises with respect to the Lease Year in which such
termination occurs shall be prorated on the basis of a 365-day year. Any amount
payable by Landlord to Tenant or by Tenant to Landlord with respect to such
adjustment shall be payable within forty-five (45) days after delivery by
Landlord to Tenant of the Statement of Actual Costs Allocable to the Premises
with respect to such Lease Year.
7. (intentionally omitted)
8. USES
The Premises shall be used only for Permitted Uses and for no other
purpose without the prior written consent of Landlord. No act shall be done in
or about the Premises that is unlawful or that will increase the existing rate
of insurance on the Buildings. Tenant shall not commit or allow to be committed
any waste upon the Premises, or any public or private nuisance or other act or
thing which disturbs the quiet enjoyment of Landlord of any other Tenant in the
Buildings. Tenant shall not, without the written consent of Landlord, use any
apparatus, machinery or device in or about the Premises which will cause any
substantial noise or vibration or any increases in the normal use of electric
power. If any of Tenant's office machines and equipment should disturb the quiet
enjoyment of Landlord or any other Tenant in the Buildings, then Tenant shall
provide adequate insulation, or take other action as may be necessary to
eliminate the disturbance. Tenant shall comply with all laws relating to
Tenant's use of the Premises and shall observe such reasonable rules and
regulations as may be adopted and published by Landlord for the safety, care and
cleanliness of the Premises or the Buildings, and for the preservation of good
order therein, including but not limited to any rules and regulations and/or
declaration of protective covenants attached to this Lease. Notwithstanding the
foregoing, no rules or regulations hereafter promulgated by Landlord shall
materially diminish Tenant's rights or increase Tenant's obligations under this
Lease.
9. SERVICES AND UTILITIES
9.1 GENERAL
Landlord shall maintain the Common Area in reasonably good order
and condition except for damage occasioned by the act or omission of Tenant, the
repair of which damage shall be paid for by Tenant.
Landlord shall furnish (or cause to be furnished) the Premises
with electricity for lighting and operation of normal power usage office
machines, water, heat and normal air conditioning
-6-
<PAGE>
service. Landlord shall also provide light replacement service for
Landlord-furnished light. If the foregoing services are not separately metered
to Tenant, the cost of providing such services shall be reimbursed by Tenant to
Landlord in the form of Additional Rent pursuant to Section 6. Tenant shall, at
Tenant's expense, provide for its own trash disposal and janitorial services
with respect to the Premises.
Landlord shall not be liable for any loss, injury or damage to
property caused by or resulting from any variation, interruption or failure of
such services to be provided by Landlord (including, but not limited to, the
emergency power backup system) due to any cause whatsoever, or from failure to
make any repairs or perform any maintenance. In the event of such variation,
interruption or failure, however, Landlord shall use reasonable diligence to
restore such service. No temporary interruption or failure of such services
incident to the making of repairs, alterations or improvements, or due to
accident or strike, or conditions or events beyond Landlord's reasonable control
shall be deemed an eviction of Tenant or relieve Tenant from any of Tenant's
obligations hereunder. Landlord will use reasonable efforts to notify Tenant at
least forty-eight (48) hours in advance of any scheduled or anticipated
interruption in any such services. Notwithstanding anything to the contrary
contained in this Section 9 or elsewhere in this Lease, if any such slowdown,
interruption or stoppage of any such services, or the Landlord's inability to
perform any covenant herein creates a condition which interferes substantially
with Tenant's normal use of the Premises as allowed under this Lease, and as a
consequence Tenant is compelled to discontinue or materially curtail business in
the Premises in whole or in part for a period of twenty (20) consecutive days,
then the Basic Rent and Additional Rent shall be proportionately abated during
the time of such discontinuance or curtailment of business, but no such
abatement shall continue beyond the time that the slowdown, interruption,
stoppage or inability to perform no longer persists, regardless of any delay by
Tenant in resuming operation of business after that time. If any such slowdown,
interruption, stoppage or inability to perform continues for a period of
forty-five (45) consecutive days and Tenant is compelled (whether for prudent
business reasons or otherwise) to discontinue business in the Premises, Tenant
shall have the right thereafter to terminate this Lease upon notice to Landlord;
however, such termination right shall not continue beyond the time that the
slowdown, interruption, stoppage or inability to perform no longer persists.
Before installing any equipment (other than customary and normal
office equipment) in the Premises that generates more than a minimum amount of
heat, Tenant shall obtain the written permission of Landlord and Landlord may
refuse to grant such permission if the amount of heat generated would place an
above average burden on the air-conditioning system of the Buildings unless
Tenant shall agree to pay at Landlord's election: (a) the costs of Landlord for
installation, operation and maintenance of supplementary air-conditioning units
as necessitated by such equipment, or (b) an amount reasonably determined by
Landlord to cover the additional burden on the existing air-conditioning system
generated by such Tenant equipment
If Tenant uses any equipment in the Premises requiring above
average power usage as compared to other areas of the Complex, Tenant shall in
advance, on the first day of each month during the Least Term, pay Landlord as
Additional Rent the reasonable amount estimated by Landlord as the cost of
furnishing electricity for the operation of such equipment provided, however,
that this provision shall not be applicable if electricity is separately metered
for the Premises. Basic Rent does not include any amount to cover the cost of
furnishing electricity for such purposes unless so state therein.
At Tenant's request, Landlord shall use its best efforts to
cause utilities furnished to Tenant to be separately metered, and Tenant shall
pay for the installation costs of and the conversion to any meters required. To
the extent meters cannot be installed, or the cost of such installation is
excessive, Tenant shall continue to pay for such utilities as part of the
Additional Rent.
9.2 CAFETERIA
Tenant shall be entitled to nonexclusive use (in common with Landlord)
of the Cafeteria servicing the Building. Operating Costs relating to the
Cafeteria will not include subsidies paid
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by Landlord for any food service operations, but will include all other costs
and expenses with respect to the Cafeteria. Tenant agrees to cause its
employees, agents and invitees to comply with all reasonable rules and
regulations as may be adopted and published by Landlord from time to time for
the safety, care and cleanliness of the Cafeteria and for the preservation of
good order therein.
10. PARKING AND ACCESS
The Parking Area shall be used for vehicle parking only and shall be
used for no other purposes except as required for trash disposal (including
exterior storage) without the prior written consent of Landlord. The Parking
Area shall be available to Tenant and its invitees on a first come, first serve
basis, and Tenant shall ensure that all parking spaces designated as "Visitor
Parking" in the Parking Area are kept available for visitors of Landlord and
Tenant, also on a first come, first serve basis. Tenant agrees that Tenant will
not park, nor will Tenant permit Tenant's employees, agents, guests, invitees
and/or licensees to park, on streets within the Property or in any other spaces,
lots or areas within the Property except as may be specifically provided for in
this Lease.
Trucks or other vehicles may only temporarily park at bays serving the
Premises while loading and unloading, and shall not be stored in the parking,
maneuvering or loading areas. Tenant, Tenant's employees, agents, guests,
invitees and licensees shall use all due care and reasonable best efforts not to
interfere with Landlord's and other tenants' use of parking and maneuvering
areas.
11. TAX ON RENT
If any governmental authority shall in any manner levy a tax on rent
payable under this Lease or rentals accruing from use of property, or such tax
in any form against Landlord measured by income derived from the leasing or
rental of the Complex, such tax shall be paid by Tenant either directly or
through Landlord; provided, however, that Tenant shall not be liable to pay any
federal or state income tax imposed on Landlord.
12. PERSONAL PROPERTY TAXES
Tenant shall pay prior to delinquency all personal property taxes
payable with respect to all property of Tenant located on the Premises or in
Building 2 and shall promptly provide written proof of such payment upon request
of Landlord.
13. IMPROVEMENTS
Prior to the Commencement Date, Landlord shall, at its own expense,
construct demising walls, as outlined on EXHIBIT B-2 attached hereto. Landlord
will submit its plans and specifications for such walls to Tenant for Tenant's
review and approval, which approval will not be unreasonably withheld or
delayed. Tenant shall be solely responsible for all furnishings required for its
entry.
All standard or special Tenant improvements which are affixed to the
Premises, including but not limited to, any paid for by Landlord, shall at all
times be the property of Landlord. Notwithstanding anything in this Lease to the
contrary, however, Tenant improvements such as telephone and computer equipment
(except for lines and internal Building wiring) and modular walls and
partitions, whether or not affixed to the Premises, will remain the property of
Tenant. Upon the Expiration Date or sooner termination of the Lease Term, all
improvements and additions to the Premises made by Tenant shall become the
property of Landlord, except Tenant may remove Tenant's trade fixtures, office
supplies and movable office furniture and equipment not attached to Building 2
provided: (a) such removal is made prior to the Expiration Date or sooner
termination of the Lease Term, (b) no Event of Default (as defined in Section 24
of this Lease) exists at the time of such removal, and (c) Tenant immediately
repairs all damage caused by or resulting from such removal. All other property
in the Premises and any alterations or
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additions thereto (including, without limitation, wall-to-wall carpeting,
paneling, wall covering or lighting fixtures and apparatus) and any other
article affixed to the floor, wall or ceiling of the Premises shall become the
property of Landlord and shall remain upon and be surrendered with the Premises,
Tenant hereby waiving all rights to any payment or compensation therefor. If,
however, Landlord so requests in writing, Tenant will, prior to the Expiration
Date or sooner termination of the Lease Term, remove such alterations,
additions, fixtures, equipment and property placed or installed by Tenant in the
Premises as requested by Landlord, and will immediately repair any damage caused
by or resulting from such removal to the condition of the Premises prevailing
upon the Commencement Date, reasonable wear and tear excepted.
If Tenant shall fail to remove any of Tenant's property of any nature
whatsoever from the Premises on the Expiration Date, sooner termination of the
Lease Term or when Landlord has the right of re-entry, Landlord may, at
Landlord's option, remove and store said property without liability for loss
thereof or damage thereto, such storage to be for the account and at the expense
of Tenant. If Tenant shall not pay the cost of storing any such property after
it has been stored for a period of thirty (30) days or more, Landlord may, at
Landlord's option, sell, or permit to be sold, any or all of such property at
public or private sale (and Landlord may become a purchaser at such sale), in
such manner and at such times and places as Landlord in Landlord's sole
discretion may deem proper, without notice to Tenant, and shall apply the
proceeds of such sale; first, to the cost and expenses of such sale, including
reasonable attorneys fees actually incurred; second, to the payment of the costs
or charges for storing any such property; third, to the payment of any other
sums of money which may then be or thereafter become due Landlord from Tenant
under any of the terms hereof; and, fourth, the balance, if any, to Tenant
14. ALTERATIONS AND CARE OF PREMISES
Tenant shall take good care of the Premises (and all telephone lines,
equipment, fixtures and mechanical systems therein) and shall promptly make all
necessary repairs and maintenance, except those to be made by Landlord as
provided herein, in order to keep the Premises in neat, clean and sanitary
condition. Tenant shall maintain all signs approved by Landlord in good, clean
and attractive condition.
