-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HzSJYHpMaZqaT3aOA/+6m93G4s7m0TchrUplhL3xkf7ZteGO/GOGxHUsVadqNWTn fb6wEs9f4LuJNT24mTXQVw== 0000950144-98-013898.txt : 19981216 0000950144-98-013898.hdr.sgml : 19981216 ACCESSION NUMBER: 0000950144-98-013898 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECH DATA CORP CENTRAL INDEX KEY: 0000790703 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 591578329 STATE OF INCORPORATION: FL FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14625 FILM NUMBER: 98770163 BUSINESS ADDRESS: STREET 1: 5350 TECH DATA DR CITY: CLEARWATER STATE: FL ZIP: 33760 BUSINESS PHONE: 7275397429 MAIL ADDRESS: STREET 1: 5350 TECH DATA DRIVE CITY: CLEARWATER STATE: FL ZIP: 33760 10-Q 1 TECH DATA CORPORATION 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended October 31, 1998 ---------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission file number 0-14625 ------- TECH DATA CORPORATION ---------------------------------------------------- (Exact name of registrant as specified in its charter)
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 14, 1998 - ---------------------------------------- ----------------- Common stock, par value $.0015 per share 51,073,865
2 TECH DATA CORPORATION AND SUBSIDIARIES Form 10-Q For The Quarter Ended October 31, 1998 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheet as of October 31, 1998 (unaudited) and January 31, 1998 3 Consolidated Statement of Income (unaudited) for the three and nine months ended October 31, 1998 and 1997 4 Consolidated Statement of Cash Flows (unaudited) for the nine months ended October 31, 1998 and 1997 5 Notes to Consolidated Financial Statements (unaudited) 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Item 3. Quantitative and Qualitative Disclosures about Market Risk - Not applicable PART II. OTHER INFORMATION All items required in Part II have been previously filed, have been included in Part I of this report or are not applicable for the quarter ended October 31, 1998. SIGNATURES 17
2 3 TECH DATA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands, except share amounts)
October 31, January 31, 1998 1998 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,375 $ 2,749 Accounts receivable, less allowance for doubtful accounts of $58,589 and $29,731 1,520,429 909,426 Inventories 1,064,083 1,028,367 Prepaid and other assets 84,396 65,843 ----------- ----------- Total current assets 2,670,283 2,006,385 Property and equipment, net 130,772 100,562 Excess of cost over acquired net assets, net 342,614 55,460 Other assets, net 62,499 22,976 ----------- ----------- $ 3,206,168 $ 2,185,383 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Revolving credit loans $ 430,123 $ 540,177 Accounts payable 1,270,179 850,866 Accrued expenses 242,884 77,961 ----------- ----------- Total current liabilities 1,943,186 1,469,004 Long-term debt 308,557 8,683 ----------- ----------- 2,251,743 1,477,687 ----------- ----------- Minority interest 23,837 5,108 ----------- ----------- Commitments and contingencies Shareholders' equity: Preferred stock, par value $.02; 226,500 shares authorized and issued; liquidation preference $.20 per share 5 5 Common stock, par value $.0015; 200,000,000 shares authorized; 51,064,179 and 48,250,349 issued and outstanding 77 72 Additional paid-in capital 505,591 403,880 Retained earnings 392,240 299,768 Cumulative translation adjustment 32,675 (1,137) ----------- ----------- Total shareholders' equity 930,588 702,588 ----------- ----------- $ 3,206,168 $ 2,185,383 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements 3 4 TECH DATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (In thousands, except per share amounts)
Three months ended Nine months ended October 31, October 31, ----------------------- ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net sales $3,278,401 $2,021,479 $7,676,028 $4,943,445 ---------- ---------- ---------- ---------- Cost and expenses: Cost of products sold 3,065,306 1,892,137 7,178,418 4,614,948 Selling, general and administrative expenses 143,892 83,294 333,314 205,938 ---------- ---------- ---------- ---------- 3,209,198 1,975,431 7,511,732 4,820,886 ---------- ---------- ---------- ---------- Operating profit 69,203 46,048 164,296 122,559 Interest expense 14,422 7,991 28,765 20,644 Gain on sale of Macrotron AG - - 12,500 - ---------- ---------- ---------- ---------- Income before income taxes 54,781 38,057 148,031 101,915 Provision for income taxes 20,088 14,384 54,977 38,556 ---------- ---------- ---------- ---------- Income before minority interest 34,693 23,673 93,054 63,359 Minority interest 605 - 582 - ---------- ---------- ---------- ---------- Net income $ 34,088 $ 23,673 $ 92,472 $ 63,359 ========== ========== ========== ========== Net income per common share: Basic $ .67 $ .54 $ 1.88 $ 1.45 ========== ========== ========== ========== Diluted $ .63 $ .51 $ 1.79 $ 1.39 ========== ========== ========== ========== Weighted average common shares outstanding: Basic 50,911 44,226 49,276 43,730 ========== ========== ========== ========== Diluted 57,997 46,483 52,927 45,579 ========== ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 4 5 TECH DATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands)
