<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 31, 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 0-14625
-------
TECH DATA CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Florida No. 59-1578329
--------- ----------------
<S> <C>
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5350 Tech Data Drive, Clearwater, Florida 33760
- ----------------------------------------- --------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:(727) 539-7429
--------------
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
CLASS December 14, 1998
- ---------------------------------------- -----------------
<S> <C>
Common stock, par value $.0015 per share 51,073,865
</TABLE>
<PAGE> 2
TECH DATA CORPORATION AND SUBSIDIARIES
Form 10-Q For The Quarter Ended October 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet as of
October 31, 1998 (unaudited) and
January 31, 1998 3
Consolidated Statement of Income
(unaudited) for the three and nine
months ended October 31, 1998 and 1997 4
Consolidated Statement of Cash Flows
(unaudited) for the nine months
ended October 31, 1998 and 1997 5
Notes to Consolidated Financial Statements
(unaudited) 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk - Not applicable
PART II. OTHER INFORMATION
All items required in Part II have been previously filed, have
been included in Part I of this report or are not applicable for
the quarter ended October 31, 1998.
SIGNATURES 17
</TABLE>
2
<PAGE> 3
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,375 $ 2,749
Accounts receivable, less allowance for
doubtful accounts of $58,589 and $29,731 1,520,429 909,426
Inventories 1,064,083 1,028,367
Prepaid and other assets 84,396 65,843
----------- -----------
Total current assets 2,670,283 2,006,385
Property and equipment, net 130,772 100,562
Excess of cost over acquired net assets, net 342,614 55,460
Other assets, net 62,499 22,976
----------- -----------
$ 3,206,168 $ 2,185,383
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loans $ 430,123 $ 540,177
Accounts payable 1,270,179 850,866
Accrued expenses 242,884 77,961
----------- -----------
Total current liabilities 1,943,186 1,469,004
Long-term debt 308,557 8,683
----------- -----------
2,251,743 1,477,687
----------- -----------
Minority interest 23,837 5,108
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.02; 226,500 shares
authorized and issued; liquidation
preference $.20 per share 5 5
Common stock, par value $.0015; 200,000,000
shares authorized; 51,064,179
and 48,250,349 issued and outstanding 77 72
Additional paid-in capital 505,591 403,880
Retained earnings 392,240 299,768
Cumulative translation adjustment 32,675 (1,137)
----------- -----------
Total shareholders' equity 930,588 702,588
----------- -----------
$ 3,206,168 $ 2,185,383
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
3
<PAGE> 4
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $3,278,401 $2,021,479 $7,676,028 $4,943,445
---------- ---------- ---------- ----------
Cost and expenses:
Cost of products sold 3,065,306 1,892,137 7,178,418 4,614,948
Selling, general and
administrative expenses 143,892 83,294 333,314 205,938
---------- ---------- ---------- ----------
3,209,198 1,975,431 7,511,732 4,820,886
---------- ---------- ---------- ----------
Operating profit 69,203 46,048 164,296 122,559
Interest expense 14,422 7,991 28,765 20,644
Gain on sale of Macrotron AG - - 12,500 -
---------- ---------- ---------- ----------
Income before income taxes 54,781 38,057 148,031 101,915
Provision for income taxes 20,088 14,384 54,977 38,556
---------- ---------- ---------- ----------
Income before minority interest 34,693 23,673 93,054 63,359
Minority interest 605 - 582 -
---------- ---------- ---------- ----------
Net income $ 34,088 $ 23,673 $ 92,472 $ 63,359
========== ========== ========== ==========
Net income per common share:
Basic $ .67 $ .54 $ 1.88 $ 1.45
========== ========== ========== ==========
Diluted $ .63 $ .51 $ 1.79 $ 1.39
========== ========== ========== ==========
Weighted average common shares
outstanding:
Basic 50,911 44,226 49,276 43,730
========== ========== ========== ==========
Diluted 57,997 46,483 52,927 45,579
========== ========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
4
<PAGE> 5
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
October 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 7,528,870 $ 4,782,338
Cash paid to suppliers and employees (7,070,188) (4,685,677)
Interest paid (22,789) (20,895)
Income taxes paid (45,612) (37,201)
----------- -----------
Net cash provided by operating activities 390,281 38,565
----------- -----------
Cash flows from investing activities:
Sale of Macrotron AG 227,843 -
Acquisition of business, net of cash acquired (90,430) (53,668)
Capital expenditures (43,760) (24,430)