Landlord will be responsible only for structural repairs or
replacement of or to the roof, foundations, sub-floor and structural walls of
the Buildings, HVAC, mechanical, electrical and life safety systems in the
Complex (including the Premises), normal wear and tear excepted. Nothing herein
will limit Tenant's obligation to pay its share of Operating Costs with respect
to the maintenance and operation of the HVAC, mechanical, electrical and life
safety systems in the Complex.
Tenant shall, at the expiration or sooner termination of this Lease,
surrender and deliver the Premises to Landlord in as good condition and in the
same layout and configuration as when received by Tenant from Landlord or as
thereafter improved with Landlord's consent, reasonable wear and tear and damage
by fire or other insured casualty excepted.
Tenant shall not make any material alterations, additions or
improvements in or to the Premises, or add, disturb or change in any material
way any floor covering, all covering, window blinds, fixtures, plumbing or
wiring without first obtaining the written consent of Landlord, which consent
will not be unreasonably withheld or delayed. Tenant shall deliver to
Landlord full and complete plans and specifications prepared by a licensed
architect for any such material alteration, addition or improvement along
with keys to any locks changed by Tenant provided that Tenant shall not be
required to retain an architect in connection with the installation of
telephone, computer and security equipment contemplated hereby. In addition,
notwithstanding the above, Tenant shall have the right to make nonstructural
alterations which do not exceed Ten Thousand Dollars ($10,000) in any one
instances, and minor decorations to the Premises, without obtaining
Landlord's written consent, but Tenant shall deliver to Landlord copies of
all plans and drawings relating to any such nonstructural alterations.
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Landlord shall have the right to approve the contractor to be hired by
Tenant to construct any structural alteration, and such contractor shall be
fully licensed and bonded and insured.
Landlord does not and will not make any covenant or warranty, express
or implied, that any such plans or specifications submitted by Tenant are
accurate, complete or in any suited for their intended purpose. Further, Tenant
shall indemnify and hold Landlord harmless from any liability, claim or suit,
including attorneys' fees, arising from any injury, damage, cost or loss
sustained by persons or property as a result of any defect in design, material
or workmanship arising as a result of any Tenant improvements.
All such work so done by Tenant shall be done in accordance with all laws,
ordinances and rules and regulations of any federal, state, county, municipal or
other public authority and/or Board of Fire Underwriters. Tenant expressly
covenants and agrees that no liens of mechanics, materialmen, laborers,
architects, artisans, contractors, subcontractors or any other lien of any kind
whatsoever shall be created against or imposed upon the Premises, the Property
or the Complex, and that in the event any such claims or liens of any kind
whatsoever shall be asserted or filed by any persons, firms or corporations
performing labor or furnishing material in connection with such work, Tenant
shall pay off or cause the same to be discharged of record within ten (10) days
of notification thereof. All alterations, improvements or changes made by Tenant
to the Premises shall be the property of Landlord and shall remain upon and be
surrendered with the Premises upon the termination of this Lease.
Landlord shall have the right, but not the obligation, to inspect any
alterations during and at the conclusion of construction. If, in Landlord's
reasonable opinion, the same are not installed in accordance with plans and
specifications submitted to Landlord under the requirements of this Section,
then, in addition to any other remedy provided to Landlord under this Lease,
Landlord shall have the right to require Tenant to reconstruct the same to
conform to such plans and specifications and at Tenant's cost and expense.
Tenant acknowledges and agrees that a material condition to the
granting of approval of Landlord to any alterations and/or improvements and/or
repairs required under this Lease or desired by Tenant is that the contractors
who perform such work shall carry a comprehensive liability policy, naming
Landlord as an additional insured thereon, with a combined single limit for
personal or bodily injury of not less than One Million Dollars ($1,000,000) at
Tenant's expense. Landlord may require proof of such insurance coverage from
each contractor at the time of submission of Tenant's request for Landlord's
consent to commence work.
All damage or injury done to the Premises by Tenant or by any persons
who may be in or upon the Premises with the consent (express or implied) of
Tenant, including the cracking or breaking of glass of any windows or doors,
shall be paid for by Tenant and Tenant shall pay for all damage to the Buildings
and any appurtenances thereto caused by Tenant or Tenant's employees, agents,
guests, invitees and/or licensees. Tenant shall not put any curtains, draperies,
blinds or other hangings in, on or beside the windows in the Premises or place
any furniture on the Patios, if any, without first obtaining Landlord's consent,
which shall not be unreasonably withheld or delayed. All normal repairs
necessary to maintain the Premises in a tenantable condition shall be done by or
under the direction of Landlord. Tenant shall promptly notify Landlord of any
damage to the Premises requiring repair. Landlord shall, in the exercise of
prudent business practices, determine those repairs that are necessary to
maintain the Premises in good condition.
15. HAZARDOUS MATERIAL
15.1 DEFINITION OF "ENVIRONMENTAL LAWS"
The term "Environmental Laws" means any and all state,
federal and local statutes, regulations and ordinances relating to the
protection of human health and the environment including any
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regulations, restrictions, or licenses promulgated or issued by the Liberty Lake
Sewer District or other municipal corporation.
15.2 DEFINITION OF "HAZARDOUS MATERIAL"
The term "hazardous Material" means any hazardous or toxic
substance, material or waste, including, but not limited to, those
substances, materials and wastes listed in the United States Department of
Transportation Hazardous Materials Table (49 C.F.R. Section 172.101) or by
the United States Environmental Protection Agency as hazardous substances (40
C.F.R. at. 302 and amendments thereto), or as defined as hazardous substances
by RCW 70.105D.020 (7), including petroleum products and their derivatives,
and such other substances, materials and wastes as become regulated or
subject to cleanup authority under any Environmental Laws. Notwithstanding
the foregoing, the term "Hazardous Material" shall not include: (1) chemicals
routinely used in business office areas, or (2) janitorial supplies, cleaning
fluids, or chemicals necessary for the day-to-day operation or other
maintenance of the Premises if the disposition, handling, storage or quantity
of the items described in (1) and (2) herein are at all times in compliance
with all applicable legal requirements.
15.3 LIMITATION ON USES OF HAZARDOUS MATERIAL
Tenant shall:
(a) not cause or permit any Hazardous Material to be brought upon, used,
kept or stored on or about the Premises by Tenant or its agents, contractors or
subtenants without the prior written consent of Landlord;
(b) cause the Premises and all of Tenant's operations conducted thereon to
comply with all Environmental Laws and orders of any governmental authorities
having jurisdiction under any Environmental Laws; and
(c) obtain, keep in effect and comply with all governmental permits and
authorizations required by Environmental Laws with respect to the Premises or
Tenant's operations.
15.4 NOTICES
Tenant shall immediately notify Landlord in writing if Tenant
becomes aware of any of the following:
(a) Any violation of Environmental Laws regarding the Premises or Tenant's
operations;
(b) Any order, notice of violation, fine or penalty or other similar
action relating to Hazardous Material or Environmental laws and to the Premises
or Tenant's operations; or
(c) Any complaint or lawsuit filed or threatened to be filed by any person
or other entity, including, without limitation, any governmental authority,
relating to Hazardous Material or Environmental Laws and to the Premises or
Tenant's operations.
15.5 INDEMNIFICATION
Tenant agrees to defend (with counsel approved by Landlord),
fully indemnify, and hold entirely free and harmless Landlord from and against
all claims, judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Premises, damages for
the loss or restriction on the use of rentable or usable space or of any amenity
of the Premises, damages arising from any adverse impact on marketing of space,
sums paid in settlement of
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claims, attorneys' fees, consultant fees and expert fees) that arise during or
after the Lease Term and that are imposed on, or paid by or asserted against
Landlord by reason or on account of, or in connection with, or arising out of
Tenant's use, generation, manufacture, refinement, transportation, treatment,
storage, handling, recycling or disposal of Hazardous Material, or any release
of Hazardous Material in connection with or as a result of Tenant's use or
activities, or of Tenant's agents, contractors or subtenants, or any violation
of any Environmental Law by Tenant or its agents, subcontractors or subtenants;
provided further, however, that Tenant acknowledges that Landlord has disclosed
to Tenant the presence of asbestos floor tiles currently covered by carpeting
within the Premises. In the event any Tenant improvements or other alterations
require Tenant to disturb the floor tiles, Tenant will comply with all
Environmental Laws in connection with the disturbance of such tiles, and will
take all actions necessary to prevent or minimize any damage or personal injury
that may be caused by the release of, or exposure to, such asbestos and shall
pay for the removal of said floor tiles by a licensed asbestos abatement
contractor.
15.6 SURVIVAL
The provisions of this Section 15 shall survive the expiration
or earlier termination of this Lease.
16. ACCESS
16.1 GENERALLY
Landlord and Landlord's employees and agents shall not have any
right to enter the Premises without having given Tenant at least twenty-four
(24) hours prior written notice of such entry, but no such notice shall be
required in cases of emergency involving an imminent risk to persons or property
or in cases of access to the security and electrical rooms as provided in
Section 16.3. When reasonably necessary, Landlord may temporarily close
entrances, doors, corridors, elevators or other facilities without liability to
Tenant by reason of such closure and without such action by Landlord being
construed as an eviction of Tenant or as relieving Tenant from the duty of
observing and performing any of the provisions of this Lease. Landlord shall
have the right to enter the Premises for the purpose of showing the Premises to
prospective tenants within one hundred twenty (120) days prior to the Expiration
Date or sooner termination of the Lease Term. Landlord shall not be liable for
the consequences of admitting by passkey, or refusing to admit to the Premises,
Tenant or Tenant's employees, agents, guests, invitees and/or licensees.
Landlord shall indemnity and hold Tenant harmless from and
against all loss, cost, expense, claim or damage arising from any negligent act
or omission of any employee, agent or invitee of Landlord while in the Premises.
16.2 EXERCISE FACILITIES AND UTILITIES AND TELEPHONE EQUIPMENT ROOMS
Landlord has retained exclusive use of, and does not lease to
Tenant,the water heater room adjacent to the exercise facilities, both located
in Building 2, as outlined on the site plan attached hereto as EXHIBIT B-2.
Landlord will have access through the Premises on an as-needed basis only to the
telephone equipment room, the water heater room and the utility room adjacent to
the water heater room. Landlord's access to such rooms will be limited to
Landlord's technical, maintenance and security personnel and will be by card key
only. Landlord's access to the utility room will be for the purpose of reading
meters and observing the security panel located therein. During the period of
shared access to the telephone equipment room, if either Landlord or Tenant
determines that any repairs, modifications or alterations are necessary in the
telephone equipment room, the party making such determination may make such
repairs, modifications or alterations only after receiving the written approval
of the other party, which party shall not unreasonably withhold or delay such
approval. Landlord agrees to use commercially reasonable best efforts to comply
with all reasonable requests of Tenant to assist
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Tenant in Tenant's installation of its Telephone Switching Equipment and systems
in the Premises. Landlord and Landlord's employees and agents shall not have
access to the exercise facilities through the Premises.
Tenant and its employees will have the right have access to and use of
the exercise room. Landlord shall be responsible for the maintenance of the
exercise equipment and such maintenance costs shall be included in the Operating
Costs referenced in Section 1.11.2 above.
