<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
Mark One Quarterly Report Pursuant to Section 13 or 15(d) of the
[X] Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____.
Commission file number 0-19349
SOFTWARE SPECTRUM, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1878002
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2140 MERRITT DRIVE
GARLAND, TEXAS
75041
(Address of principal executive offices)
(Zip Code)
972-840-6600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At December 8, 2000, the Registrant had outstanding 3,411,089 shares
of its Common Stock, par value $.01 per share.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at October 31, 2000
and April 30, 2000 1
Consolidated Statements of Operations for the
Three and Six Months Ended October 31, 2000 and 1999 2
Consolidated Statements of Cash Flows for the
Six Months Ended October 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE> 3
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
October 31, April 30,
2000 2000
----------- ---------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 6,568 $ 5,652
Trade accounts receivable, net of allowance for doubtful
accounts of $2,815 at October 31 and $2,767 at April 30 130,885 145,954
Prepaid expenses 1,475 1,031
Net assets of discontinued operations 1,186 12,037
Other current assets 2,802 4,869
--------- ---------
Total current assets 142,916 169,543
Furniture, equipment and leasehold improvements, at cost 51,546 48,108
Less accumulated depreciation and amortization 30,679 27,301
--------- ---------
20,867 20,807
Other assets, consisting primarily of goodwill, net of accumulated
amortization of $11,080 at October 31 and $9,819 at April 30 40,718 42,504
--------- ---------
$ 204,501 $ 232,854
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ -- $ 63
Trade accounts payable 115,265 135,410
Other current liabilities 10,675 24,602
--------- ---------
Total current liabilities 125,940 160,075
Long-term debt, less current maturities 19,450 7,800
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, 4,602,814 shares at October 31 and 4,585,140 shares at April 30 46 46
Additional paid-in capital 42,493 42,292
Retained earnings 38,927 39,897
Currency translation adjustments (4,780) (4,267)
--------- ---------
76,686 77,968
Less treasury stock at cost - 1,193,801 shares at October 31
and 841,201 shares at April 30 17,575 12,989
--------- ---------
Total shareholders' equity 59,111 64,979
--------- ---------
$ 204,501 $ 232,854
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales
Software services $ 231,985 $ 211,401 $ 480,455 $ 426,399
Support services 14,030 15,723 29,459 29,128
--------- --------- --------- ---------
246,015 227,124 509,914 455,527
--------- --------- --------- ---------
Cost of sales
Software services 213,126 191,891 442,196 385,566
Support services 11,419 12,377 23,448 23,444
--------- --------- --------- ---------
224,545 204,268 465,644 409,010
--------- --------- --------- ---------
Gross margin 21,470 22,856 44,270 46,517
Selling, general and administrative expenses 20,308 17,288 39,824 35,291
Depreciation and amortization 2,578 2,510 5,148 4,851
--------- --------- --------- ---------
Operating income (loss) (1,416) 3,058 (702) 6,375
Interest expense (income)
Interest expense 427 262 786 512
Interest income (260) (195) (543) (384)
--------- --------- --------- ---------
167 67 243 128
--------- --------- --------- ---------
Income (loss) before income taxes (1,583) 2,991 (945) 6,247
Income tax expense (benefit) (702) 1,216 (440) 2,539
--------- --------- --------- ---------
Income (loss) from continuing operations (881) 1,775 (505) 3,708
Loss from operations of discontinued professional
services business (net of applicable tax benefit) -- 1,091 -- 1,577
Loss on disposition of discontinued professional
services business (net of applicable tax benefit) 465 -- 465 --
--------- --------- --------- ---------
Loss from discontinued operations 465 1,091 465 1,577
--------- --------- --------- ---------
