10-Q 1 d85042e10-q.txt FORM 10-Q FOR QUARTER ENDED JANUARY 31, 2001 1 ================================================================================ 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 JANUARY 31, 2001 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 March 9, 2001, the Registrant had outstanding 3,313,120 shares of its Common Stock, par value $.01 per share. ================================================================================ 2 SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets at January 31, 2001 and April 30, 2000 1 Consolidated Statements of Income for the Three and Nine Months Ended January 31, 2001 and 2000 2 Consolidated Statements of Cash Flows for the Nine Months Ended January 31, 2001 and 2000 3 Notes to Consolidated Financial Statements 4-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13

3 SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)

~~PAGE~~ASSETS ~~NUMBER~~January ~~PART~~31, I.April ~~FINANCIAL~~30, ~~INFORMATION~~2001 ~~Item~~2000 1.------------ ~~Consolidated~~------------ ~~Financial~~(Unaudited) ~~Statements~~Current ~~Consolidated~~assets ~~Balance~~Cash ~~Sheets~~and atcash ~~October~~equivalents 31$ 23,931 ~~2000~~$ 5,652 Marketable equity securities 4,076 -- Trade accounts receivable, net of allowance for doubtful accounts of $3,464 at January 31 and $2,767 at April 30 237,742 ~~2000~~145,954 Prepaid expenses 1,235 ~~Consolidated~~1,031 ~~Statements~~Net assets of ~~Operations~~discontinued ~~for~~operations ~~the~~5 ~~Three~~12,037 Other current assets 6,257 4,869 ------------ ------------ Total current assets 273,246 169,543 Furniture, equipment and ~~Six~~leasehold ~~Months~~improvements, ~~Ended~~at ~~October~~cost 3151,830 ~~2000~~48,108 Less accumulated depreciation and ~~1999~~amortization 232,359 ~~Consolidated~~27,301 ~~Statements~~------------ ------------ 19,471 20,807 Other assets, consisting primarily of ~~Cash~~goodwill, ~~Flows~~net ~~for~~of ~~the~~accumulated ~~Six~~amortization ~~Months~~of ~~Ended~~$11,435 ~~October~~at January 31 and $9,819 ~~2000~~at ~~and~~April ~~1999~~30 338,097 ~~Notes~~42,504 to------------ ~~Consolidated~~------------ ~~Financial~~$ ~~Statements~~330,814 4$ ~~Item~~232,854 2.============ ~~Management~~============ LIABILITIES AND SHAREHOLDERS's ~~Discussion~~EQUITY ~~and~~Current ~~Analysis~~liabilities Current maturities of ~~Financial~~long-term ~~Condition~~debt ~~and~~$ ~~Results~~-- of$ ~~Operations~~63 7Trade ~~Item~~accounts payable 251,536 135,410 Other current liabilities 12,326 24,602 ------------ ------------ Total current liabilities 263,862 160,075 Long-term debt, less current maturities 3,800 7,800 Shareholders' equity Preferred stock, par value $.01; ~~Quantitative~~authorized, 1,000,000 shares; issued and ~~Qualitative~~outstanding, ~~Disclosures~~none ~~About~~-- ~~Market~~-- ~~Risk~~Common 10stock, ~~PART~~par IIvalue $.01; ~~OTHER~~authorized, ~~INFORMATION~~20,000,000 ~~Item~~shares; issued, 4.,610,135 ~~Submission~~shares ofat ~~Matters~~January to31 ~~Vote~~and of4,585,140 ~~Security~~shares ~~Holders~~at 11April ~~Item~~30 6.46 ~~Exhibits~~46 Additional paid-in capital 42,552 42,292 Retained earnings 42,663 39,897 Currency translation adjustments (4,492) (4,267) ------------ ------------ 80,769 77,968 Less treasury stock at cost - 1,198,801 shares at January 31 and ~~Reports~~841,201 onshares ~~Form~~at 8April 30 17,617 12,989 -K----------- 11------------ Total shareholders' equity 63,152 64,979 ------------ ------------ $ 330,814 $ 232,854 ============ ============

See notes to consolidated financial statements. 1 4 SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share amounts)