Nine months ended October 31, ----------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Cash received from customers $ 7,528,870 $ 4,782,338 Cash paid to suppliers and employees (7,070,188) (4,685,677) Interest paid (22,789) (20,895) Income taxes paid (45,612) (37,201) ----------- ----------- Net cash provided by operating activities 390,281 38,565 ----------- ----------- Cash flows from investing activities: Sale of Macrotron AG 227,843 - Acquisition of business, net of cash acquired (90,430) (53,668) Capital expenditures (43,760) (24,430) ----------- ----------- Net cash provided by (used in) investing activities 93,653 (78,098) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 16,716 17,953 Net (repayments) borrowings under revolving credit loan (501,865) 22,962 Principal payments on long-term debt (159) (150) ----------- ----------- Net cash (used in) provided by financing activities (485,308) 40,765 ----------- ----------- Net (decrease) increase in cash and cash equivalents (1,374) 1,232 Cash and cash equivalents at beginning of period 2,749 661 ----------- ----------- Cash and cash equivalents at end of period $ 1,375 $ 1,893 =========== =========== Reconciliation of net income to net cash provided by operating activities: Net income $ 92,472 $ 63,359 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 28,491 18,749 Provision for losses on accounts receivable 23,316 19,555 Gain on sale of Macrotron AG (12,500) - (Increase) decrease in assets: Accounts receivable (147,158) (161,107) Inventories 255,438 (167,710) Prepaid and other assets 134,926 (6,212) Increase (decrease) in liabilities: Accounts payable 153,449 262,076 Accrued expenses (138,153) 9,855 ----------- ----------- Total adjustments 297,809 (24,794) ----------- ----------- Net cash provided by operating activities $ 390,281 $ 38,565 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 5 6 TECH DATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements and related notes included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited consolidated financial statements contain all material adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial position of Tech Data Corporation and subsidiaries (the "Company" or "Tech Data") as of October 31, 1998, their results of operations for the three and nine months ended October 31, 1998 and 1997 and their cash flows for the nine months ended October 31, 1998 and 1997. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the nine months ended October 31, 1998 are not necessarily indicative of the results that can be expected for the entire fiscal year ending January 31, 1999. NOTE 2 - ACQUISITION AND DISPOSITION OF SUBSIDIARIES: Acquisition of Computer 2000 AG On July 1, 1998, Tech Data completed the acquisition of approximately 83% of the voting common stock of Computer 2000 AG ("Computer 2000"), Europe's leading technology products distributor. The Company acquired 80% of the outstanding voting stock of Computer 2000 from its parent company, Klockner & Co. AG., a subsidiary of Munich-based conglomerate VIAG AG, and an additional stake of approximately 3% of Computer 2000's shares from an institutional investor. The initial acquisition was completed through an exchange of approximately 2.2 million shares of Tech Data common stock and $300 million of 5% convertible subordinated notes, due 2003 (coupon rate of 5.0%, five year term and convertible into shares of common stock at $56.25 per share). The purchase agreement is subject to certain indemnification and contingent payments which are based on future events. On November 17, 1998, the Company commenced a tender offer for the remaining C2000 shares at a price per share of DM845. As a result of this tender offer, prior open market purchases and private purchase transactions, the Company currently owns approximately 97% of Computer 2000's outstanding stock for a total purchase price of approximately $500 million. The open market purchases, private purchase transactions and tender offer have been funded through the Company's revolving credit loan agreements. The acquisition of Computer 2000 is accounted for under the purchase method. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over net assets acquired of approximately $340 million is being amortized on a straight-line basis over 40 years. The final allocation of the purchase price may vary as additional information is obtained, and accordingly, the ultimate allocation may differ from those used in the unaudited consolidated financial statements included herein. 