FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-14625
TECH DATA CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA NO. 59-1578329
- ------------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5350 TECH DATA DRIVE, CLEARWATER, FLORIDA 33760
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(727) 539-7429
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS DECEMBER 10, 1999
- ----------------------------------------- -----------------
Common stock, par value $.0015 per share 52,141,585
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheet as of
October 31, 1999 (unaudited) and
January 31, 1999 3
Consolidated Statement of Income
(unaudited) for the three and nine
months ended October 31, 1999 and 1998 4
Consolidated Statement of Cash Flows
(unaudited) for the nine months
ended October 31, 1999 and 1998 5
Notes to Consolidated Financial Statements
(unaudited) 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
PART II. OTHER INFORMATION
Items 1-5 All items required in Part II have been previously
filed, have been included in Part I of this report, or are not
applicable for the quarter ended October 31, 1999. 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1999 1999
------------ ----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,210 $ 8,615
Accounts receivable, less allowance for 1,872,185 1,796,045
doubtful accounts of $62,783 and $60,521
Inventories 1,448,283 1,369,351
Prepaid and other assets 163,703 113,952
----------- ----------
Total current assets 3,488,381 3,287,963
Property and equipment, net 146,053 126,537
Excess of cost over acquired net assets, net 337,195 345,326
Other assets, net 73,967 85,161
----------- ----------
$ 4,045,596 $3,844,987
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loans $ 731,056 $ 817,870
Accounts payable 1,664,278 1,503,866
Accrued expenses 315,729 241,170
----------- ----------
Total current liabilities 2,711,063 2,562,906
Long-term debt 308,405 308,521
----------- ----------
3,019,468 2,871,427
----------- ----------
Minority interest 1,065 6,269
----------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.02; 226,500 shares
authorized and issued; liquidation
preference $.20 per share 5 5
Common stock, par value $.0015; 200,000,000
shares authorized; 52,131,890
and 51,098,442 issued and outstanding 78 77
Additional paid-in capital 528,488 505,385
Retained earnings 519,164 428,720
Accumulated other comprehensive income (22,672) 33,104
----------- ----------
Total shareholders' equity 1,025,063 967,291
----------- ----------
$ 4,045,596 $3,844,987
=========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements
3
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
---------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 4,310,072 $ 3,278,401 $12,212,195 $ 7,676,028
Cost and expenses:
Cost of products sold 4,078,719 3,065,306 11,533,116 7,178,418
Selling, general and
administrative expenses 163,040 143,892 481,623 333,314
----------- ----------- ----------- -----------
4,241,759 3,209,198 12,014,739 7,511,732
----------- ----------- ----------- -----------
Operating income 68,313 69,203 197,456 164,296
Interest expense 17,024 14,422 49,564 28,765
Net foreign currency exchange
(gain) loss (418) -- 4,745 --
Gain on sale of Macrotron AG -- -- -- 12,500
----------- ----------- ----------- -----------
Income before income taxes 51,707 54,781 143,147 148,031
Provision for income taxes 18,614 20,088 52,396 54,977
----------- ----------- ----------- -----------
Income before minority interest 33,093 34,693 90,751 93,054
Minority interest 89 605 307 582
----------- ----------- ----------- -----------
Net income $ 33,004 $ 34,088 $ 90,444 $ 92,472
=========== =========== =========== ===========
Net income per common share:
Basic $ .63 $ .67 $ 1.75 $ 1.88
=========== =========== =========== ===========
Diluted $ .60 $ .63 $ 1.67 $ 1.79
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 52,048 50,911 51,537 49,276
=========== =========== =========== ===========
Diluted 58,977 57,997 58,466 52,927
=========== =========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
4
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 12,151,157 $ 7,528,870
Cash paid to suppliers and employees (11,875,721) (7,070,188)
Interest paid (50,073) (22,789)
Income taxes paid (42,112) (45,612)
------------ -----------
Net cash provided by operating activities 183,251 390,281
------------ -----------
Cash flows from investing activities:
Sale of Macrotron AG -- 227,843
Acquisition of businesses, net of cash acquired (42,927) (90,430)
Capital expenditures (49,894) (43,760)
------------ -----------
Net cash (used in) provided by investing activities (92,821) 93,653