~~October~~Three Months Ended Nine Months Ended January 31, ~~April~~January 3031, ------------------------ ------------------------ 2001 2000 2001 2000 ----------- ----------- ~~(Unaudited)~~----------- ~~Current~~----------- ~~assets~~Net ~~Cash~~sales ~~and~~Software ~~cash~~services ~~equivalents~~ $ 6416,~~568~~749 $ 5281,~~652~~075 ~~Trade~~$ ~~accounts receivable~~897,204 ~~net of allowance for doubtful accounts of~~ $~~2,815~~ ~~at October 31 and $2~~707,~~767~~474 atContact ~~April~~services ~~30 130~~12,~~885~~363 ~~145~~21,~~954~~753 ~~Prepaid expenses 1~~41,~~475~~822 150,~~031~~881 ~~Net~~----------- ~~assets~~----------- of----------- ~~discontinued~~----------- ~~operations 1~~429,~~186~~112 12302,~~037~~828 ~~Other current assets 2~~939,~~802~~026 4758,~~869~~355 ----------- ----------- ~~Total~~----------- ~~current~~----------- ~~assets~~Cost ~~142~~of sales Software services 389,~~916~~720 ~~169~~257,~~543~~982 ~~Furniture~~831,916 ~~equipment~~643,548 ~~and~~Contact ~~leasehold~~services ~~improvements~~9,292 at15,968 ~~cost 51~~32,~~546~~740 4839,~~108~~412 ~~Less~~----------- ~~accumulated~~----------- ~~depreciation~~----------- ~~and~~----------- ~~amortization~~399,012 30273,~~679~~950 27864,~~301~~656 682,960 ----------- ----------- ~~20,867~~----------- ~~20,807~~----------- ~~Other~~Gross ~~assets~~margin 30,100 ~~consisting~~28,878 ~~primarily~~74,370 of75,395 ~~goodwill~~Selling, ~~net~~general ofand ~~accumulated~~administrative ~~amortization~~expenses of20,896 ~~$11~~18,~~080~~868 at60,720 ~~October~~54,159 31Depreciation and $9amortization 2,~~819~~515 at2,644 ~~April 30 40~~7,~~718~~663 427,~~504~~495 ----------- ----------- $----------- ~~204~~----------- Operating income 6,~~501~~689 $7,366 ~~232~~5,~~854~~987 ~~=========~~13,741 ~~=========~~Non-operating ~~LIABILITIES~~expense ~~AND~~(income) ~~SHAREHOLDERS'~~Interest ~~EQUITY~~expense ~~Current~~618 ~~liabilities~~600 ~~Current~~1,404 ~~maturities~~1,113 ofInterest ~~long-term~~income ~~debt~~(110) $(120) (653) (504) Other (151) -- $(151) 63-- ~~Trade~~----------- ~~accounts~~----------- ~~payable~~----------- ~~115,265~~----------- ~~135,410~~357 ~~Other~~480 ~~current~~600 ~~liabilities~~609 ~~10,675~~----------- ~~24,602~~----------- ----------- ----------- ~~Total~~Income ~~current~~before ~~liabilities~~income ~~125,940~~taxes ~~160~~6,~~075~~332 ~~Long-term debt~~6,886 ~~less current maturities 19~~5,~~450~~387 713,~~800~~132 ~~Shareholders'~~Income ~~equity~~tax ~~Preferred~~expense ~~stock~~2,596 ~~par value $.01; authorized~~2,799 12,~~000,000~~156 ~~shares; issued and outstanding~~5,337 ~~none~~----------- ----------- ----------- ~~Common~~----------- ~~stock,~~Income ~~par~~from ~~value~~continuing ~~$.01;~~operations ~~authorized~~3,736 204,~~000,000~~087 ~~shares; issued~~3,231 47,~~602,814~~795 ~~shares~~Loss atfrom ~~October~~operations 31of ~~and~~discontinued ~~4,585,140~~professional ~~shares~~services atbusiness ~~April~~(net 30of 46applicable 46tax ~~Additional~~benefit) ~~paid~~-in- ~~capital 42~~1,~~493~~912 42-- 3,~~292~~489 ~~Retained~~Loss ~~earnings~~on ~~38,927~~disposition ~~39,897~~of ~~Currency~~discontinued ~~translation~~professional ~~adjustments~~services ~~(4,780)~~business (~~4,267~~net of applicable tax benefit) -- -- 465 -- ----------- ----------- ~~76,686~~----------- ~~77,968~~----------- ~~Less~~Loss ~~treasury~~from ~~stock~~discontinued atoperations ~~cost~~ -- 1,~~193,801~~912 ~~shares~~465 ~~at October 31 and 841~~3,~~201~~489 ~~shares at April 30 17,575 12,989~~ ----------- ----------- ~~Total shareholders' equity 59,111 64,979~~ ----------- ----------- Net income $ ~~204~~3,~~501~~736 $ ~~232~~2,~~854~~175 $ 2,766 $ 4,306 =========== =========== =========== =========== Earnings per share - basic Income from continuing operations $ 1.10 $ 1.06 $ 0.91 $ 1.95 =========== =========== =========== =========== Net income $ 1.10 $ 0.56 $ 0.78 $ 1.08 =========== =========== =========== =========== Earnings per share -diluted Income from continuing operations $ 1.10 $ 1.02 $ 0.91 $ 1.92 =========== =========== =========== =========== Net income $ 1.10 $ 0.54 $ 0.78 $ 1.06 =========== =========== =========== =========== Weighted average shares outstanding Basic 3,410 3,859 3,551 3,998 =========== =========== =========== =========== Diluted 3,410 4,019 3,558 4,066 =========== =========== =========== ===========

