<PAGE> 1
This filing is made pursuant to Rule 424(b)(2)
under the Securities Act of 1933 in connection
with Registration No. 333-07665
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 11, 1996)
[LOGO] PIONEER-STANDARD
$150,000,000
PIONEER-STANDARD ELECTRONICS, INC.
8 1/2% SENIOR NOTES DUE 2006
------------------------
The 8 1/2% Senior Notes due 2006 (the "Notes") of Pioneer-Standard
Electronics, Inc. (the "Company" or "Pioneer-Standard") will mature on
August 1, 2006. Interest on the Notes will accrue from August 12, 1996 and is
payable semi-annually on February 1 and August 1 of each year, commencing
February 1, 1997. The interest rate is subject to an increase to 9 1/2% per
annum under certain circumstances as described herein. The Notes are not
redeemable prior to maturity. Upon the occurrence of a Change of Control (as
defined in the Prospectus), each holder of the Notes may require that the
Company purchase the Notes at a purchase price equal to 100% of the principal
amount of the Notes plus accrued and unpaid interest, if any, to the date of
such purchase.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=========================================================================================================
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note..................... 100.000% 1.000% 99.000%
- ---------------------------------------------------------------------------------------------------------
Total........................ $150,000,000 $1,500,000 $148,500,000
=========================================================================================================
<FN>
(1) Plus accrued interest, if any, from August 12, 1996.
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting estimated expenses of $215,000 payable by the Company.
</TABLE>
------------------------
The Notes offered hereby are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves its right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Notes will be made through the facilities of The Depository
Trust Company in New York on or about August 12, 1996.
------------------------
LAZARD FRERES & CO. LLC
------------------------
The date of this Prospectus Supplement is August 7, 1996.
<PAGE> 2
[PASTE UP OF UNITED STATES MAP
DEPICTING LOCATIONS OF COMPANY HEADQUARTERS AND WAREHOUSES]
------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Certain capitalized terms in this summary are defined elsewhere in
this Prospectus Supplement.
THE COMPANY
Pioneer-Standard Electronics, Inc. (together with its subsidiaries, the
"Company" or "Pioneer-Standard") is a leading distributor of a broad range of
industrial and end-user electronic components and computer products supplied by
more than 100 manufacturers to original equipment manufacturers, value-added
resellers, research laboratories, government agencies and other organizations,
primarily in the United States and Canada. The Company distributes products to
over 24,000 customers, including Abbott Laboratories, AlliedSignal,
Hewlett-Packard, IBM, Intel, Northern Telecom and United Technologies.
The Company's products are classified into three broad categories:
semiconductors, computer systems products, and passive and electromechanical
products. Semiconductors are the building blocks of computer chips and include
microprocessors, memory devices, programmable logic devices, and analog and
digital integrated circuits. Computer systems products include storage
subsystems, software services, servers, personal computers, display terminals
and networking products. Passive and electromechanical products are devices that
move or use an electrical signal and include capacitors, connectors, resistors,
potentiometers, switches and power conditioning equipment.
The Company markets products supplied by many of the largest and best-known
manufacturers in the industry. The Company's two largest suppliers are Digital
Equipment Corporation and Intel. Other major suppliers include Bourns, Cisco
Systems, IBM, Kemet Electronics, Lucent Technologies, Micron Technology,
National Semiconductor, Oracle, Siemens and Thomas & Betts.
The Company has more than 1,000 sales personnel, sales support personnel
and technical experts at over 50 locations throughout North America who work
closely together to provide customers with individualized services and
solutions. The Company distributes its products to customers from strategic
locations throughout the United States and Canada. The Company's 106,000 square
foot Corporate Distribution Center near Cleveland, Ohio, is a state-of-the-art
facility that serves as the hub of the distribution process. The Company
provides customers with same-day shipment of substantially all orders received
by 3:00 p.m.
Total quality management plays a key strategic role in the Company's
continued progress. The Company is ISO 9002 certified for a number of its
facilities, processes and services and is seeking additional certifications.
This is important to maintaining and improving the Company's strategic position
in North America and abroad.
The Company's primary objective is to improve its position as an industry
leader through strong internal growth and acquisitions, continued development of
the breadth and quality of its product line, anticipation and satisfaction of
customer needs by providing innovative value-added services, maintenance of a
strong sales and technical force, emphasis on an efficient and effective
distribution system, rigorous attention to quality control, and continued focus
on cost reduction initiatives.
On November 30, 1995, the Company acquired the remaining 50% of
Pioneer-Standard of Maryland, Inc. ("Pioneer Maryland"), which distributes
electronic components and computer products and provides technical support
through 11 locations in the Southeast and Northwest regions of the United
States. The acquisition was completed to expand the Company's product base and
service offerings and geographic position. The Company anticipates that the
significant benefits from this transaction will include cost savings and
operational and process improvements.
S-3
<PAGE> 4
THE OFFERING
Securities Offered.............. $150,000,000 aggregate principal amount of
8 1/2% Senior Notes due 2006.
Maturity Date................... August 1, 2006.
Interest Payment Dates.......... February 1 and August 1 of each year,
commencing February 1, 1997.
Interest Adjustments............ The Notes will bear interest at the rate of
8 1/2% per annum, subject to an increase to
9 1/2% per annum upon the occurrence of a
Rating Event (as defined herein). See
"Description of the Notes -- Interest
Adjustments."
Ranking......................... The indebtedness evidenced by the Notes will
rank pari passu in right of payment with all
other unsubordinated indebtedness of the
Company.
Redemption...................... The Notes will not be redeemable prior to
their stated maturity.
Certain Covenants............... The Indenture under which the Notes will be
issued (the "Indenture") limits (i) the
creation of liens, (ii) sale and leaseback
transactions, (iii) consolidations, mergers
and transfers of all or substantially all of
the Company's assets, and (iv) indebtedness
of the Company's Restricted Subsidiaries.
These limitations are subject to a number of
important qualifications and exceptions. In
addition, the Notes will be subject to
mandatory purchase by the Company at the
option of the Holders in the event of a
Change of Control of the Company. See
"Description of Debt Securities --
Restrictive Covenants" and "-- Change of
Control" in the accompanying Prospectus.
Defeasance...................... The Notes will be subject to defeasance and
discharge and defeasance of certain covenants
and certain events of default. See
"Description of Debt Securities --
Defeasance" in the accompanying Prospectus.
Use of Proceeds................. The net proceeds from the sale of the Notes
will be used to repay bank indebtedness. See
"Use of Proceeds" and "Proposed Credit
Facility."
S-4
<PAGE> 5
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five years ended March 31, 1992 through 1996, which have
been derived from the annual consolidated financial statements of the Company.
This data should be read in conjunction with the consolidated financial
statements included elsewhere herein. The consolidated financial data include
the operating results of Pioneer Maryland from November 30, 1995, when it became
a wholly-owned subsidiary of the Company. Prior to the acquisition, the Company
accounted for its 50% equity interest in Pioneer Maryland under the equity
method of accounting.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------------------
1996(1) 1995 1994 1993 1992
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................... $1,105,281 $832,152 $580,757 $430,013 $362,386
Operating income............... 51,948 43,679 31,389 21,061 12,393
Interest expense............... 8,136 3,966 2,687 3,581 4,505
Net income..................... 25,252 25,009 19,676 12,913 5,327
BALANCE SHEET DATA (YEAR END):
Total assets................... $ 559,110 $327,415 $220,039 $171,860 $150,871
Long-term debt................. 164,447 56,318 22,272 21,328 44,717
Shareholders' equity........... 150,693 126,415 102,740 84,117 57,455
OTHER DATA:
EBITDA(2)...................... $ 60,946 $ 49,909 $ 36,653 $ 25,707 $ 16,520
Depreciation and
amortization................ 8,998 6,230 5,264 4,646 4,127
Capital expenditures........... 21,004 11,326 7,626 4,160 5,110
Ratio of earnings to fixed
charges (unaudited)......... 5.08x 7.90x 8.74x 5.15x 2.37x
<FN>
- ---------------
(1) Fiscal year 1996 results include Pioneer Maryland under the equity method of
accounting prior to the acquisition of the remaining 50% on November 30,
1995. If Pioneer Maryland's results were included on a consolidated basis
for the full fiscal year ended March 31, 1996, net sales, operating income,
interest expense, and net income would have been $1,325,047,000,
$55,552,000, $12,191,000 and $24,704,000, respectively.
(2) Excludes equity in earnings (loss) of 50% owned company.