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 23,104 16,716
Net repayments under revolving credit loan (117,814) (501,865)
Principal payments on long-term debt (125) (159)
------------ -----------
Net cash used in financing activities (94,835) (485,308)
------------ -----------
Net decrease in cash and cash equivalents (4,405) (1,374)
Cash and cash equivalents at beginning of period 8,615 2,749
------------ -----------
Cash and cash equivalents at end of period $ 4,210 $ 1,375
============ ===========
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 90,444 $ 92,472
------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 42,736 28,491
Provision for losses on accounts receivable 30,898 23,316
Gain on sale of Macrotron AG -- (12,500)
(Increase) decrease in assets:
Accounts receivable (61,038) (147,158)
Inventories (50,932) 255,438
Prepaid and other assets (71,837) 134,926
Increase (decrease) in liabilities:
Accounts payable 132,412 153,449
Accrued expenses 70,568 (138,153)
------------ -----------
Total adjustments 92,807 297,809
------------ -----------
Net cash provided by operating activities $ 183,251 $ 390,281
============ ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
5
<PAGE>
TECH DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The consolidated financial statements and related notes included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial position of Tech Data Corporation and subsidiaries
(the "Company" or "Tech Data") as of October 31, 1999 and the results of their
operations for the three and nine months ended October 31, 1999 and 1998 and
their cash flows for the nine months ended October 31, 1999 and 1998. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The results of operations for the nine months ended October 31,
1999 are not necessarily indicative of the results that can be expected for the
entire fiscal year ending January 31, 2000.
NOTE 2 - ACQUISITION OF BUSINESSES:
ACQUISITION OF GLOBELLE CORPORATION
On May 21, 1999, Tech Data Canada, a wholly-owned subsidiary of the
Company, through an initial tender offer, acquired approximately 11.6 million
common shares, or 80.4% of the outstanding common shares of Globelle Corporation
("Globelle"), a mass storage and components distributor based in Canada.
The initial tender offer, at Cdn $2.50 per share (US$1.70 per share),
was completed through an exchange of approximately Cdn $29.0 million in cash.
Through a subsequent tender offer period ending on June 2, 1999, the Company
increased its ownership to 11.8 million common shares, or 81.6%, for a total
price of Cdn $29.5 million (US$20.3 million). The remaining Globelle common
shareholders, under the terms of the merger agreement, received one redeemable
retractable preferred share of Tech Data Canada for each Globelle common share
held. The preferred shares were redeemed in full by Tech Data Canada on October
8, 1999, resulting in 100% ownership of Globelle for total cash consideration of
approximately Cdn $37.0 million (US$25.0 million).
The acquisition of Globelle was accounted for under the purchase
method. The preliminary purchase price allocation has resulted in approximately
US$13 million in excess cost over the net fair market value of tangible assets
acquired as of October 31, 1999, to be amortized over a period of 20 years.
Pro forma financial information related to the Globelle acquisition has not been
presented since the acquisition was not material to the Company's financial
position or results of operations.
6
<PAGE>
ACQUISITION OF COMPUTER 2000 AG
In July 1998, the Company acquired 80% of the outstanding voting common
stock of Computer 2000 AG ("Computer 2000"), Europe's leading electronics
distributor. In connection with the acquisition (accounted for under the
purchase method), the Company is subject to additional contingent purchase price
payments. The Company is presently negotiating the resolution of this
contingency and believes the ultimate settlement will not exceed $21 million.
Any payments made related to this contingency will increase the purchase price
of Computer 2000 and result in the recognition of additional goodwill. During
the nine months ended October 31, 1999 the Company has acquired additional
shares of Computer 2000 common stock, which, including other cash payments,
has resulted in additional consideration of approximately $18 million. As of
October 31, 1999, the Company owns 99.6% of the outstanding shares of common
stock of Computer 2000.
NON-CASH TRANSACTIONS
The Company issued $300,000,000 convertible subordinated notes and
approximately 2,200,000 shares of common stock in conjunction with its
acquisition of Computer 2000 in July 1998.