----------- -----------
Net cash provided by (used in) investing activities 93,653 (78,098)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 16,716 17,953
Net (repayments) borrowings under revolving credit loan (501,865) 22,962
Principal payments on long-term debt (159) (150)
----------- -----------
Net cash (used in) provided by financing activities (485,308) 40,765
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,374) 1,232
Cash and cash equivalents at beginning of period 2,749 661
----------- -----------
Cash and cash equivalents at end of period $ 1,375 $ 1,893
=========== ===========
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 92,472 $ 63,359
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,491 18,749
Provision for losses on accounts receivable 23,316 19,555
Gain on sale of Macrotron AG (12,500) -
(Increase) decrease in assets:
Accounts receivable (147,158) (161,107)
Inventories 255,438 (167,710)
Prepaid and other assets 134,926 (6,212)
Increase (decrease) in liabilities:
Accounts payable 153,449 262,076
Accrued expenses (138,153) 9,855
----------- -----------
Total adjustments 297,809 (24,794)
----------- -----------
Net cash provided by operating activities $ 390,281 $ 38,565
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
5
<PAGE> 6
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements and related notes included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all material adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position of Tech Data Corporation and
subsidiaries (the "Company" or "Tech Data") as of October 31, 1998, their
results of operations for the three and nine months ended October 31, 1998 and
1997 and their cash flows for the nine months ended October 31, 1998 and 1997.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The results of operations for the nine months ended October 31,
1998 are not necessarily indicative of the results that can be expected for the
entire fiscal year ending January 31, 1999.
NOTE 2 - ACQUISITION AND DISPOSITION OF SUBSIDIARIES:
Acquisition of Computer 2000 AG
On July 1, 1998, Tech Data completed the acquisition of approximately
83% of the voting common stock of Computer 2000 AG ("Computer 2000"), Europe's
leading technology products distributor. The Company acquired 80% of the
outstanding voting stock of Computer 2000 from its parent company, Klockner &
Co. AG., a subsidiary of Munich-based conglomerate VIAG AG, and an additional
stake of approximately 3% of Computer 2000's shares from an institutional
investor. The initial acquisition was completed through an exchange of
approximately 2.2 million shares of Tech Data common stock and $300 million of
5% convertible subordinated notes, due 2003 (coupon rate of 5.0%, five year term
and convertible into shares of common stock at $56.25 per share). The purchase
agreement is subject to certain indemnification and contingent payments which
are based on future events. On November 17, 1998, the Company commenced a tender
offer for the remaining C2000 shares at a price per share of DM845. As a result
of this tender offer, prior open market purchases and private purchase
transactions, the Company currently owns approximately 97% of Computer 2000's
outstanding stock for a total purchase price of approximately $500 million. The
open market purchases, private purchase transactions and tender offer have been
funded through the Company's revolving credit loan agreements.
The acquisition of Computer 2000 is accounted for under the purchase
method. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition. The
excess of the purchase price over net assets acquired of approximately $340
million is being amortized on a straight-line basis over 40 years. The final
allocation of the purchase price may vary as additional information is obtained,
and accordingly, the ultimate allocation may differ from those used in the
unaudited consolidated financial statements included herein.
6
<PAGE> 7
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - ACQUISITION AND DISPOSITION OF SUBSIDIARIES - CONTINUED:
Disposition of Macrotron AG
On July 28, 1998, pursuant to a Share Purchase Agreement dated June 10,
1998, the Company completed the sale of its majority interest in Munich-based
subsidiary Macrotron AG ("Macrotron") to Ingram Micro, Inc. ("Ingram"). Tech
Data acquired its majority interest in Macrotron in July 1997 and owned 99% and
91% of Macrotron's outstanding common and preferred stock, respectively, at the
time of the sale. The sale of Macrotron was completed through the receipt of
approximately $228 million from Ingram (approximately $100 million for the
Company's shares of Macrotron and the balance of $128 million for the repayment
of Macrotron's intercompany indebtedness).