</TABLE>
S-5
<PAGE> 6
USE OF PROCEEDS
Net proceeds from the sale of the Notes will be approximately $148.3
million. The Company will apply the entire net proceeds from the sale of the
Notes to the payment of a portion of the amount outstanding under the Company's
revolving credit facility, which matures in November 1997. At June 30, 1996, the
Company had an aggregate of $200 million in borrowings outstanding under the
revolving credit facility, which currently bears interest at a weighted rate of
6.34% per annum. The indebtedness under this facility was primarily incurred in
1995 and 1996 to finance working capital needs, capital expenditures and the
acquisition of the remaining 50% of Pioneer Maryland. The remainder of the
revolving credit facility is expected to be repaid with the proceeds of
borrowings under a new proposed credit facility. See "Proposed Credit Facility."
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996, and as adjusted to give effect to: (i) this offering and the
application of the net proceeds therefrom to reduce bank borrowings under the
revolving credit facility, and (ii) the formation of the Share Subscription
Agreement and Trust (the "SSAT"), effective July 2, 1996, under which the
trustee of the SSAT has subscribed to purchase 5,000,000 of the Company's Common
Shares over a 15-year period at a price of $13.125 per share. The Company will
use the Common Shares or proceeds from the sales thereof to fund certain
employee compensation benefit plans. Under certain circumstances the Board of
Directors has the right to terminate the SSAT. See "Description of Capital Stock
- -- Share Subscription Agreement and Trust" in the Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT:
Short-term debt................................................. $ 29,500 $ 29,500
Current maturities of long-term debt............................ 2,888 2,888
-------- -----------
Total short-term debt................................... 32,388 32,388
LONG-TERM DEBT:
Credit Agreement due 1997....................................... 200,000 50,000
8 1/2% Senior Notes due 2006.................................... -- 150,000
9.79% Senior Notes due 2000..................................... 11,420 11,420
Capitalized lease............................................... 1,061 1,061
-------- -----------
Total long-term debt.................................... 212,481 212,481
SHAREHOLDERS' EQUITY:
Common shares, $.30 stated value
Authorized - 40,000,000 shares(1)
Issued and subscribed - 22,534,167
(27,534,167 as adjusted) shares.............................. 6,675 8,175
Capital in excess of stated value............................... 17,517 81,642
Less unpaid subscriptions
(5,000,000 shares as adjusted)............................... -- (65,625)
Retained earnings............................................... 131,982 131,982
Foreign currency translation adjustment......................... 294 294
-------- -----------
Total shareholders' equity.............................. 156,468 156,468
-------- -----------
Total capitalization.................................... $401,337 $ 401,337
======== ===========
<FN>
- ---------------
(1) On July 23, 1996, shareholders approved an amendment to the Company's
Articles of Incorporation, as amended, to increase the authorized capital
stock to 80,000,000 Common Shares.
</TABLE>
S-6
<PAGE> 7
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five years during the period ended March 31, 1996, which
have been derived from the annual consolidated financial statements of the
Company. The selected consolidated financial data should be read in conjunction
with the consolidated financial statements included elsewhere herein. The
consolidated financial data include the operating results of Pioneer Maryland
from November 30, 1995, when it became a wholly-owned subsidiary of the Company.
Prior to the acquisition, the Company accounted for its 50% equity interest in
Pioneer Maryland under the equity method of accounting.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------------
1996(1) 1995 1994 1993 1992
---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $1,105,281 $ 832,152 $ 580,757 $430,013 $362,386
Operating profit...................... 51,948 43,679 31,389 21,061 12,393
Equity in earnings (loss) of
50% owned company.................. (173) 2,500 3,001 2,505 654
Interest expense...................... 8,136 3,966 2,687 3,581 4,505
---------- ---------- ---------- -------- --------
Income from operations before income
taxes.............................. 43,639 42,213 31,703 19,985 8,542
Provision for income taxes............ 18,387 17,204 12,027 7,072 3,215
---------- ---------- ---------- -------- --------
Net income............................ $ 25,252 $ 25,009 $ 19,676 $ 12,913 $ 5,327
========= ========= ========= ======== ========
BALANCE SHEET DATA (YEAR END):
Working capital....................... $ 224,840 $ 131,438 $ 85,132 $ 70,781 $ 69,325
Total assets.......................... 559,110 327,415 220,039 171,860 150,871
Long-term debt........................ 164,447 56,318 22,272 21,328 44,717
Shareholders' equity.................. 150,693 126,415 102,740 84,117 57,455
OTHER DATA:
EBITDA(2)............................. $ 60,946 $ 49,909 $ 36,653 $ 25,707 $ 16,520
Depreciation and amortization......... 8,998 6,230 5,264 4,646 4,127
Capital expenditures.................. 21,004 11,326 7,626 4,160 5,110
Ratio of earnings to fixed charges
(unaudited)........................ 5.08x 7.90x 8.74x 5.15x 2.37x
<FN>
- ---------------
(1) Fiscal year 1996 results include Pioneer Maryland under the equity method of
accounting prior to the acquisition of the remaining 50% on November 30,
1995. If Pioneer Maryland's results were included on a consolidated basis
for the full fiscal year ended March 31, 1996, net sales, operating income,
interest expense, and net income would have been $1,325,047,000,
$55,552,000, $12,191,000 and $24,704,000, respectively.
(2) Excludes equity in earnings (loss) of 50% owned company.
</TABLE>
RECENT RESULTS
Net sales for the quarter ended June 30, 1996 were approximately $375.2
million compared to approximately $224.7 million for the quarter ended June 30,
1995, representing a 67% increase. Operating profit for the quarter ended June
30, 1996 was approximately $14.8 million compared to approximately $12.5 million
for the quarter ended June 30, 1995, representing a 19% increase. Interest
expense for the quarter ended June 30, 1996 was $3.9 million compared to $1.5
million for the quarter ended June 30, 1995. Net income for the quarter ended
June 30, 1996 was approximately $6.2 million compared to approximately $6.8
million for the quarter ended June 30, 1995, representing a 10% decrease. The
increase in interest expense and corresponding decrease in net income resulted
primarily from higher borrowings due to the Company's acquisition of the
remaining 50% of Pioneer Maryland and to fund growth in the business. Net sales,
operating profit and interest expense for the quarter ended June 30, 1995 does
not include the results of Pioneer Maryland, which was accounted for under the
equity method of accounting prior to the Company's acquisition of the remaining
50% interest in Pioneer Maryland on November 30, 1995. Net income for the
quarter ended June 30, 1995 includes the Company's 50% interest in Pioneer
Maryland's net income under the equity method of accounting. All the information
included in this section is unaudited.
S-7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATIONS
Sales. Fiscal 1996 was the tenth consecutive year of record sales and the
24th year in the 25 years the Company has been public that sales increased.
Sales for fiscal 1996 were $1,105.3 million, up 33% from $832.2 million in 1995.
The Company's sales, excluding Pioneer Maryland, increased 17% and, including
the four month contribution of Pioneer Maryland, sales increased 33%.
Pro Forma Effects of Acquisition. On November 30, 1995, the Company
acquired the remaining 50% of Pioneer Maryland for $50 million in cash. The
following unaudited pro forma information presents a summary of consolidated
results of operations for the Company and Pioneer Maryland as if the acquisition
had occurred at the beginning of fiscal 1996 and fiscal 1995, respectively, with
pro forma adjustments to give effect to amortization of goodwill, interest
expense on acquisition debt and certain other adjustments, together with related
income tax effects. Included in the 1996 results is an after-tax non-recurring
discontinuance charge of $2,450,000 ($.11 per share) recorded by Pioneer
Maryland to conform to the Company's methods of accounting.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Net sales..................... $1,325,047,000 $1,200,252,000
Net income.................... 24,704,000 27,741,000
Earnings per share............ 1.07 1.21
</TABLE>
Product Line Sales. The Company distributes a broad range of electronics
components and computer products manufactured by others. These products are
classified into three broad categories: semiconductors, computer system products
and passive and electromechanical components.
All three of the Company's major product categories added to sales growth
in fiscal 1996. Semiconductor products accounted for 38% of sales, compared with
37% and 41% in 1995 and 1994, respectively. Computer systems products comprised
40% of sales, compared with 38% in 1995 and 33% in 1994. Passive and
electromechanical products were 20% of sales, as compared with 22% in 1995 and
24% in 1994. Miscellaneous products accounted for 2% of sales in 1996, 3% in
1995 and 2% in 1994.
Gross Margins. The 1996 gross margin was 18.3% compared with 18.6% in 1995
and 19.8% in 1994. Product line shifts have been a factor in the change between
gross margin percents. The difference in gross margin percent between 1995 and
1994 is attributable to increased sales volume of microprocessors. While
microprocessors earn a relatively low gross profit margin, they are marketed
through an efficient low cost sales channel.
Historically, semiconductor products have had the highest gross margin of
the three product lines, but the addition of microprocessor sales in the
semiconductor category ranks semiconductors behind passive and electromechanical
products. Computer system products have the lowest gross margin and had the
highest line item value in 1996 while passive and electromechanical products had
the lowest. The gross margin percent of the semiconductor products was below the
other two categories in 1995 and 1994 primarily due to the effect of the
increased microprocessor sales.