NOTE 3 - NET INCOME PER COMMON SHARE:
Basic Earnings per Share ("Basic EPS") excludes from the calculation of
earnings per share the potential for dilution of earnings by certain common
stock equivalents and is computed by dividing net income by the weighted average
number of common shares outstanding during the reported period. Diluted Earnings
Per Share ("Diluted EPS") reflects the potential dilution that could occur
assuming conversion of certain common stock equivalents such as the Company's
convertible subordinated notes, as well as exercise of stock options using the
if-converted and treasury stock methods, respectively. The composition of basic
and diluted net income per common share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
------------------------------- -----------------------------
WEIGHTED PER WEIGHTED PER
NET AVERAGE SHARE NET AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- --------- --------- -------- ------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income per common share - basic $33,004 52,048 $ .63 $34,088 50,911 $ .67
===== =====
Effect of dilutive securities:
Stock options 1,596 1,753
5% convertible subordinated notes 2,363 5,333 2,363 5,333
------- ------- ------- ------
Net income per common share - diluted $35,367 58,977 $ .60 $36,451 57,997 $ .63
======= ======= ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
------------------------------- -----------------------------
WEIGHTED PER WEIGHTED PER
NET AVERAGE SHARE NET AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ----------- --------- -------- ----------- -----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income per common share - basic $90,444 51,537 $1.75 $92,472 49,276 $1.88
===== =====
Effect of dilutive securities:
Stock options 1,596 1,873
5% convertible subordinated notes 7,088 5,333 2,363 1,778
------- ------ ------- ------
Net income per common share - diluted $97,532 58,466 $1.67 $94,835 52,927 $1.79
======= ====== ===== ======= ====== =====
</TABLE>
7
<PAGE>
At October 31, 1999 and 1998, there were 1,737,000 and 134,000 shares,
respectively, excluded from the computation of diluted earnings per share
because their effect would have been antidilutive.
NOTE 4 - COMPREHENSIVE INCOME:
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components in the Company's consolidated financial statements. Comprehensive
income is defined as the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The Company's balance of other comprehensive income is
comprised exclusively of changes in the net cumulative translation adjustment.
Comprehensive income for the three months ended October 31, 1999 and 1998 was
$52.4 million and $54.5 million, respectively, and $34.7 million and $110.9
million, for the nine months ended October 31, 1999 and 1998, respectively.
NOTE 5 - SEGMENT INFORMATION:
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
establishes standards for additional disclosure about operating segments for
interim and annual financial statements. This standard requires financial and
descriptive information be disclosed for segments whose operating results are
reviewed by the chief operating officer for decisions on resource allocation.
The Company operates predominantly in a single industry segment as a
wholesale distributor of computer-based technology products and services. Based
on geographic location, the Company has three principal segments. These
geographical segments are 1) the United States, 2) Europe (including the Middle
East) and 3) Other International areas (Canada, Brazil, Argentina, Chile, Peru,
Uruguay, and export sales to Latin America and the Caribbean from the U.S.). The
measure of segment profit is operating income.
Financial information by geographic segment is as follows (in
thousands):
<TABLE>
<CAPTION>
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ------ ------------- -----
<S> <C> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 31, 1999
Net sales to unaffiliated customers $2,317,315 $1,703,179 $ 289,578 $ 4,310,072
========== ========== =========== ===========
Operating income $ 48,709 $ 16,222 $ 3,382 $ 68,313
========== ========== =========== ===========
Identifiable assets $1,926,160 $1,842,100 $ 277,336 $ 4,045,596
========== =========== =========== ===========
THREE MONTHS ENDED OCTOBER 31, 1998
Net sales to unaffiliated customers $1,609,444 $1,488,434 $ 180,523 $ 3,278,401
========== ========== =========== ===========
Operating income (loss) $ 44,597 $ 26,712 $ (2,106) $ 69,203
========== ========== =========== ===========
Identifiable assets $1,462,262 $1,603,933 $ 139,973 $ 3,206,168
========== ========== =========== ===========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ------ ------------- -----
<S> <C> <C> <C> <C>
NINE MONTHS ENDED OCTOBER 31, 1999
Net sales to unaffiliated customers $ 6,146,174 $ 5,331,535 $ 734,486 $12,212,195
============ ============ =========== ===========
Operating income $ 122,144 $ 69,095 $ 6,217 $ 197,456
============ ============ =========== ===========
Identifiable assets $ 1,926,160 $ 1,842,100 $ 277,336 $ 4,045,596
============ ============ =========== ===========
NINE MONTHS ENDED OCTOBER 31, 1998
Net sales to unaffiliated customers $ 4,733,105 $ 2,493,761 $ 449,162 $ 7,676,028