See notes to consolidated financial statements. 2 5 SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)

~~Three~~Nine Months Ended ~~Six~~January ~~Months Ended October~~ 31, ~~October 31,~~ ------------------------- ~~-------------------------~~2001 2000 ~~1999 2000 1999~~ --------- --------- ~~---------~~Operating ~~---------~~activities ~~Net~~Income ~~sales~~from ~~Software~~continuing ~~services~~operations $ ~~231~~3,~~985~~231 $ ~~211~~7,~~401~~795 $Adjustments ~~480,455~~to $reconcile ~~426,399~~income ~~Support~~from ~~services~~continuing ~~14,030~~operations ~~15,723~~to ~~29,459~~net ~~29,128~~cash ~~---------~~provided ~~---------~~by ~~---------~~operating ~~---------~~activities ~~246~~Provision for bad debts 1,~~015~~695 ~~227~~1,~~124~~220 ~~509~~Depreciation and amortization 7,~~914~~663 ~~455~~7,~~527~~495 ~~---------~~Net ~~---------~~gains ~~---------~~on sales of assets (151) --~~-------~~ ~~Cost~~Changes ofin ~~sales~~operating ~~Software~~assets ~~services~~and ~~213,126~~liabilities ~~191,891~~Trade ~~442~~accounts receivable (94,~~196~~848) ~~385~~(14,~~566~~153) ~~Support~~Prepaid ~~services~~expenses ~~11,419~~and 12other assets (1,~~377~~270) 231,~~448~~148 23Marketable equity securities 1,~~444~~306 --~~-------~~ ~~---------~~Trade accounts payable and other current liabilities 104,323 (389) --------- --------- ~~224,545~~Net ~~204,268~~cash ~~465~~provided by operating activities 21,~~644~~949 ~~409~~3,~~010~~116 --------- --------- ~~---------~~Investing ~~---------~~activities ~~Gross~~Purchase ~~margin~~of 21subsidiary,~~470~~ ~~22,856~~net ~~44,270~~of 46cash acquired (2,~~517~~159) ~~Selling~~(1,916) ~~general~~Sale ~~and~~of ~~administrative~~subsidiary, ~~expenses~~net ~~20,308~~503 ~~17,288~~-- ~~39,824~~Purchase 35of furniture,~~291~~ ~~Depreciation~~equipment and ~~amortization~~leasehold ~~2,578~~improvements 2(4,~~510~~781) 5(8,~~148~~163) ~~4,851~~ --------- --------- Net cash used in investing activities (6,437) (10,079) --------- --------- ~~Operating~~Financing ~~income~~activities ~~(loss)~~Borrowings (1on long-term debt 188,~~416)~~430 3132,~~058~~870 ~~(702)~~Repayments ~~6,375~~of ~~Interest~~long-term ~~expense~~debt (~~income~~192,493) ~~Interest~~(129,094) ~~expense~~Proceeds ~~427~~from ~~262~~stock ~~786~~issuance ~~512~~260 ~~Interest~~585 ~~income~~Purchase ~~(260)~~of ~~(195)~~treasury stock (~~543~~4,628) (~~384~~6,632) --------- --------- ~~---------~~Net ~~---------~~cash ~~167~~used 67in ~~243~~financing ~~128~~activities ~~---------~~(8,431) ~~---------~~(2,271) --------- --------- ~~Income~~Effect ~~(loss)~~of ~~before~~exchange ~~income~~rate ~~taxes~~changes ~~(1,583)~~on ~~2,991~~cash (~~945~~667) ~~6,247~~37 ~~Income tax expense (benefit) (702) 1,216 (440) 2,539~~ --------- --------- ~~---------~~Net ~~---------~~cash ~~Income~~provided by (~~loss~~used in) ~~from~~ continuing operations ~~(881) 1~~6,~~775~~414 (~~505~~9,197) ~~3,708~~Net ~~Loss~~cash ~~from~~provided ~~operations~~by ~~of discontinued professional services business~~ (~~net~~used ~~of applicable tax benefit~~in) --discontinued ~~1,091~~operations ~~-- 1~~11,~~577~~865 ~~Loss on