The Company's subsidiaries outside of North America are included in its
consolidated financial statements on a calendar quarter basis. As such, the
quarter ended October 31, 1998 includes a full quarter of results for Computer
2000 (which was acquired effective July 1, 1998) and excludes operating results
for Macrotron (which was sold effective July 1, 1998). The Company's fiscal
quarter ending October 31, 1998 includes the proceeds received from the sale of
Macrotron as well as Computer 2000's operations for the three month period
beginning July 1, 1998 and ending September 30, 1998.
Pro forma information
The following pro forma unaudited results of operations reflects the
effect on the Company's operations, as if the above described acquisition of
Computer 2000 and disposition of Macrotron had occurred at the beginning of each
of the periods presented below:
<TABLE>
<CAPTION>
Nine months ended
October 31,
--------------- -------- ---------------
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Net sales $9,841,455 $8,185,058
Net income 91,426 63,704
Net income per common share:
Basic $ 1.81 $ 1.39
Diluted $ 1.70 $ 1.33
</TABLE>
The unaudited pro forma information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the Computer 2000 acquisition and the Macrotron
disposition been consummated as of the beginning of the periods above, nor are
they necessarily indicative of future operating results.
7
<PAGE> 8
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - NET INCOME PER COMMON SHARE:
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" ("SFAS 128") and related interpretations.
SFAS 128 requires dual presentation of basic earnings per share ("basic EPS")
and diluted earnings per share ("diluted EPS"). Basic EPS is computed by
dividing net income by the weighted average number of common shares outstanding
during the reported period. Diluted EPS reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised using the treasury stock method. The composition of basic and diluted
net income per common share is as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
October 31, 1998 October 31, 1997
--------------------------------- ------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------- -------- ------ ------- -------- ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income per common share - basic $34,088 50,911 $ .67 $23,673 44,226 $ .57
====== ======
Effect of dilutive securities:
Stock options - 1,753 - - 2,257 -
5% convertible subordinated notes 2,363 5,333 - - - -
------- -------- ------- --------
Net income per common share - diluted $36,451 57,997 $ .63 $23,673 46,483 $ .51
======= ======== ====== ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
October 31, 1998 October 31, 1997
--------------------------------- ---------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------- -------- ------ ------- -------- ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income per common share - basic $92,472 49,276 $ 1.88 $63,359 43,730 $ 1.45
====== ======
Effect of dilutive securities:
Stock options - 1,873 - - 1,849 -
5% convertible subordinated notes 2,363 1,778 - - - -
------- -------- ------- --------
Net income per common share - diluted $94,835 52,927 $ 1.79 $63,359 45,579 $ 1.39
======= ======== ====== ======= ======== ======
</TABLE>
8
<PAGE> 9
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - COMPREHENSIVE INCOME:
Effective in the first quarter ended April 30, 1998 the Company adopted
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in the Company's consolidated financial statements. Comprehensive
income is defined in SFAS 130 as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Total comprehensive income was $54.5 million and $23.8
million for the three months ended October 31, 1998 and 1997, respectively, and
$110.9 million and $62.0 million for the nine months ended October 31, 1998 and
1997, respectively. The difference between net income as reported and total
comprehensive income is the tax effected change in the cumulative translation
adjustment.
NOTE 5 - LONG TERM DEBT:
On July 1, 1998, the Company issued $300 million convertible
subordinated notes due July 1, 2003. The notes bear interest at 5% per year and
are convertible any time prior to maturity, unless previously redeemed or
repurchased, into shares of common stock at a conversion rate of 17.777 shares
per $1,000 principal amount of notes, equivalent to a conversion price of
approximately $56.25 per share. The notes are convertible into approximately 5.3
million shares of the Company's common stock. The notes are redeemable in whole
or in part, at the option of the Company at any time on or after July 1, 2001.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS:
In September 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 requires that companies disclose segment data based on
how management makes decisions about allocating resources to segments and
measuring their performance. The statement is effective for fiscal years
beginning after December 15, 1997 but does not require compliance with interim
reporting requirements until the second year of implementation. The standard
addresses disclosure issues and therefore will not affect the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if so, the type of the hedge
transaction. The ineffective portion of all hedge transactions will be
recognized in the current-period earnings. SFAS 133 is effective for fiscal
years beginning after December 31, 1998. The future impact of this statement on
the Company's results of operations is not expected to be material.
