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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended January 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-14625
TECH DATA CORPORATION
(Exact name of registrant as specified in its charter)
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Florida No. 59-1578329
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
5350 Tech Data Drive, Clearwater, FL 33760
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number including area code: (813) 539-7429
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.0015 per share.
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 shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K.__X__
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 1998: $1,698,978,000
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
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Common stock, par value $.0015 per share 48,267,064
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Proxy Statement for use at the Annual Meeting of
Shareholders on June 23, 1998 is incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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PART I
ITEM 1. Business
(a) General development of business
Tech Data Corporation (the "Company" or "Tech Data") was incorporated
in 1974 to market data processing supplies such as tape, disk packs, and custom
and stock tab forms for mini and mainframe computers directly to end users. In
1984, the Company began marketing certain of its products to the newly emerging
market of microcomputer dealers and had withdrawn entirely from end-user sales,
broadened its product line to include hardware products, and completed its
transition to a wholesale distributor. The Company has since continually
expanded its product lines, customer base and geographical presence.
On May 31, 1989, the Company entered the Canadian market through the
acquisition of a distributor subsequently named Tech Data Canada Inc. ("Tech
Data Canada"). Tech Data Canada serves customers in all Canadian provinces and
carries many of the same products offered by the Company.
On March 24, 1994, the Company completed the non-cash exchange of
1,144,000 shares of its common stock for all of the outstanding capital stock of
Softmart International, S.A. (subsequently named Tech Data France, SNC) ("Tech
Data France"), a privately-held distributor of personal computer products based
in Paris, France. Tech Data France is one of the largest wholesale distributors
of microcomputer products in France, representing leading manufacturers and
publishers such as Compaq, Hewlett-Packard, IBM, Lotus and Microsoft. The
acquisition was accounted for as a pooling-of-interests effective February 1,
1994; however, due to the immaterial size of the acquisition in relation to the
consolidated financial statements, prior period financial statements were not
restated.
To complement its Miami-based Latin American export business, the
Company opened a 33,000 square-foot distribution center near Sao Paulo, Brazil
in February 1997.
On July 1, 1997, Tech Data acquired a controlling interest in Macrotron
AG ("Macrotron"), a leading publicly held distributor of personal computer
products based in Munich, Germany. Macrotron is one of the largest computer
products wholesale distributors in Germany whose product line includes such
leading vendors as 3Com, Canon, Compaq, Corel, Epson, Hewlett-Packard, IBM,
Intel, Microsoft, Sony and Toshiba. As of January 31, 1998, the Company owned
approximately 98% and 82% of Macrotron's common and preferred stock,
respectively. The acquisition has been accounted for under the purchase method.
(b) Financial information about industry segments
The Company operates in only one business segment.
(c) Narrative description of business
The Company is the world's second largest distributor of microcomputer
hardware and software products to value-added resellers ("VARs"), corporate
resellers, retailers and direct marketers (collectively with VARs, "customers").
Tech Data distributes products throughout the United States, Canada, Latin
America, Germany, France, Switzerland and Austria. The Company purchases its
products directly from more than 900 manufacturers of microcomputer hardware and
publishers of software in large quantities, maintains a stocking inventory of
more than 45,000 products and sells to an active base of over 70,000 customers.
The Company's broad assortment of vendors and products meets the customers' need
for a cost effective link to those vendors' products offered through a single
source.
The Company provides its customers with leading products including
systems, peripherals, networking, and software, which accounted for 24%, 42%,
18% and 16%, respectively, of sales in fiscal 1998. The Company offers products
from manufacturers and publishers such as Bay Networks, Cisco, Compaq, Corel,
Creative Labs, Digital Equipment, Epson, Hewlett-Packard, IBM, Intel, Microsoft,
Novell, Okidata, Seagate, Symantec, 3Com, Toshiba, Viewsonic and Western
Digital. The Company generally ships products the same day the orders are
received from regionally located distribution centers. The customers are
provided with a high-level of service through the Company's pre- and post-sale
technical
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support, electronic commerce tools (including on-line order entry, product
configuration services and electronic data interchange ("EDI") services),
customized shipping documents and flexible financing programs.
Industry
The wholesale distribution model, like that provided by the Company,
has proven to be well-suited for both manufacturers and publishers of
microcomputer products ("vendors") and resellers of those products. The large
number and diversity of resellers makes it cost efficient for vendors to rely on
wholesale distributors which can leverage distribution costs across multiple
vendors who outsource a portion of their distribution, credit, marketing and
support services. Similarly, due to the large number of vendors and products,
resellers often cannot or choose not to establish direct purchasing
relationships. Instead they rely on wholesale distributors, such as Tech Data,
which can leverage purchasing costs across multiple resellers to satisfy a
significant portion of their product procurement and delivery, financing,
marketing and technical support needs.
The Company believes that the rates of growth of the wholesale
distribution segment of the microcomputer industry and the Company continue to
outpace that of the microcomputer industry as a whole for three principal
reasons. First, as a result of the use of open systems and off-the-shelf
components, hardware and software products are increasingly viewed as
commodities. The resulting price competition, coupled with rising selling costs
and shorter product life cycles, make it difficult for manufacturers and
publishers to efficiently sell directly to resellers and has prompted them to
rely on more cost-efficient methods of distribution. Second, resellers are
increasingly relying on wholesale distributors such as Tech Data for product
availability and flexible financing alternatives rather than stocking large
inventories themselves and maintaining credit lines to finance working capital
needs. Third, restrictions by certain major manufacturers on sales through
wholesale distributors were gradually eased commencing in 1991. Since the
beginning of 1995, the Company has been able to sell certain of those
manufacturers' products under more competitive terms and conditions
("open-sourcing"). Historically, these previously restricted product lines were
sold by master resellers, or aggregators, (whose business model was similar to
wholesale distributors, but focused on relatively few product lines) to a
network of franchise dealers. Open-sourcing has virtually eliminated any
advantage that these aggregators enjoyed as a result of the exclusive
arrangements. In addition, consolidation in the wholesale distribution industry
continues as economies of scale and access to financial resources become more
critical. Larger distributors, like the Company, that have been able to utilize
economies of scale to lower costs and pass on the savings to its customers in
the form of reduced prices have continued to take market share.
Recent trends in wholesale distribution include the final assembly of
certain products by the distributor and continued expansion of electronic
commerce. In order to compete more effectively and lower their costs, major
computer systems manufacturers which rely on the two-tier distribution model
have begun to take steps to reduce their own inventories and the inventories of
their distributors and resellers by implementing a build-to-order manufacturing
process. They have also begun to re-engineer their distribution by developing
programs whereby final assembly will be performed at the distribution level
("channel assembly") versus the current build-to-forecast methodology employed
by these manufacturers. Tech Data has been selected by Compaq, Hewlett-Packard
and IBM to participate in their respective channel assembly programs. Tech Data
began performing assembly services for IBM in October 1997 and expects to begin
performing such services for Compaq and Hewlett-Packard in fiscal 1999.
The increasing utilization of electronic ordering and information
delivery systems, including the ability to transact business over the World Wide
Web, has had and is expected to continue to have a significant impact on the
cost efficiency of the wholesale distribution industry. Distributors, such as
Tech Data, with the financial and technical resources to develop, implement and
operate state-of-the-art management information systems have been able to reduce
both their customers' and their own transaction costs through more efficient
purchasing and lower selling costs.
In summary, microcomputer distribution is experiencing rapid growth and
consolidation, creating an environment in which market share and the resulting
cost efficiencies are critical.
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Business Strategy
Tech Data, as the world's second largest distributor of microcomputer
products, believes that its infrastructure and the size of its operation
position it to gain share in its current markets as well as continue its
expansion into new geographic markets. The Company's size and performance have
allowed it to make significant investments in personnel, management information
systems, distribution centers and other capital resources. The Company provides
a broad array of products and services for its resellers, which allows them to
satisfy their needs from a single source. The Company's competitive advantage is
the result of its low cost structure, investment in sophisticated management
information systems and its access to capital to finance growth.
To maintain and enhance its leadership position in wholesale
distribution, the Company's business strategy includes the following main
elements:
Maintain low cost and efficient operations. The Company has
pursued a strategy of profitable revenue growth by providing its
customers with the benefit of operating efficiencies achieved through
centralized management and control, stringent cost controls and
automation. The Company strictly regulates selling, general and
administrative expenses; utilizes its highly automated order placement
and processing systems to efficiently manage inventory and shipments and
to reduce transaction costs; and realizes economies of scale in product
purchasing, financing and working capital management. The Company has
been successful in reducing selling, general and administrative expenses
as a percentage of net sales from 6.8% for the fiscal year ended January
31, 1992 to 4.2% for the fiscal year ended January 31, 1998.
Leverage management information systems. In order to further
improve its operating efficiencies and services to its resellers, the
Company invested approximately $30 million in a scaleable,
state-of-the-art computer information system which was implemented in
December 1994. This system, which currently supports the Company's U.S.
and Canadian operations and Latin American export operations, allows the
Company to improve operating efficiencies and to offer additional
services such as expanding its electronic commerce capabilities,
including electronic data interchange and Tech Data On-Line electronic
ordering and information systems. The Company's ordering system will be
available on its World Wide Web site in the near future. The Company
believes that growth in its electronic commerce capabilities will provide
incremental economies of scale and further reduce transaction costs.
Offer a broad and balanced product mix. The Company offers its
resellers a broad assortment of leading technology products. Currently,
the Company offers more than 45,000 products from more than 900
manufacturers and publishers. By offering a broad product assortment, the
Company can benefit from its resellers' objective to procure product more
efficiently by reducing the number of their direct vendor relationships.
The Company is continually broadening its product assortment and has
recently expanded its offerings of communication products as a result of
the convergence of the computing and telecommunication markets. The
Company maintains a balanced product line of systems, peripherals,
networking products and software to minimize the effects of fluctuation
in supply and demand
Foster customer loyalty through superior customer service. Tech
Data's sales force provides superior customer service through a dedicated
team approach in order to differentiate itself from its competitors and
foster customer loyalty. The Company provides services such as flexible
customer financing and credit programs, a suite of electronic commerce
tools (including electronic order entry and access to product
specifications), pre- and post-sale technical support, products
configuration, customized shipping documents, flexible product return
policies and customer education programs. The Company believes its
strategy of not competing with its customer base also promotes customer
loyalty.
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Broaden geographic coverage through international expansion. The
Company plans to take advantage of its strong financial position, vendor
relationships and distribution expertise to continue to expand its
business in the markets it currently serves and additional markets. The
Company's expansion strategy focuses on identifying companies with
significant market positions and quality management teams in markets
where there is developed or emerging demand for microcomputer products.
Following expansion into a new market, Tech Data enhances its market
share by providing capital, adding new product lines, competitively
pricing its products and delivering value-added services. The Company's
operations have expanded from its North American focus to include Europe
with the acquisition in 1994 of France's largest wholesale microcomputer
distributor. In February 1997, the Company continued its international
expansion through the development of an in-country subsidiary which
stocks and distributes products in Brazil. In July 1997, Tech Data
broadened its European presence with the acquisition of a majority
interest in one of Germany's largest wholesale microcomputer
distributors, Macrotron AG.
Vendor Relations
The Company's strong financial and industry positions have enabled it
to obtain contracts with most leading manufacturers and publishers. The Company
purchases products directly from more than 900 manufacturers and publishers,
generally on a nonexclusive basis. The Company's vendor agreements are believed
to be in the form customarily used by each manufacturer and typically contain
provisions which allow termination by either party upon 60 days notice.