disposition of discontinued professional services business~~ (~~net of applicable tax benefit~~3,326) ~~465~~ -- ~~465~~ -- -----~~----~~ --------- ~~---------~~Increase ~~---------~~(decrease) ~~Loss~~in ~~from~~cash ~~discontinued~~and ~~operations~~cash ~~465~~equivalents 118,~~091~~279 ~~465~~(12,523) 1Cash and cash equivalents at beginning of period 5,~~577~~652 ~~---------~~20,084 --------- --------- ~~---------~~Cash ~~Net~~and ~~income~~cash ~~(loss)~~equivalents $at ~~(1,346)~~end $of ~~684~~period $ ~~(970)~~23,931 $ 27,~~131~~561 ========= ========= ~~=========~~Supplemental ~~=========~~disclosure ~~Earnings~~of ~~(loss)~~cash ~~per~~paid ~~share~~during -the ~~basic~~period ~~and diluted~~ Income ~~(loss)~~taxes ~~from continuing operations~~ $ ~~(0.25)~~3,326 $ ~~0.44~~1,847 $Interest ~~(0.14)~~832 $823 ~~0.91~~Non-cash ~~=========~~investing ~~=========~~and ~~=========~~financing ~~=========~~activities ~~Net~~Marketable ~~income~~equity ~~(loss)~~securities $received ~~(0.38)~~from $sale ~~0.17~~of $subsidiary ~~(0.27)~~ $ ~~0.52 ========= ========= ========= ========= Weighted average shares outstanding Basic 3~~5,~~523~~309 ~~4,029~~$ ~~3,622 4,068 ========= ========= ========= ========= Diluted 3,523 4,054 3,622 4,089 ========= ========= ========= =========~~--

See notes to consolidated financial statements. 3 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 January 31, 2001, the consolidated results of operations for the three and nine months ended January 31, 2001 and 2000 and the consolidated cash flows for the nine months ended January 31, 2001 and 2000 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 its 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, net of 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 nine months ended January 31, 2000 included revenues of approximately $10.3 million and $35.8 million and income tax benefits of approximately $675,000 and $1.7 million, respectively. The net assets of discontinued operations were as follows:

~~Six~~January ~~Months~~31, ~~Ended~~April ~~October 31~~30, 2001 2000 -----------~~------------~~ ~~2000 1999~~ -------- ---~~-----~~ ~~Operating~~Accounts ~~activities~~receivable, ~~Income~~net ~~(loss) from continuing operations~~ $ ~~(505)~~17 $ 311,~~708~~051 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~~assets ~~(31,672) (19,661)~~ --~~------~~ ~~--------~~317 ~~Net cash used in operating activities (11~~Furniture,~~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 --~~------~~ ~~-------- Net cash used in investing activities (4~~3,~~030)~~244 ~~(7,245)~~Other ~~--------~~assets --~~------~~ ~~Financing~~201 ~~activities~~Trade ~~Borrowings~~accounts onpayable ~~long-term debt 92,050 53,875 Repayments of long-term debt~~ (~~80,463~~10) (~~37,774~~187) ~~Proceeds~~Other ~~from~~current ~~stock~~liabilities ~~issuance 201 364 Purchase of treasury stock~~ (~~4,585~~2) (2,~~949~~589) -------- ---~~-----~~ ~~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~~ $ 612,~~568~~037 ~~$ 6,342~~ =========== ======== ~~Supplemental disclosure of cash paid during the period Income taxes $ 1,583 $ 1,846 Interest 560 359~~===