6 7 TECH DATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 2 - ACQUISITION AND DISPOSITION OF SUBSIDIARIES - CONTINUED: Disposition of Macrotron AG On July 28, 1998, pursuant to a Share Purchase Agreement dated June 10, 1998, the Company completed the sale of its majority interest in Munich-based subsidiary Macrotron AG ("Macrotron") to Ingram Micro, Inc. ("Ingram"). Tech Data acquired its majority interest in Macrotron in July 1997 and owned 99% and 91% of Macrotron's outstanding common and preferred stock, respectively, at the time of the sale. The sale of Macrotron was completed through the receipt of approximately $228 million from Ingram (approximately $100 million for the Company's shares of Macrotron and the balance of $128 million for the repayment of Macrotron's intercompany indebtedness). The Company's subsidiaries outside of North America are included in its consolidated financial statements on a calendar quarter basis. As such, the quarter ended October 31, 1998 includes a full quarter of results for Computer 2000 (which was acquired effective July 1, 1998) and excludes operating results for Macrotron (which was sold effective July 1, 1998). The Company's fiscal quarter ending October 31, 1998 includes the proceeds received from the sale of Macrotron as well as Computer 2000's operations for the three month period beginning July 1, 1998 and ending September 30, 1998. Pro forma information The following pro forma unaudited results of operations reflects the effect on the Company's operations, as if the above described acquisition of Computer 2000 and disposition of Macrotron had occurred at the beginning of each of the periods presented below:
Nine months ended October 31, --------------- -------- --------------- 1998 1997 --------------- --------------- (Unaudited) Net sales $9,841,455 $8,185,058 Net income 91,426 63,704 Net income per common share: Basic $ 1.81 $ 1.39 Diluted $ 1.70 $ 1.33
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Computer 2000 acquisition and the Macrotron disposition been consummated as of the beginning of the periods above, nor are they necessarily indicative of future operating results. 7 8 TECH DATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 3 - NET INCOME PER COMMON SHARE: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS 128") and related interpretations. SFAS 128 requires dual presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS"). Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised using the treasury stock method. The composition of basic and diluted net income per common share is as follows:
Three months ended Three months ended October 31, 1998 October 31, 1997 --------------------------------- ------------------------------------ Weighted Per Weighted Per Net Average Share Net Average Share Income Shares Amount Income Shares Amount ------- -------- ------ ------- -------- ------ (In thousands, except per share amounts) Net income per common share - basic $34,088 50,911 $ .67 $23,673 44,226 $ .57 ====== ====== Effect of dilutive securities: Stock options - 1,753 - - 2,257 - 5% convertible subordinated notes 2,363 5,333 - - - - ------- -------- ------- -------- Net income per common share - diluted $36,451 57,997 $ .63 $23,673 46,483 $ .51 ======= ======== ====== ======= ======== ======
Nine months ended Nine months ended October 31, 1998 October 31, 1997 --------------------------------- --------------------------------- Weighted Per Weighted Per Net Average Share Net Average Share Income Shares Amount Income Shares Amount ------- -------- ------ ------- -------- ------ (In thousands, except per share amounts) Net income per common share - basic $92,472 49,276 $ 1.88 $63,359 43,730 $ 1.45 ====== ====== Effect of dilutive securities: Stock options - 1,873 - - 1,849 - 5% convertible subordinated notes 2,363 1,778 - - - - ------- -------- ------- -------- Net income per common share - diluted $94,835 52,927 $ 1.79 $63,359 45,579 $ 1.39 ======= ======== ====== ======= ======== ======
8 9 TECH DATA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 4 - COMPREHENSIVE INCOME: Effective in the first quarter ended April 30, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the Company's consolidated financial statements. Comprehensive income is defined in SFAS 130 as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Total comprehensive income was $54.5 million and $23.8 million for the three months ended October 31, 1998 and 1997, respectively, and $110.9 million and $62.0 million for the nine months ended October 31, 1998 and 1997, respectively. The difference between net income as reported and total comprehensive income is the tax effected change in the cumulative translation adjustment. NOTE 5 - LONG TERM DEBT: On July 1, 1998, the Company issued $300 million convertible subordinated notes due July 1, 2003. The notes bear interest at 5% per year and are convertible any time prior to maturity, unless previously redeemed or repurchased, into shares of common stock at a conversion rate of 17.777 shares per $1,000 principal amount of notes, equivalent to a conversion price of approximately $56.25 per share. The notes are convertible into approximately 5.3 million shares of the Company's common stock. The notes are redeemable in whole or in part, at the option of the Company at any time on or after July 1, 2001. NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS: In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. The statement is effective for fiscal years beginning after December 15, 1997 but does not require compliance with interim reporting requirements until the second year of implementation. The standard addresses disclosure issues and therefore will not affect the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if so, the type of the hedge transaction. The ineffective portion of all hedge transactions will be recognized in the current-period earnings. SFAS 133 is effective for fiscal years beginning after December 31, 1998. The future impact of this statement on the Company's results of operations is not expected to be material. 