Operating Efficiencies. Warehouse, selling and administrative expenses in
1996 were 13.6% of sales, compared with 13.4% in 1995 and 14.4% in 1994. The
slightly increased rate of operating expenses as a percent of sales in 1996 is
in part a reflection of the Company's investment in various programs to foster
growth and improve value added offerings and customer service and satisfaction.
The improvements since 1994 reflect to some extent the leveraging of expenses on
greater sales volume, and to a larger extent the many efficiencies realized
through FutureStart(SM), the Company's total quality management initiative. In
addition, operating expenses in all three years included outlays for geographic
expansion of sales operations.
The resulting operating profit amounted to $51.9 million, up 19% from $43.7
million in 1995, which was 39% greater than $31.4 million of 1994. Operating
profit amounted to 4.7% of net sales in 1996, compared with 5.2% in 1995 and
5.4% in 1994.
S-8
<PAGE> 9
On a weighted basis, after giving effect to the acquisition of the
remaining 50% of Pioneer Maryland, sales per employee were $671,000. Sales per
employee have reflected an average annual efficiency gain of approximately 12%
over the past five years. Turns on annual average inventory were 5.4 in 1996,
6.5 in 1995 and 6.1 in 1994. Pioneer-Standard's inventory turn has ranked at the
top of the industry's averages.
Interest Expense. Interest expense totaled $8.1 million in 1996, $4.0
million in 1995 and $2.7 million in 1994. Total interest-bearing debt increased
by $122.0 million during 1996 due principally to the additional indebtedness
associated with funding the $50 million cash acquisition of the remaining 50% of
Pioneer Maryland and assumption of its debt, which was refinanced. In addition,
the increased interest expense in 1996 reflects working capital needs stemming
from increased sales volume and increased capital expenditures.
Interest expense in fiscal 1995 also increased over the prior year amount.
Total interest bearing debt in 1995 increased by $38.9 million from 1994
primarily due to the working capital needs arising from increased sales volume
coupled with the cash investment in the Canadian business and to an increased
level of capital expenditures.
Equity Interest. The equity interest in the net income of Pioneer Maryland
resulted in a loss of $173 thousand during 1996, compared to net income of $2.5
million in 1995 and $3.0 million in 1994. The amounts above include Pioneer
Maryland's net income, and in 1996 include the Company's 50% share for only the
first eight months prior to the acquisition of the remaining 50% of Pioneer
Maryland, on November 30, 1995. The $173 thousand loss includes the Company's
50% share of non-recurring discontinuance costs of $1.2 million after tax, or 5
cents per share. Notwithstanding this one-time charge, effects of the
acquisition were approximately neutral to earnings in the final four months of
the year, and it is expected to have a positive effect on earnings in fiscal
1997.
Pioneer Maryland's sales for fiscal 1996 were $350.6 million, compared with
$368.1 million in 1995 and $422.0 million in 1994. Lower 1996 net sales
reflected reduced microprocessor sales which earn a relatively low gross profit
margin. However, Pioneer Maryland's traditional business sales volume, excluding
microprocessors, actually increased over the prior year. In both 1996 and 1995
microprocessor sales were reduced from a substantial build up in 1993 and 1994.
Taxes. The effective tax rate was 42.1% in 1996, compared to 40.8% in 1995
and 37.9% in 1994. The 1996 and 1995 tax rate increases were due to decreases in
the equity income amounts of Pioneer Maryland relative to the Company's total
net income, coupled with higher effective state tax rates and the unrecognized
tax benefit associated with the operating losses of the Canadian subsidiary.
Net Income. Despite the impact of non-recurring acquisition discontinuance
costs and other factors outlined above, fiscal 1996 net income increased 1% to a
new record high of $25.3 million, compared with $25.0 million in 1995 which was
up 27% from $19.7 million in 1994.
Earnings per share of $1.09 in 1996 matched the year ago record of $1.09,
compared with 87 cents per share in 1994. Per share amounts have been adjusted
to reflect a 3-for-2 split of the Company's Common Shares effective September 6,
1995.
Risk Control. Systems are in place providing for continuous measurement
and evaluation of foreign exchange exposures so that timely action can be taken
when considered desirable. Reducing exposure to foreign currency fluctuations is
an integral part of the Company's risk management program. Financial instruments
in the form of forward exchange contracts are employed as one of the methods to
reduce such risk. The Company does not enter into financial instruments for
trading or speculative purposes.
The Company extends credit based on customers' financial conditions, and
generally collateral is not required. Credit losses are provided for in the
financial statements when collections are in doubt.
Inflation has had little effect on the Company's operations.
S-9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
On November 30, 1995, the Company acquired the remaining 50% interest of
Pioneer Maryland for $50 million in cash and assumed its $30 million bank debt,
which was subsequently refinanced. Intangible assets of $38.4 million arising
from the transaction are being amortized over 40 years.
The Company maintains a strong financial position and excellent liquidity.
Current assets at fiscal 1996 year-end were $466.5 million, 1.9 times current
liabilities.
On July 25, 1995, the Company declared a three-for-two split of Common
Shares in the form of a 50% share dividend. Also at that time, reflecting sales
and earnings progress, the quarterly cash dividend rate was increased from 3.5
cents per share to 4.5 cents per share on a pre-split basis, or to 3 cents per
share on a post-split basis, for a 29% increase. This marks the 8th consecutive
year of a dividend increase and the 21st increase in the 25 years the Company
has been publicly traded.
The Company continued investing in programs to stimulate and support future
growth. Capital expenditures were $21.0 million in 1996, $11.3 million in 1995,
and $7.6 million in 1994. The increased spending in 1996 and 1995 is largely
related to ongoing initiatives designed to improve efficiencies through computer
enhancement of operating processes as well as investments in value added and
warehousing operations, and this will be true as well in 1997. Plans call for
approximately $23.0 million of capital expenditures in 1997. The increase in
1996 and planned increase in spending during 1997 reflect, in part, investments
in the Company's continuing business process redesign efforts. In addition,
amounts expended will enable the Company's technology toolset migration to a
new, state-of-the art software platform to support growth and flexibility
requirements.
In order to finance the purchase of the remaining 50% of Pioneer Maryland
and to meet near-term cash needs, the Company entered into a new credit
agreement dated November 29, 1995, with five banks providing up to an aggregate
of $200.0 million of unsecured borrowings on a revolving credit basis for two
years. As of March 31, 1996, borrowings outstanding of $152.0 million resulted
in $48.0 million of this total commitment available for use. In addition to the
revolving credit line, unsecured short-term lines of credit are available
whereby a maximum of $40.0 million may be borrowed to meet short-term
fluctuations in cash needs. At March 31, 1996, borrowings pursuant to these
short-term lines totaled $21.0 million leaving $19.0 million available for use.
The debt to capitalization ratio was 56% at March 31, 1996. The Company believes
that cash generated from operations and amounts available under its lines of
credit are presently sufficient to fund its working capital and capital
expenditure requirements.
It is anticipated that some portion of the outstanding bank borrowings will
be refinanced with fixed rate debt, equity, or a combination thereof given
favorable market conditions. However, there can be no assurance that any part of
the borrowings will be refinanced.
See "Use of Proceeds" and "Proposed Credit Facility" for a description of
the Company's proposed refinancing of debt incurred under the existing bank
credit facility.
S-10
<PAGE> 11
THE COMPANY
GENERAL
The Company is a leading distributor of a broad range of industrial and
end-user electronic components and computer products to customers located
principally in the United States and Canada. The Company's customers include
original equipment manufacturers, value-added resellers, research laboratories,
government agencies and other manufacturing and non-manufacturing organizations.
The Company distributes its products to customers from strategic locations
throughout the United States and Canada. The 106,000 square foot Corporate
Distribution Center near Cleveland, Ohio serves as the hub of the distribution
process.
PRODUCTS
The products distributed by the Company are classified into three broad
categories as follows:
Semiconductors. Semiconductor products are active products, which control
or effect a change in electrical signals. Semiconductor products are the
building blocks of computer chips and include microprocessors, memory devices,
programmable logic devices and analog and digital integrated circuits. The
Company's semiconductor products suppliers include Analog Devices, Intel, Micron
Technology, National Semiconductor and Siemens. Recent additions to the
Company's list of semiconductor suppliers include Integrated Silicon Solutions
and Lucent Technologies. Semiconductor products accounted for approximately $420
million, or 38%, of net sales in fiscal 1996.
Computer Systems Products. The Company distributes a wide spectrum of
computer systems products, including storage subsystems, software services,
servers, personal computers, display terminals and networking products. The
Company's computer systems suppliers include Digital Equipment Corporation,
Intel and Oracle. Recent additions to the list of suppliers include Cisco
Systems, IBM, Network General and Tadpole Technology. Computer systems products
accounted for approximately $442 million, or 40%, of net sales in fiscal 1996.