Net income (loss) $ (1,346) $ 684 $ (970) $ 2,131
========= ========= ========= =========
Earnings (loss) per share - basic and diluted
Income (loss) from continuing operations $ (0.25) $ 0.44 $ (0.14) $ 0.91
========= ========= ========= =========
Net income (loss) $ (0.38) $ 0.17 $ (0.27) $ 0.52
========= ========= ========= =========
Weighted average shares outstanding
Basic 3,523 4,029 3,622 4,068
========= ========= ========= =========
Diluted 3,523 4,054 3,622 4,089
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities
Income (loss) from continuing operations $ (505) $ 3,708
Adjustments to reconcile income (loss) from continuing operations to
net cash used in operating activities
Provision for bad debts 591 864
Depreciation and amortization 5,148 4,851
Changes in operating assets and liabilities
Trade accounts receivable 12,712 (9,778)
Prepaid expenses and other assets 2,063 473
Trade accounts payable and other
current liabilities (31,672) (19,661)
-------- --------
Net cash used in operating activities (11,663) (19,543)
-------- --------
Investing activities
Purchase of subsidiary, net of cash acquired -- (1,916)
Purchase of furniture, equipment and
leasehold improvements (4,030) (5,329)
-------- --------
Net cash used in investing activities (4,030) (7,245)
-------- --------
Financing activities
Borrowings on long-term debt 92,050 53,875
Repayments of long-term debt (80,463) (37,774)
Proceeds from stock issuance 201 364
Purchase of treasury stock (4,585) (2,949)
-------- --------
Net cash provided by financing activities 7,203 13,516
-------- --------
Effect of exchange rate changes on cash (508) 604
-------- --------
Net cash used in continuing operations (8,998) (12,668)
Net cash provided by (used in) discontinued operations 9,914 (1,074)
-------- --------
Increase (decrease) in cash and cash equivalents 916 (13,742)
Cash and cash equivalents at beginning of period 5,652 20,084
-------- --------
Cash and cash equivalents at end of period $ 6,568 $ 6,342
======== ========
Supplemental disclosure of cash paid during the period
Income taxes $ 1,583 $ 1,846
Interest 560 359
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements include the accounts of Software Spectrum,
Inc. (the "Company") and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
The consolidated financial statements contained herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position as of October 31, 2000, the
consolidated results of operations for the three and six months ended October
31, 2000 and 1999 and the consolidated cash flows for the six months ended
October 31, 2000 and 1999 have been made. In addition, all such adjustments
made, in the opinion of management, are of a normal recurring nature. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the interim reporting rules of the
Securities and Exchange Commission. The interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and related notes for the year ended April 30, 2000, included in the
Company's 2000 Annual Report on Form 10-K.
NOTE B -- DISCONTINUED OPERATIONS
In May 2000, the Company announced a plan to exit the professional services
business. In accordance with this plan, 10 of the Company's 16 professional
services sites were closed effective May 31, 2000. The Company sold its three
Asia/Pacific sites, excluding accounts receivable, effective July 31, 2000 for
approximately $725,000 and its three remaining North American sites effective
August 31, 2000 for approximately $1.4 million. The Company recorded an
additional loss of $465,000, including tax benefits of $221,000, during the
quarter ended October 31, 2000, primarily related to customer collection issues
and real estate lease termination costs.
The financial data related to the professional services business is classified
as discontinued operations for all periods presented.
The loss from discontinued operations for the three and six months ended October
31, 1999 included revenues of $12.1 million and $25.5 million and income tax
benefits of $722,000 and $996,000, respectively.