9 10 TECH DATA CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended October 31, 1998 and 1997 Net sales increased 62.2% to $3.28 billion in the third quarter of fiscal 1999 compared to $2.02 billion in the third quarter last year. This increase is attributable to the acquisition of Computer 2000 AG ("Computer 2000") as well as the addition of new product lines and the expansion of existing product lines. Sales for the third quarter of fiscal 1999 include a full quarter of results for Computer 2000 and exclude the results of the Company's former subsidiary, Macrotron AG. The Company's international sales advanced 222% in the third quarter of fiscal 1999 compared to the prior year third quarter while domestic sales increased 7%. The significant growth in the Company's international sales is attributable to the acquisition of Computer 2000, in which the Company acquired a controlling interest on July 1, 1998. International sales represented approximately 51% of fiscal 1999 third quarter net sales compared to 23% for the third quarter of fiscal 1998. The cost of products sold as a percentage of net sales was 93.5% in the third quarter of fiscal 1999, compared to 93.6% in the prior year. This decrease is the result of the inclusion of Computer 2000, partially offset by competitive market conditions in the Company's U.S. business. Selling, general and administrative expenses increased 72.8% to $143.9 million in the third quarter of fiscal 1999 compared to $83.3 million last year and as a percentage of net sales increased to 4.39%, compared to 4.12% in the third quarter last year. The dollar value increase in selling, general and administrative expenses as well as the increase as a percentage of sales in the third quarter of fiscal 1999 is attributable to the acquisition of Computer 2000 and the increases in other operating expenses needed to support the increased volume of business. As a result of the factors described above, operating profit increased to $69.2 million in the third quarter of fiscal 1999, compared to $46.0 million, for the third quarter last year and as a percentage of net sales, decreased to 2.1% from 2.3%, respectively. Interest expense increased in the third quarter of fiscal 1999 due to an increase in the average outstanding indebtedness related to the issuance of the $300 million in convertible subordinated notes in conjunction with the acquisition of Computer 2000 as well as the Company's continued growth. The provision for income taxes increased 39.7% to $20.1 million in the third quarter of fiscal 1999 compared to $14.4 million last year. This increase is attributable to an increase in the Company's income before income taxes. The Company's average income tax rate declined to 36.7% in the third quarter this year compared with 37.8% in the prior year due to fluctuations in the amount of federal, state and foreign taxable income reported in each period. 10 11 As a result of the factors described above, net income increased 44.0% to $34.1 million, or $.63 per diluted share, in the third quarter of fiscal 1999 compared to $23.7 million, or $.51 per diluted share, in the prior year comparable quarter. Nine Months Ended October 31, 1998 and 1997 Net sales increased 55.3% to $7.68 billion in the first nine months of fiscal 1999 compared to $4.94 billion in the same period last year. Net income for the nine month period this year was $92.5 million, or $1.79 per diluted share, up 45.9% from the $63.4 million, or $1.39 per diluted share, in the same period last year. The Company's results of operations for the nine months ended October 31, 1998, include a pretax gain of $12.5 million ($7.6 million net of income taxes) related to the sale of Macrotron. (The underlying reasons for all other fluctuations in the results of operations for the nine months ended October 31, 1998 are substantially the same as in the comparative quarterly discussion above and, therefore, will not be repeated here). Liquidity and Capital Resources Net cash provided by operating activities of $390.3 million during the first nine months of fiscal 1999 was primarily attributable to income from operations of $92.5 million combined with an increase in accounts payable and a decrease in inventories partially offset by an increase in accounts receivable. Net cash provided by investing activities of $93.7 million during the first nine months of fiscal 1999 was attributable to receipt of $227.8 million in proceeds from the sale of Macrotron (See Note 2 of Notes to Consolidated Financial Statements) offset by $90.4 million related to the acquisition of Computer 2000 and the Company's continuing investment of $43.8 million in its management information systems, office facilities and its distribution center facilities. The Company expects to make