Passive and Electromechanical Products. Passive products are devices that
move or use an electrical signal, such as a connector or an LED display. Passive
and electromechanical products include capacitors, connectors, resistors,
potentiometers, switches and power conditioning equipment. The Company's passive
and electromechanical products suppliers include Bourns, Kemet Electronics,
Power-One and Thomas & Betts. Passive and electromechanical products accounted
for approximately $221 million, or 20%, of net sales in fiscal 1996.
The majority of the products sold by the Company are purchased pursuant to
distributor agreements which generally provide the Company with certain
inventory return privileges. The distributor agreements generally also provide
the Company certain protections from product obsolescence and price erosion.
The Company regularly reviews the products offered by its existing
suppliers as well as products available through new suppliers to assure that its
product line has sufficient variety and availability to meet the requirements of
its existing customers and to attract new customers. The Company emphasizes
product quality, product and supplier name recognition, breadth of product line
and pricing considerations.
VALUE-ADDED SERVICES
As an important part of its strategy, the Company offers its customers a
broad selection of value-added services together with its distributed products.
Such services include the following:
Inventory Management. The Company offers its customers a computerized
inventory management program, referred to as RSVP (Replenishment Services Via
Pioneer). Customers who contract for RSVP are provided with bar codes and a
personal computer, and are able to process and transmit orders through a
computer modem instantly to the Company. Under RSVP, customers' forecasts of
product requirements are sent electronically to the Company, which automatically
reserves the required inventory. As customers' purchase orders are received, the
appropriate products are transferred out of "reserved" status and are shipped to
customers. As a result, RSVP enhances the Company's ability to provide its
customers with just-in-time inventory and helps customers reduce their overall
product acquisition costs.
S-11
<PAGE> 12
Systems Integration. The Company provides systems integration services to
its customers, including assigning project managers to oversee the entire
implementation of a system and technically trained account managers and account
executives to provide on-going support and consulting services.
Just-in-time Kitting/Turnkey Assembly. The Company offers custom-tailored
just-in-time kitting services to its customers. In performing this service, the
Company purchases the necessary components, stores them in its ISO 9002
certified warehouses and packages them in convenient bundles for shipment to
customers. These services particularly benefit customers lacking in-house
kitting capabilities and customers with more complex kitting requirements. The
Company also provides turnkey assembly, which involves supplying customers with
complete sub-assemblies or finished products built to customers' engineering
specifications ready for immediate use. The Company is involved in the entire
process, including design review, engineering and production analysis,
purchasing of all parts and materials, packaging and delivery.
Memory and Logic Device Programming. The Company offers its customers
memory programming as an add-on service with its programmable chip devices,
which devices include EPROM (electrically programmable read only memory), EPLD
(erasable programmable logic devices) and PAL (programmable array logic
devices). Device programming is performed by the Company's programmers, who work
from permanent master chips supplied by customers. This method of programming
saves customers time and unnecessary administrative and handling expenses.
Connector and Cable Assembly. The Company's cable assembly center provides
customers with a wide variety of connectors and cables made to customers'
precise specifications. The Company has the capability to fill orders of all
sizes, from large volume orders to requests for a few prototypes. Prototypes
typically are delivered within 24 to 48 hours. The Company also provides
installation services and technical expertise, which can lower customers'
overall product acquisition costs.
Power Products Integration. The Company offers power supplies and complete
design and engineering services in support of customers' power integration
needs.
Solutions Implementation. Through its Solutions Implementation Group, the
Company offers customers resource planning, supply management and solutions
services. The Solutions Implementation Group helps customers address issues
relating to operations, marketing, systems and data architecture, and
profitability.
Enterprise Networking Solutions. The Company offers customers network
expertise through its Enterprise Networking Solutions Group, which is a
field-based, highly-skilled network integration team assembled by the Company to
address customers' long-term enterprise networking needs. The Company's
Enterprise Networking Solutions Group delivers networking solutions to
customers, which the Company believes match their long range business plans, and
improve decision support and overall productivity.
SALES AND TECHNICAL SUPPORT
The Company has more than 1,000 sales personnel, sales support personnel
and technical experts at over 50 locations throughout North America who work
closely together to provide customers with individualized services and
solutions. Sales personnel are trained by the Company to become familiar with
the Company's products and services and the quality standards of the Company and
its suppliers. Additionally, the Company's sales personnel are provided with
regular training on a quarterly and annual basis to assure that sales personnel
maintain current knowledge and expertise on the Company's constantly changing
product lines. Generally, some or all of each sales person's compensation is
based on the amount of sales generated by the individual. The Company believes
it has had low turnover of its sales personnel relative to the industry due to
its attractive work environment and successful compensation structure.
Highly qualified technical experts support the Company's many value-added
services. The Company believes it has one of the highest ratios of technical to
sales personnel in the industry. Management believes that this team concept,
which involves the cooperative efforts of sales and technical personnel, has
enabled the Company to build strong relationships with its customers and
provides it with a distinct advantage in obtaining new customers.
S-12
<PAGE> 13
DISTRIBUTION
The Company distributes its products to customers from strategic locations
throughout the United States and Canada. The 106,000 square foot Corporate
Distribution Center near Cleveland, Ohio, serves as the hub of the distribution
process. All of the locations are computer linked and exchange information by
computer modem. Requests are sent electronically and are received at the
Corporate Distribution Center where products are then shipped to the customer.
The Company provides its customers with same-day shipment of substantially all
orders received by 3:00 p.m. An efficient distribution system is important to
the Company's strategy to achieve growth and improve its competitive position.
The Company maintains inventory levels appropriate to its customers' needs and
has systems designed to minimize excess inventory and related carrying costs.
QUALITY CONTROL
FutureStart, the Company's total quality management initiative, plays a
strategic role in the Company's continued progress. FutureStart is designed to
effect process improvements and process redesigns that enable employees to
increase productivity, improve customer satisfaction and exercise creativity in
implementing operational efficiencies important to preserving margins in a
competitive environment.
The Company is ISO 9002 certified for a number of its facilities, processes
and services and is seeking additional certifications. ISO certification is
required by several of the Company's customers, including customers who select
distributors whose certifications satisfy their own quality control
requirements. The Company believes continued achievement of ISO 9002
certification is important to maintain and improve its position as a leading
distributor in North America and to position itself to enter international
markets.
BUSINESS STRATEGIES
The Company believes that 1995 sales of the ten largest distributors of
electronic components and computer products in the North American market were
approximately $17.5 billion and that the Company was the fourth largest
distributor in terms of total sales, which includes combined annual sales of the
Company and Pioneer Maryland. The Company believes that the largest distributors
in its industry with the broadest selection of products and the widest
geographic reach have a significant advantage. Accordingly, the Company's
primary objective is to improve its position as an industry leader through
strong internal growth and acquisitions, continued development of the breadth
and quality of its product line, anticipation and satisfaction of customer needs
by providing innovative value-added services, maintenance of a strong sales and
technical organization, emphasis on an efficient and effective distribution
system, rigorous attention to quality control and continued focus on cost
reduction initiatives.
In 1994, the Company purchased certain assets and assumed certain
liabilities of United Westburne Inc.'s Zentronics Division, which the Company
believes is one of the largest distributors of electronic components and
computer products in Canada. Similarly, on November 30, 1995, the Company
acquired the remaining 50% of Pioneer Maryland, which distributes electronic
components and computer products and provides technical support through 11
locations in the Southeast and Northwest regions of the United States. The
acquisition of the remaining 50% of Pioneer Maryland expanded the Company's
product base and service offerings and improved the Company's geographic
position and its ability to service its customers effectively and efficiently.
Specific benefits include the following:
Cost Savings. These savings are expected to result primarily from the
elimination of duplicative administrative functions.
Operational Improvements. The acquisition is producing increased
efficiencies and effectiveness from combined asset management and logistic
services, including higher utilization of Pioneer-Standard's state-of-the-art
Corporate Distribution Center.
Process Improvements. The acquisition is allowing the Company to extend
operating performance gains from FutureStart, its total quality management
initiative, to Pioneer Maryland's locations.
Earnings and Cash Flow Stability. The acquisition is enabling
Pioneer-Standard's management to make operational decisions to improve the
earnings and cash flow from Pioneer Maryland's operations.
S-13
<PAGE> 14
PROPOSED CREDIT FACILITY
The Company anticipates putting in place the Proposed Credit Facility
principally to extend the term of the Company's existing bank credit facility.