Generally, the Company's supplier agreements do not require it to sell a
specified quantity of products or restrict the Company from selling similar
products manufactured by competitors. Consequently, the Company has the
flexibility to terminate or curtail sales of one product line in favor of
another product line as a result of technological change, pricing
considerations, product availability, customer demand and vendor distribution
policies. Such agreements generally contain stock rotation and price protection
provisions which, along with the Company's inventory management policies and
practices, reduce the Company's risk of loss due to slow-moving inventory,
vendor price reductions, product updates or obsolescence. Under the terms of
many distribution agreements, suppliers will credit the distributor for declines
in inventory value resulting from the supplier's price reductions if the
distributor complies with certain conditions. In addition, under many such
agreements, the distributor has the right to return for credit or exchange for
other products a portion of those inventory items purchased, within a designated
period of time. A supplier who elects to terminate a distribution agreement
generally will repurchase from the distributor the supplier's products carried
in the distributor's inventory. While the industry practices discussed above are
sometimes not embodied in written agreements and do not protect the Company in
all cases from declines in inventory value, management believes that these
practices provide a significant level of protection from such declines. No
assurance can be given, however, that such practices will continue or that they
will adequately protect the Company against declines in inventory value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Asset Management."
Major computer systems manufacturers have begun to re-engineer their
manufacturing processes whereby final assembly will be performed at the
distribution level ("channel assembly") versus the current "build-to-forecast"
methodology employed by these manufacturers. Tech Data has been selected by
Compaq, Hewlett-Packard and IBM to participate in their respective channel
assembly programs. The Company currently performs configuration services at its
South Bend distribution center which has been ISO 9002 certified. Tech Data
began performing assembly services for IBM in October 1997 and expects to begin
performing such services for Compaq and Hewlett-Packard in fiscal 1999. The
Company plans to expand its configuration and final assembly services
capabilities into its Fontana, California and Swedesboro, New Jersey
distribution centers later this year.
In addition to providing manufacturers and publishers with one of the
largest bases of resellers in the United States, Canada, Latin America, Germany,
France, Switzerland and Austria, the Company also offers manufacturers and
publishers the opportunity to participate in a number of special promotions,
training programs and marketing services targeted to the needs of its resellers.
No single vendor accounted for more than 10% of the Company's net sales
during fiscal 1998, 1997 or 1996, except sales of Compaq products which
accounted for 13% and 12% of net sales in fiscal 1998 and 1997, respectively,
and sales of Hewlett-Packard products which accounted for 13% of net sales in
fiscal 1998.
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Customers, Products and Services
The Company sells more than 45,000 microcomputer products including
systems, peripherals, networking and software purchased directly from
manufacturers and publishers in large quantities for sale to an active reseller
base of more than 70,000 VARs, corporate resellers, direct marketers and
retailers.
The Company's VARs typically do not have the resources to establish a
large number of direct purchasing relationships or stock significant product
inventories. This market segment is attractive because VARs, which constituted
approximately 53% of Tech Data's net sales in fiscal 1998, generally rely on
distributors as their principal source of computer products and financing.
Corporate resellers, retailers and direct marketers may establish direct
relationships with manufacturers and publishers for their more popular products,
but utilize distributors as the primary source for other product requirements
and the alternative source for products acquired direct. The Company's Tech Data
Elect Program provides cost-plus pricing on certain high volume products,
primarily computer systems and printers, and other special terms to target
corporate resellers. Corporate resellers constituted approximately 30% of the
Company's net sales in fiscal 1998. Tech Data also has developed special
programs to meet the unique needs of retail and direct marketers, which
customers constituted approximately 17% of the Company's net sales in fiscal
1998. No single customer accounted for more than 5% of the Company's net sales
during fiscal 1998, 1997 or 1996.
The Company pursues a strategy of expanding its product line to offer
its customers a broad assortment of products. Based upon the convergence of
computing and communication technologies, the Company has also expanded its
offering of communication products. From time to time, the demand for certain
products sold by the Company exceeds the supply available from the manufacturer
or publisher. The Company then receives an allocation of the products available.
Management believes that the Company's ability to compete is not adversely
affected by these periodic shortages and the resulting allocations.
Tech Data provides resellers a high-level of service through the
Company's pre- and post-sale technical support, suite of electronic commerce
tools (including on-line order entry and EDI services), customized shipping
documents, product configuration services and flexible financing programs.
The Company delivers products throughout the United States, Canada,
Latin America, Germany, France, Switzerland and Austria from its fourteen
distribution centers in Miami, Florida; Atlanta, Georgia; Paulsboro, New Jersey;
Ft. Worth, Texas; South Bend, Indiana; Ontario, California; Union City,
California; Mississauga, Ontario (Canada); Richmond, British Columbia (Canada);
Sao Paulo, Brazil; Munich, Germany; Bobigny (Paris), France; Hunenberg,
Switzerland and Vienna, Austria. Locating distribution centers near its
customers enables the Company to deliver products on a timely basis, thereby
reducing customers' need to invest in inventory. See Item 2. Properties for
further discussion of the Company's locations and distribution centers.
Sales and Electronic Commerce
Currently, the Company's sales force consists of approximately 80 field
sales representatives and 1,054 inside telemarketing sales representatives.
Field sales representatives are located in major metropolitan areas. Each field
representative is supported by inside telemarketing sales teams covering a
designated territory. The Company's team concept provides a strong personal
relationship between representatives of the customers and Tech Data. Territories
with no field representation are serviced exclusively by the inside
telemarketing sales teams. Customers typically call their inside sales teams on
dedicated toll-free numbers to place orders. If the product is in stock and the
customer has available credit, customer orders received by 5:00 p.m. local time
are generally shipped the same day from the distribution facility nearest the
customer.
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Customers rely upon the Company's electronic ordering and information
systems, product catalogs and frequent mailings as sources for product
information, including prices. The Company's on-line computer system allows the
inside sales teams to check for current stocking levels in each of the seven
United States distribution centers. Likewise, inside sales teams in Canada,
Brazil, Germany, France, Switzerland and Austria can check on stocking levels in
their respective distribution centers. Through "Tech Data On-Line", the
Company's proprietary electronic on-line system, U.S. customers can gain remote
access to the Company's data processing system to check product availability and
pricing and to place an order. Certain of the Company's larger customers have
available EDI services whereby orders, order acknowledgments, invoices,
inventory status reports, customized pricing information and other industry
standard EDI transactions are consummated on-line which improves efficiency and
timeliness for both the Company and the customers. The Company anticipates
providing customers with access to order entry capabilities on the World Wide
Web in the near future.
The Company provides comprehensive training to its field and inside
sales representatives regarding technical characteristics of products and the
Company's policies and procedures. Each new domestic sales representative
attends a four to six-week course provided in-house by the Company. In addition,
the Company's ongoing training program is supplemented by product seminars
offered daily by manufacturers and publishers.
Competition
The Company operates in a market characterized by intense competition.
Competition within the industry is based on product availability, credit
availability, price, delivery and various services and support provided by the
distributor to the customer. The Company believes that it is equipped to compete
effectively with other distributors in these areas. Major competitors include
Ingram Micro, Inc. and Merisel, Inc. in North America, Computer 2000 and CHS
Electronics, Inc. in Europe and a variety of smaller distributors. The only
competitor larger than the Company is Ingram Micro, Inc.
The Company also competes with manufacturers and publishers who sell
directly to resellers and end-users. The Company nevertheless believes that in
the majority of cases, manufacturers and publishers choose to sell products
though distributors rather than directly because of the relatively small volume
and high selling costs associated with numerous small orders. Management also
believes that the Company's prompt delivery of products and efficient handling
of returns provide an important competitive advantage over manufacturers' and
publishers' efforts to market their products directly.
Employees
On January 31, 1998, the Company had approximately 5,075 full-time
employees. The Company enjoys excellent relations with its employees, all of
whom are non-union.
(d) Financial information about foreign and domestic operations and
export sales
The geographic areas in which the Company operates are the United
States (including exports to Latin America and the Caribbean) and International
(Germany, France, Canada, Switzerland, Austria and Brazil). See Note 9 and Note
10 of Notes to Consolidated Financial Statements regarding the geographical
distribution of the Company's net sales, operating income and identifiable
assets and the acquisition of Macrotron AG.
Executive Officers
Steven A. Raymund, Chairman of the Board of Directors and Chief
Executive Officer, age 42, has been employed by the Company since 1981, serving
as Chief Executive Officer since January 1986 and as Chairman of the Board of
Directors since April 1991. He has a B.S. Degree in Economics from the
University of Oregon and a Masters Degree from the Georgetown University School
of Foreign Service.
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Anthony A. Ibarguen, President and Chief Operating Officer, age 38,
joined the Company in September 1996 as President of the Americas and was
appointed President and Chief Operating Officer in March 1997. Prior to joining
the Company, he was employed by ENTEX Information Services, Inc. from August
1993 to August 1996 as Executive Vice President of Sales and Marketing. From
June 1990 to August 1993, he was employed by JWP, Inc. most recently as a Vice
President. Mr. Ibarguen holds a B.S. Degree in Marketing from Boston College and
a Masters in Business Administration Degree from Harvard University.
Jeffery P. Howells, Executive Vice President of Finance and Chief
Financial Officer, age 41, joined the Company in October 1991 as Vice President
of Finance and assumed the responsibilities of Chief Financial Officer in March
1992. In March 1993, he was promoted to Senior Vice President of Finance and
Chief Financial Officer and was promoted to Executive Vice President of Finance
and Chief Financial Officer in March 1997. From June 1991 through September 1991
he was employed as Vice President of Finance of Inex Vision Systems. From 1979
to May 1991 he was employed by Price Waterhouse, most recently as a Senior Audit
Manager. Mr. Howells is a Certified Public Accountant and holds a B.B.A. Degree
in Accounting from Stetson University.
Peggy K. Caldwell, Senior Vice President of Marketing, age 52, joined
the Company in May 1992. Prior to joining the Company, she was employed by
International Business Machines Corporation for 25 years, most recently serving
in a variety of senior management positions in the National Distribution
Division. Ms. Caldwell holds a B.S. Degree in Mathematics and Physics from
Bucknell University.
Timothy J. Curran, Senior Vice President of Sales, age 46, joined
the Company in April 1997. Prior to joining the Company, he was employed by
Panasonic Communications and Systems Company (including various other Panasonic
affiliates) from 1983 to 1997 serving in a variety of senior management
positions. Mr. Curran holds a B.A. Degree in History from the University of
Notre Dame and a Ph.D. in International Relations from Columbia University.
Lawrence W. Hamilton, Senior Vice President of Human Resources, age 40,
joined the Company in August 1993 as Vice President of Human Resources and was
promoted to Senior Vice President in March 1996. Prior to joining the Company,
he was employed by Bristol-Myers Squibb Company from 1985 to August 1993, most
recently as Vice President - Human Resources and Administration of Linvatec
Corporation (a division of Bristol-Myers Squibb Company). Mr. Hamilton holds a
B.A. Degree in Political Science from Fisk University and a Masters of Public
Administration, Labor Policy from the University of Alabama.
Gerald M.Labie, President and Managing Director of European Operations,
age 54, joined the Company in November 1997. Prior to joining the Company, he
was employed by Corporate Software Inc. from 1989 to 1997, most recently serving
in the role of Senior Vice President and General Manager, Europe. Mr. Labie
holds a B.A. Degree from Alfred University.
H. John Lochow, Senior Vice President and Chief Information Officer,
age 45, joined the Company in February 1998. Prior to joining the Company, he
served as Chief Information Officer at Bell Canada and Chief Executive of their
international subsidiary Bell Sygma from 1996 to February 1998. From 1994 to
1996, he was employed by AT&T Capital Corporation as Vice President of Systems
and New Business Development and from 1989 to 1994 he was employed by CNA
Insurance Companies as Vice President of Systems. Mr. Lochow holds a B.A. Degree
in Mathematics from Thomas Edison University.