16.3 ELECTRICAL ROOM
Landlord has retained use of, and does not lease to Tenant, the
electrical room located in Building 2, as outlined on the site plan attached
hereto as EXHIBIT B-2. Landlord agrees to use commercially reasonable best
efforts to comply with all reasonable requests of Tenant to assist Tenant in
Tenant's installation of its wiring and connections for computer and electrical
equipment required by Tenant for the operation of its business in the Premises.
Landlord will share use of the electrical room with Tenant. The costs and
expenses that are paid or incurred by Landlord for maintaining, operating and
repairing the electrical room will be included within Operating Costs to be
shared by Tenant under this Lease. In addition, each party shall defend and
indemnify the other party and save the other party harmless from and against any
and all liability, damages, costs or expenses, including reasonable attorneys'
fees, arising from any act, omission or negligence of the indemnifying party or
its employees or agents arising from such party's use of or access to the
electrical room. Tenant shall permit Landlord and Landlord's employees and
agents to enter into, upon and through the Premises, at all times required by
Landlord, for ingress and egress to and from the electrical room. Landlord's
access through the Premises to the electrical room will be limited to Landlord's
technical, maintenance and security personnel. Such access shall be by card-key
only, and shall be on an as-needed basis only. Landlord will keep records of its
access to the electrical room and will provide such records to Tenant upon
request.
17. INSURANCE
17.1 FIRE AND EXTENDED COVERAGE INSURANCE ON TENANT'S PERSONAL
PROPERTY AND FIXTURES
At all times during the Lease Term, Tenant shall keep in force
at Tenant's sole cost and expense All Direct Cause of Loss coverage in companies
reasonably acceptable to Landlord, equal to the full replacement cost of
Tenant's fixtures, furnishings, equipment and contents upon the Premises.
Landlord shall be named as an additional insured on all such policies.
At all times during the Lease Term, Landlord shall keep in force
All Direct Cause of Loss coverage in an amount equal to the full replacement
cost of the Complex in amounts and with companies acceptable to Landlord in the
exercise of prudent business practices. Tenant acknowledges that it will pay its
proportionate share of such insurance pursuant to Sections 1.11.2 and 6 and
Tenant will be named an additional insured on such policies.
17.2 LIABILITY INSURANCE
Tenant shall, during the Lease Term, keep in full force and
effect a policy of public liability and property damage insurance with respect
to the Premises and the business operated by Tenant in the Premises, with a
combined single limit for personal or bodily injury and property damage of not
less than One Million Dollars ($1,000,000). The policy shall name Tenant as
insured, and Landlord as an additional insured and shall contain a clause that
the insurer will not cancel or change the insurance without first giving
Landlord Thirty (30) days' written notice. The insurance shall be provided by an
insurance company approved by Landlord and a copy of the policy or a certificate
of insurance shall be delivered to Landlord. All public liability, property
damage and other liability policies shall be written as primary policies, not
contributing with and not in excess of coverage which Landlord may carry. All
such policies
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shall contain a provision that Landlord, although named as an additional
insured, shall nevertheless be entitled to recover under said policies for any
loss occasioned to Landlord, Landlord's employees and/or agents by reason of the
negligence of Tenant. All such insurance shall specifically insure the
performance by Tenant of the indemnity agreement as to liability for injury to
or death of persons or injury or damage to property as contained in Section 20.
Any insurance (whether liability or casualty) required by the terms of this
Lease to be carried by Tenant may be carried under a blanket policy (or
policies) covering other properties of Tenant or its related or affiliated
corporations, or both; provided, however, that Tenant provide Landlord evidence
reasonably satisfactory to Landlord that (a) Landlord is named as an additional
insured on such policy or policies and (b) the coverage under such policy or
policies is sufficient to cover the limits required herein.
17.3 LANDLORD'S LIABILITY INSURANCE
At all times during the term of this Lease, Landlord shall
maintain in full force and effect comprehensive public liability insurance with
minimum limits of One Million Dollars ($1,000,000) for injury to or death of one
or more persons in any one occurrence and One Million Dollars ($1,000,000) for
damage to or destruction of property in any one occurrence. Any insurance
(whether liability or casualty) required by the terms of this Lease to be
carried by Landlord may be under a blanket policy (or policies) covering other
properties of Landlord and/or its related or affiliated entities.
17.4 LENDER
Any mortgage lender interested in any part of the Buildings or
Premises may, at Landlord's option, be afforded coverage under any policy
required to be secured by Tenant hereunder, by use of a mortgagee's endorsement
to the policy or policies.
18. DAMAGE OR DESTRUCTION
If the Premises or all or part of the Complex shall be destroyed or
rendered untenantable, either wholly or in part, by fire or other unavoidable
casualty such that Tenant cannot reasonably continue to carry out its normal
business activities from the Premises until such damage is repaired, which
repairs Landlord's Architect reasonably believes can be repaired within one
hundred eight (180) days from the casualty, and provided such repairs do not
actually require more than two hundred ten (210) days from the date of the
casualty to be completed, then this Lease shall not terminate. Otherwise, either
party may, by written notice to the other, either (a) terminate this Lease
within sixty (60) days after (i) such casualty or (ii) the end of such two
hundred ten (210) day period, as applicable, or (b) keep this Lease in effect,
in which case Landlord shall restore the Premises to their previous condition;
provided during such restoration Basic Rent and Additional Rent shall be abated
in the same proportion as the untenantable portion of the Premises bears to the
whole thereof; and provided further if the damage is due directly or indirectly
to the fault or neglect of Tenant or Tenant's employees, agents, guests,
invitees and/or licensees, there shall be no abatement of Rent. Landlord shall
not be required to repair or restore fixtures, improvements or other property of
Tenant.
19. WAIVER OF SUBROGATION
Whether the loss or damage is due to the negligence of either Landlord
of Tenant, their employees or agents, or any other cause, Landlord and Tenant do
each herewith and hereby release and relieve the other and any other Tenant, its
employees and agents from responsibility for, and waive their entire claim of
recovery (including deductible amounts under the policies of insurance referred
to below) for, any loss or damage to the real or personal property of either
located anywhere in the Buildings arising out of or incident to the occurrence
of any of the perils which are covered and paid by their respective insurance
policies, with extended coverage endorsements, that each of them is required to
carry under this Lease (regardless of whether such coverage is actually in
effect). Each party shall cause its insurance
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carriers to consent to such waiver and to waive all rights of subrogation
against the other party.
20. INDEMNIFICATION
Subject to Section 19, Tenant shall defend and indemnify Landlord and
save Landlord harmless from and against any and all liability, damages, costs or
expenses, including attorneys' fees, arising from any act, omission or
negligence of Tenant or Tenant's employees, agents, guests, invitees and/or;
licensees in or about the Premises, the Common Area and the Parking Area, or
arising from any breach or default under this Lease by Tenant, or arising from
any accident, injury or damage, howsoever and by whomsoever caused, to any
person or property, occurring in or about the Premises, the Common Area and the
Parking Area; provided that the foregoing provision shall not be construed to
make Tenant responsible for loss, damage, liability or expense resulting from
injuries to third parties caused by the negligence of Landlord or Landlord's
employees, agents and/or invitees.
Landlord shall not be liable for any loss or damage to person or
property sustained by Tenant or other persons, which may be caused by the
buildings or the Premises, or any appurtenances thereto, being out of repair, or
the bursting or leakage of any water, gas, sewer or steam pipe, or by theft, or
by any food born or contagious illness; or by any act, omission or neglect of
any Tenant or occupant, including the Cafeteria and its employees and agents, or
other person, or by any other cause of whatsoever nature except to the extent
that Tenant's loss is caused by the gross negligence, willful misconduct or
wilful omission of Landlord or Landlord's employees or agents. Tenant agrees to
use and occupy the Premises, the Common Area and the Parking Area at Tenant's
own risk and, except as specifically set forth in the preceding sentence, hereby
releases Landlord, Landlord's employees and/or agents from all claims for any
damage or injury to the fullest extent permitted by law.
21. ASSIGNMENT AND SUBLETTING
Subject to the terms set forth herein, Tenant shall not assign,
transfer, mortgage or encumber this Lease nor sublet the whole or any part of
the Premises without First obtaining Landlord's written consent, which consent
may be withheld or conditioned in Landlord's sole reasonable discretion. Any
consent granted by Landlord shall require that such subtenant or assignee
consent to be bound by all of the terms and conditions of this Lease. No such
assignment or subletting shall relieve Tenant of any liability under this Lease
regardless of whether such liability arises by or through Tenant. Assignment or
subletting shall not operate as a waiver of the necessity for a written consent
to any subsequent assignment or subletting, and the terms of such consent shall
be binding upon any person holding by, under or through Tenant Landlord may, at
Landlord's election, collect rent directly, from such assignee or subtenant.
If Tenant is a corporation, then any transfer of this Lease by
operation of law, merger, consolidation or liquidation shall constitute an
assignment for the purpose of this Section; provided, whoever, that as long as
Tenant is a publicly owned company, Landlord's consent to an assignment of this
Lease will not be required as a result of merger, consolidation or liquidation,
or any change in the ownership of, or power to vote, the majority or controlling
interest of Tenant's outstanding voting stock unless (a) such change is the
result of any reorganization or merger by which the Tenant's rights under this
Lease are transferred to a subsidiary or affiliate or any other entity in which
Tenant has controlling interest (in which case Tenant agrees to guaranty
performance under this Lease and upon receipt of such guaranty, an form and
content satisfactory to Landlord, Landlord's consent will automatically be
deemed to be given) or (b) such change results from Tenant's merger with, or
purchase by, any competitor of Landlord.
In the event Tenant should desire to assign this Lease or sublet the
Premises or any part hereof, Tenant shall give Landlord written notice at least
thirty (30) days in advance of the date on which Tenant desires to make such
assignment or sublease, which notice shall specify: (a) the name and business of
the proposed assignee or sublessee, (b) the amount and location of the space
affected, (c) the proposed
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effective date and duration of the subletting or assignment, and (d) the
proposed rental to be paid to Tenant by such sublessee or assignee. Landlord
shall then have a period of fifteen (15) days following receipt of such notice
within which to notify Tenant in writing that Landlord elects either (i) to
permit Tenant to assign or sublet such space, in which event if the proposed
rental rate between Tenant and sublessee is greater than the Rent payable under
this Lease, then such excess rental shall be deemed Additional Rent owed by
Tenant to Landlord under this lease, and the amount of such excess, including
any subsequent increases due to escalation or otherwise, shall be paid by Tenant
to Landlord in the same manner than Tenant pays the Rent hereunder and in
addition thereto, or (ii) to withhold consent to Tenant's assignment or
subleasing such space and to continue this Lease in full force and effect as to
the entire Premises.
22. SIGNS
Tenant shall not inscribe any inscription, or post, place or in any
manner display any sign, notice, picture, placard or poster or any advertising
matter whatsoever, anywhere in or about the Premises or the Buildings at places
visible (either directly or indirectly as an outline or shadow on a glass pane)
from anywhere outside the Premises without first obtaining Landlord's written
consent thereto which consent shall not be unreasonably withheld or delayed.