The following description of the indebtedness under a proposed credit facility
is based upon the term sheet (the "Term Sheet") executed by the Company and
National City Bank, Cleveland, Ohio ("NCB") (the "Proposed Credit Facility"),
which provides for NCB's arrangement and structuring of the Proposed Credit
Facility and its acting as agent thereunder. The Term Sheet contemplates that
NCB and the other lenders in the syndicate (the "Bank Syndicate") will, subject
to definitive documentation and other customary conditions, provide the Company
with loans of up to $125 million on a revolving credit basis. The terms of the
Proposed Credit Facility have been agreed to in principle; however, the
documentation with respect thereto has not been fully negotiated and the
establishment of the Proposed Credit Facility is conditioned on NCB's and the
Bank Syndicate's obtaining internal credit approvals and the negotiation,
execution and delivery of the definitive documentation. The Company anticipates
that the Proposed Credit Facility will be entered into and effective at the time
of issue and delivery of the Notes or shortly thereafter. In the event the
Proposed Credit Facility is not effective at the time of issue and delivery of
the Notes, the Company will continue to be subject to the provisions of the
existing credit facility until the Proposed Credit Facility is effective. The
terms of the existing credit facility are similar in all material respects to
the terms of the Proposed Credit Facility described below.
MATURITY AND PREPAYMENT
The Company anticipates that the Proposed Credit Facility will have an
initial term of three years, which would extend the terms of the Company's
existing bank credit facility from November 1997 to August 1999. In addition, on
an annual basis, the Proposed Credit Facility may be extended for a three-year
period upon the Company's request, with the consent of all members of the Bank
Syndicate. All or any portion of the outstanding loans may be prepaid at any
time and the commitments may be terminated, in whole or in part, at the
Company's option, subject to reimbursement of redeployment costs in the case of
early prepayment of LIBOR or CD Rate loans. Loans also may be repaid without
terminating the facility, in which case available funds may be reborrowed.
The Company anticipates that the interest rate available under the Proposed
Credit Facility will be, at its option (i) a rate per annum equal to NCB's base
rate, (ii) a rate per annum ranging from LIBOR plus .625% to LIBOR plus 1.37%
depending on the Company's performance with respect to a certain financial
leverage test, or (iii) a rate per annum ranging from the CD Rate plus .75% to
the CD Rate plus 1.50% depending on the Company's performance with respect to a
certain financial leverage test. Interest on amounts permitted to be outstanding
under the facilities is payable in cash, in arrears, on (i) a monthly basis in
the case of base rate loans and (ii) at the end of any relevant interest period,
but not less often than quarterly in the case of LIBOR loans or CD Rate loans,
or, in either case, upon optional prepayment. The Company will also be required
to pay certain agency fees to NCB and certain facility fees to the Bank
Syndicate.
CONDITIONS PRECEDENT
The Company anticipates that the initial advance under the Proposed Credit
Facility will be conditioned upon (i) receipt by the Company of all borrowings
under the Proposed Credit Facility and the issuance of the Notes necessary to
retire amounts outstanding under the existing credit facility and evidence of
the simultaneous termination of the existing credit facility, (ii) the issuance
of the Notes offered hereby and (iii) the satisfaction of other customary
conditions. Any subsequent advances under the Proposed Credit Facility will be
conditioned upon the absence of any defaults under the Proposed Credit Facility
and other customary conditions.
COVENANTS
The Company anticipates that the Proposed Credit Facility will contain
customary restrictive covenants which impose limitations on the Company and
certain of its subsidiaries with respect to certain matters, including, but not
limited to (i) creation or incurrence of liens, (ii) entry into sale and
leaseback transactions, (iii) acquisitions, consolidations, mergers, sales,
leases or conveyances of assets, (iv) transactions with stockholders and
affiliates, (v) incurrence of indebtedness, (vi) amendments to documents and
(vii) changes
S-14
<PAGE> 15
in the nature of the Company's business. The Proposed Credit Facility also will
contain customary covenants requiring satisfaction by the Company of certain
financial tests and the maintenance of certain financial ratios on a
consolidated basis with respect to minimum consolidated tangible net worth,
working capital, current ratio, and maximum leverage ratio and capital
expenditures.
DEFAULTS
The Company anticipates that the Proposed Credit Facility will contain
customary default and acceleration provisions, including defaults for nonpayment
of principal when due, nonpayment of interest and fees within three business
days after they become due, material misrepresentations, default in the
performance of covenants and the expiration of any applicable grace period,
bankruptcy or insolvency, ERISA violations, material judgments for the payment
of money, governmental condemnation or seizure of material property and default
by the Company on any material debt.
DESCRIPTION OF THE NOTES
The Notes are a series of Debt Securities described in the accompanying
Prospectus. The Notes will be issued under the Indenture dated as of August 1,
1996 (the "Indenture"), between the Company and StarBank, N.A., as trustee (the
"Trustee"). The Indenture is subject to and is governed by the Trust Indenture
Act of 1939 (the "TIA"), and the terms of the Notes include those made part of
the Indenture by reference to the TIA as in effect on the date of the Indenture.
The following is a summary of certain provisions of the Notes and the Indenture
and should be read in conjunction with the description of the Debt Securities
and the Indenture under "Description of Debt Securities" in the accompanying
Prospectus. The following description and the description in the accompanying
Prospectus do not purport to be complete and are subject to and qualified in
their entirety by reference to the TIA and all the provisions of the Notes and
the Indenture. The following description of the particular terms of the Notes
supplements and, to the extent inconsistent therewith, replaces the description
of the general terms and provisions of the Debt Securities set forth in the
accompanying Prospectus, to which reference is hereby made. The particular terms
of the Notes offered by this Prospectus Supplement are described herein.
THE NOTES
The Notes will be unsecured, unsubordinated obligations of the Company,
will be limited to $150,000,000 aggregate principal amount and, unless
previously repurchased, will mature on 2006. The Notes will bear interest at the
rate per annum shown on the front cover of this Prospectus Supplement, subject
to adjustment as provided below, from August 12, 1996 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually on February 1 and August 1 of each year, commencing February 1,
1997, to the Person in whose name a Note (or any predecessor Note) is registered
at the close of business on the preceding January 15 or July 15, as the case may
be.
The Notes will not be redeemable prior to maturity and will be subject to
defeasance and discharge and defeasance of certain covenants and certain events
of default. See "Description of Debt Securities" in the accompanying Prospectus.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
No service charge will be made for any registration of transfer or exchange of
Notes.
The Notes will be issued in definitive form, including in the form of fully
registered global securities ("Global Securities") registered in the name of
Cede & Co., as the nominee of The Depository Trust Company ("DTC"). Investors
may elect to hold their Notes directly or to hold interests in the Global
Securities through DTC. Persons who are not DTC participants and who do not
elect to have definitive Notes registered in their names may beneficially own
interests in the Global Securities held by DTC only through direct or indirect
participants in DTC. Payment of principal of and interest on Global Securities
will be made to Cede & Co., the nominee for DTC, as the registered owner.
S-15
<PAGE> 16
INTEREST ADJUSTMENTS
The Notes will bear interest at the rate of 8 1/2% per annum (the "Initial
Rate"), subject to an increase to 9 1/2% per annum (the "Adjusted Rate") upon
the occurrence of a Rating Event. "Rating Event" means either (a) the assignment
of a rating to the Notes by the National Association of Insurance Commissioners
(the "NAIC") which is either NAIC-3, NAIC-4 or NAIC-5, or (b) the assignment of
a rating to the Notes by (i) Moody's Investors Service, Inc. ("Moody's") which
is below Baa3 and (ii) Standard & Poor's Corporation ("S&P") which is below
BBB-. The rating currently assigned to the Notes by Moody's is Baa3 and by S&P
is BB-; the NAIC has not rated the Notes, but has assigned a rating of NAIC-2 to
the Company's 9.79% Senior Notes due 2000. Upon the occurrence of a Rating
Event, the Initial Rate will be immediately increased (an "Interest Increase
Adjustment") to the Adjusted Rate. If any and all Rating Events cease at any
time to exist, the Adjusted Rate will be immediately decreased (an "Interest
Decrease Adjustment" and together with an Interest Increase Adjustment, an
"Interest Adjustment") to the Initial Rate. The effective date of any Interest
Increase Adjustment will be either, (i) the earlier of the date that the
occurrence of a Rating Event is publicly announced or notice thereof is received
by the Company or (ii) if such public announcement or notice occurs between a
record date and an interest payment date, such interest payment date (an
"Interest Increase Date"). The effective date of any Interest Decrease
Adjustment will be either (i) the earlier of the date on which the cessation of
any and all Rating Events is publicly announced or notice thereof is received by
the Company or (ii) if such public announcement or notice occurs between a
record date and an interest payment date, such interest payment date (an
"Interest Decrease Date" and together with an Interest Increase Date, an
"Interest Adjustment Date"). Interest Adjustments may occur throughout the term
of the Notes.