9
<PAGE> 10
TECH DATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended October 31, 1998 and 1997
Net sales increased 62.2% to $3.28 billion in the third quarter of
fiscal 1999 compared to $2.02 billion in the third quarter last year. This
increase is attributable to the acquisition of Computer 2000 AG ("Computer
2000") as well as the addition of new product lines and the expansion of
existing product lines. Sales for the third quarter of fiscal 1999 include a
full quarter of results for Computer 2000 and exclude the results of the
Company's former subsidiary, Macrotron AG. The Company's international sales
advanced 222% in the third quarter of fiscal 1999 compared to the prior year
third quarter while domestic sales increased 7%. The significant growth in the
Company's international sales is attributable to the acquisition of Computer
2000, in which the Company acquired a controlling interest on July 1, 1998.
International sales represented approximately 51% of fiscal 1999 third quarter
net sales compared to 23% for the third quarter of fiscal 1998.
The cost of products sold as a percentage of net sales was 93.5% in the
third quarter of fiscal 1999, compared to 93.6% in the prior year. This decrease
is the result of the inclusion of Computer 2000, partially offset by competitive
market conditions in the Company's U.S. business.
Selling, general and administrative expenses increased 72.8% to $143.9
million in the third quarter of fiscal 1999 compared to $83.3 million last year
and as a percentage of net sales increased to 4.39%, compared to 4.12% in the
third quarter last year. The dollar value increase in selling, general and
administrative expenses as well as the increase as a percentage of sales in the
third quarter of fiscal 1999 is attributable to the acquisition of Computer 2000
and the increases in other operating expenses needed to support the increased
volume of business.
As a result of the factors described above, operating profit increased
to $69.2 million in the third quarter of fiscal 1999, compared to $46.0 million,
for the third quarter last year and as a percentage of net sales, decreased to
2.1% from 2.3%, respectively.
Interest expense increased in the third quarter of fiscal 1999 due to
an increase in the average outstanding indebtedness related to the issuance of
the $300 million in convertible subordinated notes in conjunction with the
acquisition of Computer 2000 as well as the Company's continued growth.
The provision for income taxes increased 39.7% to $20.1 million in the
third quarter of fiscal 1999 compared to $14.4 million last year. This increase
is attributable to an increase in the Company's income before income taxes. The
Company's average income tax rate declined to 36.7% in the third quarter this
year compared with 37.8% in the prior year due to fluctuations in the amount of
federal, state and foreign taxable income reported in each period.
10
<PAGE> 11
As a result of the factors described above, net income increased 44.0%
to $34.1 million, or $.63 per diluted share, in the third quarter of fiscal 1999
compared to $23.7 million, or $.51 per diluted share, in the prior year
comparable quarter.
Nine Months Ended October 31, 1998 and 1997
Net sales increased 55.3% to $7.68 billion in the first nine months of
fiscal 1999 compared to $4.94 billion in the same period last year. Net income
for the nine month period this year was $92.5 million, or $1.79 per diluted
share, up 45.9% from the $63.4 million, or $1.39 per diluted share, in the same
period last year.
The Company's results of operations for the nine months ended October
31, 1998, include a pretax gain of $12.5 million ($7.6 million net of income
taxes) related to the sale of Macrotron.
(The underlying reasons for all other fluctuations in the results of
operations for the nine months ended October 31, 1998 are substantially the same
as in the comparative quarterly discussion above and, therefore, will not be
repeated here).
Liquidity and Capital Resources
Net cash provided by operating activities of $390.3 million during the
first nine months of fiscal 1999 was primarily attributable to income from
operations of $92.5 million combined with an increase in accounts payable and a
decrease in inventories partially offset by an increase in accounts receivable.