Tenant shall have the right to place signage on the north wall of Building 1
below the Landlord's signage and subject to Landlord's approval as set forth in
this section. It is understood and agreed that Landlord's signage may be more
prominent than Tenant's signage Tenant shall deliver to Landlord drawings or
plans showing any such sign prior to its installation. Any such consent by
Landlord shall be upon the understanding and condition that Tenant will remove
the same at the Expiration Date or sooner termination of the Lease Term and
Tenant shall repair any damage to the Premises or the Building caused thereby.
23. LIENS AND INSOLVENCY
Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed and materials ordered or obligations incurred
by Tenant, and Tenant does hereby indemnify and hold Landlord harmless from any
liability arising from such lien. In the event any lien is filed against the
Complex, the Property described on EXHIBIT A or the Premises by any person
claiming by, through or under Tenant, Tenant shall promptly, upon request of
Landlord and at Tenant's sole costs and expense, furnish to Landlord a bond in
form, content and amount, and issued by a surety, satisfactory to Landlord, in
its sole discretion, indemnifying Landlord, the Property and the Complex against
any liability, costs and expenses, including, without limitation, attorneys'
fees, which Landlord may incur as a result thereof. Provided such bond has been
furnished, and after written notice to Landlord, Tenant may contest any such
lien by appropriate proceedings conducted in good faith and with due diligence,
at Tenant's sole cost and expense, if and only if such proceedings suspend the
collection of any amount claimed from Landlord, Tenant, the Property and the
Premises, and neither the Property, the Complex nor the Premises (or any part
thereof) is or will be in danger of being sold, forfeited or lost.
24. DEFAULTS
24.1 EVENTS OF DEFAULT
The following events are referred to, collectively, as "Events
of Default" or, individually, as an "Event of Default":
(a) Tenant defaults in the due and punctual payment of Rent, and such
default continues for five (5) days after written notice from Landlord delivered
by hand to Tenant's last known address or via facsimile to Tenant's last known
facsimile number; however, Tenant will not be entitled to more than one (1)
written notice for monetary defaults during any twelve (12) month period, and if
after such written notice any Rent is not paid within five (5) days of when due,
an Event of Default will be considered to have occurred without further notice:
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(b) This Lease or the Premises or any part of the Premises are taken upon
execution or by other process of law directed against Tenant, or are taken upon
or subject to any attachment by any creditor of Tenant or claimant against
Tenant, and the attachment is not discharged or disposed of within thirty (30)
days after its levy.
(c) Tenant is insolvent or files a petition in bankruptcy or insolvency or
for reorganization or arrangement under the bankruptcy laws of the United States
or under any solvency act of any state, or admits the material allegations of
any such petition by answer or otherwise, or is dissolved or makes an assignment
for the benefit of creditors;
(d) Involuntary proceedings under any such bankruptcy law or insolvency
act or for the dissolution of Tenant are instituted against Tenant, or a
receiver or trustee is appointed for all or substantially all of the property of
Tenant, and such proceeding is not dismissed or such receivership or trusteeship
vacated within sixty (60) days after such institution or appointment; or
(e) Tenant breaches any of the other agreements, terms, covenants or
conditions that this Lease requires Tenant to perform, and such breach continues
for a period of thirty (30) days after written notice from Landlord to Tenant
or, if such breach cannot be cured reasonably within such thirty (30) day
period, if Tenant fails to diligently commence to cure such breach within thirty
(30) days after written notice from Landlord and to complete such cure within a
reasonable time thereafter.
Notice as required herein shall be delivered in compliance with provisions of
Section 30.
24.2 LANDLORD'S REMEDIES
If any one or more Events of Default set forth in Section 24.1
occur, then Landlord has the right, at its election:
(a) To give Tenant written notice by hand delivery to Tenant's last known
address or via facsimile to Tenant's last known facsimile number of Landlord's
intention to terminate this Lease on the earliest date permitted by law or on
any later date specified in such notice, in which case Tenant's right to
possession of the Premises will cease and this Lease will be terminated, except
as to Tenant's liability, as if the expiration of the term fixed in such notice
were the end of the term;
(b) Without further demand or notice, to reenter and take possession of
the Premises or any part of the Premises, repossess the same, expel Tenant and
those claiming through or under Tenant, and remove the effects of both or
either, using such force for such purposes as may be necessary, without being
liable for prosecution, without being deemed guilty of any manner of trespass
and without prejudice to any remedies for arrears of monthly rent or other
amounts payable under this Lease or as a result of any preceding breach of
covenants or conditions; or
(c) Without further demand or notice to cure any Event of Default and to
charge Tenant for the cost of effecting such cure, including, without
limitation, reasonable attorneys' fees and interest on the amount so advanced at
the rate of ten percent (10%) per annum, provided that Landlord will have no
obligation to cure any such Event of Default of Tenant.
Should Landlord elect to reenter as provided in (b), or should Landlord
take possession pursuant to legal proceedings or pursuant to any notice provided
by law, Landlord may, from time to time, without terminating this Lease, relet
the Premises or any part of the Premises in Landlord's or Tenant's name, but for
the account of Tenant, for such term or terms (which may be greater or less than
the period that would otherwise have constituted the balance of the term) and on
such conditions and upon such other terms (which may include concessions of free
rent and alteration and repair of the Premises) as Landlord, in its reasonable
discretion, may determine, and Landlord may collect and receive the Rent.
Landlord will in no way be responsible or liable for any failure to relet the
Premises, or any part of the Premises, or for any
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failure to collect any Rent due upon such reletting. No such reentry or taking
possession of the Premises by Landlord will be construed as an election on
Landlord's part to terminate this Lease unless a written notice of such
intention is given to Tenant. No written notice from Landlord under this Section
24.2 or under a forcible or unlawful entry and detainer statute or similar law
will constitute an election by Landlord to terminate this Lease unless such
notice specifically so states. Landlord reserves the right following any such
reentry or reletting to exercise its right to terminate this Lease by giving
Tenant such written notice, in which event this Lease will terminate as
specified in such notice.
24.3 CERTAIN DAMAGES
In the event that Landlord does not elect to terminate this
Lease as permitted in Section 24.1(a), but on the contrary elects to take
possession as provided in Section 24.2(b), Tenant shall pay to Landlord monthly
Rent and other sums as provided in this Lease that would be payable under this
Lease if such repossession had not occurred, less the net proceeds, if any, of
any reletting of the Premises after deducting all of Landlord's reasonable
expenses in connection with such reletting, including, without limitation, all
repossession costs, brokerage commissions, attorneys' fees, expenses of
employees, alteration and repair costs and expenses of preparation for such
reletting. If, in connection with any reletting, the new lease terms extends
beyond the existing term, or the Premises covered by such new lease include
other premises not part of the Premises, a fair apportionment of the rent
received from such reletting and the expenses incurred in connection with such
reletting as provided in this Section 24.3 will be made in determining the net
proceeds from such reletting, and any rent concessions will be equally
apportioned over the term of the new lease. Tenant shall pay such rent and other
sums to Landlord monthly on the day on which the monthly Rent would have been
payable under this Lease if possession had not been retaken, and the Landlord
will be entitled to receive such rent and other sums from Tenant on each such
day. Landlord will attempt to mitigate damages arising from an Event of Default
by making reasonable efforts to relet the Premises in whole or in part.
24.4 CONTINUING LIABILITY AFTER TERMINATION
If this Lease is terminate on account of the occurrence of an
Event of Default, Tenant will remain liable to Landlord for damages in an amount
equal to monthly Rent and other amounts that would have been owing by Tenant for
the balance of the term had this Lease not been terminated, less the net
proceeds, if any, of any reletting of the Premises by Landlord subsequent to
such termination, after deducting all of Landlord's expenses in connection with
such reletting, including, without limitation, the expenses enumerated in
Section 24.3. Landlord will be entitled to collect such damages from Tenant
monthly on the day on which monthly Rent and other amounts would have been
payable under this Lease if this Lease had not been terminated, and Landlord
will be entitled to receive such monthly Rent and other amounts from Tenant on
each such day. Alternatively, at the option of Landlord, in the event this Lease
is so terminated, Landlord will be entitled to recover against Tenant as damages
for loss of the bargain and not as penalty.
(a) The worth at the time of award of the unpaid Rent that had been earned
at the time of termination;
(b) The worth at the time of award of the amount by which the unpaid Rent
that would have been earned after termination until the time of award exceeds
the amount of such rental loss that Tenant proves could have been reasonably
avoided:
(c) The worth at the time of award of the amount by which the unpaid Rent
for the balance of the term of this Lease (had the same not been so terminated
by Landlord) after the time of award exceeds the amount of such rental loss that
Tenant proves could be reasonably avoided; and
(d) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or, in the ordinary course of
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business, likely to result therefrom.
The "Worth at the time of award" of the amounts referred to in (a) and (b) above
is computed by adding interest at the interest rate of ten percent (10%) per
annum on the termination date from the termination date until the time of the
award. The "worth at the time of award" of the amount referred to in (c) above
is computed by discounting such amount at the discount rate of the Federal
Reserve Bank of Seattle, Washington, at the time of award plus one percent (1%).
24.5 CUMULATIVE REMEDIES
Any suit or suits for the recovery of the amounts and damages
set forth in Sections 24.3 and 24.4 may be brought by Landlord, from time to
time, at Landlord's election, and nothing in this Lease will be deemed to
require Landlord to await the date upon which this Lease or the term would have
expired had there occurred no Event of Default. Each right and remedy provided
for in this Lease is cumulative and is in addition to every other right or
remedy provided for in this Lease or now of hereafter existing at law or in
equity or by statute or otherwise, and the exercise or beginning of the exercise
by Landlord of any one or more of the right or remedies provided for in this
Lease or now or hereafter existing at law or in equity or by statute or
otherwise will be preclude the simultaneous or later exercise by Landlord of any
or all other rights or remedies provided for in this Lease or now or hereafter
existing at law or in equity or by statute or otherwise. All costs incurred by
Landlord in collecting any amounts and damages owing by Tenant pursuant to the
provisions of this Lease or to enforce any provision of this Lease, including
reasonable attorneys' fees from the date any such matter is turned over to an
attorney, whether or not one or more actions are commenced by Landlord, will
also be recoverable by Landlord from Tenant.
25. PRIORITY
This Lease will be subordinate to any mortgage or deed of trust now
existing upon the Premises or the Property and to any and all advances to be
made thereunder, and to interest thereon, and all renewals, replacements or
extensions thereof. Tenant agrees to subordinate its interest in the Premises
and under this Lease to the lien of a future mortgage or deed of trust which
secures a loan to Landlord for the benefit of the Complex or Premises (or a loan
to refinance such a loan), and further agrees to attorn to the holder of such
mortgage or such deed of trust, provided that the holder of such mortgage or
deed of trust delivers to Tenant a nondisturbance agreement providing that so
long as Tenant is not in default under this Lease, Tenant's possession of the
Premises and rights under this Lease shall not be effected by a foreclosure, a
deed in lieu of foreclosure or any other post-default remedy or proceeding under
such mortgage or deed of trust.