capital expenditures of approximately $60 - $75 million during fiscal 1999 to further expand its management information systems capability, office facilities and distribution centers. Net cash used in financing activities of $485.3 million during the first nine months of fiscal 1999 reflects the net repayments under the Company's revolving credit loans of $501.9 million partially offset by proceeds from stock option exercises (including the related income tax benefit) of $16.7 million. As of October 31, 1998, the Company maintained domestic and foreign revolving credit agreements which provide maximum short-term borrowings of approximately $1.47 billion (including local country credit lines), of which $430 million was outstanding at that date. The Company believes that cash from operations, available and obtainable bank credit lines and trade credit from its vendors and periodic offerings of the Company's common stock and equity securities (both in public offerings and in conjunction with business combinations) will be sufficient to satisfy its working capital and capital expenditure needs through fiscal 2000. 11 12 Asset Management The Company manages its inventories by maintaining sufficient quantities to achieve high order fill rates while attempting to stock only those products in high demand with a rapid turnover rate. Inventory balances fluctuate as the Company adds new product lines and when appropriate, makes large purchases, including cash purchases from manufacturers and publishers when the terms of such purchases are considered advantageous. The Company's contracts with most of its vendors provide price protection and stock rotation privileges to reduce the risk of loss due to manufacturer price reductions and slow moving or obsolete inventory. In the event of a vendor price reduction, the Company generally receives a credit for the impact on products in inventory. In addition, the Company has the right to rotate a certain percentage of purchases, subject to certain limitations. Historically, price protection and stock rotation privileges, as well as the Company's inventory management procedures have helped to reduce the risk of loss of carrying inventory. The Company attempts to control losses on credit sales by closely monitoring customers' creditworthiness through evaluating detailed information on customer payment history and other relevant information. In addition, the Company participates in a national credit association which exchanges credit information on mutual customers. The Company has credit insurance which insures a percentage of the credit extended by the Company to international and certain of its larger domestic customers against possible loss. Customers who qualify for credit terms are typically granted net 30 day payment terms. The Company also sells product on a prepay or credit card basis or through commercial finance companies. Recent Accounting Pronouncements In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. The statement is effective for fiscal years beginning after December 15, 1997 but does not require compliance with interim reporting requirements until the second year of implementation. The standard addresses disclosure issues and therefore will not affect the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if so, the type of the hedge transaction. The ineffective portion of all hedge transactions will be recognized in the current-period earnings. SFAS 133 is effective for fiscal years beginning after December 31, 1998. The future impact of this statement on the Company's results of operations is not expected to be material. 12 13 Year 2000 Introduction The "Year 2000 Problem" arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The problems created by using abbreviated dates appear in hardware (such as microchips), operating systems and other software programs. The Company's Year 2000 ("Y2K") compliance project is intended to determine the readiness of the Company's business for the Year 2000. The Company defines Y2K "compliance" to mean that the computer code will process all defined future dates properly and give accurate results. Description of Areas of Impact and Risk The Company has identified four areas where the Y2K problem creates risk to the Company. These areas are: a) internal Information Technology ("IT") systems; b) non-IT systems with embedded chip technology; c) system capabilities of third party businesses with relationships with the Company, including product suppliers, customers, service providers (such as telephone, power, logistics, financial services) and other businesses whose failure to be Y2K compliant could have a material adverse effect on the Company's business, financial condition or results of operations; and d) product liability claims arising out of the non-performance of computer products distributed by the Company. Plan to Address Year 2000 Compliance In August 1997, the Company formed a Year 2000 Compliance Project Team and began developing an overall plan to address Y2K readiness issues. This plan includes five phases as follows: Phase I is to create an inventory of the Company's IT systems, non-IT systems and service providers (each of these being referred to as "business components") that need to be analyzed for Y2K compliance. During Phase I a priority is established so that the Company will first address the most important business components to determine Y2K readiness. Phase II analyzes the identified business components to determine which of the business components in the inventory require additional effort to be Y2K compliant. Phase III is the repair, modification or replacement of business components which the analysis determines are not Y2K compliant ("remediation"). Phase IV consists of various types of testing to confirm that the remediation process has resulted in the business components being Y2K compliant. Phase V is the development of contingency plans to address potential risks that the Y2K compliance project may not fully address. State of Readiness IT Systems - The initial Phase I inventory and prioritization process for the Company's U.S. based IT systems has been completed. The Company's current focus in this area is on testing and remediation, inventory refinement, and test plan refinement. Approximately 32% of all identified IT system business components in the U.S. have been deemed to be Y2K compliant as of November 30, 1998 with analysis of 13 14 the remaining 68% continuing. The Y2K test environment in the U.S. is also expected to be fully functional in January 1999. Testing will continue through July 1999 when all compliance testing is anticipated to be completed. Even though the original design of the Company's mainframe and DCS software system (the Company's system performing the primary business functions of sales order entry, billing, purchasing, distribution and inventory control) considered the Y2K problem and is currently deemed compliant, the test plan includes detailed testing of this business critical system. Desktop hardware and software systems testing and remediation in the U.S. is anticipated to be completed in February 1999. Following the Company's acquisition of Computer 2000 in July 1998, the Company revised its Y2K compliance program to include the systems of the Munich-based operation and its subsidiaries. During acquisition due diligence and as a part of the contractual purchase arrangement, Computer 2000's primary computer system was represented as Y2K compliant. Therefore, the current focus of this part of the project is on the client server and network based systems that connect to this system. It is anticipated that this portion of the Company's Y2K compliance program will achieve completion of all phases by the same time the Company completes all of its phases of the U.S. and Canada plan, July 1999. Non-IT systems - Non-IT systems consist of any device which is able to store and report date-related information, such as access control systems, elevators, conveyors, escalators and other items containing a microprocessor or internal clock. The phased plan approach utilized by the Company for analysis of the IT systems is also being used for non-IT systems. Phase I inventory and prioritization has been completed for non-IT systems in the U.S. and is currently being conducted in the Company's worldwide locations. Phase II analysis will be performed on systems material to the Company's operations with the assistance of the Company's vendors. The Company currently plans to complete the Y2K compliance program for all material non-IT systems by the end of November 1999. Material Third Parties - The Company has created an inventory of what it believes to be all material third parties with whom the Company has a business relationship in the U.S. Y2K readiness surveys were sent to these third parties beginning in February 1998. The Company is currently reviewing the responses to these surveys to determine the Y2K readiness of these third parties. For those critical third party suppliers, service providers and customers that fail to respond to the Company's survey, the Company intends to pursue alternative means of obtaining Y2K readiness information, such as review of publicly available information published by such third parties. The Company also plans to implement this same approach to third party Y2K readiness at the Company's foreign subsidiaries. The Company plans to continue to review its third party relationships throughout the Y2K compliance program to ensure all material third party relationships are addressed. Product Liability - The Company does not make any representations or warranties that the products it distributes are or will be Y2K ready or compliant. In certain countries where the Company or its subsidiaries distribute products, the Company may have an obligation to accept returns of products which fail because the product is not Y2K ready. In most cases, these returns may be passed on to the manufacturer. In those countries where product return obligations may exist, the Company plans to carefully review manufacturer representations regarding products that are sold in material volumes by the Company or its subsidiaries. 