Yuda Saydun, Senior Vice President and General Manager - Latin America,
age 44, joined the Company in May 1993 as Vice President and General Manager -
Latin America. In March 1997 he was promoted to Senior Vice President and
General Manager - Latin America. Prior to joining the Company, he was employed
by American Express Travel Related Services Company, Inc. from 1982 to May 1993,
most recently as Division Vice President, Cardmember Marketing. Mr. Saydun holds
a B.S. Degree in Political and Diplomatic Sciences from Universite Libre de
Bruxelles and a Masters of Business Administration Degree, Finance/Marketing
from U.C.L.A.
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Joseph B. Trepani, Senior Vice President and Corporate Controller, age
37, joined the Company in March 1990 as Controller and held the position of
Director of Operations from October 1991 through January 1995. In February 1995,
he was promoted to Vice President and Worldwide Controller and to Senior Vice
President in March 1998. Prior to joining the Company, Mr. Trepani was Vice
President of Finance for Action Staffing, Inc. from July 1989 to February 1990.
From 1982 to June 1989, he was employed by Price Waterhouse. Mr. Trepani is a
Certified Public Accountant and holds a B.S. Degree in Accounting from Florida
State University.
Theodore F. Augustine, Vice President of Distribution and Logistics,
age 51, joined the Company in July 1996. Prior to joining the Company he served
as President of M-Group Logistics, Inc. from June 1995 to July 1996. From 1989
to June 1995 he was employed by The Eli Witt Company as Executive Vice President
and Chief Operations Officer. Mr. Augustine holds a Masters of Business
Administration Degree from Loyola College.
Patrick O. Connelly, Vice President of Worldwide Credit Services,
age 52, joined the Company in August 1994. Prior to joining the Company, he was
employed by Unisys Corporation for nine years as Worldwide Director of Credit.
Mr. Connelly holds a B.A. Degree in History and French from the University of
Texas at Austin.
Charles V. Dannewitz, Vice President of Taxes, age 43, joined the
Company in February 1995. Prior to joining the Company, he was employed by Price
Waterhouse for 13 years, most recently as a Tax Partner. Mr. Dannewitz is a
Certified Public Accountant and holds a B.S. Degree in Accounting from Illinois
Wesleyan University.
Arthur W. Singleton, Vice President, Treasurer and Secretary, age 37,
joined the Company in January 1990 as Director of Finance and was appointed
Treasurer and Secretary in April 1991. In February 1995, he was promoted to Vice
President, Treasurer and Secretary. Prior to joining the Company, Mr. Singleton
was employed by Price Waterhouse from 1982 to December 1989, most recently as an
Audit Manager. Mr. Singleton is a Certified Public Accountant and holds a B.S.
Degree in Accounting from Florida State University.
David R. Vetter, Vice President and General Counsel, age 39, joined
the Company in June 1993. Prior to joining the Company, he was employed by the
law firm of Robbins, Gaynor & Bronstein, P.A. from 1984 to June 1993, most
recently as a partner. Mr. Vetter is a member of the Florida Bar and holds a
B.A. Degree in English and Economics from Bucknell University and a J.D. Degree
from the University of Florida.
ITEM 2. Properties
Tech Data's executive offices, are located in Clearwater, Florida, all
of which buildings, except for one, are owned by the Company. In addition, the
Company maintains distribution centers in Miami, Florida; Atlanta, Georgia;
Paulsboro, New Jersey; Ft. Worth, Texas; South Bend, Indiana; Ontario,
California; Union City, California; Mississauga, Ontario (Canada); Richmond,
British Columbia (Canada); Bobigny (Paris), France; Sao Paulo, Brazil; Munich,
Germany; Hunenberg, Switzerland; and Vienna, Austria. The Company leases all of
the preceeding distribution centers with the exception of one of its Munich
locations. The Company also operates training centers in nine cities in the U.S.
The Company is in the process of significantly expanding five of its
seven U.S. distribution centers which will encompass a total of 2.2 million
square-feet when completed later this year as compared to the former capacity of
800,000 square feet. Four of the five new U.S. distribution center locations
include adjacent land which provides enough space to double the capacity of each
of these locations to meet future growth requirements. The facilities of the
Company are substantially utilized, well-maintained and are adequate to conduct
the Company's current business.
ITEM 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
There have been no matters submitted to a vote of security holders
during the last quarter of the fiscal year ended January 31, 1998.
9
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Shareholder Matters
The Company's common stock is traded on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol TECD. The Company has not paid cash
dividends since fiscal 1983. The Board of Directors does not intend to institute
a cash dividend payment policy in the foreseeable future. The table below
presents the quarterly high and low sales prices for the Company's common stock
as reported by The Nasdaq Stock Market. The approximate number of shareholders
as of January 31, 1998 was 17,000.
Sales Price
---------------------
Fiscal year 1998 High Low
- ---------------- ---------- -------
Fourth quarter.......................................... $47 3/4 $34 1/8
Third quarter........................................... 51 3/4 36 1/4
Second quarter.......................................... 39 15/16 22 7/8
First quarter........................................... 27 1/2 19 3/4
Fiscal year 1997
- ----------------
Fourth quarter.......................................... $36 3/8 $21 5/8
Third quarter........................................... 30 3/8 22 1/8
Second quarter.......................................... 24 3/4 18 1/4
First quarter........................................... 19 1/2 13
10
<PAGE>
ITEM 6. Selected Financial Data
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL SUMMARY
(In thousands, except per share data)
Year ended January 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Income statement data:
Net sales $7,056,619 $4,598,941 $3,086,620 $2,418,410 $1,532,352
---------- ---------- ---------- ---------- ----------
Cost and expenses:
Cost of products sold 6,590,873 4,277,160 2,867,226 2,219,122 1,397,967
Selling, general and
administrative expenses 293,108 206,770 163,790 127,951 79,390
---------- ---------- ---------- ---------- ----------
6,883,981 4,483,930 3,031,016 2,347,073 1,477,357
---------- ---------- ---------- ---------- ----------
Operating profit 172,638 115,011 55,604 71,337 54,995
Interest expense 29,908 21,522 20,086 13,761 5,008
---------- ---------- ---------- ---------- ----------
Income before income taxes 142,730 93,489 35,518 57,576 49,987
Provision for income taxes 52,816 36,516 13,977 22,664 19,774
---------- ---------- ---------- ---------- ----------
Income before minority interest 89,914 56,973 21,541 34,912 30,213
Minority interest 429 - - - -
---------- ---------- ---------- ---------- ----------
Net income $ 89,485 $ 56,973 $ 21,541 $ 34,912 $30,213
========== ========== ========== ========== ==========
Net income per common share:
Basic $ 2.00 $ 1.39 $ .57 $ .92 $ .83
========== ========== ========== ========== ==========
Diluted $ 1.92 $ 1.35 $ .56 $ .91 $ .83
========== ========== ========== ========== ==========
Weighted average common
shares outstanding:
Basic 44,715 40,870 37,846 37,758 36,196
========== ========== ========== ========== ==========
Diluted 46,610 42,125 38,138 38,258 36,590
========== ========== ========== ========== ==========
Dividends per common share - - - - -
========== ========== ========== ========== ==========
Balance sheet data:
Working capital $ 537,381 $ 351,993 $ 201,704 $ 182,802 $ 165,366
Total assets 2,185,383 1,545,294 1,043,879 784,429 506,760
Revolving credit loans 540,177 396,391 283,100 304,784 153,105
Long-term debt 8,683 8,896 9,097 9,682 9,467
Shareholders' equity 702,588 438,381 285,698 260,826 213,326
- ---------
</TABLE>
11
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following table sets forth the percentage of cost and expenses to
net sales derived from the Company's Consolidated Statement of Income for each
of the three preceding fiscal years.
<TABLE>
<CAPTION>
Percentage of net sales
-------------------------
Year ended January 31,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales.................................................................... 100.0% 100.0% 100.0%
----- ----- -----
Cost and expenses:
Cost of products sold..................................................... 93.4 93.0 92.9
Selling, general and administrative expenses.............................. 4.2 4.5 5.3
----- ----- -----
97.6 97.5 98.2
----- ----- -----
Operating profit............................................................. 2.4 2.5 1.8
Interest expense............................................................. .4 .5 .6
----- ----- -----
Income before income taxes................................................... 2.0 2.0 1.2
Provision for income taxes................................................... .7 .8 .5
----- ----- -----
Income before minority interest.............................................. 1.3 1.2 .7
Minority interest............................................................ - - -
----- ----- -----
Net income................................................................... 1.3% 1.2% .7%
===== ===== =====
</TABLE>
Fiscal Years Ended January 31, 1998 and 1997
Net sales increased 53.4% to $7.1 billion in fiscal 1998 compared to
$4.6 billion in the prior year. This increase is attributable to the acquisition
of Macrotron AG, the addition of new product lines and the expansion of existing
product lines combined with an increase in the Company's market share. The
Company's U.S. and international sales grew 40.3% and 143.1% respectively, in
fiscal 1998 compared to the prior year. The significant growth in the Company's
international sales is attributable to the acquisition of Macrotron AG, in which
the Company acquired a controlling interest on July 1, 1997. The Company's
international sales in fiscal 1998 were approximately 20% of consolidated net
sales compared with 13% in the prior year.
The cost of products sold as a percentage of net sales increased from
93.0% in fiscal 1997 to 93.4% in fiscal 1998. This increase is a result of
competitive market prices and the Company's strategy of lowering selling prices
in order to gain market share and to pass on the benefit of operating
efficiencies to its customers.
Selling, general and administrative expenses increased 41.8% from
$206.8 million in fiscal 1997 to $293.1 million in fiscal 1998, and as a
percentage of net sales decreased to 4.2% in fiscal 1998 from 4.5% in the prior
year. This decline in selling, general and administrative expenses as a
percentage of net sales is attributable to greater economies of scale the
Company realized during fiscal 1998 in addition to improved operating
efficiencies. The dollar value increase in selling, general and administrative
expenses is attributable to the acquisition of Macrotron AG and the expanded
employment and increases in other operating expenses needed to support the
increased volume of business.
As a result of the factors described above, operating profit in fiscal
1998 increased 50.1% to $172.6 million, or 2.4% of net sales, compared to $115.0
million, or 2.5% of net sales, in fiscal 1997. A factor contributing to the
decrease in the operating profit margin from 2.5% in fiscal 1997 to 2.4% in
fiscal 1998 was the acquisition of Macrotron AG. Macrotron's operating model
employs a lower operating profit margin due to its higher asset turnover, as
compared to the Company's U.S. business.
Interest expense increased due to an increase in the Company's average
outstanding indebtedness related to funding continued growth, the acquisition of
Macrotron AG and capital expenditures. The increase in interest expense was
partially offset in fiscal 1998 by decreases in short-term interest rates on the
Company's floating rate indebtedness and by the receipt of net proceeds of
approximately $149 million from the Company's November 1997 common stock
offering which were used to reduce indebtedness.
12
<PAGE>
The Company's average income tax rate declined to 37.0% for fiscal 1998
as compared to 39.1% for fiscal 1997. This reduction primarily is the result of
a larger portion of the Company's income being subject to lower state income tax
jurisdictions.