26. NONWAIVER
Waiver by Landlord of any breach of any term, covenant or condition
herein contained shall not be deemed to be a waiver of such term, covenant or
condition, or of any subsequent breach of the same or any other term, covenant
or condition herein contained. The subsequent acceptance of Rent by Landlord
shall not be deemed to be a waiver of any preceding breach by Tenant of any
term, covenant or condition of this Lease, other than the failure of Tenant to
pay the particular Rent so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such Rent.
27. SURRENDER OF POSSESSION
Upon the Expiration Date or sooner termination of the Lease Term,
whether by lapse of time or otherwise, Tenant shall promptly and peacefully
surrender the Premises to Landlord.
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28. HOLDOVER
If Tenant shall, with the written consent of Landlord, hold over after
the Expiration Date of the Lease Term, Tenant shall be deemed to be occupying
the Premises on a month-to-month tenancy, which tenancy may be terminated as
provided by the laws of the State of Washington. During such tenancy, Tenant
agrees to pay to Landlord twice the Basic Rent as set forth herein, plus
Additional Rent unless a different rate shall be agreed upon, and to be bound by
all of the terms, covenants and conditions herein specified, so far as
applicable.
29. CONDEMNATION
If all of the Premises, or such portions of Building 2 as may be
required for the reasonable use of the Premises, are taken by eminent domain,
this Lease shall automatically terminate as of the date Tenant is required to
vacate the Premises and all Rent shall be paid to that date. In case of a taking
of a part of the Premises, or a portion of Building 2 not required for the
reasonable use of the Premises, then this Lease shall continue in full force and
effect and the Rent shall be equitable reduced based on the proportion by which
Tenant's Percentage of the Complex is reduced, such Rent reduction to be
effective as of the date possession of such portion is delivered to the
condemning authority. Landlord reserves all rights to damage to the Premises for
any taking by eminent domain, and Tenant hereby assigns to Landlord any right
Tenant may have to such damages or award, and Tenant shall make no claim against
Landlord for damages for termination of the leasehold interest or interference
with Tenant's business. Tenant shall have the right, however, to claim and
recover from the condemning authority compensation for any loss to which Tenant
may be put for Tenant's moving expenses, provided that such damages may be
claimed only if they are awarded separately in the eminent domain proceedings
and not as part of the damages recoverable by Landlord.
30. NOTICES
Any notices, consents, approvals, elections, submissions, requests or
demands required or permitted to be given under this Lease or pursuant to any
law or governmental regulation by Landlord to Tenant or by Tenant to Landlord
shall be in writing (whether or not expressly so provided) and shall be deemed
received and effective five (5) days after being deposited in the United States
mail, registered or certified mail, return receipt requested, postage prepaid or
one (1) business day after being sent by overnight express mail or nationally
recognized courier service (e.g. Federal Express) to Landlord or Tenant, at the
respective addresses set forth below or such other addresses as either party may
designate by notice to the other from time to time. In lieu of registered or
certified mail, and in any event during any period of postal strike or other
interference with the mails, any notice may be given by personal delivery with a
receipt signed by the person served or by any person authorized by law to serve
process in the jurisdiction where such service is accomplished and shall be
effective when received. The address for notices to Landlord shall be Spokane
Teachers Credit Union, Att.: Steven Dahlstrom, 106 W. Nora, P. O. Box 5264,
Spokane, WA 99205-0264. The address for notices to Tenant shall be, Software
Spectrum, Inc. Att.: Larry Callahan at 2140 Merritt Drive, Garland, TX 75041
and a copy to General Counsel.
31. COSTS AND ATTORNEYS' FEES
If Tenant or Landlord shall take any action for any relief against the
other, declaratory or otherwise, arising out of this Lease, including any suit
by Landlord for the recovery or rent or possession of the Premises, the losing
party shall pay the successful party a reasonable sum for attorneys' fees and
costs in such action, at trial and on appeal, and such attorneys' fees and costs
shall be deemed to have accrued on the commencement of such action.
In the event Tenant requests Landlord's consent to any assignment or
sublease hereunder or to any modification or amendment of this Lease, then
Tenant shall pay reasonable attorneys' fees
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incurred by Landlord in connection with Landlord's review of such request and
preparation of any documents required to evidence Landlord's consent, if
granted.
32. LANDLORD'S LIABILITY
Anything in this Lease to the contrary notwithstanding, covenants,
undertakings and agreements herein made on the part of Landlord are made and
intended not as personal covenants, undertakings and agreements or for the
purpose of binding Landlord personally or the assets of,Landlord except
Landlord's interest in the Premises and the Complex, but are made and intended
for the purpose of binding only Landlord's interest in the Premises and Complex,
including, but not limited to, any and all net consideration received by
Landlord from the sale of all or any portion thereof, and all net insurance and
condemnation proceeds paid to Landlord in connection therewith. No personal
liability or personal responsibility is assumed by, or shall at any time be
asserted or enforceable against, Landlord or Landlord's heirs, legal
representatives, successors or assigns on account of this Lease or on account of
any covenant, undertaking or agreement of Landlord contained in this Lease.
33. ESTOPPEL CERTIFICATES
Tenant shall, from time to time upon written request of Landlord,
execute, acknowledge and deliver to Landlord or Landlord's designee a written
statement stating: the date of this Lease was executed and the date it expires;
the date Tenant entered into occupancy of the Premises; the amount of Basic Rent
and Additional Rent and the date to which such Rent has been paid; and
certifying (to the extent that the same is true and correct): that this Lease is
in full force and effect and has not been assigned, modified, supplemented or
amended in any way (or specifying the date of agreement so effecting this
Lease); that this Lease represents the entire agreement between the parties as
to this leasing; that any conditions under this Lease to be performed by
Landlord have been satisfied; that any required contributions by Landlord to
Tenant on account of Tenant's improvements have been received; that there are no
existing defenses or offsets which Tenant has against the enforcement of this
Lease by Landlord; that no Rent has been paid in advance; and stating the amount
of the Security Deposit paid to Landlord. It is intended that any such statement
may be relief upon by a prospective purchaser of Landlord's interest or a
mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's
interest in the Property. If Tenant shall fail to respond within ten (10)
business days of receipt by Tenant of a written request by Landlord as herein
provided, Tenant shall be deemed to have given such certificate as above
provided without modification and shall be deemed to have admitted the accuracy
of any information supplied by Landlord to a prospective purchase or mortgagee
and that this Lease is in full force and effect, that there are no uncured
defaults in Landlord's performance;, that the Security Deposit is as stated in
this Lease and that not more than one month's Rent has been paid in advance.
34. TRANSFER OF LANDLORD'S INTEREST
This Lease shall be assignable by Landlord without the consent of
Tenant. In the event of any transfer or transfers of Landlord's interest in the
Premises or the Property, other than a transfer for security purposes only, the
transferor shall be automatically relieved of any and all obligations and
liabilities on the part of Landlord accruing from and after the date of such
transfer and Tenant agrees to attorn to the transferee.
35. RIGHT TO PERFORM
If Tenant shall fall to pay any sum of money, other than Rent,
required to be paid by Tenant hereunder or shall fail to perform any other act
on Tenant's part to be performed hereunder, and such failure shall continue for
ten (10) business days after notice thereof by Landlord, Landlord may, but shall
not be obligated so to do, and without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such other act on
Tenant's part to be made or performed as provided in this Lease. Landlord shall
have (in addition to any other right or remedy of Landlord) the
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same rights and remedies in the event of the nonpayment of sums due under this
Section as in the case of default by Tenant in the payment of Rent.
36. EXECUTION OF LEASE BY LANDLORD
The submission of this document for examination and negotiation does
not constitute an offer to lease, or a reservation of or option for the
Premises, and this document shall become effective and binding only upon
execution and delivery by Landlord. No act or omission of any employee or agent
of Landlord or of Landlord's broker shall alter, change or modify any of the
provisions hereof.
37. GENERAL
37.1 TITLES
The title to sections of this Lease are not a part of this Lease
and shall have no effect upon the construction or interpretation of any part
hereof.
37.2 GOVERNING LAW
This Lease shall be construed and governed by the laws of the
State of Washington. Spokane County Superior Court shall be the venue for any
lawsuit or other legal proceedings.
37.3 BINDING EFFECT
All of the covenants, agreements, terms and conditions contained
in this Lease shall apply to and be binding upon Landlord and Tenant and their
respective heirs, executors, administrators, successors and assigns.
37.4 NO BROKER ENGAGED BY TENANT
Tenant represents and warrants to Landlord that Tenant has not
engaged any broker, finder or other person who would be entitled to any
commission or fee in respect of the negotiation, execution or delivery of this
Lease sand shall indemnify and hold harmless Landlord against any loss, cost,
liability or expense incurred by Landlord as a result of any claim asserted by
any such broker, finder or other person on the basis of any arrangements or
agreements made or alleged to have been made by or on behalf of Tenant.
37.5 ENTIRE AGREEMENT
This Lease contains all covenants and agreements between
Landlord and Tenant relating in any manner to the lease, use and occupancy of
the Premises and other matters set forth in this Lease. No prior agreements or
understanding pertaining to the same shall be valid or of any force or effect
and the covenants and agreements of this Lease shall not be altered, modified or
added to except in writing signed by Landlord and Tenant.
37.6 VALIDITY
Any provision of this Lease which shall prove to be invalid,
void or illegal shall in no way affect, impair or invalidate any other provision
hereof and the remaining provisions hereof shall nevertheless remain in full
force and effect.
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37.7 INTEREST
Any Rent or other sums payable by Tenant to Landlord which shall
not be paid within fifteen (15) days after the due date thereof shall bear
interest from the date tenant received notification that such sums are past due
at the Default Rate calculated from the date of delinquency to the date of
payment.
37.8 INTERPRETATION
This Agreement and each of the terms and provisions hereof are
deemed to have been explicitly negotiated between the parties, and the language
in all parts of this Agreement shall, in all cases, be construed according to
its fair meaning and not strictly for or against either party.
37.9 AUTHORIZATION
If Tenant is a corporation or partnership, Tenant represents and
warrants that the execution, delivery and performance of this Lease have been
duly authorized by all necessary persons. The officer or partner executing this
Lease on behalf of Tenant further individually represents and warrants that he
or she is duly authorized to execute and deliver this Lease to Landlord on
behalf of Tenant.
37.10 NO RECORDING
Tenant shall not record this Lease or any notice or memorandum
thereof in the records of the county auditor without Landlord's prior written
consent.
IN WITNESS WHEREOF, this Lease has been executed the day and year first
above set forth.
LANDLORD: SPOKANE TEACHERS CREDIT UNION
By: /s/ Steven L. Dahlstrom
---------------------------------------
(signature)
STEVEN L. DAHLSTROM
---------------------------------------
(print name)
Title: President/CEO
---------------------------------------
TENANT: SOFTWARE SPECTRUM, INC
By: /s/ Robert D. Graham
---------------------------------------
(signature)
Robert D. Graham
---------------------------------------
(print name)
Title: Vice President and General Counsel
---------------------------------------
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STATE OF WASHINGTON )
) ss
County of Spokane )
On this 1st day of May, 1998, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared
/s/ Steven L. Dahlstrom
-----------------------------------------------
to me known to be the person who signed as ____________________ of SPOKANE
TEACHERS CREDIT UNION, the entity that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said entity for the uses and purposed therein mentioned, and on oath
that he was duly elected, qualified and acting as said officer of said entity,
that he was authorized to execute said instrument and that the seal affixed,
if any, is the seal of said entity.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the day
and year first above written.