4 7 SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C -- OTHER COMPREHENSIVE INCOME The components of comprehensive income are as follows (in thousands):

~~October~~Three Months Ended Nine Months Ended January 31, ~~April~~January 3031, ~~2000 2000~~ ------------------------ ------------------------ ~~Accounts~~2001 ~~receivable,~~2000 ~~net~~2001 $2000 ~~2,102~~----------- $----------- ~~11,051~~----------- ~~Prepaid expenses and other current assets~~ ----------- ~~317~~Net ~~Furniture,~~income ~~equipment~~$ ~~and~~3,736 ~~leasehold~~$ ~~improvements~~2,175 ~~net~~$ ~~-- 3~~2,~~244~~766 ~~Other~~$ ~~assets~~4,306 --Currency ~~201~~translation ~~Trade~~adjustments ~~accounts~~288 ~~payable~~ (10101) (~~187~~225) ~~Other current liabilities~~ (~~906~~427) ~~(2,589)~~----------- ----------- ----------- ----------- Comprehensive income $ 14,~~186~~024 $ 122,~~037~~074 $ 2,541 $ 3,879 =========== =========== =========== ===========

NOTE D -- 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 655,000 and 494,000 shares for the three and nine months ended January 31, 2001 and 455,000 and 354,000 shares for the three and nine months ended January 31, 2000, respectively.

Three Months Ended ~~Six~~Nine Months Ended ~~October~~January 31, ~~October~~January 31, ----------------------------- ----------------------------- 2001 2000 ~~1999~~2001 2000 ~~1999~~ ------------ ------------ ------------ ------------ ~~Net~~Income ~~income~~from ~~(loss)~~continuing operations $(1 3,~~346)~~736 $ ~~684~~4,087 $ ~~(970)~~3,231 $ 27,~~131~~795 ~~Currency~~============ ~~translation~~============ ~~adjustments~~============ (============ Loss from discontinued operations $ -- $ 1,~~263)~~912 ~~(196)~~$ ~~(513)~~465 ~~(326)~~$ 3,489 ============ ============ ============ ============ Weighted average shares outstanding - basic 3,410 3,859 3,551 3,998 Effect of dilutive employee and director stock options -- 160 7 68 ------------ ------------ ------------ ------------ ~~Comprehensive~~Weighted ~~income~~average ~~(loss)~~shares ~~$(2~~outstanding - diluted 3,~~609)~~410 4,019 3,558 4,066 ------------ ------------ ------------ ------------ Earnings per share from continuing operations - basic $ ~~488~~1.10 $( 1~~,483)~~.06 $ 0.91 $ 1~~,805~~.95 ============ ============ ============ ============ Earnings per share from continuing operations - diluted $ 1.10 $ 1.02 $ 0.91 $ 1.92 ============ ============ ============ ============ Loss per share from discontinued operations - basic $ -- $ 0.50 $ 0.13 $ 0.87 ============ ============ ============ ============ Loss per share from discontinued operations - diluted $ -- $ 0.48 $ 0.13 $ 0.86 ============ ============ ============ ============

5 8 SOFTWARE SPECTRUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E -- BUSINESS SEGMENTS Information for the Company's reportable segments for the three and nine months ended January 31, 2001 and 2000 is presented below (in thousands). The contact services segment was formerly referred to as support services.