Net income in fiscal 1998 increased 57.1% to $89.5 million, or $1.92
per diluted share, compared to $57.0 million, or $1.35 per diluted share, in the
prior year. Fiscal Years Ended January 31, 1997 and 1996
Net sales increased 49.0% to $4.6 billion in fiscal 1997 compared to
$3.1 billion in the prior year. This increase is attributable to the addition of
new product lines and the expansion of existing product lines combined with an
increase in the Company's market share. The rate of growth in fiscal year 1997
was also positively impacted by a lower growth rate in the prior comparable
period as the Company was recovering from the effects of the business
interruptions caused by the conversion to a new computer system in December
1994. The Company's U.S. and international sales grew 51% and 36% respectively,
in fiscal 1997 compared to the prior year. The Company's international sales in
fiscal 1997 were approximately 13% of consolidated net sales.
The cost of products sold as a percentage of net sales increased from
92.9% in fiscal 1996 to 93.0% in fiscal 1997. This increase is a result of
competitive market prices and the Company's strategy of lowering selling prices
in order to gain market share and to pass on the benefit of operating
efficiencies to its customers.
Selling, general and administrative expenses increased by 26.2% from
$163.8 million in fiscal 1996 to $206.8 million in fiscal 1997, and as a
percentage of net sales decreased to 4.5% in fiscal 1997 from 5.3% in the prior
year. This decline in selling, general and administrative expenses as a
percentage of net sales is attributable to greater economies of scale the
Company realized during fiscal 1997 in addition to improved operating
efficiencies. The dollar value increase in selling, general and administrative
expenses is primarily a result of expanded employment and increases in other
administrative expenses needed to support the increased volume of business.
As a result of the factors described above, operating profit in fiscal
1997 increased 106.8% to $115.0 million, or 2.5% of net sales, compared to $55.6
million, or 1.8% of net sales, in fiscal 1996.
Interest expense increased due to an increase in the Company's average
outstanding indebtedness, partially offset by decreases in short-term interest
rates on the Company's floating rate indebtedness. Interest expense was further
moderated in fiscal 1997 by the receipt of net proceeds of approximately $83.3
million from the Company's July 1996 common stock offering which were used to
reduce indebtedness.
Net income in fiscal 1997 increased 164.5% to $57.0 million, or $1.35
per diluted share, compared to $21.5 million, or $.56 per diluted share, in the
prior year.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
and display of comprehensive income and its components and is effective for
financial statements for fiscal years beginning after December 15, 1997. This
standard addresses disclosure issues and therefore will not affect the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that
companies disclose segment data based on how management makes decisions about
allocating resources to segments and measuring their performance. SFAS 131 will
be effective for fiscal years beginning after December 15, 1997. This standard
addresses disclosure issues and therefore will not affect the Company's
financial position or results of operations.
13
<PAGE>
Impact of Inflation
The Company has not been adversely affected by inflation as
technological advances and competition within the microcomputer industry have
generally caused prices of the products sold by the Company to decline.
Management believes that any price increases could be passed on to its
customers, as prices charged by the Company are not set by long-term contracts.
Year 2000 Compliance
The Company has conducted a comprehensive audit of the "Year 2000"
issues affecting its operations and is in the process of implementing required
modifications to its systems. The underlying issues are not expected to have a
material adverse affect on the Company's operations or financial position. The
cost of addressing "Year 2000" issues has not been material to the Company to
date and is not expected to be in future periods.
Liquidity and Capital Resources
Net cash used in operating activities of $126.3 million in fiscal 1998
was primarily attributable to growth in sales and the resulting increases in
accounts receivable and inventories.
Net cash used in investing activities of $116.3 million in fiscal 1998
was a result of the payment of $68.1 million related to the acquisition of the
common and preferred stock of Macrotron combined with the Company's continuing
investment of $48.1 million in its management information system capability,
office facilities and equipment for distribution centers. The Company expects to
make capital expenditures of approximately $75 - $100 million during fiscal 1999
to further expand its management information systems, office facilities and
distribution centers.
Net cash provided by financing activities of $244.6 million in fiscal
1998 was provided by additional borrowings of $76.8 million under the Company's
revolving credit loans in addition to net proceeds of approximately $149 million
from the November 1997 common stock offering and approximately $19 million of
proceeds from other issuance of the Company's common stock.
The Company currently maintains domestic and foreign revolving credit
agreements which provide maximum short-term borrowings of approximately $907
million (including local country credit lines), of which $540 million was
outstanding at January 31, 1998. In November 1997, the Company completed a
public offering of 3.7 million shares of its common stock resulting in net
proceeds of approximately $149 million. The Company believes that proceeds from
the common stock offering, along with cash from operations, available and
obtainable bank credit lines and trade credit from its vendors will be
sufficient to satisfy its working capital and capital expenditure needs through
fiscal 1999.
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 its computer system which
contains detailed information on each customer's payment history and other
relevant information. The Company has obtained credit insurance which insures a
percentage of the credit extended by the Company to certain of its larger
domestic and international customers against possible loss. Customers who
qualify for credit terms are typically granted net 30-day payment terms. The
Company also sells products on a prepay, credit card, cash on delivery and
floorplan basis.
14
<PAGE>
Comments on Forward-Looking Information
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company has filed Exhibit 99A as
part of this Form 10-K which outlines cautionary statements and identifies
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 Items 1
and 7 of this Form 10-K, should be considered in conjunction with the
aforementioned Exhibit 99A.
15
<PAGE>
ITEM 8. Financial Statements
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Tech Data Corporation:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Tech Data Corporation and its subsidiaries at January 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/S/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Tampa, Florida
March 18, 1998
REPORT OF MANAGEMENT
To Our Shareholders:
The management of Tech Data Corporation is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
and related financial information contained in this Annual Report. The financial
statements have been prepared by the Company in accordance with generally
accepted accounting principles and, in the judgment of management, present
fairly and consistently the Company's financial position and results of
operations. The financial statements and other financial information in this
report include amounts that are based on management's best estimates and
judgments and give due consideration to materiality.
The Company maintains a system of internal accounting controls to
provide reasonable assurance that assets are safeguarded and that transactions
are executed in accordance with management's authorization and recorded properly
to permit the preparation of financial statements in accordance with generally
accepted accounting principles. The design, monitoring and revisions of the
system of internal accounting controls involves, among other things,
management's judgment with respect to the relative cost and expected benefits of
specific control measures.
The Audit Committee of the Board of Directors is responsible for
recommending to the Board, subject to shareholder approval, the independent
certified public accounting firm to be retained each year. The Audit committee
meets periodically with the independent accountants and management to review
their performance and confirm that they are properly discharging their
responsibilities. The independent accountants have direct access to the Audit
Committee to discuss the scope and results of their work, the adequacy of
internal accounting controls and the quality of financial reporting.
/S/ STEVEN A. RAYMUND /S/ JEFFERY P. HOWELLS
Steven A. Raymund Jeffery P. Howells
Chairman of the Board Directors Executive Vice President of Finance
and Chief Executive Officer and Chief Financial Officer
March 18, 1998
16
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
January 31,
------------------------
1998 1997
---------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,749 $ 661
Accounts receivable, less allowance
of $29,731 and $23,922 909,426 633,579
Inventories 1,028,367 759,974
Prepaid and other assets 65,843 55,796
---------- ----------
Total current assets 2,006,385 1,450,010
Property and equipment, net 100,562 65,597
Excess of cost over acquired net assets, net 55,460 5,922
Other assets, net 22,976 23,765
---------- ----------
$2,185,383 $1,545,294
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loans $ 540,177 $ 396,391
Accounts payable 850,866 658,732
Accrued expenses 77,961 42,894
---------- ----------
Total current liabilities 1,469,004 1,098,017
Long-term debt 8,683 8,896
---------- ----------
Total Liabilities 1,477,687 1,106,913
---------- ----------
Minority interest 5,108 -
---------- ----------
Commitments and contingencies (Note 8)
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
and 100,000,000 shares authorized; 48,250,349
and 43,291,423 issued and outstanding 72 65
Additional paid-in capital 403,880 226,577
Retained earnings 299,768 210,283
Cumulative translation adjustment (1,137) 1,451
---------- ----------
Total shareholders' equity 702,588 438,381
---------- ----------
$2,185,383 $1,545,294
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of these
financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
Year ended January 31,
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $7,056,619 $4,598,941 $3,086,620
---------- ---------- ----------
Cost and expenses:
Cost of products sold 6,590,873 4,277,160 2,867,226
Selling, general and administrative expenses 293,108 206,770 163,790
---------- ---------- ----------
6,883,981 4,483,930 3,031,016
---------- ---------- ----------
Operating profit 172,638 115,011 55,604
Interest expense 29,908 21,522 20,086
---------- ---------- ----------
Income before income taxes 142,730 93,489 35,518
Provision for income taxes 52,816 36,516 13,977
---------- ---------- ----------
Income before minority interest 89,914 56,973 21,541
Minority interest 429 - -
========== ========== ==========
Net income $ 89,485 $ 56,973 $ 21,541
========== ========== ==========
Net income per common share:
Basic $ 2.00 $ 1.39 $ .57
========== ========== ==========
Diluted $ 1.92 $ 1.35 $ .56
========== ========== ==========
Weighted average common shares outstanding:
Basic 44,715 40,870 37,846
========== ========== ==========
Diluted 46,610 42,125 38,138
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Preferred Stock Common Stock Additional Cumulative Total
---------------- --------------- Paid-In Retained Translation Shareholders'
Shares Amount Shares Amount Capital Earnings Adjustment Equity
------ ------ ------ ------ -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - January 31, 1995 227 $5 37,808 $57 $127,947 $131,769 $1,048 $260,826
Issuance of common stock
for stock options
exercised and related tax
benefit 123 2,098 2,098
Net income 21,541 21,541
Translation adjustments 1,233 1,233
---- -- ------ --- -------- -------- ------ --------
Balance -- January 31, 1996 227 5 37,931 57 130,045 153,310 2,281 285,698
Issuance of common stock
for stock options
exercised and related tax
benefit 760 1 13,223 13,224
Issuance of common stock
net of offering costs 4,600 7 83,309 83,316
Net income 56,973 56,973
Translation adjustments (830) (830)
---- -- ------ --- -------- -------- ------ --------
Balance - January 31, 1997 227 5 43,291 65 226,577 210,283 1,451 438,381
Issuance of common stock in
business purchase 407 1 9,255 9,256
Issuance of common stock
for stock options
exercised and related tax 861 1 19,077 19,078
benefit
Issuance of common stock
net of offering costs 3,691 5 148,971 148,976
Net income 89,485 89,485
Translation adjustments (2,588) (2,588)
==== == ====== ==== ======== ======== ======= ========
Balance - January 31, 1998 227 $5 48,250 $72 $403,880 $299,768 $(1,137) $702,588
==== == ====== ==== ======== ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of these
financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year ended January 31,
---------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $6,870,096 $4,390,916 $2,933,831
Cash paid to suppliers and employees (6,914,537) (4,513,309) (2,854,653)
Interest paid (29,909) (21,122) (20,276)
Income taxes paid (51,949) (45,037) (11,628)
---------- ----------- ----------
Net cash (used in) provided by operating activities (126,299) (188,552) 47,274
---------- ----------- ----------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (68,136) - -
Expenditures for property and equipment (45,900) (19,229) (23,596)
Software development costs (2,216) (2,024) (2,826)
---------- --------- ----------
Net cash used in investing activities (116,252) (21,253) (26,422)
---------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 168,054 96,540 2,098
Net borrowings (repayments) from revolving credit loans 76,786 113,291 (21,684)
Principal payments on long-term debt (201) (519) (608)
---------- ---------- ----------
Net cash provided by (used in) financing activities 244,639 209,312 (20,194)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 2,088 (493) 658
Cash and cash equivalents at beginning of year 661 1,154 496
---------- ---------- ----------
Cash and cash equivalents at end of year $ 2,749 $ 661 $ 1,154
========== ========== ==========
Reconciliation of net income to net cash (used in)
provided by operating activities:
Net income $ 89,485 $ 56,973 $ 21,541
---------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 26,364 20,011 17,364
Provision for losses on accounts receivable 22,634 19,648 17,433
Loss on disposal of fixed assets - 446 603
Deferred income taxes 3,720 (5,051) (5,603)
Changes in assets and liabilities:
(Increase) in accounts receivable (183,481) (208,025) (152,789)
(Increase) in inventories (181,393) (294,552) (100,891)
(Increase) in prepaid and other assets (8,317) (13,962) (7,254)
Increase in accounts payable 106,134 225,358 239,161
(Decrease) increase in accrued expenses (1,445) 10,602 17,709
----------- ----------- -----------
Total adjustments (215,784) (245,525) 25,733
----------- ----------- -----------
Net cash (used in) provided by operating activities $ (126,299) $ (188,552) $ 47,274
=========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of these
financial statements.