If an Interest Adjustment occurs during an interest payment period, the
Notes will bear interest during such interest payment period at a rate per annum
equal to the weighted average of the Initial Rate and the Adjusted Rate,
calculated by multiplying the Initial Rate or the Adjusted Rate, as applicable,
by the number of days such interest rate is in effect during such interest
payment period, determining the sum of such products, and dividing such sum by
the number of days in such interest payment period, rounding to the nearest one
hundreth of a percentage point. All calculations pursuant to the preceding
sentence will be made on the basis of a 360-day year consisting of twelve 30-day
months.
RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right of
payment with all other unsubordinated Indebtedness of the Company.
PROVISION OF FINANCIAL AND OTHER INFORMATION
The Company will file with the Trustee all annual reports and other
documents which the Company is required to file with or furnish to the
Commission pursuant to such Section 13 or 15(d) of the Exchange Act within 15
days after the respective dates (the "Required Filing Dates") by which the
Company is required so to file or furnish such documents with the Commission.
The Company will also mail to all holders of Notes all annual reports and
certified financial statements and any other reports it generally furnishes to
its shareholders, and, within 30 days after filing thereof with the Trustee,
summaries of the reports filed pursuant to (i) and (ii) in the paragraph below.
If at any time the Company is not required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall nevertheless (i) file with the Trustee copies of the annual reports and
other documents which the Company would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act, or any
successor provisions thereto if the Company were subject to such Sections, (ii)
if filing such documents by the Company with the Commission is permitted under
the Exchange Act, file the same with the Commission, in accordance with the
rules and regulations prescribed by the Commission and (iii) furnish to the
Trustee on or before May 1 of each year a certificate from certain officers of
the Company as to compliance with the terms and conditions of the Indenture.
S-16
<PAGE> 17
UNDERWRITING
Under the terms and subject to the conditions set forth in the underwriting
agreement dated the date hereof (the "Underwriting Agreement") between the
Company and Lazard Freres & Co. LLC (the "Underwriter"), the Underwriter has
agreed to purchase, and the Company has agreed to sell to the Underwriter, all
of the Notes offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Notes offered hereby are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter is obligated to purchase all Notes if any are purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes initially to offer the Notes offered hereby directly to the public at
the public offering price set forth on the cover page of this Prospectus
Supplement and to certain dealers at such price less a concession not in excess
of 0.600% of the principal amount of the Notes. The Underwriter may allow, and
such dealers may reallow, a concession not in excess of 0.250% of the amount of
the Notes to certain other dealers. After the Offering, the public offering
price and such concessions may be changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Act.
Lazard Freres & Co. LLC has provided financial advice to the Company from
time to time for which it received customary fees.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Calfee, Halter & Griswold, Cleveland, Ohio, and for the Underwriter by Sidley &
Austin, Chicago, Illinois. William A. Papenbrock, Esq., a partner of Calfee,
Halter & Griswold, is the Secretary of the Company.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus Supplement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report included herein. Such consolidated
financial statements are included herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
S-17
<PAGE> 18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of March 31, 1996 and March 31, 1995................... F-3
Consolidated Statements of Income for each of the years in the three-year period ended
March 31, 1996...................................................................... F-4
Consolidated Statements of Shareholders' Equity for each of the three years in the
three-year period ended March 31, 1996.............................................. F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended March 31, 1996................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
Shareholders and the Board of Directors
Pioneer-Standard Electronics, Inc.
We have audited the accompanying consolidated balance sheets of
Pioneer-Standard Electronics, Inc. as of March 31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Pioneer-Standard Electronics, Inc. at March 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
May 1, 1996
F-2
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash.............................................................. $ 24,440,000 $ 9,598,000
Accounts receivable, less allowance for doubtful accounts
(1996 -- $6,982,000, 1995 -- $4,606,000)........................ 189,296,000 133,987,000
Merchandise inventory............................................. 238,370,000 123,008,000
Prepaid expenses.................................................. 2,922,000 1,623,000
Deferred income taxes............................................. 11,454,000 5,708,000
------------ ------------
Total current assets......................................... 466,482,000 273,924,000
INVESTMENT AND OTHER ASSETS:
Investment in 50%-owned company................................... -- 16,963,000
Intangible assets................................................. 42,446,000 4,456,000
Other assets...................................................... 1,503,000 1,143,000
PROPERTY AND EQUIPMENT, AT COST:
Land.............................................................. 1,070,000 1,070,000
Buildings......................................................... 13,768,000 12,984,000
Furniture and equipment........................................... 62,276,000 39,166,000
Leasehold improvements............................................ 6,910,000 2,176,000
------------ ------------
84,024,000 55,396,000
Less accumulated depreciation and amortization.................... 35,345,000 24,467,000
------------ ------------
Net property and equipment................................... 48,679,000 30,929,000
------------ ------------
$559,110,000 $327,415,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks............................................ $ 21,000,000 $ 7,000,000
Accounts payable.................................................. 184,946,000 106,905,000
Income taxes...................................................... 1,654,000 3,946,000
Accrued salaries, wages and commissions........................... 13,017,000 8,593,000
Other accrued liabilities......................................... 18,154,000 13,086,000
Long-term debt due within one year................................ 2,871,000 2,956,000
------------ ------------
Total current liabilities.................................... 241,642,000 142,486,000
LONG-TERM DEBT.................................................... 164,447,000 56,318,000
DEFERRED INCOME TAXES............................................. 2,328,000 2,196,000
SHAREHOLDERS' EQUITY:
Common shares, without par value, $.30 stated value: authorized
40,000,000 shares in 1996 and 1995; outstanding 22,498,510
shares in 1996 and 22,374,219 shares in 1995.................... 6,667,000 6,630,000
Capital in excess of stated value................................. 17,221,000 16,318,000
Retained earnings................................................. 126,506,000 103,646,000
Foreign currency translation adjustment........................... 299,000 (179,000)
------------ ------------
Total shareholders' equity................................... 150,693,000 126,415,000
------------ ------------
$559,110,000 $327,415,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 21
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
NET SALES.......................................... $1,105,281,000 $832,152,000 $580,757,000
Operating costs and expenses:
Cost of goods sold............................... 902,629,000 677,171,000 465,614,000
Warehouse, selling and administrative expenses... 150,704,000 111,302,000 83,754,000
-------------- ------------ ------------
1,053,333,000 788,473,000 549,368,000
-------------- ------------ ------------
Operating profit................................... 51,948,000 43,679,000 31,389,000
Equity in earnings (loss) of 50%-owned company..... (173,000) 2,500,000 3,001,000
Interest expense................................... (8,136,000) (3,966,000) (2,687,000)
-------------- ------------ ------------
Income from operations before income taxes......... 43,639,000 42,213,000 31,703,000
Provision for income taxes:
Federal
Current....................................... 16,779,000 14,517,000 9,946,000
Deferred...................................... (2,304,000) (1,107,000) (574,000)
-------------- ------------ ------------
14,475,000 13,410,000 9,372,000
State............................................ 3,912,000 3,794,000 2,655,000
-------------- ------------ ------------
18,387,000 17,204,000 12,027,000
-------------- ------------ ------------
NET INCOME......................................... $ 25,252,000 $ 25,009,000 $ 19,676,000
============== ============ ============
INCOME PER COMMON SHARE:
Primary and fully diluted........................ $ 1.09 $ 1.09 $ .87
============== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
FOREIGN
STATED VALUE CAPITAL IN CURRENCY
OF COMMON EXCESS OF RETAINED TRANSLATION
SHARES STATED VALUE EARNINGS ADJUSTMENT TOTAL
------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1993....... $ 6,529,000 $ 15,665,000 $ 61,923,000 $ 84,117,000
Net income...................... 19,676,000 19,676,000
Cash dividends ($.058 per
share)........................ (1,274,000) (1,274,000)
Shares issued upon exercise of
stock options................. 95,000 719,000 814,000
Tax benefit related to exercise
of stock options.............. 21,000 21,000
Shares retired.................. (15,000) (599,000) (614,000)
---------- ----------- ------------ ---------- ------------
BALANCE AT MARCH 31, 1994....... 6,609,000 15,806,000 80,325,000 102,740,000
Net income...................... 25,009,000 25,009,000
Cash dividends ($.075 per
share)........................ (1,688,000) (1,688,000)
Shares issued upon exercise of
stock options................. 21,000 388,000 409,000
Tax benefit related to exercise
of stock options.............. 124,000 124,000
Foreign currency translation
adjustment.................... $ (179,000) (179,000)
---------- ----------- ------------ ---------- ------------