Three Months Ended ~~Six~~Nine Months Ended ~~October~~January 31, ~~October~~January 31, ------------------------ ------------------------ 2001 2000 ~~1999~~2001 2000 ~~1999~~ --------- --------- --------- --------- ~~Income~~Net ~~(loss)~~sales ~~from~~Software ~~continuing~~services ~~operations~~ $ ~~(881)~~416,749 $ 1281,~~775~~075 $ ~~(505)~~897,204 $ 3707,~~708~~474 ~~=======~~Contact ~~=======~~services ~~=======~~12,363 ~~=======~~21,753 ~~Loss~~41,822 ~~from~~50,881 ~~discontinued~~--------- ~~operations~~--------- --------- --------- $ ~~(465)~~429,112 $(1 302,~~091)~~828 $ ~~(465)~~939,026 $(1 758,~~577)~~355 ========= ========= ========= ========= ~~Weighted~~Operating ~~average~~income ~~shares~~(loss) ~~outstanding~~Software -services ~~basic~~$ 317,~~523~~394 4$ 13,~~029~~920 3$ 38,~~622~~013 4$ 39,~~068~~072 ~~Effect~~Contact ofservices ~~dilutive~~(312) ~~employee~~2,638 ~~and~~(2,077) ~~director~~2,756 ~~stock~~Unallocated ~~options~~corporate --overhead 25(10,393) --(9,192) 21(29,949) (28,087) ------- --~~-----~~ ------- --~~-----~~ ~~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)~~6,689 $ ~~0.44~~7,366 $ ~~(0.14)~~5,987 $ ~~0.91~~13,741 ======= ==~~=====~~ ======= ==~~=====~~ ~~Loss per share from discontinued operations - basic and diluted $ (0.13) $ (0.27) $ (0.13) $ (0.39)~~ ======= ==~~=====~~ ======= ==~~=====~~

NOTE F - DISPOSITION OF SUBSIDIARY On December 5, 2000, the Company sold all of the outstanding stock of its customer relationship management ("CRM") subsidiary for proceeds of 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 for approximately $2.2 million. The gain realized on the sale was insignificant. NOTE G - MARKETABLE EQUITY SECURITIES The Company's marketable equity securities consist of the common stock acquired through the sale of its CRM subsidiary (see Note F.) The securities are classified as trading securities and are recorded at fair value as determined by quoted market prices. Other non-operating income for the three and nine months ended January 31, 2001 included realized gains of approximately $1.3 million, offset by unrealized losses of approximately $1.2 million, related to these securities. As of March 9, 2001, the fair market value of the securities was approximately $1.8 million. 6 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 contact services to software publishers, Internet service providers and other organizations. In May 2000, the Company announced a plan to exit its 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 Income expressed as a percentage of net sales.

Three Months Ended ~~Six~~Nine Months Ended ~~October~~January 31, ~~October~~January 31, ------------------------ ------------------------ 2001 2000 ~~1999~~2001 2000 ~~1999~~ --------- --------- --------- --------- Net sales ~~Software~~100.0% ~~services~~100.0% $100.0% ~~231,985~~100.0% $Cost ~~211,401~~of $sales ~~480,455~~93.0 $90.5 ~~426,399~~92.1 ~~Support~~90.1 ~~services 14,030 15,723 29,459 29,128~~ --------- --------- --------- --------- $Gross ~~246,015~~margin $7.0 ~~227,124~~9.5 $7.9 ~~509~~9.9 Selling,~~914~~ $general ~~455,527~~and ~~=========~~administrative ~~=========~~expenses ~~=========~~4.8 ~~=========~~6.2 ~~Operating~~6.5 ~~income~~7.1 ~~(loss)~~Depreciation ~~Software~~and ~~services~~amortization $0.6 0.9~~,896~~ $0.8 ~~12,204~~1.0 $-------- ~~20,619~~-------- $-------- ~~25,152~~-------- ~~Support~~Operating ~~services~~income (1~~,600)~~.6 ~~276~~2.4 (0.6 1~~,765)~~.8 ~~118~~Non-operating ~~Unallocated~~expense ~~corporate~~0.1 ~~overhead~~0.1 ~~(9,712)~~0.1 ~~(9,422)~~0.1 ~~(19,556) (18,895)~~ -------- -------- -------- -------- Income before income taxes 1.5 2.3 0.5 1.7 Income tax expense 0.6 0.9 0.2 0.7 -------- -------- -------- -------- $Income ~~(1,416)~~from $continuing ~~3,058~~operations $0.9% ~~(702)~~1.4% $0.3% ~~6,375~~1.0% ========= ========= ========= =========