19
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of Tech Data
Corporation and its subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Method of accounting
The Company prepares its financial statements in conformity with
generally accepted accounting principles. These principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue recognition
Sales are recorded upon shipment. The Company allows its customers to
return product for exchange or credit subject to certain limitations. Provision
for estimated losses on such returns are recorded at the time of sale (see
product warranty below). Funds received from vendors for marketing programs and
product rebates are accounted for as a reduction of selling, general and
administrative expenses or product cost according to the nature of the program.
Inventories
Inventories (consisting of computer related hardware and software
products) are stated at the lower of cost or market, cost being determined on
the first-in, first-out (FIFO) method.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed
over the estimated economic lives (or lease period if shorter) using the
following methods:
<TABLE>
<CAPTION>
Method Years
------ -----
<S> <C> <C>
Buildings and improvements Straight-line 15 - 39
Leasehold improvements Straight-line 2 - 5
Furniture, fixtures and equipment Accelerated 2 - 7
and straight-line
</TABLE>
Expenditures for renewals and improvements that significantly add to
productive capacity or extend the useful life of an asset are capitalized.
Expenditures for maintenance and repairs are charged to operations when
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated depreciation are eliminated from the accounts and any gain or loss
is recognized at such time.
Excess of cost over acquired net assets
The excess of cost over acquired net assets is being amortized on a
straight-line basis over 15 to 35 years. Amortization expense was $1,458,000,
$602,000 and $646,000 in 1998, 1997 and 1996, respectively. The accumulated
amortization of goodwill is approximately $3,563,000 and $2,264,000 at January
31, 1998 and 1997, respectively. The Company evaluates, on a regular basis,
whether events and circumstances have occurred that indicate the carrying amount
of goodwill may warrant revision or may not be recoverable. At January 31, 1998,
the net unamortized balance of goodwill is not considered to be impaired.
20
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Capitalized deferred software costs
Deferred software costs are included in other assets and represent
internal development costs and payments to vendors for the design, purchase and
implementation of the computer software for the Company's operating and
financial systems. Such deferred costs are being amortized over three to seven
years with amortization expense of $4,967,000, $4,611,000 and $4,253,000 in
1998, 1997 and 1996, respectively. The accumulated amortization of such costs
was $14,160,000 and $9,193,000 at January 31, 1998 and 1997, respectively. The
remaining unamortized balance of such costs was $17,894,000 and $20,645,000 at
January 31, 1998 and 1997, respectively.
Product warranty
The Company does not offer warranty coverage. However, to maintain
customer goodwill, the Company facilitates vendor warranty policies by accepting
for exchange (with the Company's prior approval) defective products within 60
days of invoicing. Defective products received by the Company are subsequently
returned to the vendor for credit or replacement.
Income taxes
Income taxes are accounted for under the liability method. Deferred
taxes reflect the tax consequences on future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts.
Deferred taxes have not been provided on the cumulative undistributed earnings
of foreign subsidiaries since such amounts are expected to be reinvested
indefinitely.
Foreign currency translation
The assets and liabilities of foreign operations are translated at the
exchange rates in effect at the balance sheet date, with the related translation
gains or losses reported as a separate component of shareholders' equity. The
results of foreign operations are translated at the weighted average exchange
rates for the year. Gains or losses resulting from foreign currency transactions
are included in the statement of income.
Concentration of credit risk
The Company sells its products to a large base of value-added resellers
("VARs"), corporate resellers, retailers and direct marketers throughout the
United States, Canada, Latin America, Germany, France, Switzerland and Austria.
The Company also performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company has obtained credit insurance
which insures a percentage of credit extended by the Company to certain of its
larger domestic and international customers against possible loss. The Company
makes provisions for estimated credit losses at the time of sale.
Derivative financial instruments
The Company operates internationally with distribution facilities in
various locations around the world. The Company reduces its exposure to
fluctuations in interest rates and foreign exchange rates by creating offsetting
positions through the use of derivative financial instruments. The market risk
related to the foreign exchange agreements is offset by changes in the valuation
of the underlying items being hedged. The majority of the Company's derivative
financial instruments have terms of 180 days or less. The Company currently does
not use derivative financial instruments for trading or speculative purposes,
nor is the Company a party to leveraged derivatives.
21
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Derivative financial instruments are accounted for on an accrual basis.
Income and expense are recorded in the same category as that arising from the
related asset or liability being hedged. Gains and losses resulting from
effective hedges of existing assets, liabilities or firm commitments are
deferred and recognized when the offsetting gains and losses are recognized on
the related hedged items.
The notional amount of forward exchange contracts and options is the
amount of foreign currency bought or sold at maturity. The notional amount of
currency interest rate swaps is the underlying principal and currency amounts
used in determining the interest payments exchanged over the life of the swap.
Notional amounts are indicative of the extent of the Company's involvement in
the various types and uses of derivative financial instruments and are not a
measure of the Company's exposure to credit or market risks through its use of
derivatives. The estimated fair value of derivative financial instruments
represents the amount required to enter into like off-setting contracts with
similar remaining maturities based on quoted market prices.
The Company's derivative financial instruments outstanding at January
31, 1998 are as follows: (Derivative instruments outstanding at January 31, 1997
were not material)
<TABLE>
<CAPTION>
January 31, 1998
---------------------------------------
Notional Estimated Fair
Amounts Value
---------------- --------------
(In thousands)
<S> <C> <C>
Foreign exchange forward contracts $ 78,043 $ 939
Purchased foreign currency options $ 500 $ (12)
Currency interest rate swaps $128,300 $ 377
</TABLE>
Disclosures about fair value of financial instruments
Financial instruments (excluding derivative financial instruments) that
are subject to fair value disclosure requirements are carried in the
consolidated financial statements at amounts that approximate fair value.
Net income per common share
Effective for the fiscal year ended January 31, 1998, the Company has
adopted Statement of Financial Accounting Standards 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
were exercised using the treasury stock method. Earnings per share for all prior
periods have been restated to reflect the adoption of SFAS 128. The composition
of basic and diluted net income per common share is as follows:
<TABLE>
<CAPTION>
Year ended January 31,
------------------------------------------
1998 1997 1996
----------- ----------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income $ 89,485 $ 56,973 $ 21,541
========== ========== ==========
Weighted average shares 44,715 40,870 37,846
========== ========== ==========
Net income per common share - basic $ 2.00 $ 1.39 $ .57
========== ========== ==========
Weighted average shares including the dilutive
effect of stock options (1,895,000, 1,255,000 and 292,000
for fiscal 1998, 1997 and 1996, respectively) 46,610 42,125 38,138
========== ========== ==========
Net income per common share - diluted 1.92 1.35 .56
========== ========== ==========
</TABLE>
22
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash management system
Under the Company's cash management system, disbursements cleared by
the bank are reimbursed on a daily basis from the revolving credit loans. As a
result, checks issued but not yet presented to the bank are not considered
reductions of cash or accounts payable. Included in accounts payable are
$60,000,000 and $111,826,000 at January 31, 1998 and 1997, respectively, for
which checks are outstanding.
Statement of cash flows
Short-term investments which have an original maturity of ninety days
or less are considered cash equivalents in the statement of cash flows. The
effect of changes in foreign exchange rates on cash balances is not material.
See Note 9 of Notes to Consolidated Financial Statements regarding the non-cash
exchange of common stock in connection with a business combination.
Fiscal year
The Company and its subsidiaries operate on a fiscal year that ends on
January 31, except for the Company's French, German and Brazilian subsidiaries
which operate on a fiscal year that ends on December 31.
NOTE 2 - PROPERTY AND EQUIPMENT:
January 31,
---------------------
1998 1997
-------- -------
(In thousands)
Land $ 7,805 $ 3,898
Buildings and improvements 36,543 29,155
Furniture, fixtures and equipment 112,821 75,982
Construction in progress 12,359 629
-------- -------
169,528 109,664
Less-accumulated depreciation (68,966) (44,067)
-------- -------
$100,562 $65,597
======== =======
NOTE 3 - REVOLVING CREDIT LOANS:
The Company has an agreement (the "Receivables Securitization Program")
with a financial institution that allows the Company to transfer an undivided
interest in a designated pool of accounts receivable on an ongoing basis to
provide borrowings up to a maximum of $325,000,000. As collections reduce
accounts receivable balances included in the pool, the Company may transfer
interests in new receivables to bring the amount available to be borrowed up to
the $325,000,000 maximum. The Company pays interest on advances under the
Receivables Securitization Program at a designated commercial paper rate, plus
an agreed-upon spread. At January 31, 1998, the Company had a $237,420,000
outstanding balance under this program which is included in the balance sheet
caption "Revolving Credit Loans". This agreement expires December 31, 1998.
In August 1997, the Company entered into a new three-year unsecured
$550,000,000 multi-currency revolving credit facility replacing its former
$290,000,000 facility. The Company and its subsidiaries are able to borrow funds
in sixteen major foreign currencies under this agreement.
As of January 31, 1998, the Company maintained domestic and foreign
revolving credit loan agreements (including the Receivables Securitization
Program) with a total of twenty financial institutions which provide for maximum
short-term borrowings of approximately $907,000,000 (including local country
credit loans). At January 31, 1998, the weighted average interest rate on all
short-term borrowings was 4.89%. The Company can fix the interest rate for
periods of 30 to 180 days under various interest rate options. The credit
agreements contain warranties and covenants that must be complied with on a
continuing basis, including the maintenance of certain financial ratios. At
January 31, 1998, the Company was in compliance with all such covenants.
23
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
January 31,
------------------
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Mortgage note payable, interest at 10.25%, principal
and interest of $85,130 payable monthly, balloon
payment due 2005 $8,788 $8,902
Mortgage note payable funded through Industrial Revenue
Bond, interest at 7.5%, principal and interest payable
quarterly, through 1999 108 195
------ ------
8,896 9,097
Less - current maturities (213) (201)
====== ======
$8,683 $8,896
====== ======
</TABLE>
Principal maturities of long-term debt at January 31, 1998 for the
succeeding five fiscal years are as follows: 1999 - $213,000; 2000 - $162,000;
2001 - $155,000; 2002 - $172,000; 2003 - $190,508.
Mortgage notes payable are secured by property and equipment with an
original cost of approximately $12,000,000. The Industrial Revenue Bond contains
covenants which require the Company to maintain certain financial ratios with
which the Company was in compliance at January 31, 1998.