14 15 Cost of Project The overall cost of the Company's Y2K compliance effort cannot be accurately estimated until all inventory and analysis phases have been completed. Current expenditures on Y2K compliance have not been material to the Company's operations or financial condition. Contingency Planning and Risks Upon completion of Phase I (inventory of components) and Phase II (analysis of Y2K readiness) the Y2K compliance project team will commence development of a contingency plan to address risks arising from Y2K. While the Company believes that its approach to Y2K readiness is sound, it is possible that some business components are not identified in the inventory, or that the scanning or testing process does not result in analysis and remediation of all source code. The Company will assume a third party is not Y2K ready if no survey response or an inadequate survey response is received. The Company's contingency plan will address alternative providers and processes to deal with business interruptions that may be caused by internal system or third party providers failure to be Y2K ready to the extent it is possible. The failure to correct a material Y2K problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failure could materially and adversely affect the Company's results of operations, liquidity and financial condition. In addition, the Company's operating results could be materially adversely affected if it were to be held responsible for the failure of any products sold by the Company to be Y2K ready despite the Company's disclaimer of product warranties and the limitation of liability contained in its sales terms and conditions. Euro Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to commence conversion from their existing sovereign currencies to a new, single currency called the euro. Fixed conversion rates between the existing currencies, the legacy currencies, and the euro will be established and the euro will become the common legal currency of the participating countries on this date. The euro will then trade on currency exchanges and be available for non-cash transactions. The participants will issue sovereign debt exclusively in euro and will redenominate outstanding sovereign debt at this time. Following this introduction period, the participating members legacy currencies will remain legal tender as denominations of euro until January 1, 2002. At that time, countries will issue new euro-denominated bills for use in cash transactions. All legacy currency will be withdrawn prior to July 1, 2002 completing the euro conversion on this date. As of January 1, 1999, the participating countries no longer will control their own monetary policies by directing independent interest rates for the legacy currencies, and instead, the authority to direct monetary policy, including money supply and official interest rates for the euro, will be exercised by the new European Central Bank. The Company has established a plan to address the issues raised by the euro conversion. These issues include, but are not limited to; the competitive impact created 15 16 by cross-border price transparency; the need for the Company and its business partners to adapt IT and non-IT systems to accommodate euro-demoninated transactions; and the need to analyze the legal and contractual implications of the Company's contracts. The Company currently anticipates that the required modifications to its systems, equipment and processes will be made on a timely basis and does not expect that the costs of such modifications will have a material effect on the Company's financial position or results of operations. Comments on Forward-Looking Information In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company, in Exhibit 99A to its Annual Report on Form 10-K for the year ended January 31, 1998, outlined cautionary statements and identified important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. Such forward-looking statements, as made within this Form 10-Q, should be considered in conjunction with the information included within the aforementioned Exhibit 99A as well as other risks identified in this Form 10-Q. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TECH DATA CORPORATION (Registrant)
Signature Title Date - --------- ----- ---- /s/ Steven A. Raymund Chairman of the Board of December 15, 1998 - ----------------------- Directors and Chief Steven A. Raymund Executive Officer /s/ Jeffery P. Howells Executive Vice President December 15, 1998 - ----------------------- and Chief Financial Officer; Jeffery P. Howells (principal financial officer); Director /s/ Joseph B. Trepani Senior Vice President and December 15, 1998 - ----------------------- Corporate Controller (principal Joseph B. Trepani accounting officer) /s/ Arthur W. Singleton Vice President, Treasurer and December 15, 1998 - ----------------------- Secretary Arthur W. Singleton
17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TECH DATA CORPORATION QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS JAN-31-1999 FEB-01-1998 OCT-31-1998 1,375 0 1,579,018 58,589 1,064,083 2,670,283 130,772 0 3,206,168 1,943,186 309,557 0 5 77 930,506 3,206,168 7,676,028 7,676,028 7,178,718 7,511,732 333,314 0 28,765 148,031 54,977 93,054 0 0 0 92,472 1.88 1.79
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