(SEAL) /s/ Karen V. O'Neel
----------------------------------------
Notary Public in and for the State of
Washington, residing at Spokane
My Commission expires: 3/2/02
------------------
STATE OF TEXAS )
) ss
County of DALLAS )
On this 30th day of April, 1998, before me, the undersigned, a Notary
Public in and for the State of Texas, duly commissioned and sworn, personally
appeared
Robert D. Graham
------------------------------------------------------------
to me known to be the person who signed as Vice President & General Counsel of
SOFTWARE SPECTRUM, INC., the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation for the uses and purposed therein mentioned, and on
oath that he was duly elected, qualified and acting as said officer of said
corporation, that he was authorized to execute said instrument and that the
corporate seal affixed, if any, is the seal of said corporation.
(STAMP) Debra S. Thompson /s/ Debra S. Thompson
-------------------------------------------------
Notary Public in and for the State of
Texas, residing at 1220 Warwick, Mesquite, TX
--------------------------
My Commission Expires: March 31, 2001
---------------
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EXHIBIT A, LEGAL DESCRIPTION - PAGE 1 OF 4
Parcel A:
That portion of Parcel 1, Block 1, Binding Site Plan 33-92, according to Site
Plan recorded in Book 1 of Binding Site Plans, Pages 61 and 62, in Spokane
County, Washington, described as follows:
BEGINNING at the Southwest corner of Parcel 1 of Spokane County Binding Site
Plan No. 33-92; Thence along the Westerly line of said Parcel 1 the following
five courses:
1. North 02DEG. 56'04" West, 346.82 feet;
2. North 69DEG. 35'51" West, 20.25 feet;
3. Northwesterly 84.12 feet along the arc of a non-tangent circular curve
concave to the Northeast said curve having a radius of 218.89 feet, a central
angle of 22DEG. 01'11" and a long chord that bears North 54DEG. 21'51" West,
83.61 feet;
4. Northwesterly 13.33 feet along the arc of a circular curve concave to the
Southwest, said curve having a radius of 20.00 feet, a central angle of 38DEG.
10'56" and a long chord that bears North 62DEG. 26'44" West, 13.08 feet;
5. Northwesterly 18.55 feet along the arc of a circular curve concave to the
Northeast, said curve having a radius of 50.00 feet, a central angle of 21DEG.
15'27" and a long chord that bears North 70DEG. 54'29" West, 18.44 feet, to the
Northwest corner of said Parcel 1;
Thence North 59DEG. 53'21" East, along the North line of said Parcel 1,315.86
feet;
Thence South 02DEG. 56'04" East, 564.79 feet, to the Northerly right of way line
of Mission Avenue;
Thence South 87DEG. 03'56" West along said right of way line, 168.66 feet to the
Point of Beginning.
Parcel B:
A Parcel of Land located in the East half of the East half of the Southwest
quarter and the West half of the West half of the Southeast quarter of Section
10, Township 25 North, Range 45 East, W.M., in Spokane County, Washington, more
particularly described as follows:
BEGINNING at the South quarter corner of said Section from which the Southeast
corner of said Section bears North 87DEG. 03'56" East;
Thence North 30DEG. 56'04" West, a distance of 562.49 feet to Southerly right of
way of the Chicago, Milwaukee and St. Paul Railroad;
Thence North 59DEG. 53'21" East along said Southerly right of way, a distance of
30.00 feet to the true point of beginning of this description;
Thence continue along said Southerly right of way North 59DEG. 53'21" East, a
distance of 480.00 feet to the most Northwesterly corner of Parcel 1 of
Homestead Industrial Properties No. III, according to Binding Site Plan recorded
in Volume 1 of Binding Site Plans, Page 12;
<PAGE>
EXHIBIT A, LEGAL DESCRIPTION - PAGE 2 OF 4
Thence South 30DEG. 56'04" East, a distance of 411.00 feet;
Thence South 68DEG. 44'58" West, a distance of 486.89 feet;
Thence North 30DEG. 56'04" West, a distance of 336.00 feet to the True Point of
Beginning.
Parcel C:
A Parcel of land located in the East half of the East half of the Southwest
quarter and the West half of the West half of the Southeast quarter of Section
10, Township 25 North, Range 45 East, W.M., in Spokane County, Washington, being
more particularly described as follows:
BEGINNING at the South quarter corner of said Section from which the Southeast
corner of said section bears North 87DEG. 03'56" East; Thence North 30DEG.
56'04" West, a distance of 33.97 feet to the Northerly right of way of Mission
Avenue as it now exists 60.00 feet in width on March 27, 1979, and the True
Point of Beginning:
Thence South 87DEG. 03'56" West, a distance of 33.97 feet;
Thence North 30DEG. 56'04" West a distance of 413.86 feet to the beginning of a
non-tangent curve concave to the Northeast from which the radius bears North
19DEG. 24'09" West, a distance of 50.00 feet;
Thence Northerly along said curve through a central angle of 156DEG. 56'19", an
arc distance of 136.96 feet;
Thence North 30DEG. 56'04" West, a distance of 1.16 feet to the former Southerly
right of way of the Chicago, Milwaukee and St. Paul Railroad;
Thence North 59DEG. 53'21" East, a distance of 60.00 feet;
Thence South 30DEG. 56'04" East, a distance of 544.03 feet to the Northerly
right of way of said Mission Avenue;
Thence South 87DEG. 03'56" West, a distance of 33.97 feet to the True Point of
Beginning;
EXCEPT that portion deeded to Spokane County for Signal Road by Right of Way
Deed recorded April 1, 1986, under Auditor's File No. 8604010235, described as
follows:
BEGINNING at the South quarter corner of said Section from which the Southeast
corner of said Section bears North 87DEG. 03'56" East;
Thence North 30DEG. 56'04" West, a distance of 33.97 feet to the Northerly right
of way line of Mission Avenue as it now exists 60.00 feet in width on March 27,
1979, and the True Point of Beginning;
Thence South 87DEG. 03'56" West, a distance of 33.97 feet;
Thence North 30DEG. 56'04" West, a distance of 513.01 feet to the Southerly
right of way line of the Chicago, Milwaukee and St. Paul Railroad;
Thence North 59DEG. 53'21" East, a distance of 60.00 feet;
Thence South 30DEG. 56'04" East, a distance of 544.03 feet to the Northerly
right of way line of said Mission Avenue;
Thence South 87DEG. 03'56" West, a distance of 33.97 feet to the True Point of
Beginning.
<PAGE>
EXHIBIT A, LEGAL DESCRIPTION - PAGE 3 OF 4
Parcel D:
A Parcel of Land in the South half of Section 10, Township 25 North, Range 45
East, W.M., in Spokane County, Washington, described as follows:
BEGINNING at the South quarter corner of said Section, from which the Southeast
corner of said Section bears North 87DEG. 03'56" East;
Thence North 30DEG. 56'04" West, a distance of 33.97 feet to the North margin of
Mission Avenue as it now exists 60 feet in width on May 27, 1980;
Thence North 87DEG. 03'56" East, a distance of 33.97 feet to the True Point of
Beginning of this description, said point being the Southeast corner of Parcel
"B" of the Record of Survey recorded in Book 18 of Surveys, Page 27, in the
Spokane Auditor's Office;
Thence North 30DEG. 56'04" West, along the East boundary of said Parcel "B", a
distance of 208.03 feet to the Southwest corner of that parcel of land conveyed
to William W. Main and Norma Lee Main, doing business as William W. Main
Investment Company, by deed dated January 10, 1980, and recorded January 11,
1980, in said Auditor's Office under Auditor's File No. 8001110047;
Thence North 68DEG. 44'58" East along the South boundary of said Parcel, a
distance of 486.89 feet to the Southeast corner of said Parcel;
Thence North 30DEG. 56'04" West along the boundary of said Parcel and the
boundary of Parcel "A" of said Record of Survey, a distance of 25.00 feet;
Thence North 59DEG. 56'27" East, a distance of 201.24 feet to the beginning of a
non-tangent curve concave to the Northeast having a radius of 50.00 feet (to
which a radial line bears South 29DEG. 43'15" West);
Thence Southeasterly along said curve through a central angle of 21DEG. 15'27"
an arc distance of 18.55 feet to the beginning of a reverse curve concave to the
Southwest having a radius of 20.00 feet;
Thence Southeasterly along said curve through a central angle of 38DEG. 10'56"
an arc distance of 13.33 feet to the beginning of a reverse curve concave to the
Northeast having a radius of 218.89 feet (to which a radial line bears South
46DEG. 38'44" West);
Thence Southeasterly along said curve through a central angle of 27DEG. 23'09"
an arc distance of 104.62 feet;
Thence South 02DEG. 56'04" East a distance of 376.22 feet to said North margin
of Mission Avenue;
Thence South 87DEG. 03'56" West along said North margin, a distance of 644.25
feet to the True Point of Beginning.
EXCEPT that portion deeded to Spokane County for Mission Avenue by right of way
deed recorded October 7, 1993 under Auditor's File No. 9310070105 described as
follows:
<PAGE>
Exhibit A, Legal Description - Page 4 of 4
BEGINNING at the Southeast corner of that parcel shown on the Record of Survey
recorded in Book 22 of Surveys, page 41;
Thence North 02DEG. 56'04" West, along the East line of said Parcel, a distance
of 16 feet;
Thence South 87DEG. 03'56" West, parallel with the South line of said Parcel, a
distance of 353.73 feet to the beginning of a curve concave to the Southeast
with a radius of 866.05 feet;
Thence Southwesterly along said curve to the South line of said Parcel;
Thence North 87DEG. 03'56" East, along said South line to the Point of
Beginning.
Parcel E:
A parcel of land located in the South half of Section 10, Township 25 North,
Range 45 East, W.M., in Spokane County, Washington, described as follows:
BEGINNING at the South quarter corner of said Section from which the Southeast
corner of said Section bears North 87DEG. 03'56" East; Thence North 30DEG.
56'04" West, 33.97 feet to the Northerly margin of Mission Avenue;
Thence North 87DEG. 03'56" East along said Northerly margin, a distance of
678.22 feet to a point, said point being the Southeast corner of that parcel
shown on the survey recorded in Book 22 of Surveys, Page 41;
Thence North 02DEG. 56'04" West along the Easterly boundary of said parcel, a
distance of 376.22 feet to an angle point in the boundary of said parcel and the
True Point of Beginning of this description;
Thence continue North 02DEG. 56'04" West, 0.60 feet;
Thence North 69DEG. 35'51" West, 20.25 feet to a point on the Northeasterly
boundary of said parcel, said point being the beginning to a non-tangent curve
concave to the Northeast, the radius of which bears North 24DEG. 37'34" East,
218.89 feet;
Thence Easterly along said curve through a central angle of 5DEG. 21'58" an arc
distance of 20.50 feet to the True Point of Beginning, in Spokane County,
Washington.