NOTE 5 - INCOME TAXES (In thousands):
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
January 31,
--------------------
Deferred tax liabilities: 1998 1997
------- -------
Accelerated depreciation $10,519 $ 6,863
Deferred revenue 1,630 2,811
Other - net 4,937 3,525
------- -------
Total deferred tax liabilities 17,086 13,199
------- -------
Deferred tax assets:
Accruals not currently deductible 5,412 5,092
Reserves not currently deductible 21,290 21,340
Capitalized inventory costs 1,959 2,220
Other - net 371 213
------- -------
Total deferred tax assets 29,032 28,865
------- -------
Net deferred tax assets (included in
prepaid and other assets) $11,946 $15,666
======= =======
24
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Significant components of the provision for income taxes are as
follows:
Year ended January 31,
-----------------------------------
Current: 1998 1997 1996
------- ------- -------
Federal $39,805 $32,485 $15,107
State 2,469 5,897 2,932
Foreign 6,822 3,185 1,541
------- ------- -------
Total current 49,096 41,567 19,580
------- ------- -------
Deferred:
Federal 3,328 (3,490) (4,656)
State 507 (451) (625)
Foreign (115) (1,110) (322)
------- ------- -------
Total deferred 3,720 (5,051) (5,603)
======= ======= =======
$52,816 $36,516 $13,977
======= ======= =======
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is as
follows:
Year ended January 31,
----------------------------
1998 1997 1996
----- ----- -----
Tax at U.S. statutory rates 35.0% 35.0% 35.0%
State income taxes, net
of federal tax benefit 1.4 3.8 4.2
Other - net .6 .3 .2
===== ===== =====
37.0% 39.1% 39.4%
===== ===== =====
The components of pretax earnings are as follows:
Year ended January 31,
--------------------------------
1998 1997 1996
-------- ------- ------
United States $126,757 $88,536 $33,164
Foreign 15,973 4,953 2,354
======== ======= =======
$142,730 $93,489 $35,518
======== ======= =======
The cumulative amount of undistributed earnings of international
subsidiaries for which U.S. income taxes have not been provided was
approximately $10 million at January 31, 1998. It is not practical to estimate
the amount of unrecognized deferred U.S. taxes on these undistributed earnings.
NOTE 6 - EMPLOYEE BENEFIT PLANS:
Stock compensation plans
At January 31, 1998, the Company had four stock-based compensation
plans, an employee stock ownership plan and a retirement savings plan, which are
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans and its stock purchase plan.
Fixed stock option plans
In August 1985, the Board of Directors adopted the 1985 Incentive Stock
Option Plan (the "1985 Plan"), which covers an aggregate of 1,050,000 shares of
common stock. The options were granted to certain officers and key employees at
or above fair market value; accordingly, no compensation expense has been
recorded with respect to these options. Options are exercisable beginning two
years from the date of grant only if the grantee is an employee of the Company
at that time. No options may be granted under the 1985 Plan after July 31, 1995.
25
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In June 1990, the shareholders approved the 1990 Incentive and
Non-Statutory Stock Option Plan (the "1990 Plan") which covers an aggregate of
10,000,000 shares (as amended in June 1997) of common stock. The 1990 Plan
provides for the granting of incentive and non-statutory stock options, stock
appreciation rights ("SARs") and limited stock appreciation rights ("Limited
SARs") at prices determined by the stock option committee, except for incentive
stock options which are granted at the fair market value of the stock on the
date of grant. Incentive options granted under the 1990 Plan become exercisable
over a five year period while the date of exercise of non-statutory options is
determined by the stock option committee. As of January 31, 1998, no SARs or
Limited SARs had been granted under the 1990 Plan. Options granted under the
1985 Plan and the 1990 Plan expire 10 years from the date of grant, unless a
shorter period is specified by the stock option committee.
In June 1995, the shareholders approved the 1995 Non-Employee
Director's Non-Statutory Stock Option Plan. Under this plan, the Company grants
non-employee members of its Board of Directors stock options upon their initial
appointment to the board and then annually each year thereafter. Stock options
granted to members upon their initial appointment vest and become exercisable at
a rate of 20% per year. Annual awards vest and become exercisable one year from
the date of grant. The number of shares subject to options under this plan
cannot exceed 100,000 and the options expire 10 years from the date of grant.
A summary of the status of the Company's stock option plans is as
follows:
<TABLE>
<CAPTION>
January 31, January 31, January 31,
1998 1997 1996
-------------------- ------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,285,818 $14.31 3,081,110 $13.31 2,644,056 $15.62
Granted 1,643,400 26.65 1,112,000 16.27 1,683,450 12.91
Exercised (720,573) 13.23 (675,492) 13.11 (79,800) 8.53
Canceled (327,100) 17.57 (231,800) 13.72 (1,166,596) 18.45
========= ========= =========
Outstanding at year end 3,881,545 19.43 3,285,818 14.31 3,081,110 13.31
========= ========= =========
Options exercisable at year end 601,895 576,862 494,460
Available for grant at year end 4,737,458 905,000 1,785,000
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------
Weighted-Average
Remaining Weighted-Average Weighted-Average
Number Contractual Life Exercise Price Number Exercise Price
Range of Outstanding at (years) Exercisable
Exercise Prices 1/31/98 at 1/31/98
- ------------------ -------------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - $10.99 562,150 6.4 $10.24 250,400 $ 9.72
11.00 - 15.99 1,386,195 7.7 14.20 221,495 13.94
16.00 - 29.99 1,597,900 8.4 23.59 130,000 20.23
30.00 - 51.00 335,300 9.6 36.62 0 -
=========== =========
3,881,545 601,895
=========== =========
</TABLE>
26
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Employee stock purchase plan
Under the 1995 Employee Stock Purchase Plan, approved in June 1995, the
Company is authorized to issue up to 1,000,000 shares of common stock to
eligible employees. Under the terms of the plan, employees can choose to have a
fixed dollar amount or percentage deducted from their compensation to purchase
the Company's common stock and/or elect to purchase shares once per calendar
quarter. The purchase price of the stock is 85% of the market value on the
exercise date and employees are limited to a maximum purchase of $25,000 fair
market value each calendar year. Since plan inception, the Company has sold
137,246 shares as of January 31, 1998. All shares purchased under this plan must
be retained for a period of one year.
Pro forma effect of stock compensation plans
Had the compensation cost for the Company's stock option plans and
employee stock purchase plan been determined based on the fair value at the
grant dates for awards under the plans consistent with the method prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per common share on a pro
forma basis would have been (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Net income $85,344 $55,059 $19,937
Net income per common share:
Basic $ 1.91 $ 1.35 $ .53
Diluted $ 1.83 $ 1.31 $ .53
</TABLE>
The preceding pro forma results were calculated with the use of the
Black Scholes option-pricing model. The following assumptions were used for the
years ended January 31, 1998, 1997 and 1996, respectively: (1) risk-free
interest rates of 6.76%, 6.08% and 6.96%; (2) dividend yield of 0.0%, 0.0% and
0.0%; (3) expected lives of 4.87, 5.08 and 5.08 years; and (4) volatility of
56%, 56% and 39%. Results may vary depending on the assumptions applied within
the model.
Stock ownership and retirement savings plans
In February 1984, the Company established an employee stock ownership
plan (the "ESOP") covering substantially all U.S. employees. The ESOP provides
for distribution of vested percentages of the Company's common stock to
participants. Such benefit becomes fully vested after seven years of qualified
service. At January 31, 1998 and 1997, 780,000 and 717,000 shares, respectively,
were held by the ESOP. The Company also offers its U.S. employees a retirement
savings plan pursuant to section 401(k) of the Internal Revenue Code which
provides for the Company to match 50% of the first $1,000 of each participant's
deferrals annually. Contributions to these plans are made in amounts approved
annually by the Board of Directors. Aggregate contributions made by the Company
to these plans were $2,460,000, $2,090,000 and $1,659,000 for 1998, 1997 and
1996, respectively.
NOTE 7 - CAPITAL STOCK:
Each outstanding share of preferred stock is entitled to one vote on
all matters submitted to a vote of shareholders, except for matters involving
mergers, the sale of all Company assets, amendments to the Company's charter and
exchanges of Company stock for stock of another company which require approval
by a majority of each class of capital stock. In such matters, the preferred and
common shareholders will each vote as a separate class.
In November 1997, the Company completed a public offering of 3.7
million shares of common stock resulting in net proceeds to the Company of
approximately $149,000,000.
27
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
Operating leases
The Company leases distribution facilities and certain equipment under
noncancelable operating leases which expire at various dates through 2005.
Future minimum lease payments under all such leases for the succeeding five
fiscal years are as follows: 1999 - $15,145,000; 2000 - $13,604,000; 2001 -
$10,079,000; 2002 - $4,278,000; 2003 - $1,601,000 and $4,294,000 thereafter.
Rental expense for all operating leases amounted to $15,704,000, $10,160,000 and
$7,547,000 in 1998, 1997 and 1996, respectively.
NOTE 9 - ACQUISITIONS:
On July 1, 1997 the Company acquired approximately 77% of the voting
common stock and 7% of the non-voting preferred stock of Macrotron AG
("Macrotron"), a distributor of personal computer products based in Munich,
Germany. The initial acquisition was completed through an exchange of
approximately $26 million in cash and 406,586 shares of the Company's common
stock, for a combined total value of $35 million. On July 10, 1997, the Company
commenced a tender offer for the remaining shares of Macrotron common and
preferred stock at a price per share of DM730 and DM600, respectively. The
tender offer period ended on September 5, 1997. As of January 31, 1998, the
Company owned approximately 98% and 82% of Macrotron's common and preferred
stock, respectively. The cash portion of the initial acquisition, the related
tender offer and subsequent purchase of Macrotron's common and preferred stock
were funded from the Company's revolving credit loan agreements.
The acquisition of Macrotron is accounted for under the purchase
method. The preliminary purchase price allocation has resulted in approximately
$51,000,000 in excess cost over the net fair market value of tangible assets
acquired as of January 31, 1998. The Company is currently implementing its
acquisition strategy which may result in an adjustment to the net assets
acquired. Consistent with the Company's accounting policy for foreign
subsidiaries, Macrotron's operations will be consolidated into the Company's
consolidated financial statements on a calendar year basis. Consequently, the
Company's fiscal year ending January 31, 1998 includes Macrotron's operations
for the six month period beginning July 1, 1997 and ending December 31, 1997.
The following pro forma unaudited results of operations reflects the
effect on the Company's operations, as if the above described acquisition had
occurred at the beginning of each of the periods presented below:
Year ended January 31,
------------ ------ ------------
1998 1997
------------ ------------
(In thousands)
Net sales $7,623,852 $5,571,406
Net income $ 90,161 $ 60,716
Net income per common share:
Basic $ 2.01 $ 1.47
Diluted $ 1.93 $ 1.43
The unaudited pro forma information is presented for informational
purposes only and includes certain pro forma adjustments. Such pro forma
information is not necessarily indicative of the operating results that would
have occurred had the Macrotron acquisition been consummated as of the beginning
of the periods above, nor are they necessarily indicative of future operating
results.