============ ============ ========== ===========
Operating income $ 122,619 $ 39,945 $ 1,732 $ 164,296
============ ============ =========== ===========
Identifiable assets $ 1,462,262 $ 1,603,933 $ 139,973 $ 3,206,168
============ ============ =========== ===========
</TABLE>
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement establishes requirements for accounting and
reporting of derivative instruments and hedging activities. SFAS 133 was updated
by the issuance of SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FAS No. 133" and is effective for
fiscal years beginning after June 15, 2000. The future impact of this statement
on the Company's results of operations is not expected to be material.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Three Months Ended October 31, 1999 and 1998
Net sales increased 31.5% to $4.31 billion in the third quarter of
fiscal 2000 compared to $3.28 billion in the third quarter last year. This
increase is attributable to growth in the Company's U.S. business through the
addition of new customers and gains in market share as well as the addition of
new product lines and the expansion of existing product lines in all
geographies. The Company's third quarter U.S., Europe and other international
sales grew 44.0%, 14.4%, and 60.4%, respectively, compared to the third quarter
of last year. Total international sales represented approximately 46% of fiscal
2000 third quarter net sales compared to 51% for the third quarter of fiscal
1999.
The cost of products sold as a percentage of net sales was 94.6% in the
third quarter of fiscal 2000, compared to 93.5% in the prior year. This increase
is a result of competitive market conditions, primarily in the Company's U.S.
and European operations, 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. Additionally contributing to this increase is the
Company's increased participation in customer outsourcing activities in the U.S.
which provide lower gross profit margins, while, because of cost efficiencies in
these activities, maintain consistent operating margins.
Selling, general and administrative expenses increased 13.3% to $163.0
million in the third quarter of fiscal 2000 compared to $143.9 million last year
and as a percentage of net sales decreased to 3.78%, compared to 4.39% in the
third quarter last year. The dollar value increase in selling, general and
administrative expenses is attributable to increases in headcount and other
expenses needed to support the increased volume of business.
As a result of the factors described above, operating income decreased
to $68.3 million in the third quarter of fiscal 2000, compared to $69.2 million,
for the third quarter last year and as a percentage of net sales, decreased to
1.6% from 2.1%, respectively.
Interest expense increased in the third quarter of fiscal 2000 due to
an increase in the Company's average outstanding indebtedness related to funding
for continued growth and capital expenditures.
The provision for income taxes decreased 7.3% to $18.6 million in the
third quarter of fiscal 2000 compared to $20.1 million in the comparable quarter
last year. This decrease is attributable to a decrease in the Company's income
before income taxes. The Company's average income tax rate declined to 36.0% in
the third quarter this year compared with 36.7% in the prior year due to
fluctuations in the amount of federal, state and foreign taxable income reported
in each period.
10
<PAGE>
As a result of the factors described above, net income decreased 3.2%
to $33.0 million, or $.60 per diluted share, in the third quarter of fiscal 2000
compared to $34.1 million, or $.63 per diluted share, in the prior year
comparable quarter.
NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
Net sales increased 59.1% to $12.2 billion in the first nine months of
fiscal 2000 compared to $7.7 billion in the same period last year. Net income
for the nine month period this year was $90.4 million, or $1.67 per diluted
share, up 6.6% from the $84.8 million, or $1.64 per diluted share, in the same
period last year, excluding the $12.5 million pre tax gain on the sale of its
former Munich-based subsidiary Macrotron AG.
(The underlying reasons for the fluctuations in the results of
operations for the nine months ended October 31, 1999 compared with the prior
year primarily relate to the inclusion of nine months of operations for Computer
2000 in the current year, whereas the prior year nine month period included six
months of operations for Macrotron AG which was sold on July 1, 1998, and
included only three months of operations for the larger Computer 2000 operation,
which was acquired on July 1, 1998. Excluding the impact of the acquisition of
Computer 2000 and the disposition of Macrotron AG, the underlying reasons for
the fluctuations in the results of operations are substantially the same as in
the comparative quarterly discussion above and, therefore, will not be repeated
here).
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $183.3 million during the
first nine months of fiscal 2000 was primarily attributable to net income of
$90.4 million combined with non-cash charges for depreciation, amortization and
provisions for losses on accounts receivable.