NET SALES Software revenues for the three and nine months ended January 31, 2001 increased approximately 48% and 27% over those for the three and nine months ended January 31, 2000, primarily due to the Company's strong competitive position with global enterprises, the expansion of the sales force throughout the year and the continued trend on the part of large customers toward enterprise-wide licensing agreements. Software revenues from VLM agreements represented approximately 90% and 87% of software revenues for the three and nine months ended January 31, 2001 compared to approximately 89% and 87% for the three and nine months ended January 31, 2000. For the three months ended January 31, 2001, contact services (formerly referred to as support services) revenues decreased by 43% as compared to the three months ended January 31, 2000. The decline was attributable to the decision by one of the Company's largest customers to reduce and realign call volumes outsourced to third parties, which resulted in lower call volumes in the Company's Garland and Spokane 7 10 contact centers. Contact services revenues decreased approximately 18% for the nine months ended January 31, 2001 compared to the nine months ended January 31, 2000. Increased call volumes in the Company's Tampa contact center, which opened in June 1999, partially offset the decline in call volumes in the Garland and Spokane contact centers. Contact services represented approximately 3% and 4% of the Company's overall revenues for the three and nine months ended January 31, 2001 as compared to 7% for both the three and nine months ended January 31, 2000. Such revenue generated approximately 10% and 12%, respectively, of the Company's gross margin dollars during the three and nine months ended January 31, 2001, compared to 20% and 15% during the three and nine months ended January 31, 2000. The Company believes future increases in revenues will depend upon its ability to maintain and increase its customer base, to develop and expand its contact services and to capitalize on continued growth in technology markets around the world. INTERNATIONAL OPERATIONS For the three and nine months ended January 31, 2001, sales outside of North America increased 35% and 21%, to $35 million and $104 million, respectively, as compared to $26 million and $86 million for the three and nine months ended January 31, 2000. Sales in Europe increased 37% and 32% to $24 million and $59 million for the three and nine months ended January 31, 2001. Sales in Asia/Pacific increased 32% and 10% to $11 million and $45 million during the same periods. For the three and nine months ended January 31, 2001, fluctuations in foreign currencies increased operating income by approximately $403,000 and $415,000, respectively. Fluctuations in foreign currencies decreased operating income by approximately $615,000 and $860,000, respectively, for the three and nine months ended January 31, 2000. GROSS MARGIN Overall gross margin as a percentage of net sales was 7.0% and 7.9% for the three and nine months ended January 31, 2001, as compared to 9.5% and 9.9% 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 product services revenues, as well as the decrease in the percentage of revenues provided by contact services, which traditionally have higher margins than the Company's product services. For the three and nine months ended January 31, 2001, gross margins on product services decreased to 6.5% and 7.3% as compared to 8.2% and 9.0% for the three and nine months ended January 31, 2000, primarily due to price competition and an increase in the percentage of revenue derived from enterprise-wide licensing contracts, which generally have lower margins than traditional VLM arrangements. In addition, gross margins in contact services for the nine months ended January 31, 2001 were negatively impacted by a $560,000 nonrecurring charge for employee termination costs related to the decline in business in the Garland contact 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 increases in gross margin dollars generated by contact services. 8 11 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 nine months ended January 31, 2001, SG&A expenses, as a percentage of net sales, decreased to 4.8% and 6.5%, as compared to 6.2% and 7.1% for the three and nine months ended January 31, 2000. SG&A expenses for the nine months ended January 31, 2001 include a nonrecurring charge of $730,000 relating to excess facilities due to the decline in the contact services business. The decrease in SG&A expenses, as a percentage of net sales, is primarily due to increased sales in the product services area and the favorable movement of foreign currency exchange rates, as well as more frequent use of the Company's electronic offerings. The Company remains focused on controlling operating costs in both of its business lines. DEPRECIATION AND AMORTIZATION The decrease in depreciation and amortization for the three months ended January 31, 2001, as compared to the three months ended January 31, 2000 is primarily due to a decline in goodwill amortization. The increase in depreciation and amortization for the nine months ended January 31, 2001, as compared to the nine months ended January 31, 2000, 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 contact services business in fiscal 2001. INCOME TAX