The net assets of discontinued operations were as follows:
<TABLE>
<CAPTION>
October 31, April 30,
2000 2000
----------- ---------
<S> <C> <C>
Accounts receivable, net $ 2,102 $ 11,051
Prepaid expenses and other current assets -- 317
Furniture, equipment and leasehold improvements, net -- 3,244
Other assets -- 201
Trade accounts payable (10) (187)
Other current liabilities (906) (2,589)
-------- --------
$ 1,186 $ 12,037
======== ========
</TABLE>
4
<PAGE> 7
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C -- OTHER COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(1,346) $ 684 $ (970) $ 2,131
Currency translation adjustments (1,263) (196) (513) (326)
------- ------- ------- -------
Comprehensive income (loss) $(2,609) $ 488 $(1,483) $ 1,805
======= ======= ======= =======
</TABLE>
NOTE D -- EARNINGS (LOSS) PER SHARE
The following table (in thousands, except per share amounts) sets forth the
computation of basic and diluted earnings (loss) per share. Outstanding options
that were not included in the computation of diluted earnings (loss) per share
because their effect would be antidilutive totaled approximately 665,000 and
639,000 shares for the three and six months ended October 31, 2000 and 215,000
and 303,000 shares for the three and six months ended October 31, 1999,
respectively.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ (881) $ 1,775 $ (505) $ 3,708
======= ======= ======= =======
Loss from discontinued operations $ (465) $(1,091) $ (465) $(1,577)
======= ======= ======= =======
Weighted average shares outstanding - basic 3,523 4,029 3,622 4,068
Effect of dilutive employee and director
stock options -- 25 -- 21
------- ------- ------- -------
Weighted average shares outstanding - diluted 3,523 4,054 3,622 4,089
------- ------- ------- -------
Earnings (loss) per share from continuing
operations - basic and diluted $ (0.25) $ 0.44 $ (0.14) $ 0.91
======= ======= ======= =======
Loss per share from discontinued
operations - basic and diluted $ (0.13) $ (0.27) $ (0.13) $ (0.39)
======= ======= ======= =======
</TABLE>
NOTE E -- BUSINESS SEGMENTS
Information for the Company's reportable segments for the three and six months
ended October 31, 2000 and 1999 is presented below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales
Software services $ 231,985 $ 211,401 $ 480,455 $ 426,399
Support services 14,030 15,723 29,459 29,128
--------- --------- --------- ---------
$ 246,015 $ 227,124 $ 509,914 $ 455,527
========= ========= ========= =========
Operating income (loss)
Software services $ 9,896 $ 12,204 $ 20,619 $ 25,152
Support services (1,600) 276 (1,765) 118
Unallocated corporate overhead (9,712) (9,422) (19,556) (18,895)
--------- --------- --------- ---------
$ (1,416) $ 3,058 $ (702) $ 6,375
========= ========= ========= =========
</TABLE>
5
<PAGE> 8
SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F -- LONG-TERM DEBT
The Company has a revolving credit facility (the "Facility") which permits the
Company to borrow up to $100 million, subject to availability under its
borrowing base. The Facility requires the Company to maintain certain financial
covenants and ratios. The Company was not in compliance with the Facility's
minimum net worth covenant as of October 31, 2000. The lenders have waived
compliance with this covenant and have amended the Facility to replace this
covenant with a financial ratio requirement for future periods. The Company
believes it will be in compliance with its debt covenants following this
amendment and does not anticipate that further waivers or amendments will be
necessary.
NOTE G -- SUBSEQUENT EVENT
On December 6, 2000, the Company sold all of the outstanding stock of its
customer relationship management ("CRM") subsidiary for approximately $6.1
million, consisting of $750,000 in cash and the remainder in shares of common
stock of the acquirer, a publicly traded corporation. Concurrent with the sale,
Software Spectrum also extinguished certain contingent purchase obligations to
the former owners of the CRM business. At the closing date, the fair value of
the net proceeds from the sale approximated the Company's investment in the CRM
business.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a global business-to-business software services provider that
delivers comprehensive information technology solutions to organizations
throughout North America, Europe and Asia/Pacific. The Company sells personal
computer ("PC") software through volume licensing and maintenance ("VLM")
agreements or right-to-copy arrangements, and full-packaged PC software
products. In addition, the Company provides technical support services to
software publishers, Internet service providers and other organizations.
In May 2000, the Company announced a plan to exit the professional services
business. In accordance with this plan, 10 of the Company's 16 professional
services sites were closed effective May 31, 2000. The Company sold its three
Asia/Pacific sites effective July 31, 2000 and its three remaining North
American sites effective August 31, 2000. The financial data related to the
professional services business is classified as discontinued operations for all
periods presented.