Net cash used in investing activities of $92.8 million during the first
nine months of fiscal 2000 was attributable to the Company's continuing
investment of $49.9 million related to the expansion of the Company's management
information systems, office facilities and its distribution centers combined
with the use of $18.0 million related to the acquisition of additional shares of
Computer 2000 and approximately $25.0 million in the acquisition of Globelle
(see Note 2 of Notes to Consolidated Financial Statements). The Company expects
to make capital expenditures of approximately $75 - $100 million during fiscal
2000 to further expand its management information systems, office facilities and
distribution centers.
Net cash used in financing activities of $94.8 million during the first
nine months of fiscal 2000 reflects the net repayments under the Company's
revolving credit loans of $117.8 million partially offset by proceeds from stock
option exercises (including the related income tax benefit) of $23.1 million.
As of October 31, 1999, the Company maintained domestic and foreign
revolving credit agreements which provide maximum short-term borrowings of
approximately $1.35 billion (subsequently increased to $1.5 billion in November
1999 including local country credit lines), of which $731 million was
outstanding at that date. The Company believes that cash from operations,
available and obtainable bank credit lines and trade credit from its vendors
will be sufficient to satisfy its working capital and capital expenditure needs
through fiscal 2001.
11
<PAGE>
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 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 product on a prepay, credit card, cash on delivery and
floor-plan basis.
YEAR 2000
Introduction
The "Year 2000 Problem" generally refers to computer programs that do
not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, many computer applications could fail or create
erroneous results. The Company's Year 2000 ("Y2K") compliance project is
intended to determine the readiness of the Company's business for the Year 2000.
The Company defines Y2K "compliance" to mean that the computer code will process
all defined future dates properly and give accurate results.
Description of Areas of Impact and Risk
The Company identified four areas where the Y2K problem creates risk to
the Company. These areas are: a) internal Information Technology ("IT") systems;
b) non-IT systems with embedded chip technology; c) system capabilities of third
party businesses with relationships with the Company, including product
suppliers, customers, service providers (such as telephone, power, logistics,
financial services) and other businesses whose failure to be Y2K compliant could
have a material adverse effect on the Company's business, financial condition or
results of operations; and d) product liability claims arising out of the
non-performance of computer products distributed by the Company.
Plan to Address Year 2000 Compliance
In August 1997, the Company formed a Year 2000 compliance project team
and began developing an overall plan to address Y2K readiness issues. This plan
included
12
<PAGE>
five phases as follows: Phase I created an inventory of the Company's
IT systems, non-IT systems and service providers (each of these being referred
to as "business components") to be analyzed for Y2K compliance. During Phase I,
priorities were established so that the Company addressed the most important
business components to determine Y2K readiness. In Phase II identified business
components were analyzed to determine which components in the inventory required
additional effort to be Y2K compliant. Phase III addressed the repair,
modification or replacement of business components that were not Y2K compliant
("remediation"). Phase IV consisted of various types of tests to confirm that
the remediation process resulted in the business components being Y2K compliant.
In Phase V contingency plans were developed to address potential risks that may
be experienced due to Y2K related issues.
State of Readiness
IT Systems - U.S., Canada and Latin America - The Company
substantially completed Phase I through Phase V of the Year 2000 compliance
project. Approximately 99% of the IT business components are deemed Y2K
compliant with work to remediate the remaining 1% continuing.
Functional testing of individual components of the Company's business
critical applications is complete. Both the on-line and batch portions of the
DCS software system (the Company's system performing the primary business
functions of sales order entry, billing, purchasing, distribution and inventory
control) is determined to be compliant for the following dates: January 1,
February 29, December 31, 2000. User acceptance testing for all portions of the
DCS system, EDI and other critical application systems is complete.
The Company retained the services of external consultants to perform an
independent code inspection of the DCS application. This inspection provided
further validation of the effectiveness of the automated scanning, visual
inspection, corrective action and testing performed by the Company's employees
and outside consultants.
The Company addressed the Y2K compliance of the Company's desktop
hardware and software by accelerating a previously planned desktop technology
refresh. Systems that were not Y2K compliant were replaced. The technology
refresh is substantially complete with a few remaining non critical desktops to
be upgraded prior to end of December.