BALANCE AT MARCH 31, 1995....... 6,630,000 16,318,000 103,646,000 (179,000) 126,415,000
Net income...................... 25,252,000 25,252,000
Cash dividends ($.106 per
share)........................ (2,392,000) (2,392,000)
Shares issued upon exercise of
stock options................. 37,000 693,000 730,000
Tax benefit related to exercise
of stock options.............. 214,000 214,000
Cash in lieu of fractional
shares for stock split........ (4,000) (4,000)
Foreign currency translation
adjustment.................... 478,000 478,000
---------- ----------- ------------ ---------- ------------
BALANCE AT MARCH 31, 1996....... $ 6,667,000 $ 17,221,000 $126,506,000 $ 299,000 $150,693,000
========== =========== ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 25,252,000 $ 25,009,000 $ 19,676,000
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation and amortization................... 8,998,000 6,230,000 5,264,000
Undistributed (earnings) loss of affiliate...... 173,000 (2,500,000) (3,001,000)
Increase in operating working capital........... (31,898,000) (38,566,000) (11,635,000)
Increase in intangible assets................... (5,155,000) (1,488,000) --
(Increase) decrease in other assets............. 67,000 (225,000) (199,000)
Deferred taxes.................................. (2,304,000) (1,115,000) (574,000)
------------ ------------ ------------
Total adjustments............................. (30,119,000) (37,664,000) (10,145,000)
------------ ------------ ------------
Net cash (used) provided by operating
activities................................. (4,867,000) (12,655,000) 9,531,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................ (21,004,000) (11,326,000) (7,626,000)
Acquisition of businesses, net of cash acquired.... (49,883,000) (10,068,000) --
------------ ------------ ------------
Net cash used in investing activities......... (70,887,000) (21,394,000) (7,626,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term financing........ 14,000,000 5,000,000 (500,000)
Increase in revolving credit borrowings............ 81,000,000 37,000,000 4,000,000
Principal payments under long-term debt
obligations..................................... (2,956,000) (3,056,000) (262,000)
Issuance of common shares under stock option
plans........................................... 730,000 409,000 200,000
Tax benefit related to exercise of stock options... 214,000 124,000 21,000
Dividends paid..................................... (2,392,000) (1,688,000) (1,274,000)
Cash in lieu of fractional shares for stock
split........................................... (4,000) -- --
------------ ------------ ------------
Net cash provided by financing activities..... 90,592,000 37,789,000 2,185,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............. 4,000 (96,000) --
------------ ------------ ------------
NET INCREASE IN CASH................................. 14,842,000 3,644,000 4,090,000
CASH AT BEGINNING OF YEAR............................ 9,598,000 5,954,000 1,864,000
------------ ------------ ------------
CASH AT END OF YEAR.................................. $ 24,440,000 $ 9,598,000 $ 5,954,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Company distributes a broad range of electronics components and
computer products manufactured by others. These products are sold to original
equipment manufacturers, value-added resellers, research laboratories,
government agencies, and end-users, including manufacturing companies, and
service and other non-manufacturing organizations. The Company has operations in
the United States and Canada.
The Company maintains the following accounting policies:
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions have been eliminated. As discussed in Note 2, the
Company acquired the remaining 50% of the common stock of Pioneer/Technologies
Group, Inc. ("Technologies") on November 30, 1995. The consolidated statements
include the operating results of Technologies from the date of acquisition.
Prior to the acquisition, the Company accounted for its investment in
Technologies under the equity method of accounting.
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
Cash Equivalents -- The Company considers highly liquid instruments with a
maturity of ninety days or less at date of purchase to be cash equivalents.
Merchandise Inventory -- Inventory is stated at the lower of cost
(first-in, first-out basis) or market. The Company's inventory is constantly
monitored for obsolescence. This review considers such factors as turnover,
technical obsolescence, right of return status to suppliers and price protection
offered by suppliers. Reserves for slow-moving and obsolete inventory at March
31, were $8,777,000 in 1996 and $3,416,000 in 1995.
Intangible Assets -- Intangible assets include the excess of cost over
value assigned to net assets of purchased businesses, which is being amortized
on the straight-line method over 40 years. Intangible assets are periodically
reviewed for impairment based on an assessment of future operations to ensure
they are appropriately valued.
Property and Equipment -- Property and equipment are recorded at cost. The
Company capitalizes costs associated with software developed for its own use.
Depreciation and amortization is computed using principally the straight-line
method. Accelerated methods are used for tax reporting purposes.
Foreign Currency -- The assets and liabilities of foreign operations are
translated into U.S. dollars at the exchange rates in effect at the balance
sheet date whereas income statement accounts are translated at the weighted
average exchange rates for the year. The gains or losses resulting from these
translations are recorded in a separate component of shareholders' equity. Gains
or losses resulting from realized foreign currency transactions are included in
net income.
Stock Split -- On July 25, 1995, the Board of Directors declared a
three-for-two stock split effected in the form of a 50% share dividend of the
Company's Common Shares payable September 6, 1995 to shareholders of record
August 16, 1995. All share and per share data have been restated for all periods
presented to reflect the stock split.
Common Shares and Net Income Per Common Share -- Net income per common
share is computed using the weighted average common shares and common share
equivalents outstanding during the year of 23,127,486 in 1996, 22,886,877 in
1995 and 22,677,034 in 1994. Common share equivalents consists of shares
issuable upon exercise of stock options computed by using the treasury stock
method.
Use of Estimates -- The financial statements are prepared in conformity
with generally accepted accounting principles and accordingly, include
management's best estimates and judgments where applicable. Actual results could
differ from those estimates.
F-7
<PAGE> 25
Accounting Changes -- Effective April 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Adoption of this statement was not material to the financial results.
In 1995, the Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (FAS 121), and Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). FAS 121 requires that, under certain circumstances,
long-lived assets be reviewed for impairment and any applicable impairment loss
be recognized. FAS 123 allows accounting for employee stock options under either
the fair value or the intrinsic value method. The Company plans to continue to
use the intrinsic value method. These statements, which must be adopted by the
Company no later than the first quarter of fiscal 1997, are not expected to have
a material effect on the financial statements.
2. ACQUISITIONS
On November 30, 1995, the Company acquired the remaining 50% of the common
stock of Pioneer/Technologies Group, Inc. for $50,000,000 in cash. The Company
refinanced all of Technologies' bank debt approximating $30,000,000. The
acquisition was accounted for by using the purchase method of accounting and the
operating results of Technologies have been included in the consolidated
financial statements since the date of acquisition. The cost in excess of the
net assets of the business acquired is included in intangible assets and is
being amortized over 40 years. Prior to the acquisition, the Company accounted
for its investment in Technologies under the equity method of accounting.
The following unaudited pro forma information presents a summary of
consolidated results of operations for the Company and Technologies as if the
acquisition had occurred at the beginning of fiscal 1995 and fiscal 1996, with
pro forma adjustments to give effect to amortization of goodwill, interest
expense on acquisition debt and certain other adjustments, together with related
income tax effects. Included in the 1996 results is an after-tax non-recurring
discontinuance charge of $2,450,000 ($.11 per share) recorded by Technologies to
conform to the Company's methods of accounting.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Net sales..................... $1,325,047,000 $1,200,252,000
Net income.................... 24,704,000 27,741,000
Earnings per share............ $ 1.07 $ 1.21
</TABLE>
On June 1, 1994, the Company acquired certain of the assets of the
Zentronics Division of Westburne Industrial Enterprises Ltd. ("Westburne"), a
Canadian corporation, and assumed certain of Westburne's liabilities for a
purchase price of approximately $10,068,000. The transaction has been accounted
for by the purchase method of accounting and the pro forma effects are not
material. Operating results are included in the consolidated financial
statements from the date of acquisition.
3. NOTES PAYABLE AND LONG-TERM DEBT
SHORT-TERM:
The Company has unsecured short-term lines of credit aggregating
$40,000,000 available for use. The unsecured lines, which may be withdrawn at
the option of the lenders, permit the Company to borrow at varying interest
rates. Borrowings against these lines and related weighted average interest
rates, at March 31, 1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Borrowings.................................. $21,000,000 $7,000,000 $2,000,000
Weighted average interest rate.............. 6.08% 6.69% 5.75%
</TABLE>
F-8
<PAGE> 26
LONG-TERM:
Long-term debt at March 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Revolving credit....................................... $152,000,000 $41,000,000
9.79% Senior Notes..................................... 14,280,000 17,140,000
Obligations under capital leases....................... 1,038,000 1,134,000
------------ -----------
167,318,000 59,274,000
------------ -----------
Less amounts due within one year....................... 2,871,000 2,956,000
------------ -----------
$164,447,000 $56,318,000
============ ===========
</TABLE>
The Company entered into a new credit agreement dated November 29, 1995
with five banks providing for up to an aggregate of $200,000,000 of unsecured
borrowings on a revolving credit basis for two years. Interest rates on
borrowings are based on various floating rate alternative pricing mechanisms.