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.3 89.9 91.3 89.8
------ ------ ------ ------
Gross margin 8.7 10.1 8.7 10.2
Selling, general and administrative expenses 8.3 7.7 7.8 7.7
Depreciation and amortization 1.0 1.1 1.0 1.1
------ ------ ------ ------
Operating income (loss) (0.6) 1.3 (0.1) 1.4
Interest expense, net 0.1 -- 0.1 --
------ ------ ------ ------
Income (loss) before income taxes (0.7) 1.3 (0.2) 1.4
Income tax expense (benefit) (0.3) 0.5 (0.1) 0.6
------ ------ ------ ------
Income (loss) from continuing operations (0.4)% 0.8% (0.1)% 0.8%
====== ====== ====== ======
</TABLE>
NET SALES
Software sales for the three and six months ended October 31, 2000 increased
approximately 10% and 13% over those for the three and six months ended October
31, 1999, primarily due to increased sales in North America and Europe. Sales of
software through VLM agreements represented approximately 84% and 85% of
software sales for the three and six months ended October 31, 2000 compared to
approximately 85% for both the three and six months ended October 31, 1999.
For the three months ended October 31, 2000, support services revenues decreased
by 11% as compared to the three months ended October 31, 1999, primarily due to
lower revenues in the Company's Garland call center. The decline was
attributable to actions by one of the Company's largest customers to decrease
call volumes on many of its products, leading to a reduction and realignment of
support services provided for that customer by third parties. Support services
revenues increased approximately 1% for the six months
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<PAGE> 10
ended October 31, 2000 compared to the six months ended October 31, 1999.
Increased business in the Company's Tampa call center, which opened in June
1999, offset the decline in business in the Garland call center. Support
services represented approximately 6% of the Company's overall sales for both
the three and six months ended October 31, 2000 as compared to 7% and 6% for the
three and six months ended October 31, 1999. Such revenue generated
approximately 12% and 14%, respectively, of the Company's gross margin dollars
during the three and six months ended October 31, 2000.
The Company believes future increases in sales will depend upon its ability to
maintain and increase its customer base, to develop and expand its support
services and to capitalize on continued growth in desktop technology markets
around the world.
INTERNATIONAL OPERATIONS
For the three and six months ended October 31, 2000, sales outside of North
America increased 26% and 15%, to $29 million and $69 million, respectively, as
compared to $23 million and $60 million for the three and six months ended
October 31, 1999.
Sales in Europe increased 40% and 29% to $18 million and $35 million for the
three and six months ended October 31, 2000. Sales in Asia/Pacific increased 3%
and 5% to $11 million and $34 million during the same periods.
For the three months ended October 31, 2000 and October 31, 1999, fluctuations
in foreign currencies increased operating income by approximately $301,000 and
$174,000, respectively. Fluctuations in foreign currencies did not have a
material impact on operating income for the six months ended October 31, 2000
and October 31, 1999.
GROSS MARGIN
Overall gross margin as a percentage of net sales was 8.7% for both the three
and six months ended October 31, 2000, as compared to 10.1% and 10.2% for the
comparable periods of the prior year. The decrease in overall gross margin as a
percentage of net sales is primarily due to lower gross margins on software
sales. For the three and six months ended October 31, 2000, gross margin on the
sale of PC software decreased to 8.1% and 8.0% as compared to 9.2% and 9.6% for
the three and six months ended October 31, 1999, primarily due to price
competition and decreased financial incentives received from suppliers. In
addition, gross margins in support services for the three and six months ended
October 31, 2000 were negatively impacted by a $560,000 nonrecurring charge for
employee termination costs related to the decline in business in the Garland
call center.