Net cash provided by investing activities of $93.7 million during the
first nine months of fiscal 1999 was attributable to receipt of $227.8 million
in proceeds from the sale of Macrotron (See Note 2 of Notes to Consolidated
Financial Statements) offset by $90.4 million related to the acquisition of
Computer 2000 and the Company's continuing investment of $43.8 million in its
management information systems, office facilities and its distribution center
facilities. The Company expects to make capital expenditures of approximately
$60 - $75 million during fiscal 1999 to further expand its management
information systems capability, office facilities and distribution centers.
Net cash used in financing activities of $485.3 million during the
first nine months of fiscal 1999 reflects the net repayments under the Company's
revolving credit loans of $501.9 million partially offset by proceeds from stock
option exercises (including the related income tax benefit) of $16.7 million.
As of October 31, 1998, the Company maintained domestic and foreign
revolving credit agreements which provide maximum short-term borrowings of
approximately $1.47 billion (including local country credit lines), of which
$430 million was outstanding at that date. The Company believes that cash from
operations, available and obtainable bank credit lines and trade credit from its
vendors and periodic offerings of the Company's common stock and equity
securities (both in public offerings and in conjunction with business
combinations) will be sufficient to satisfy its working capital and capital
expenditure needs through fiscal 2000.
11
<PAGE> 12
Asset Management
The Company manages its inventories by maintaining sufficient
quantities to achieve high order fill rates while attempting to stock only those
products in high demand with a rapid turnover rate. Inventory balances fluctuate
as the Company adds new product lines and when appropriate, makes large
purchases, including cash purchases from manufacturers and publishers when the
terms of such purchases are considered advantageous. The Company's contracts
with most of its vendors provide price protection and stock rotation privileges
to reduce the risk of loss due to manufacturer price reductions and slow moving
or obsolete inventory. In the event of a vendor price reduction, the Company
generally receives a credit for the impact on products in inventory. In
addition, the Company has the right to rotate a certain percentage of purchases,
subject to certain limitations. Historically, price protection and stock
rotation privileges, as well as the Company's inventory management procedures
have helped to reduce the risk of loss of carrying inventory.
The Company attempts to control losses on credit sales by closely
monitoring customers' creditworthiness through evaluating detailed information
on customer payment history and other relevant information. In addition, the
Company participates in a national credit association which exchanges credit
information on mutual customers. The Company has credit insurance which insures
a percentage of the credit extended by the Company to international and certain
of its larger domestic customers against possible loss. Customers who qualify
for credit terms are typically granted net 30 day payment terms. The Company
also sells product on a prepay or credit card basis or through commercial
finance companies.
Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 requires that companies disclose segment data based on
how management makes decisions about allocating resources to segments and
measuring their performance. The statement is effective for fiscal years
beginning after December 15, 1997 but does not require compliance with interim
reporting requirements until the second year of implementation. The standard
addresses disclosure issues and therefore will not affect the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if so, the type of the hedge
transaction. The ineffective portion of all hedge transactions will be
recognized in the current-period earnings. SFAS 133 is effective for fiscal
years beginning after December 31, 1998. The future impact of this statement on
the Company's results of operations is not expected to be material.
12
<PAGE> 13
Year 2000
Introduction
The "Year 2000 Problem" arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20" instead of the
familiar "19." If not corrected, many computer applications could fail or create
erroneous results. The problems created by using abbreviated dates appear in
hardware (such as microchips), operating systems and other software programs.
The Company's Year 2000 ("Y2K") compliance project is intended to determine the
readiness of the Company's business for the Year 2000. The Company defines Y2K
"compliance" to mean that the computer code will process all defined future
dates properly and give accurate results.
Description of Areas of Impact and Risk
The Company has identified four areas where the Y2K problem creates
risk to the Company. These areas are: a) internal Information Technology ("IT")
systems; b) non-IT systems with embedded chip technology; c) system capabilities
of third party businesses with relationships with the Company, including product
suppliers, customers, service providers (such as telephone, power, logistics,
financial services) and other businesses whose failure to be Y2K compliant could
have a material adverse effect on the Company's business, financial condition or
results of operations; and d) product liability claims arising out of the
non-performance of computer products distributed by the Company.