<PAGE>
[SITE PLAN]
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[SITE PLAN]
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[SITE PLAN]
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[SITE PLAN]
<PAGE>
SOFTWARE SPECTRUM, INC.
MANAGEMENT CONTINUITY AGREEMENT
This Agreement (the "Agreement") is entered into by and between Software
Spectrum, Inc., a Texas corporation (the "Company"), and JAMES W. BROWN (the
"Executive"), dated as of the 1st day of March, 1998.
The Board of Directors of the Company (the "Board"), has determined that
it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control
(as defined in Section 2) of the Company. The Board believes it is imperative
to diminish the inevitable distraction of the Executive by virtue of the
personal uncertainties and risks created by a pending or threatened Change of
Control and to encourage the Executive's lull attention and dedication to the
Company currently and in the event of any threatened or pending Change of
Control, and to provide the Executive with compensation and benefits
arrangements upon a Change of Control which ensure that the compensation and
benefits expectations of the Executive will be satisfied and which are
competitive with those of other corporations. Therefore, in order to
accomplish these objectives, the Board has caused the Company to enter into
this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. CERTAIN DEFINITIONS.
(a) The "Effective Date" shall mean the first date during the Change of
Control Period (as defined in Section 1(b)) on which a Change of
Control occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's
employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by
the Executive that such termination of employment (i) was at the
request of a third party who has taken steps reasonably calculated to
effect the Change of Control or (ii) otherwise arose in connection
with or anticipation of the Change of Control, then for all purposes
of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the second anniversary of such date;
provided, however, that commencing on the date one year after the date
hereof, and on each annual anniversary of such date (such date and
each annual anniversary thereof shall be hereinafter referred to as
the "Renewal Date"), the Change of Control Period shall be
automatically extended so as to terminate two years from such Renewal
Date, unless at least 60 days prior to the Renewal Date the Company
shall give notice to the Executive that the Change of Control Period
shall not be so extended.
<PAGE>
2. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of Control"
shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either (i) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the
Company (excluding an acquisition by virtue of the exercise of a
conversion privilege), (ii) any acquisition by the company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the
Company or (iv) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, the conditions described in
clauses (i) and (ii) of subsection (c) of this Section 2 are
satisfied; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation, (i) more than 60% of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or
consolidation, of the outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be and (ii) at least a
majority of the members of the board of directors of the corporation
resulting from
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<PAGE>
such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
providing for such reorganization, merger or consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company,
other than to a corporation, with respect to which following such sale
or other disposition, (A) more than 60% of; respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common
Stock and outstanding Company Voting Securities immediately prior to
such sale or other disposition in substantially the same proportion as
their ownership, immediately prior to such sale or other disposition,
of the outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be and (B) at least a majority of the
members of the board of directors of such corporation were members of
the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other
disposition of assets of the Company.
3. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in
its employ, and the Executive hereby agrees to remain in the employ of the
Company, in accordance with the terms and provisions of this Agreement, for
the period commencing on the Effective Date and ending on the second
anniversary of such date (the "Employment Period").
4. TERMS OF EMPLOYMENT.
(a) POSITION AND DUTIES.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be
at least commensurate in all material aspects with the most
significant of those held, exercised and assigned at any time
during the 90-day period immediately preceding the Effective
Date and (B) the Executive's services shall be performed at
the location where the Executive was employed immediately
preceding the Effective Date or any office which is the
headquarters of the Company and is less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled,
the Executive agrees to devote reasonable attention and time
during normal business hours to the business
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<PAGE>
and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive
hereunder, to use the Executive's reasonable best efforts to
perform faithfully and efficiently such responsibilities.
During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate,
civic or charitable boards or committees, (B) deliver
lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as
such activities are similar to such activities of the
Executive prior to the Effective Date and do not significantly
interfere with the performance of the Executive's
responsibilities as an employee of the Company in accordance
with this Agreement. It is expressly understood and agreed
that to the extent that any such activities have been,
conducted by the Executive prior to the Effective Date, the
continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to
the Effective Date shall not thereafter be deemed to interfere
with the performance of the Executive's responsibilities to
the Company.
(b) COMPENSATION.
(i) BASE SALARY. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary"), which
shall be paid in equal installments in accordance with the
Company's customary pay periods, at least equal to twelve
times the highest monthly base salary paid or payable to the
Executive by the Company and its affiliated companies in
respect of the twelve-month period immediately preceding the
month in which the Effective Date occurs. For purposes of
determining Annual Base Salary for this Agreement, there will
be included in, or added to, the base salary all quarterly or
other periodic bonuses (other than annual bonus) to which the
Executive would have been entitled for the year in which the
Effective Date occurs as if all criteria for such bonuses had
been satisfied at 100% of plan, with such bonuses to be paid
in accordance with the Company's customary pay periods for
such bonuses. During the Employment Period, the Annual Base
Salary shall be reviewed at least annually and shall be
increased at any time and from time to time as shall be
substantially consistent with increases in base salary
generally awarded in the ordinary course of business to other
peer executives of the Company and its affiliated companies.
Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after any
such increase and the term Annual Base Salary as utilized in
this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated
companies" shall include any company controlled by,
controlling or under common control with the Company.
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<PAGE>
(ii) ANNUAL BONUS. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the
Employment Period, an annual bonus (the "Annual Bonus") in
cash at least equal to the greater of (A) the average
annualized (for any fiscal year consisting of less than twelve
full months or with respect to which the Executive has been
employed by the Company for less than twelve full months)
bonus paid or payable, including by reason of any deferral, to
the Executive by the Company and its affiliated companies in
respect of the three fiscal years immediately preceding the
fiscal year in which the Effective Date occurs (the "Recent
Average Bonus"), or (B) the annual bonus paid or payable,
including by reason of any deferral, to the Executive (and
annualized for any fiscal year consisting of less than twelve
full months or for which the Executive has been employed for
less than twelve full months) for the most recently completed
fiscal year as if all criteria for such bonus at 100% of plan
had been satisfied (such greater amount shall be hereinafter
referred to as the "Highest Annual Bonus"). Each such Annual
Bonus shall be paid no later than the end of the third month
of the fiscal year next following the fiscal year for which
the Annual Bonus is awarded, unless the Executive shall elect
to defer the receipt of such Annual Bonus.
(iii) SPECIAL BONUS. In addition to the Annual Base Salary and
Annual Bonus payable as hereinabove provided, if the Executive
remains employed with the Company or its affiliated companies
through the first anniversary of the Effective Date, the
Company shall pay to the Executive a special bonus (the
"Special Bonus") in recognition of the Executive's services
during the crucial one-year transition period following the
Change of Control in cash equal to the sum of (A) the
Executive's Annual Base Salary and (B) the Highest Annual
Bonus. The Special Bonus shall be paid no later than 30 days
following the first anniversary of the Effective Date.
(iv) INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Employment
Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices policies
and programs applicable generally to other peer executives of
the Company and its affiliated companies, but in no event
shall such plans, practices, policies and programs provide the
Executive with incentive opportunities (measured with respect
to both regular and special incentive opportunities, to the
extent, if any, that such distinction is applicable), savings
opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated
companies for the Executive under such plans, practices,
policies and programs as in effect at any time during the
90-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at
any time after the Effective Date to other peer executives of
the Company and, its affiliated companies.
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<PAGE>
(v) WELFARE BENEFIT PLANS. During the Employment Period, the
Executive and/or the Executive's family, as the case may be,
shall be eligible for participation in and shall receive all
benefits under welfare benefit plans, practices, policies and
programs provided by the Company and its affiliated companies
(including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life,
accidental death and travel accident insurance plans and
programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in
no event shall such plans, practices, policies and programs
provide the Executive with benefits which are less favorable,
in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the Executive
at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those
provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated
companies.
(vi) EXPENSES. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable
employment expenses incurred by the Executive in accordance
with the most favorable policies, practices and procedures of
the Company and its affiliated companies in effect for the
Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its
affiliated companies.
(vii) FRINGE BENEFITS. During the Employment Period, the Executive
shall be entitled to fringe benefits in accordance with the
most favorable plans, practices, programs and policies of the
Company and its affiliated companies in effect for the
Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its
affiliated companies.
(viii) OFFICE AND SUPPORT STAFF. During the Employment Period, the
Executive shall be entitled to an office or offices of a size
and with furnishings and other appointments, and to personal
secretarial and other assistance, at least equal to the most
favorable of the foregoing provided to the Executive by the
Company and its affiliated companies at any time during the
90-day period immediately preceding the Effective Date or, if
more favorable to the Executive, as provided generally at any
time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(ix) VACATION. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most
favorable plans, policies,
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<PAGE>
programs and practices of the Company and its affiliated
companies as in effect for the Executive at any time during
the 90-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally
at any time thereafter with respect to other peer executives
of the Company and its affiliated companies.
5. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period.
If the Company determines in good faith that the Disability of the
Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the
Executive written notice in accordance with Section 11(b) of its
intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the
"Disability Effective Date"), provided that, within the 30 days after
such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 180
consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to
the Executive or the Executive's legal representative (such agreement
as to acceptability not to be withheld unreasonably).
(b) CAUSE. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement,
"Cause" shall mean (i) a material breach by the Executive of the
Executive's obligations under Section 4(a) (other than as a result of
incapacity due to physical or mental illness) which is demonstrably
willful and deliberate on the Executive's part, which is committed in
bad faith or without reasonable belief that such breach is in the best
interests of the Company and which is not remedied in a reasonable
period of time after receipt of written notice from the Company
specifying such breach or (ii) the conviction of the Executive of a
felony involving moral turpitude.
(c) GOOD REASON; WINDOW PERIOD. The Executive's employment may be
terminated (i) during the Employment Period by the Executive for Good
Reason or (ii) during the Window Period by the Executive without any
reason. For purposes of this Agreement, the "Window Period" shall
mean the 60-day period immediately following the four-month
anniversary of the Effective Date (with the fourth-month anniversary
to be determined as the same calendar day as the Effective Date four
months later; for example, if the Effective Date were January 6,
1997, the Window Period would begin on May 6, 1997). For purposes of
this Agreement, "Good Reason" shall mean:
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<PAGE>
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties
or responsibilities as contemplated by Section 4(a) or any
other action by the Company which results in a diminution in
such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b), other than an isolated,
insubstantial and inadvertent failure not occurring in bad
faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section
4(a)(i)(B);
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy Section
10(c), provided that such successor has received at least ten
days prior written notice from the company or the Executive of
the requirements of Section 10(c).
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive.