28
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10 - SEGMENT INFORMATION:
The Company is engaged in one business segment, the wholesale
distribution of microcomputer hardware and software products. The geographic
areas in which the Company operates are the United States (United States
including exports to Latin America and the Caribbean) and International
(Germany, France, Canada, Switzerland, Austria and Brazil). The geographical
distribution of net sales, operating income and identifiable assets are as
follows (in thousands):
<TABLE>
<CAPTION>
United States International Eliminations Consolidated
------------- ------------- ------------ ------------
Fiscal year 1998
- ----------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers $5,624,891 $1,431,728 $ - $7,056,619
========== ========== ========= ==========
Operating income $ 151,887 $ 20,751 $ - $ 172,638
========== ========== ========= ==========
Identifiable assets $1,568,458 $ 616,925 $ - $2,185,383
========== ========== ========= ==========
</TABLE>
<TABLE>
Fiscal year 1997
- ----------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers $4,009,924 $ 589,017 $ - $4,598,941
========== ========== ========= ==========
Operating income $ 105,330 $ 9,681 $ - $ 115,011
========== ========== ========= ==========
Identifiable assets $1,327,156 $ 218,138 $ - $1,545,294
========== ========== ========= ==========
</TABLE>
<TABLE>
Fiscal year 1996
- ----------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers $2,654,750 $ 431,870 $ - $3,086,620
========== ========== ========= ==========
Operating income $ 48,419 $ 7,185 $ - $ 55,604
========== ========== ========= ==========
Identifiable assets $ 868,910 $ 174,969 $ - $1,043,879
========== ========== ========= ==========
</TABLE>
NOTE 11 - UNAUDITED INTERIM FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------
April 30 July 31 October 31 January 31
------------ ------------ ------------ -------------
Fiscal year 1998 (In thousands, except per share amounts)
- ----------------
<S> <C> <C> <C> <C>
Net sales $1,370,146 $1,551,820 $2,021,479 $2,113,174
Gross profit 95,177 103,978 129,342 137,249
Net income 18,222 21,464 23,673 26,126
Net income per common share:
Basic .42 .49 .54 .55
Diluted .41 .47 .51 .53
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------
April 30 July 31 October 31 January 31
------------ ------------ ------------ -------------
Fiscal year 1997 (In thousands, except per share amounts)
- ----------------
<S> <C> <C> <C> <C>
Net sales $ 985,574 $1,063,228 $1,236,650 $1,313,489
Gross profit 69,012 74,302 85,955 92,512
Net income 10,428 12,016 16,748 17,781
Net income per common share:
Basic .27 .31 .39 .41
Diluted .27 .30 .38 .40
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
<PAGE>
PART III
ITEMS 10, 11, 12 and 13.
The information required by Item 10 relating to executive officers of
the registrant is included under the caption "Executive Officers" of Item 1 of
this Form 10-K. The information required by Item 10 relating to Directors of the
registrant and the information required by Items 11, 12 and 13 is incorporated
herein by reference to the registrant's definitive proxy statement for the 1998
Annual Meeting of Shareholders. However, the information included in such
definitive proxy statement under the subcaption entitled "Grant Date Present
Value" in the table entitled "Option Grants in Last Fiscal Year", the
information included under the caption entitled "Compensation Committee Report
on Executive Compensation", and the information included in the "Stock Price
Performance Graph" shall not be deemed incorporated by reference in this Form
10-K and shall not otherwise be deemed filed under the Securities Act of 1933,
as amended, or under the Securities Exchange Act of 1934, as amended. The
definitive proxy statement for the 1998 Annual Meeting of Shareholders will be
filed with the Commission prior to May 31, 1998.
<TABLE>
<CAPTION>
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Listed below are the financial statements and the schedule filed as part of this report:
Financial Statements Page
<S> <C>
Report of Independent Certified Public Accountants....................................................... 16
Consolidated Balance Sheet at January 31, 1998 and 1997.................................................. 17
Consolidated Statement of Income for the three years ended January 31, 1998.............................. 18
Consolidated Statement of Changes in Shareholders' Equity for the
three years ended January 31, 1998.................................................................... 19
Consolidated Statement of Cash Flows for the three years ended January 31, 1998.......................... 19
Notes to Consolidated Financial Statements............................................................... 20
Financial Statement Schedule
Report of Independent Certified Public Accountants on Financial Statement Schedule....................... 33
Consent of Independent Certified Public Accountants...................................................... 33
Schedule II. -- Valuation and qualifying accounts........................................................ 34
</TABLE>
All schedules and exhibits not included are not applicable, not
required or would contain information which is shown in the financial statements
or notes thereto.
(b) The Company was not required to file a report on Form 8-K during
the fiscal year ended January 31, 1998.
(c) The exhibit numbers on the following list correspond to the numbers
in the exhibit table required pursuant to Item 601 of Regulation S-K.
3-A(1) -- Articles of Incorporation of the Company as amended to
April 23, 1986.
3-B(2) -- Articles of Amendment to Articles of Incorporation of
the Company filed on August 27, 1987.
3-C(13) -- By-Laws of the Company as amended to November 28, 1995.
30
<PAGE>
3-F(9) -- Articles of Amendment to Articles of Incorporation of
the Company filed on July 15, 1993.
4-E(15) -- Articles of Amendment to Articles of Incorporation of the
Company filed on June 25, 1997.
10-F(4) -- Incentive Stock Option Plan, as amended, and form of
option agreement.
10-G(10) -- Employee Stock Ownership Plan as amended December 16,
1994.
10-V(5) -- Employment Agreement between the Company and Edward C.
Raymund dated as of January 31, 1991.
10-W(5) -- Irrevocable Proxy and Escrow Agreement dated April 5,
1991.
10-X(6) -- First Amendment to the Employment Agreement between
the Company and Edward C. Raymund dated November 13, 1992.
10-Y(6) -- First Amendment in the nature of a Complete Substitution to
the Irrevocable Proxy and Escrow Agreement dated November 13, 1992.
10-Z(7) -- 1990 Incentive and Non-Statutory Stock Option Plan
as amended.
10-AA(7) -- Non-Statutory Stock Option Grant Form.
10-BB(7) -- Incentive Stock Option Grant Form.
10-CC(8) -- Employment Agreement between the Company and Steven A.
Raymund dated February 1, 1992.
10-EE(10) -- Retirement Savings Plan as amended January 26, 1994.
10-FF(9) -- Revolving Credit and Reimbursement Agreement dated
December 22, 1993.
10-GG(9) -- Transfer and Administration Agreement dated December
22, 1993.
10-HH(10) -- Amendments (Nos.1-4) to the Transfer and Administration
Agreement.
10-II(10) -- Amended and Restated Revolving Credit and Reimbursement
Agreement dated July 28, 1994, as amended.
10-JJ(10) -- Revolving Foreign Currency Agreement dated August 4, 1994,
as amended.
10-KK(13) -- Amendments (Nos.5,6) to the Transfer and Administration
Agreement
10-LL(13) -- Amendments (Nos. 3-5) to the Amended and Restated
Revolving Credit and Reimbursement Agreement dated July 28, 1994, as amended.
10-MM(13) -- Amendments (Nos. 3-5) to the Revolving Foreign Currency
Agreement dated August 4, 1994, as amended.
10-NN(12) -- Non-Employee Directors' 1995 Non-Statutory Stock Option
Plan.
10-OO(12) -- 1995 Employee Stock Purchase Plan.
10-PP(12) -- Employment Agreement between the Company and A. Timothy
Godwin dated as of December 5, 1995.
10-QQ(14) -- Amended and Restated Transfer and Administration Agreement
dated January 21, 1997.
10-RR(14) -- Amendment Number 1 to the Amended and Restated Transfer
and Administration Agreement dated March 3, 1997.
10-SS(14) -- Revolving Credit and Reimbursement Agreement dated May 23,
1996.
10-TT(15) -- Amendment Number 2 to the Amended and Restated Transfer
and Administration Agreement dated July 29, 1997.
10-UU(15) -- Revolving Credit and Reimbursement Agreement dated August
28, 1997.
10-VV(16) -- Amendment Number 3 to the Amended and Restated Transfer
and Administration Agreement dated December 18, 1997.
21(16) -- Subsidiaries of Registrant.
31
<PAGE>
27(3) -- Financial Data Schedule (included in the electronic
version only.)
99-A(3) -- Cautionary Statement For Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995.
- -------------
(1) Incorporated by reference to the Exhibits included in the Company's
Registration Statement on Form S-1, File No. 33-4135.
(2) Incorporated by reference to the Exhibits included in the Company's
Registration Statement on Form S-1, File No. 33-21997.
(3) Filed herewith.
(4) Incorporated by reference to the Exhibits included in the Company's
Registration Statement on Form S-8, File No. 33-21879.
(5) Incorporated by reference to the Exhibits included in the Company's Form
10-Q for the quarter ended July 31, 1991, File No. 0-14625.
(6) Incorporated by reference to the Exhibits included in the Company's Form
10-Q for the quarter ended October 31, 1992, File No. 0-14625.
(7) Incorporated by reference to the Exhibits included in the Company's
Registration Statement on Form S-8, File No. 33-41074.
(8) Incorporated by reference to the Exhibits included in the Company's Form
10-K for the year ended January 31, 1993, File No. 0-14625.
(9) Incorporated by reference to the Exhibits included in the Company's Form
10-K for the year ended January 31, 1994, File No. 0-14625.
(10) Incorporated by reference to the Exhibits included in the Company's Form
10-K for the year ended January 31, 1995, File No. 0-14625.
(11) Incorporated by reference to the Exhibits included in the Company's Form
8-K filed on March 26, 1996, File No. 0-14625.
(12) Incorporated by reference to the Exhibits included in the Company's
Definitive Proxy Statement for the 1995 Annual Meeting of Shareholders, File No.
0-14625.
(13) Incorporated by reference to the Exhibits included in the Company's Form
10-K for the year ended January 31, 1996, File No. 0-14625.
(14) Incorporated by reference to the Exhibits included in the Company's Form
10-K for the year ended January 31, 1997, File No. 0-14625.
(15) Incorporated by reference to the Exhibits included in the Company's
Registration Statement on Form S-3, File No. 333-36999.
(16) To be filed by amendment.
32
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Tech Data Corporation
Our audits of the consolidated financial statements referred to in our
report dated March 18, 1998 appearing on page 16 of this Form 10-K of Tech Data
Corporation also included an audit of the Financial Statement Schedule listed in
Item 14 of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Tampa, Florida
March 18, 1998
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8s (Nos. 33-21879, 33-41074, 33-62181 and 33-60479) of Tech
Data Corporation of our report dated March 18, 1998 appearing on page 16 of this
Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedule appearing above.
Price Waterhouse LLP
Tampa, Florida
April 8, 1998
33
<PAGE>
SCHEDULE II
TECH DATA CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
--------------------------- Balance
Balance at Charged to at end
beginning cost and of
Description of period expenses Other(1) Deductions period
- ----------- --------- -------- -------- ---------- ------
Allowance for doubtful accounts receivable and sales returns:
January 31,
<S> <C> <C> <C> <C> <C>
1998 $23,922 $22,634 $9,328 $(26,153) $29,731
1997 22,669 19,648 4,290 (22,685) 23,922
1996 16,580 17,433 4,538 (15,882) 22,669
- ----------
(1) Other includes recoveries, acquisitions and the effect of fluctuations in foreign currency.
</TABLE>
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 8th day of
April, 1998.