The Company generally realizes lower gross margins as a percentage of net sales
on sales of software through VLM agreements, as compared to sales of
full-packaged software products. Therefore, the Company believes that gross
margin percentages on sales of software may decline if the volume of software
product sales by the Company through VLM agreements, particularly
enterprise-wide agreements, continues or if publishers respond to continued
market pressures by reducing financial incentives to resellers. This potential
decrease in product gross margin percentages may be partially offset by
anticipated increases in gross margin dollars generated by support services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses include the costs of the
Company's sales and marketing organization as well as purchasing and corporate
administrative costs. For the three and six months ended October 31, 2000, SG&A
expenses, as a percentage of net sales, increased to 8.3% and 7.8%, as compared
to 7.7% for both the three and six months ended October 31, 1999. SG&A expenses
for the quarter ended October 31, 2000 include a nonrecurring charge of $730,000
relating to excess facilities due to the decline in the support services
business. Without this nonrecurring charge, SG&A expenses, as a
8
<PAGE> 11
percentage of net sales, for the three and six months ended October 31, 2000
would have been 8.0% and 7.7%, respectively. The remaining increase in the
quarter ended October 31, 2000 is primarily due to the Company's decision to
expand its product services sales force in order to increase product sales. The
Company remains focused on controlling operating costs in both of its business
lines.
DEPRECIATION AND AMORTIZATION
The increase in depreciation and amortization for the three and six months ended
October 31, 2000, as compared to the three and six months ended October 31,
1999, reflects depreciation on enhancements to the Company's computer systems
and additional depreciation on the higher level of fixed assets utilized in the
Company's support services business in fiscal 2001.
INCOME TAX EXPENSE
The Company's effective tax rate was approximately 44% and 47% for the three and
six months ended October 31, 2000 as compared to 41% for both the three and six
months ended October 31, 1999.
OPERATING INCOME
Operating loss for the three and six months ended October 31, 2000 was $881,000
and $505,000, respectively, compared to operating income of $1.8 million and
$3.7 million, respectively, for the three and six months ended October 31, 1999.
The decrease in operating income is primarily due to reduced gross margin
percentages on software sales and the $1.3 million of nonrecurring charges
related to the support services business.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, the Company had approximately $6.6 million in cash and cash
equivalents and had $19.5 million outstanding under its $100 million revolving
credit facility (the "Facility"). The 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 October 31, 2000, the Company had
approximately $51.6 million of additional borrowing availability under its
credit facility. The Facility expires in March 2002.
The Facility requires the Company to maintain certain financial covenants and
ratios. The Company was not in compliance with the Facility's minimum net worth
covenant as of October 31, 2000. The lenders have waived compliance with this
covenant and have amended the Facility to replace this covenant with a financial
ratio requirement for future periods. The Company believes it will be in
compliance with its debt covenants following this amendment and does not
anticipate that further waivers or amendments will be necessary.
The decrease in trade accounts receivable and trade accounts payable from April
30, 2000 to October 31, 2000 is due to the timing of sales throughout the
respective quarters. At October 31, 2000 and April 30, 2000, accounts
receivable represented approximately 50 and 48 days of historical sales,
respectively.
For the six months ended October 31, 2000, the Company's operating activities
used $11.7 million of cash compared to $19.5 million of cash used in operations
during the six months ended October 31, 1999. The decrease in cash used in
operations is primarily due to the timing of certain payments to the Company's
vendors and the timing of the collection of a few large receivables offset by
the reduction in income from continuing operations.
The increase in furniture, equipment and leasehold improvements from April 30,
2000 to October 31, 2000 reflects approximately $4 million of capital
expenditures related primarily to the ongoing investment in the Company's
computer systems and support services facilities.
9
<PAGE> 12
The Company expects that its cash requirements for fiscal 2001 will be satisfied
from cash flow from operations and borrowings under its credit facility.
In 1997, the Company implemented a stock repurchase program which allows for the
purchase of the Company's Common Stock from time to time in the open market or
through privately negotiated transactions. The Company funds such purchases with
cash or borrowings under the Company's credit facility. As of December 8, 2000,
the Company had repurchased 991,800 shares of Common Stock, for a total of $15
million, under the stock repurchase program. In addition, in September 2000, the
Company repurchased 150,000 shares of its Common Stock for $1.8 million in a
privately negotiated transaction. In November 2000, the Company's Board of
Directors approved a new plan allowing the repurchase of up to an additional $5
million of the Company's Common Stock.