Plan to Address Year 2000 Compliance
In August 1997, the Company formed a Year 2000 Compliance Project Team
and began developing an overall plan to address Y2K readiness issues. This plan
includes five phases as follows: Phase I is to create an inventory of the
Company's IT systems, non-IT systems and service providers (each of these being
referred to as "business components") that need to be analyzed for Y2K
compliance. During Phase I a priority is established so that the Company will
first address the most important business components to determine Y2K readiness.
Phase II analyzes the identified business components to determine which of the
business components in the inventory require additional effort to be Y2K
compliant. Phase III is the repair, modification or replacement of business
components which the analysis determines are not Y2K compliant ("remediation").
Phase IV consists of various types of testing to confirm that the remediation
process has resulted in the business components being Y2K compliant. Phase V is
the development of contingency plans to address potential risks that the Y2K
compliance project may not fully address.
State of Readiness
IT Systems - The initial Phase I inventory and prioritization process
for the Company's U.S. based IT systems has been completed. The Company's
current focus in this area is on testing and remediation, inventory refinement,
and test plan refinement. Approximately 32% of all identified IT system business
components in the U.S. have been deemed to be Y2K compliant as of November 30,
1998 with analysis of
13
<PAGE> 14
the remaining 68% continuing. The Y2K test environment in the U.S. is also
expected to be fully functional in January 1999. Testing will continue through
July 1999 when all compliance testing is anticipated to be completed. Even
though the original design of the Company's mainframe and DCS software system
(the Company's system performing the primary business functions of sales order
entry, billing, purchasing, distribution and inventory control) considered the
Y2K problem and is currently deemed compliant, the test plan includes detailed
testing of this business critical system. Desktop hardware and software systems
testing and remediation in the U.S. is anticipated to be completed in February
1999. Following the Company's acquisition of Computer 2000 in July 1998, the
Company revised its Y2K compliance program to include the systems of the
Munich-based operation and its subsidiaries. During acquisition due diligence
and as a part of the contractual purchase arrangement, Computer 2000's primary
computer system was represented as Y2K compliant. Therefore, the current focus
of this part of the project is on the client server and network based systems
that connect to this system. It is anticipated that this portion of the
Company's Y2K compliance program will achieve completion of all phases by the
same time the Company completes all of its phases of the U.S. and Canada plan,
July 1999.
Non-IT systems - Non-IT systems consist of any device which is able to
store and report date-related information, such as access control systems,
elevators, conveyors, escalators and other items containing a microprocessor or
internal clock. The phased plan approach utilized by the Company for analysis of
the IT systems is also being used for non-IT systems. Phase I inventory and
prioritization has been completed for non-IT systems in the U.S. and is
currently being conducted in the Company's worldwide locations. Phase II
analysis will be performed on systems material to the Company's operations with
the assistance of the Company's vendors. The Company currently plans to complete
the Y2K compliance program for all material non-IT systems by the end of
November 1999.
Material Third Parties - The Company has created an inventory of what
it believes to be all material third parties with whom the Company has a
business relationship in the U.S. Y2K readiness surveys were sent to these third
parties beginning in February 1998. The Company is currently reviewing the
responses to these surveys to determine the Y2K readiness of these third
parties. For those critical third party suppliers, service providers and
customers that fail to respond to the Company's survey, the Company intends to
pursue alternative means of obtaining Y2K readiness information, such as review
of publicly available information published by such third parties. The Company
also plans to implement this same approach to third party Y2K readiness at the
Company's foreign subsidiaries. The Company plans to continue to review its
third party relationships throughout the Y2K compliance program to ensure all
material third party relationships are addressed.
Product Liability - The Company does not make any representations or
warranties that the products it distributes are or will be Y2K ready or
compliant. In certain countries where the Company or its subsidiaries distribute
products, the Company may have an obligation to accept returns of products which
fail because the product is not Y2K ready. In most cases, these returns may be
passed on to the manufacturer. In those countries where product return
obligations may exist, the Company plans to carefully review manufacturer
representations regarding products that are sold in material volumes by the
Company or its subsidiaries.
14
<PAGE> 15
Cost of Project
The overall cost of the Company's Y2K compliance effort cannot be
accurately estimated until all inventory and analysis phases have been
completed. Current expenditures on Y2K compliance have not been material to the
Company's operations or financial condition.