IT Systems - Europe and the Middle East - The Company's subsidiaries
located in Europe and the Middle East have substantially completed Phase I
through IV of the Year 2000 compliance project. As of October 30th, 1999
approximately 99.1% of all identified business critical components have been
determined to be Y2K compliant. Validation plans for December 31st and January
1st have been published and approved. Each country continues to report
separately on its progress, with central coordination and management provided by
the Y2K compliance project team.
For the subsidiaries of Computer 2000 ("C2000"), country locations are
divided into two core areas: those using the SAP R/2 system (the Company's
system performing the primary business functions of sales, order entry, billing,
purchasing, distribution and inventory control) and those that use other systems
to provide these business processes. The majority of the countries use the SAP
R/2 system. The version of SAP R/2 in use by C2000, has received certification
from TUV, a German governmental independent testing authority, that it is Y2K
compliant. C2000 has
13
<PAGE>
completed testing of these elements and custom modifications it has made to the
system. This testing included related subsystems and key client/server and
desktop systems.
The countries that had been using non-SAP R/2 systems have converted to
SAP R/2 or have upgraded to a compliant system.
Non-IT systems -- The non-IT systems generally refer to devices which
store and report date-related information, such as access control systems,
elevators, conveyors and other items containing a microprocessor or internal
clock. For non-IT systems, Phase I, II, III and IV are substantially complete
and contingency plans are in place to address potential risk areas. The Company
will continue to refine the contingency plans through the remainder of the year.
Material Third Parties -- The Company relies on third party suppliers
for many systems, products and services. The Company will be adversely affected
if these third parties are not Y2K compliant. The Company continues to solicit,
receive and review responses to surveys sent to those third parties determined
to be material to the operations of the Company to determine their Y2K
readiness. For those critical third parties that fail to respond to the
Company's survey, the Company is pursuing alternative means of obtaining Y2K
readiness information and is conducting reviews of publicly available
information published by such third parties.
Product Liability -- The Company does not make any representations or
warranties that the products it distributes are or will be Y2K-ready or
compliant. In certain countries where the Company or its subsidiaries distribute
products, the Company may have an obligation to accept returns of products,
which fail because the product is not Y2K ready. In most cases, these returns
may be passed on to the manufacturer. In those countries where product return
obligations may exist, the Company plans to carefully review manufacturer
representations regarding products that are sold in material volumes by the
Company or its subsidiaries.
Cost of Project
The Company has incurred approximately $9.1 million through October 31,
1999 on the Y2K compliance effort, excluding compensation and benefit costs for
associates who do not work full-time on the Y2K project and costs of systems
upgrades that would have normally been made on a similar timetable. Based on the
analyses and modifications completed to date, the Company believes the total
cost will be approximately $11.5 million.
Contingency Planning and Risks
The Company created a Year 2000 Steering Committee to coordinate its
overall internal readiness and contingency planning efforts. The Committee,
composed of representatives from the major divisions within the Company,
completed the contingency plan and will continue to refine that plan through the
remainder of the year. The Committee's plan addresses pre-millennium rollover
preparation, the detailed millennium rollover plan and post millennium
activities for its IT and non-IT components. Specific contingency plans are in
place for critical applications and will continue to be refined on an ongoing
basis. The European and Middle Eastern operations have completed a plan for
validation of the functionality of the operating systems according to predefined
criteria. Key staff members will be on-site throughout the millennium rollover
weekend to monitor systems and expedite issue resolution should any issues
arise.
14
<PAGE>
Some of the Company's subsidiaries will close for business on those dates in
order to implement specific contingency plans.