On December 6, 2000, the Company sold all of the outstanding stock of its
customer relationship management ("CRM") subsidiary for approximately $6.1
million, consisting of $750,000 in cash and the remainder in shares of common
stock of the acquirer, a publicly traded corporation. Concurrent with the sale,
Software Spectrum also extinguished certain contingent purchase obligations to
the former owners of the CRM business. At the closing date, the fair value of
the net proceeds from the sale approximated the Company's investment in the CRM
business. The sale is not expected to significantly impact the Company's future
revenues or earnings.
EURO CURRENCY ISSUES
On January 1, 1999, eleven of the fifteen member countries of the European Union
introduced a common legal currency called the Euro, which is intended to replace
the currently existing currencies of the participating countries by January
2002. The Company does not believe that use of the Euro has or will materially
impact its financial condition, operating results or use of derivative
instruments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Other than statements of historical fact, this Management's Discussion and
Analysis of Financial Condition and Results of Operations includes certain
statements of the Company that may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements include future market trends, expectations concerning the
Company's growth, estimates regarding the economy and the software industry in
general, key performance indicators that impact the Company, statements
regarding market risk and statements included in the Euro Currency discussion
above. In developing any forward-looking statements, the Company makes a number
of assumptions, including expectations for continued market growth, supplier
relationships, anticipated revenue and gross margin levels, and cost savings and
efficiencies that include the ability of the Company to develop electronic
strategies. Although the Company believes these assumptions are reasonable, no
assurance can be given that they will prove correct. The Company's ability to
continue to grow product sales, develop its support services business 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 Company's report on Form 10-K for the fiscal
year ended April 30, 2000 contains certain cautionary statements under
"Forward-Looking Information" that identify factors that could cause the
Company's actual results to differ materially from those in the forward-looking
statements in this discussion. All forward-looking statements in this discussion
are expressly qualified in their entirety by the cautionary statements in this
paragraph and under "Forward-Looking Information" in the Company's Form 10-K.
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three and six months ended October 31,
2000 does not differ materially from that discussed in Item 7 of the Company's
Annual Report on Form 10-K for its fiscal year ended April 30, 2000.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On September 21, 2000, the Company held its Annual Meeting of Shareholders (the
"Meeting"). At the Meeting, Judy C. Odom and Frank Tindle were elected as
directors to serve three-year terms expiring at the Company's Annual Meeting of
Shareholders to be held in the Year 2003. In addition, Amendment No. 1 to the
Company's Amended and Restated Employee Stock Purchase Plan, which increased the
number of shares of common stock reserved for purchase by eligible employees by
150,000 shares, was approved.
The following table sets forth the number of shares of Common Stock that were
voted for or against or abstained from each matter.
<TABLE>
<CAPTION>
For Against Abstained
--- ------- ---------
<S> <C> <C> <C>
Election of Judy C. Odom to the Board of Directors 2,980,995 -- 50,008
Election of Frank Tindle to the Board of Directors 2,982,175 -- 48,828
Adoption of Amendment No. 1 to the Company's
Amended and Restated Employee Stock Purchase Plan 2,835,078 188,194 7,731
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 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.
Exhibit 10.18(d) - Waiver and Fourth Amendment to Amended and
Restated Credit Agreement, dated as of December 12, 2000 among the
Company, the Chase Manhattan Bank, as a Bank, as Administrative
Agent and as Collateral Agent, and other participating financial
institutions.
Exhibit 27(a) - Financial Data Schedule
Exhibit 27(b) - Restated Financial Data Schedule for the six
months ended October 31, 1999
Exhibit 27(c) - Restated Financial Data Schedule for the six
months ended October 31, 1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period
ended October 31, 2000.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTWARE SPECTRUM, INC.
Date: December 15, 2000 By: /s/ James W. Brown
----------------------------------------------
James W. Brown
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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.
10.18(d) Waiver and Fourth Amendment to Amended and Restated Credit
Agreement, dated as of December 12, 2000 among the Company, the
Chase Manhattan Bank, as a Bank, as Administrative Agent and as
Collateral Agent, and other participating financial institutions.
27(a) Financial Data Schedule
27(b) Restated Financial Data Schedule for the six months ended October
31, 1999
27(c) Restated Financial Data Schedule for the six months ended October
31, 1998
</TABLE>