Contingency Planning and Risks
Upon completion of Phase I (inventory of components) and Phase II
(analysis of Y2K readiness) the Y2K compliance project team will commence
development of a contingency plan to address risks arising from Y2K. While the
Company believes that its approach to Y2K readiness is sound, it is possible
that some business components are not identified in the inventory, or that the
scanning or testing process does not result in analysis and remediation of all
source code. The Company will assume a third party is not Y2K ready if no survey
response or an inadequate survey response is received. The Company's contingency
plan will address alternative providers and processes to deal with business
interruptions that may be caused by internal system or third party providers
failure to be Y2K ready to the extent it is possible.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failure could materially and adversely affect the Company's
results of operations, liquidity and financial condition. In addition, the
Company's operating results could be materially adversely affected if it were
to be held responsible for the failure of any products sold by the Company to
be Y2K ready despite the Company's disclaimer of product warranties and the
limitation of liability contained in its sales terms and conditions.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to commence conversion from their existing
sovereign currencies to a new, single currency called the euro. Fixed conversion
rates between the existing currencies, the legacy currencies, and the euro will
be established and the euro will become the common legal currency of the
participating countries on this date. The euro will then trade on currency
exchanges and be available for non-cash transactions. The participants will
issue sovereign debt exclusively in euro and will redenominate outstanding
sovereign debt at this time. Following this introduction period, the
participating members legacy currencies will remain legal tender as
denominations of euro until January 1, 2002. At that time, countries will issue
new euro-denominated bills for use in cash transactions. All legacy currency
will be withdrawn prior to July 1, 2002 completing the euro conversion on this
date. As of January 1, 1999, the participating countries no longer will control
their own monetary policies by directing independent interest rates for the
legacy currencies, and instead, the authority to direct monetary policy,
including money supply and official interest rates for the euro, will be
exercised by the new European Central Bank.
The Company has established a plan to address the issues raised by the
euro conversion. These issues include, but are not limited to; the competitive
impact created
15
<PAGE> 16
by cross-border price transparency; the need for the Company and its business
partners to adapt IT and non-IT systems to accommodate euro-demoninated
transactions; and the need to analyze the legal and contractual implications of
the Company's contracts. The Company currently anticipates that the required
modifications to its systems, equipment and processes will be made on a timely
basis and does not expect that the costs of such modifications will have a
material effect on the Company's financial position or results of operations.
Comments on Forward-Looking Information
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company, in Exhibit 99A to its
Annual Report on Form 10-K for the year ended January 31, 1998, outlined
cautionary statements and identified important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements, as made within this Form 10-Q, should be considered
in conjunction with the information included within the aforementioned Exhibit
99A as well as other risks identified in this Form 10-Q.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECH DATA CORPORATION
(Registrant)
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Steven A. Raymund Chairman of the Board of December 15, 1998
- ----------------------- Directors and Chief
Steven A. Raymund Executive Officer
/s/ Jeffery P. Howells Executive Vice President December 15, 1998
- ----------------------- and Chief Financial Officer;
Jeffery P. Howells (principal financial officer);
Director
/s/ Joseph B. Trepani Senior Vice President and December 15, 1998
- ----------------------- Corporate Controller (principal
Joseph B. Trepani accounting officer)
/s/ Arthur W. Singleton Vice President, Treasurer and December 15, 1998
- ----------------------- Secretary
Arthur W. Singleton
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TECH
DATA CORPORATION QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,375
<SECURITIES> 0
<RECEIVABLES> 1,579,018
<ALLOWANCES> 58,589
<INVENTORY> 1,064,083
<CURRENT-ASSETS> 2,670,283
<PP&E> 130,772
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,206,168
<CURRENT-LIABILITIES> 1,943,186
<BONDS> 309,557
0
5
<COMMON> 77
<OTHER-SE> 930,506
<TOTAL-LIABILITY-AND-EQUITY> 3,206,168
<SALES> 7,676,028
<TOTAL-REVENUES> 7,676,028
<CGS> 7,178,718
<TOTAL-COSTS> 7,511,732
<OTHER-EXPENSES> 333,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,765
<INCOME-PRETAX> 148,031
<INCOME-TAX> 54,977
<INCOME-CONTINUING> 93,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,472
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.79
</TABLE>