EXPENSE The Company's effective tax rate was approximately 41% and 40% for the three and nine months ended January 31, 2001 as compared to 41% for both the three and nine months ended January 31, 2000. OPERATING INCOME Operating income for the three and nine months ended January 31, 2001 was $6.7 million and $6.0 million, respectively, compared to operating income of $7.4 million and $13.7 million, respectively, for the three and nine months ended January 31, 2000. The decrease in operating income is primarily due to lower contact services revenues, reduced gross margin percentages on product services and the $1.3 million of nonrecurring charges related to the contact services business, which were recorded in the second fiscal quarter. LIQUIDITY AND CAPITAL RESOURCES At January 31, 2001, the Company had approximately $24 million in cash and cash equivalents and had $4 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. The Company amended the Facility in December 2000. The amendment included revisions to the Company's borrowing base calculation, which will be effective April 30, 2001. Based on the revised calculation, the Company would have had approximately $50 million of borrowing availability under its credit facility at January 31, 2001. The Facility expires in March 2002. The increase in trade accounts receivable and trade accounts payable from April 30, 2000 to January 31, 2001 reflects the Company's seasonally high sales during the third fiscal quarter. At January 31, 2001 and April 30, 2000, accounts receivable represented approximately 50 and 48 days of historical sales, respectively. For the nine months ended January 31, 2001, the Company's operating activities provided $21.9 million of cash from continuing operations compared to $3.1 million of cash provided by continuing operations during the nine months ended January 31, 2000. The increase in cash provided by continuing operations 9 12 is primarily due to increased collections of accounts receivable and the timing of certain payments to the Company's vendors, offset by the reduction in income from continuing operations. The increase in furniture, equipment and leasehold improvements from April 30, 2000 to January 31, 2001 reflects approximately $5 million of capital expenditures related primarily to the ongoing investment in the Company's computer systems. 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 March 9, 2001, the Company had repurchased 1,246,800 shares of Common Stock, for a total of $18.1 million, under the stock repurchase program and is authorized by its Board of Directors to repurchase up to an additional $3.7 million of its common stock. On December 5, 2000, the Company sold all of the outstanding stock of its customer relationship management ("CRM") subsidiary for proceeds of 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 for approximately $2.2 million. The gain realized on the sale was insignificant. 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 contact 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. 10 13 INFLATION The Company believes that inflation has not had a material impact on its operations or liquidity to date. 11 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to securities price risk relating to its marketable equity securities. The Company occasionally uses hedging activities to decrease this risk; however, no portion of this risk was hedged as of January 31, 2001. Based on the securities owned at January 31, 2001, a 10% decline in security prices would decrease operating income by approximately $408,000. Information about market risks relating to foreign currency exchange rates and interest rates for the three and nine months ended January 31, 2001 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. 12 15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.15(b) - Fourth Amended and Restated Limited Waiver Agreement, dated September 1, 2000, between the Company and Private Capital Management, Inc. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three month period ended January 31, 2001. 13 16 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: March 16, 2001 By: /s/ James W. Brown -------------------------------------------- James W. Brown Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 14 17 EXHIBIT INDEX

~~Three~~EXHIBIT ~~Months~~NUMBER ~~Ended~~DESCRIPTION ~~Six Months Ended October 31, October 31,~~ ------~~-------------~~ -----------~~--------~~ ~~2000 1999 2000 1999 ------ ------ ------ ------ Net sales 100~~10.0%15(b) ~~100.0%~~Fourth ~~100.0%~~Amended ~~100.0%~~and ~~Cost~~Restated ofLimited ~~sales~~Waiver ~~91.3~~Agreement, ~~89.9~~dated ~~91.3~~September ~~89.8 ------ ------ ------ ------ Gross margin 8.7 10.~~1, ~~8.7 10.2 Selling~~2000, ~~general~~between ~~and~~the ~~administrative~~Company ~~expenses 8.3 7.7 7.8 7.7 Depreciation~~ and ~~amortization~~Private ~~1.0~~Capital ~~1.1 1.0 1.1 ------ ------ ------ ------ Operating income (loss) (0.6) 1.3 (0.1) 1.4 Interest expense~~Management, ~~net 0~~Inc.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% ====== ====== ====== ======

For Against Abstained --- ------- --------- 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

EXHIBIT NUMBER DESCRIPTION ------- ----------- 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

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