While the Company believes that its approach to Y2K readiness is sound, it is
possible that some business components are not identified in the inventory, or
that the scanning or testing process does not result in analysis and remediation
of all source code. The Company will assume a third party is not Y2K ready if no
survey response or an inadequate survey response is received. The Company's
contingency plan addresses alternative providers and processes to deal with
business interruptions that may be caused by internal system or third party
providers failure to be Y2K ready to the extent it is possible. The failure to
correct a material Y2K problem could result in an interruption in, or a failure
of, certain normal business activities or operations. Such failure could
materially and adversely affect the Company's operations and therefore, could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. In addition, the Company's operating results could be
materially adversely affected if it were to be held responsible for the failure
of any products sold by the Company to be Y2K ready despite the Company's
disclaimer of product warranties and the limitation of liability contained in
its sales and terms and conditions.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union commenced a conversion from their existing sovereign currencies
to a new, single currency called the euro. Fixed conversion rates between the
existing currencies, the legacy currencies, and the euro were established and
the euro became the common legal currency of the participating countries on this
date. The euro now trades on currency exchanges and is available for non-cash
transactions. The participants will now issue sovereign debt exclusively in euro
and have redenominated all outstanding sovereign debt. Following this
introduction period, the participating members' legacy currencies will remain
legal tender as denominations of euro until January 1, 2002. At that time,
countries will issue new euro-denominated bills for use in cash transactions.
All legacy currency will be withdrawn prior to July 1, 2002 completing the euro
conversion on this date. As of January 1, 1999, the participating countries no
longer control their own monetary policies by directing independent interest
rates for the legacy currencies; instead, the authority to direct monetary
policy, including money supply and official interest rates for the euro, is
exercised by the new European Central Bank.
The Company has implemented a plan to address the issues raised by the
euro conversion. These issues include, but are not limited to; the competitive
impact created by cross-border price transparency; the need for the Company and
its business partners to adapt IT and non-IT systems to accommodate
euro-demoninated transactions; and the need to analyze the legal and contractual
implications of the Company's contracts. The Company currently anticipates that
the required modifications to its systems, equipment and processes will be made
on a timely basis and does not expect that the costs of such modifications will
have a material effect on the Company's financial position or results of
operations.
Since the implementation of the euro on January 1, 1999, the Company
has experienced improved efficiencies in its cash management program in Europe
and has been able to reduce certain hedging activities as a direct result of the
conversion. The Company has not experienced any material adverse effects on its
financial position or results of operations in connection with the initial
roll-out of the euro currency.
15
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement establishes requirements for accounting and
reporting of derivative instruments and hedging activities. SFAS 133 was updated
by the issuance of SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FAS No. 133" and is effective for
fiscal years beginning after June 15, 2000. The future impact of this statement
on the Company's results of operations is not expected to be material.
COMMENTS ON FORWARD-LOOKING INFORMATION
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company, in Exhibit 99A to its
Annual Report on Form 10-K for the year ended January 31, 1999, outlined
cautionary statements and identified important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements, as made within this Form 10-Q, should be considered
in conjunction with the information included within the aforementioned Exhibit
99A.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in the quantitative and qualitative
market risk disclosure of the Company as presented in the Company's Annual
Report on Form 10-K for the year ended January 31, 1999.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
NO. DESCRIPTION
--- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the quarter ended October 31, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECH DATA CORPORATION
---------------------
(Registrant)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ STEVEN A. RAYMUND Chairman of the Board of December 15, 1999
- ------------------------ Directors and Chief
Steven A. Raymund Executive Officer
/s/ JEFFERY P. HOWELLS Executive Vice President December 15, 1999
- ------------------------ and Chief Financial Officer;
Jeffery P. Howells (principal financial officer);
Director
/s/ JOSEPH B. TREPANI Senior Vice President and December 15, 1999
- ------------------------ Corporate Controller (principal
Joseph B. Trepani accounting officer)
/s/ ARTHUR W. SINGLETON Vice President, Treasurer and December 15, 1999
- ------------------------ Secretary
Arthur W. Singleton
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TECH
DATA CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 31,
1999 AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 4,210
<SECURITIES> 0
<RECEIVABLES> 1,934,968
<ALLOWANCES> 62,783
<INVENTORY> 1,448,283
<CURRENT-ASSETS> 3,488,381
<PP&E> 146,053
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,045,596
<CURRENT-LIABILITIES> 2,711,063
<BONDS> 308,405
0
5
<COMMON> 78
<OTHER-SE> 1,024,980
<TOTAL-LIABILITY-AND-EQUITY> 4,045,596
<SALES> 12,212,195
<TOTAL-REVENUES> 12,212,195
<CGS> 11,533,116
<TOTAL-COSTS> 12,014,739
<OTHER-EXPENSES> 481,623
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<INTEREST-EXPENSE> 49,564
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<INCOME-CONTINUING> 90,751
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<NET-INCOME> 90,444
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