TECH DATA CORPORATION
By /s/ STEVEN A. RAYMUND
-------------------------------
Steven A. Raymund,
Chairman of the Board of Directors;
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature to this Annual Report on Form 10-K appears
below hereby appoints Jeffery P. Howells and Arthur W. Singleton, or either of
them, as his attorney-in-fact to sign on his behalf individually and in the
capacity stated below and to file all amendments and post-effective amendments
to this Annual Report on Form 10-K, and any and all instruments or documents
filed as a part of or in connection with this Annual Report on Form 10-K or the
amendments thereto, and the attorney-in-fact, or either of them, may make such
changes and additions to this Annual Report on Form 10-K as the
attorney-in-fact, or either of them, may deem necessary or appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ STEVEN A. RAYMUND Chairman of the Board of Directors; April 8, 1998
- --------------------------- Chief Executive Officer
Steven A. Raymund
/s/ JEFFERY P. HOWELLS Executive Vice President of Finance; April 8, 1998
- --------------------------- Chief Financial Officer;
Jeffery P. Howells (principal financial officer)
/s/ JOSEPH B. TREPANI Senior Vice President and Corporate April 8, 1998
- ------------------------ Controller;(principal accounting officer)
Joseph B. Trepani
/s/ ARTHUR W. SINGLETON Vice President, Treasurer and Secretary April 8, 1998
- ---------------------------
Arthur W. Singleton
/s/ CHARLES E. ADAIR Director April 8, 1998
- ------------------------
Charles E. Adair
/s/ DANIEL M. DOYLE Director April 8, 1998
- -----------------------
Daniel M. Doyle
/s/ DONALD F. DUNN Director April 8, 1998
- ----------------------
Donald F. Dunn
/s/ EDWARD C. RAYMUND Director; Chairman Emeritus April 8, 1998
- ---------------------------
Edward C. Raymund
/s/ DAVID M. UPTON Director April 8, 1998
- ----------------------
David M. Upton
/s/ JOHN Y. WILLIAMS Director April 8, 1998
- ------------------------
John Y. Williams
</TABLE>
35
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Tech Data Corporation for the period ended
January 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-1-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,749
<SECURITIES> 0
<RECEIVABLES> 939,157
<ALLOWANCES> 29,731
<INVENTORY> 1,028,367
<CURRENT-ASSETS> 2,006,385
<PP&E> 100,562
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,185,383
<CURRENT-LIABILITIES> 1,469,004
<BONDS> 8,683
0
5
<COMMON> 72
<OTHER-SE> 702,511
<TOTAL-LIABILITY-AND-EQUITY> 2,185,383
<SALES> 7,056,619
<TOTAL-REVENUES> 7,056,619
<CGS> 6,590,873
<TOTAL-COSTS> 6,883,981
<OTHER-EXPENSES> 293,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,908
<INCOME-PRETAX> 142,730
<INCOME-TAX> 52,816
<INCOME-CONTINUING> 89,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,485
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 1.92
</TABLE>
EXHIBIT 99A
CAUTIONARY STATEMENTS FOR PURPOSES OF THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for "forward-looking statements" to encourage companies to provide
prospective information, so long as such information is identified as
forward-looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statement(s). Tech Data
Corporation (the "Company" or "Tech Data") desires to take advantage of the
safe harbor provisions of the Act.
Except for historical information, the Company's Annual Report on Form 10-K
for the year ended January 31, 1998 to which this exhibit is appended, the
Company's quarterly reports on Form 10-Q, the Company's current reports on Form
8-K, periodic press releases, as well as other public documents and statements,
may contain forward-looking statements within the meaning of the Act.
In addition, representatives of the Company, from time to time, participate
in speeches and calls with market analysts, conferences with investors and
potential investors in the Company's securities, and other meetings and
conferences. Some of the information presented in such speeches, calls, meetings
and conferences may be forward-looking within the meaning of the Act.
It is not reasonably possible to itemize all of the many factors and
specific events that could affect the Company and/or the microcomputer products
distribution industry as a whole. In some cases, information regarding certain
important factors that could cause actual results to differ materially from
those projected, forecasted, estimated, budgeted or otherwise expressed in
forward-looking statements made by or on behalf of the Company may appear or be
otherwise conveyed together with such statements. The following additional
factors (in addition to other possible factors not listed) could affect the
Company's actual results and cause such results to differ materially from those
projected, forecasted, estimated, budgeted or otherwise expressed in
forward-looking statements made by or on behalf of the Company:
Competition
The Company operates in a highly competitive environment, both in the
United States and internationally. The computer wholesale distribution industry
is characterized by intense competition, based primarily on product
availability, credit availability, price, speed of delivery, ability to tailor
specific solutions to customer needs, quality and depth of product lines and
pre-sale and post-sale training, service and support. The Company competes with
a variety of regional, national and international wholesale distributors, some
of which have greater financial resources than the Company. In addition, the
Company faces competition from direct sales by vendors which may be able to
offer resellers lower prices than the Company.
Narrow Profit Margins
As a result of intense price competition in the industry, the Company has
narrow gross profit and operating profit margins. These narrow margins magnify
the impact on operating results of variations in sales and operating costs. The
Company has partially offset the effects of its low gross profit margins by
increasing sales and reducing operating expenses as a percentage of sales;
however, there can be no assurance that the Company will maintain or increase
sales or further reduce operating expenses as a percentage of sales in the
future. Future gross profit margins may be adversely affected by changes in
product mix, vendor pricing actions and competitive and economic pressures.
1
<PAGE>
Risk Of Declines In Inventory Value
The Company is subject to the risk that the value of its inventory will
decline as a result of price reductions by vendors or technological
obsolescence. It is the policy of most vendors of microcomputer products to
protect distributors, such as the Company, which purchase directly from such
vendors, from the loss in value of inventory due to technological change or the
vendors' price reductions. Some vendors, however, may be unwilling or unable to
pay the Company for products returned to them under purchase agreements.
Moreover, industry practices are sometimes not embodied in written agreements
and do not protect the Company in all cases from declines in inventory value. No
assurance can be given that such practices will continue, that unforeseen new
product developments will not adversely affect the Company, or that the Company
will be able to successfully manage its existing and future inventories.
Some major systems vendors are developing programs which will allow the
Company to assemble systems from components provided by the vendors. While the
Company has developed the ability to configure computer products, the process of
assembling large volumes of systems from components will require new business
practices by the Company. It is also uncertain how the vendors will apply
policies related to price protection, stock rotation and other protections
against the decline in inventory value to components.
Dependence On Information Systems
The Company is highly dependent upon its internal computer and
telecommunication systems to operate its business. There can be no assurance
that the Company's information systems will not fail, that the Company will be
able to attract and retain qualified personnel necessary for the operation of
such systems, that the Company will be able to expand and improve its
information systems, or that the information systems of acquired companies will
be sufficient to meet the Company's standards or can be successfully converted
into an acceptable information system on a timely and cost-effective basis. Any
of such problems could have an adverse effect on the Company's business.
The Company is currently addressing Year 2000 system requirements and
anticipates that Year 2000 modifications will be made on a timely basis and does
not believe that the cost of the modifications will have a material effect on
the Company's operating results. There can be no assurance, however, that the
Company will be able to modify successfully and in a timely manner all of its
internal services and systems to comply with Year 2000 requirements, which could
have a material adverse effect on the Company's operating results. In addition,
the Company faces risks to the extent that suppliers of products, services and
business on a worldwide basis may not obtain proper compliance with Year 2000
requirements.
Customer Credit Exposure
The Company sells its products to a large customer base of value-added
resellers, corporate resellers, retailers and direct marketers. A significant
portion of such sales is financed by the Company. As a result, the Company's
business could be adversely affected in the event of the deterioration of the
financial condition of its customers, resulting in the customers' inability to
repay the Company. This risk would be increased in the event of a general
economic downturn affecting a large number of the Company's customers.
2
<PAGE>
Management Of Expansion
The rapid expansion of the Company's business has required the Company to
make significant recent additions in personnel and has significantly increased
the Company's working capital requirements. Although the Company has experienced
rapid expansion in recent years, such expansion should not be considered
indicative of future expansion. Such expansion has resulted in new and increased
responsibilities for management personnel and has placed and continues to place
a strain upon the Company's management, operating and financial systems and
other resources. There can be no assurance that the strain placed upon the
Company's management, operating and financial systems and other resources will
not have an adverse effect on the Company's business, nor can there be any
assurance that the Company will be able to attract or retain sufficient
personnel to continue the expansion of its operations.
Liquidity And Capital Resources
The Company's business requires substantial capital to finance accounts
receivable and product inventory that are not financed by trade creditors. The
Company has historically relied upon cash generated from operations, bank credit
lines, trade credit from its vendors and proceeds from public offerings of its
Common Stock to satisfy its capital needs and finance growth. In order to
continue its expansion, the Company will need additional financing, including
debt financing. The inability to obtain such sources of capital could have an
adverse effect on the Company's business.
Acquisitions
As part of its growth strategy, the Company pursues the acquisition of
companies that either complement or expand its existing business. As a result,
the Company regularly evaluates potential acquisition opportunities, which may
be material in size and scope. Acquisitions involve a number of risks and
uncertainties, including expansion into new geographic markets and business
areas, the requirement to understand local business practices, the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired companies, the possible requirement to upgrade the acquired
companies' management information systems to the Company's standards, potential
adverse short-term effects on the Company's operating results and the
amortization of any acquired intangible assets.
Foreign Currency Exchange Risks; Exposure To Foreign Markets
The Company conducts business in countries outside of the United States
which exposes the Company to fluctuations in foreign currency exchange rates.
The Company may enter into short-term forward exchange or option contracts to
hedge this risk according to its outlook on future exchange rates; nevertheless,
fluctuations in foreign currency exchange rates could have an adverse effect on
the Company's business.
The Company's international operations are subject to other risks such as
the imposition of governmental controls, export license requirements,
restrictions on the export of certain technology, political instability, trade
restrictions, tariff changes, difficulties in staffing and managing
international operations, difficulties in collecting accounts receivable and
longer collection periods and the impact of local economic conditions and
practices. As the Company continues to expand its international business, its
success will be dependent, in part, on its ability to anticipate and effectively
manage these and other risks. There can be no assurance that these and other
factors will not have an adverse effect on the Company's business.
3
<PAGE>
Product Supply Shortages
The Company is dependent upon the supply of products available from its
vendors. The industry is characterized by periods of severe product shortages
due to vendors' difficulty in projecting demand for certain products distributed
by the Company. When such product shortages occur, the Company typically
receives an allocation of product from the vendor. There can be no assurance
that vendors will be able to maintain an adequate supply of products to fulfill
all of the Company's customer orders on a timely basis. Failure to obtain
adequate product supplies, if available to competitors, could have an adverse
effect on the Company's business.
Vendor Relations
The loss of certain key vendors could have an adverse effect on the
Company's business. In addition, the Company relies on various rebate and
cooperative marketing programs offered by its vendors to defray expenses
associated with distributing and marketing the vendors' products. Additionally,
certain of the Company's vendors subsidize floor plan financing arrangements.A
reduction by the Company's vendors in any of these programs could have an
adverse effect on the Company's business.
General Economic Conditions
From time to time the markets in which the Company sells its products
experience weak economic conditions that may negatively affect the Company's
sales. Although the Company does not consider its business to be highly
seasonal, it has experienced seasonally higher sales and earnings in the third
and fourth quarters. To the extent that general economic conditions affect the
demand for products sold by the Company, such conditions could have an adverse
effect on the Company's business.
Exposure To Natural Disasters
The Company's headquarters facilities, certain of its distribution centers
as well as certain vendors and customers are located in areas prone to natural
disasters such as floods, hurricanes, tornadoes, earthquakes and other adverse
weather conditions. The Company's business could be adversely affected should
its ability to distribute products be impacted by such an event.
Labor Strikes
The Company's labor force is currently non-union. The Company, however,
does business in certain foreign countries where labor disruption is more common
than is experienced in the United States. The majority of the freight carriers
used by the Company are unionized. A labor strike by one of the Company's
freight carriers, one of its vendors, a general strike by civil service
employees, or a governmental shutdown could have an adverse effect on the
Company's business.
Volatility Of Common Stock
Because of the foregoing factors, as well as other variables affecting the
Company's operating results, past financial performance should not be considered
a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, the Company's participation in a highly dynamic industry often results
in significant volatility of the Common Stock price.
4
<PAGE>