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by
the Executive without any reason during the Window Period or for Good
Reason, shall be communicated by Notice of Termination to the other
party hereto given in accordance with section 11(b). For purposes of
this Agreement, a "Notice of Termination" means a written notice which
(i) indicates the specific termination provision in this Agreement
relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so
indicated and (iii) if the Date of Termination (as defined below) is
other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than 15 days after the
giving of such notice). The failure by the Executive or the Company to
set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or cause shall not waive any
right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
-8-
<PAGE>
(e) DATE OF TERMINATION. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by
the Executive during the Window Period or for Good Reason, the date of
receipt of the Notice of Termination or any later date specified
therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date
of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment
is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or the
Disability Effective Date, as the case may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) GOOD REASON OR DURING THE WINDOW PERIOD; OTHER THAN FOR CAUSE, DEATH
OR DISABILITY. If, during the Employment Period, the Company shall
terminate the Executive's employment other than for Cause or
Disability (and other than a termination due to death) or the
Executive shall terminate employment either for Good Reason or without
any reason during the Window Period:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of
the following amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not
theretofore paid, (2) the product of (x) the Highest
Annual Bonus and (y) a fraction, the numerator of which
is the number of days in the current fiscal year
through the Date of Termination, and the denominator of
which is 365 and (3) the Special Bonus, if due to the
Executive pursuant to Section 4(b)(iii), to the extent
not theretofore paid and (4) any compensation
previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in
clauses (1), (2), (3) and (4) shall be hereinafter
referred to at the "Accrued Obligations"); and
B. the amount (such amount shall be hereinafter referred
to as the "Severance Amount") equal to the product of
(1) one and one-half (1.5) and (2) the sum of (x) the
Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
(ii) for the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide,
the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would
have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(b)(v)
if the Executive's employment had not been terminated in
accordance with the
-9-
<PAGE>
most favorable plans, practices, programs or policies of the
Company and its affiliated companies as in effect and
applicable generally to other peer executives and their
families during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies
and their families, provided, however, that if the Executive
becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another
employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility
(such continuation of such benefits for the applicable period
herein set forth shall be hereinafter referred to as "Welfare
Benefit Continuation"). For purposes of determining
eligibility of the Executive for retirement benefits pursuant
to such plans, practices, programs and policies, the Executive
shall be considered to have remained employed until the end of
the Employment Period and to have retired on the last day of
such period; and,
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive and/or the
Executive's family any other amounts or benefits required to
be paid or provided or which the Executive and/or the
Executive's family is eligible to receive pursuant to this
Agreement and under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated
companies as in effect and applicable generally to other peer
executives and their families during the 90-day period
immediately preceding the Effective Date or, if more favorable
to the Executive, as in effect generally thereafter with
respect to other peer executives of the Company and its
affiliated companies and their families (such other amounts
and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) DEATH. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal
representatives under this Agreement, other than for (i) payment of
Accrued Obligations (which shall be paid to the Executive's estate or
beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination) and the timely payment or provision of the
Welfare Benefit Continuation and other Benefits (excluding, in each
case, Death Benefits (as defined below)) and (ii) payment to the
Executive's estate or beneficiary, as applicable, in a lump sum in
cash within 30 days of the Date of Termination of an amount equal to
the greater of (A) the Severance Amount or (B) the present value
determined as provided in Section 280G(d)(4) of the Code of any cash
amount to be received by the Executive or the Executive's family as a
death benefit pursuant to the terms of any plan, policy or arrangement
of the Company and its affiliated companies, but not including any
proceeds of life insurance
-10-
<PAGE>
covering the Executive to the extent paid for directly or on a
contributory basis by the Executive (which shall be paid in any event
as an Other Benefit) (the benefits included in this clause (B) shall
be hereinafter referred to as the "Death Benefits").
(c) DISABILITY. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the
Executive, other than for (i) payment of Accrued Obligations (which
shall be paid to the Executive in a lump sum in cash within 30 days of
the Date of Termination) and the timely payment or provision of the
Welfare Benefit Continuation and Other Benefits (excluding, in each
case, Disability Benefits (as defined below)) and (ii) payment to the
Executive in a lump sum in cash within 30 days of the Date of
Termination of an amount equal to the greater of (A) the Severance
Amount or (B) the present value (determined as provided in Section
280G(d)(4) of the Code) of any cash amount to be received by the
Executive as a disability benefit pursuant to the terms of any plan,
policy or arrangement of the Company and its affiliated companies, but
not including any proceeds of disability insurance covering the
Executive to the extent paid for directly or on a contributory basis
by the Executive (which shall be paid in any event as an Other
Benefit) (the benefits included in this clause (B) shall be
hereinafter referred to as the "Disability Benefits").
(d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement
shall terminate without further obligations to the Executive other
than the obligation to pay to the Executive Annual Base Salary through
the Date of Termination plus the amount of any compensation previously
deferred by the Executive, in each case to the extent theretofore
unpaid. If the Executive terminates employment during the Employment
Period, excluding a termination either for Good Reason or without any
reason during the Window Period, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued
Obligations and the timely payment or provision of Other Benefits. In
such case, all Accrued Obligations shall be paid to the Executive in a
lump sum in cash within 30 days of the Date of Termination.
7. NON-EXCLUSIVITY OF RIGHTS. Except as provided in sections 6(a)(ii), 6(b)
and 6(c), nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which
the Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any contract or
agreement with the Company or any of its affiliated companies. Amounts
which are vested benefits or which the Executive is otherwise entitled to
receive under any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
-11-
<PAGE>
8. FULL SETTLEMENT; RESOLUTION OF DISPUTES.
(a) The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not
be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of
the amounts payable to the Executive under any of the provisions of
this Agreement and, except as provided in Section 6(a)(ii), such
amounts shall not be reduced whether or not the Executive obtains
other employment. The Company agrees to pay promptly as incurred, to
the full extent permitted by law, all legal fees and expenses which
the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereof
(including as a result of any contest by the Executive about the
amount of any payment pursuant to this Agreement), plus in each case
interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Code.
(b) If there shall be any dispute between the Company and the Executive
(i) in the event of any termination of the Executive's employment by
the Company, whether such termination was for Cause, or (ii) in the
event of any termination of employment by the Executive, whether Good
Reason existed, then, unless and until there is a final, nonappealable
judgment by a court of competent jurisdiction declaring that such
termination was for Cause or that the determination by the Executive
of the existence of Good Reason was not made in good faith, the
Company shall pay all amounts, and provide all benefits, to the
Executive and/or the Executive's family or other beneficiaries, as the
case may be, that the Company would be required to pay or provide
pursuant to Section 6(a) as though such termination were by the
Company without Cause or by the Executive with Good Reason; provided,
however, that the Company shall not be required to pay any disputed
amounts pursuant to this paragraph except upon receipt of an
undertaking by or on behalf of the Executive to repay all such amounts
to which the Executive is ultimately adjudged by such court not to be
entitled.
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would
be subject to the excise tax imposed by Section 4999 of the Code or
any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax,
-12-
<PAGE>
together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all
taxes (including any interest or penalties imposed with respect to
such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be
made by an independent national accounting firm selected by the
Company (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within
15 business days of the receipt of notice from the Executive that
there has been a Payment, or such earlier time as is requested by the
Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group affecting
the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 9, shall be paid by the Company to
the Executive within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a
written opinion that failure to report the Excise Tax on the
Executive's applicable federal income tax return would not result in
the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Company and the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments
which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies
pursuant to Section 9(c) and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business
days after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. The Executive shall not pay
such claim
-13-
<PAGE>
prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in writing prior
to the expiration of such period that it desires to contest such
claims the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order to
effectively contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 9(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and
may, at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
-14-
<PAGE>
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall
(subject to the Company, complying with the requirements of Section
9(c)) promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is
made that the Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount
of Gross-Up Payment required to be paid.
10. SUCCESSORS.
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and
distribution. The economic benefit provisions of this Agreement shall
inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially
all of the business and/or assets of the Company to assume expressly
and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
11. MISCELLANEOUS; NOTICES.
(a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas without reference to principles of
conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement
may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and
legal representatives.
-15-
<PAGE>
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed
as follows:
If to the Executive: James W. Brown
2114 Green Hill
McKinney, Texas 75070
If to the Company: Software Spectrum, Inc.
2140 Merritt Drive
Garland, Texas 75041
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notice and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or the failure to assert any
right the Executive or the Company may have hereunder, including,
without limitation, the right of the Executive to terminate employment
for Good Reason pursuant to Section 5(c)(i)-(v), shall not be deemed
to be a waiver of such provision or right or any other provision or
right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the
Executive and the Company, the employment of the Executive by the
Company is "at will" and, prior to the Effective Date, may be
terminated by either the Executive or the Company at any time.
Moreover, if prior to the Effective Date, the Executives employment
with the Company terminates, then the Executive shall have no further
rights under this Agreement.
-16-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf; all as of the
day and year first above written.
EXECUTIVE
/s/ James W. Brown
--------------------------------------------
Name: James W. Brown
SOFTWARE SPECTRUM, INC.
By: /s/ Judy O. Sims
---------------------------------
Name: Judy O. Sims
Title: Chief Executive Officer
-17-
<PAGE>
SCHEDULE A
TO MANAGEMENT CONTINUITY AGREEMENT
BETWEEN THE COMPANY
AND JAMES W. BROWN
The Company has entered into Management Continuity Agreements with
executive officers of the Company, which agreements are identical to the that
filed as Exhibit 10.13 with the exception of the difference in the parties and
the dates of execution set forth below:
<TABLE>
<CAPTION>
Party: Date of execution:
----- -----------------
<S> <C>
(1) Keith R. Coogan January 10, 1997
(2) Robert D. Graham January 10, 1997
(3) Roger J. King January 10, 1997
(4) Robert B. Mercer January 10, 1997
(5) Lisa M. Stewart January 10, 1997
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
1. Spectrum Integrated Services, Inc. d/b/a Software Spectrum Technology
Services Group
2. Software Spectrum Limited
3. Software Spectrum Holdings Pty, Ltd.
4. Software Spectrum (UK) Ltd.
5. Software Spectrum B.V.
6. Software Spectrum Canada, Ltd.
<PAGE>
We have issued our report dated June 24, 1998, accompanying the consolidated
financial statements and schedule incorporated by reference or included in
the Annual Report of Software Spectrum, Inc. on Form 10-K for the year ended
April 30, 1998. We hereby consent to the incorporation by reference of said
report in the Registration Statements of Software Spectrum, Inc. on Forms S-8
(Software Spectrum, Inc. 1993 Long Term Incentive Plan, Software Spectrum,
Inc. Employee Stock Purchase Plan and Amended and Restated Stock Option Plan,
filed on July 19, 1995, and Software Spectrum, Inc. Non-Employee Directors'
Retainer Stock Plan, filed on September 28, 1995).
/s/ Grant Thornton LLP
- ---------------------------
Grant Thornton LLP
Dallas, Texas
July 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 7,129
<SECURITIES> 0
<RECEIVABLES> 174,510
<ALLOWANCES> 3,050
<INVENTORY> 4,564
<CURRENT-ASSETS> 186,456
<PP&E> 37,951
<DEPRECIATION> 17,538
<TOTAL-ASSETS> 258,631
<CURRENT-LIABILITIES> 174,548
<BONDS> 7,813
0
0
<COMMON> 44
<OTHER-SE> 76,226
<TOTAL-LIABILITY-AND-EQUITY> 258,631
<SALES> 884,087
<TOTAL-REVENUES> 884,087
<CGS> 783,777
<TOTAL-COSTS> 783,777
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,747
<INTEREST-EXPENSE> 3,069
<INCOME-PRETAX> 8,202
<INCOME-TAX> 3,715
<INCOME-CONTINUING> 4,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,487
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
</TABLE>