There is a commitment fee on the unborrowed amount and there is no prepayment
penalty.
Annual principal payments of $2,860,000 on the 9.79% Senior Notes are due
each November 1 and continue through November 1, 2000 when the last payment of
$2,840,000 is due. Interest is payable semi-annually.
The terms of the credit agreement and Senior Note Purchase Agreement
provide for, among other things, restrictions regarding the payment of cash
dividends and purchase of the Company's Common Shares, limitations on other
borrowings and capital expenditures, minimum working capital requirements and
the maintenance of certain financial ratios. Unrestricted retained earnings
available for dividends at March 31, 1996 under the most restrictive covenants
are $17,965,000.
Aggregate maturities of long-term debt for the next five fiscal years are:
1997 -- $2,871,000; 1998 -- $154,873,000; 1999 -- $2,874,000; 2000 -- $2,876,000
and 2001 -- $2,858,000.
4. LEASE COMMITMENTS
The Company is committed under lease agreements, which contain renewal
options for periods up to twenty years, for certain facilities and equipment
expiring at various dates to the year 2017.
Amounts for capitalized leases are included in property and equipment at
cost of $1,668,000 and $2,181,000 at March 31, 1996 and 1995, less accumulated
amortization of $619,000 and $1,034,000 at March 31, 1996 and 1995,
respectively.
Future minimum lease payments under capital leases and operating leases at
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ------------
<S> <C> <C>
1997......................................................... $132,000 $5,075,000
1998......................................................... 132,000 4,474,000
1999......................................................... 132,000 3,982,000
2000......................................................... 132,000 1,711,000
2001......................................................... 132,000 628,000
Thereafter................................................... 2,178,000 1,845,000
---------- -----------
Total minimum lease payments............................... 2,838,000 $17,715,000
===========
Less amount representing interest.......................... 1,800,000
----------
Present value of minimum lease payments.................... $1,038,000
==========
</TABLE>
Rental expense for operating leases was $4,230,000, $2,897,000 and
$2,166,000 for 1996, 1995 and 1994, respectively.
F-9
<PAGE> 27
5. INCOME TAXES
The following is a reconciliation of the Company's effective income tax
rate to the statutory rate:
<TABLE>
<CAPTION>
LIABILITY METHOD
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory rate............................................. 35.0% 35.0% 35.0%
Equity in undistributed (earnings) loss of 50%-owned
company.................................................. .1 (1.6) (2.6)
Provision for state taxes.................................. 5.8 5.8 5.4
Foreign losses with unrecognized tax benefits.............. .6 1.1 --
Other items................................................ .6 .5 .1
----- ----- -----
Effective rate............................................. 42.1% 40.8% 37.9%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities as of March 31, 1996 and 1995 are presented
below:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Capitalized inventory costs................................ $ 1,842,000 $1,391,000
Accrued expenses........................................... 3,322,000 1,674,000
Allowance for doubtful accounts............................ 2,433,000 1,581,000
Inventory valuation reserve................................ 2,807,000 639,000
Foreign losses............................................. 691,000 450,000
Other...................................................... 1,050,000 423,000
----------- ----------
Deferred tax assets.......................................... 12,145,000 6,158,000
Less valuation allowance..................................... (691,000) (450,000)
----------- ----------
Total deferred tax assets.................................... 11,454,000 5,708,000
----------- ----------
Deferred tax liabilities:
Depreciation expense....................................... 1,325,000 1,335,000
Other...................................................... 1,003,000 861,000
----------- ----------
Total deferred tax liabilities............................... 2,328,000 2,196,000
----------- ----------
Net deferred tax assets...................................... $ 9,126,000 $3,512,000
=========== ==========
</TABLE>
6. COMMON SHARE PURCHASE RIGHTS PLAN
The Company maintains a Common Share Purchase Rights Plan whereby, until
the occurrences of certain events, each share of the Company's outstanding
common shares represents ownership of one right (Right). The Rights may only be
exercised if a person or group acquires twenty percent (20%) or more of the
Company's Common Shares, or announces a tender offer for at least twenty percent
(20%) of the Company's Common Shares. The exercise price of each Right is $11.85
per Common Share subject to adjustment in certain events. The Rights trade with
the Company's Common Shares until the Rights become exercisable.
If the Company is acquired in a merger or other business combination
transaction, each Right will entitle its holder to purchase, at the Right's
then-exercise price, a number of the acquiring company's common shares (or other
securities) having a market value at the time of twice the Right's then-current
exercise price. In addition, if a person or group acquires twenty percent (20%)
or more of the Company's Common Shares or certain specified transactions occur
while a person or group beneficially owns twenty percent (20%) or more of such
Common Shares, each Right will entitle its holder (other than such person or
members of such group) to purchase, at the Right's then-current exercise price,
a number of the Company's Common Shares having a market value of twice the
Right's then-exercise price.
Prior to the acquisition by a person or group of beneficial ownership of
twenty percent (20%) or more of the Company's Common Shares, the Rights are
redeemable for $.003 per Right at the option of the Board of Directors. The
Rights will expire May 10, 1999.
F-10
<PAGE> 28
7. STOCK OPTIONS
The Company has stock option plans which provide for the granting of
options to employees and directors to purchase its Common Shares. These plans
provide for nonqualified or incentive stock options.
A stock option plan for non-employee directors was approved by shareholders
on July 25, 1995 for the granting of a maximum of 75,000 Common Shares.
The options under the Company's plans are priced at 100% of fair market
value at date of grant and expire ten years from date of grant.
No charges are made against income in accounting for stock options. Any tax
benefits arising from the exercise of options are recognized when realized and
credited to capital in excess of stated value. Transactions involving the stock
option plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER AVERAGE OPTION
OF SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding at March 31, 1993................................. 654,919 $ 2.93
Exercised................................................... (318,262) $ 2.56
Granted..................................................... 675,000 $ 6.11
Forfeited................................................... (2,250) $ 6.11
---------
Outstanding at March 31, 1994................................. 1,009,407 $ 5.17
Exercised................................................... (70,332) $ 5.82
Granted..................................................... 646,950 $ 12.06
Forfeited................................................... (4,275) $ 11.33
---------
Outstanding at March 31, 1995................................. 1,581,750 $ 7.95
Exercised................................................... (124,442) $ 5.87
Granted..................................................... 274,000 $ 14.99
Forfeited................................................... (110,734) $ 10.53
---------
Outstanding at March 31, 1996................................. 1,620,574 $ 9.12
=========
Exercisable at March 31, 1996................................. 603,200 $ 6.84
=========
Available for grant at March 31, 1996......................... 565,107
=========
</TABLE>
8. FINANCIAL INSTRUMENTS AND ESTIMATED FAIR VALUES
The Company uses forward exchange contracts to reduce exposure to foreign
currency fluctuations. Gains or losses on forward contracts which hedge its net
investment in its Canadian subsidiary are accrued in shareholders' equity. Gains
or losses resulting from contracts which hedge specific transactions are
included in net income offsetting the net income effect of the transaction
creating the risk. As of March 31, 1996 there is one contract outstanding for
the forward purchase of U.S. dollars against Canadian dollars in a notional
amount of $1,000,000, which also approximates fair value at March 31, 1996. The
contract matured on April 30, 1996 and was utilized to hedge U.S. dollar
transactions of the Canadian subsidiary.
On June 1, 1995 the Company entered into a five year interest rate swap
agreement for a notional amount of $20,000,000 to reduce the impact of increases
in interest rates on its outstanding floating rate debt. Under the agreement,
the Company will pay interest at a fixed rate of 6.05% and will receive interest
payments on the same notional amount at a floating rate based on 3 month LIBOR
(London Interbank Offered Rate). This swap agreement has the effect of
converting the floating rate of interest into a fixed rate of 6.05% on
$20,000,000 of floating rate bank credit borrowings outstanding.
F-11
<PAGE> 29
The carrying amounts and estimated fair values of the Company's other
financial instruments are as follows:
<TABLE>
<CAPTION>
1996
---------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Cash...................................................... $ 24,440,000 $ 24,440,000
Notes payable to banks.................................... 21,000,000 21,000,000
Long-term debt:
9.79% Senior Notes...................................... 14,280,000 15,107,000
Revolving credit borrowings............................. 152,000,000 152,000,000
Gain on interest rate swap................................ -- 75,000
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Cash...................................................... $ 9,598,000 $ 9,598,000
Notes payable to banks.................................... 7,000,000 7,000,000
Long-term debt:
9.79% Senior Notes...................................... 17,140,000 17,916,000
Revolving credit borrowings............................. 41,000,000 41,000,000
</TABLE>
The carrying amount of cash, notes payable to banks and revolving credit
borrowings approximates fair value. The fair value of the Senior Notes is
estimated using rates currently available for securities with similar terms and
remaining maturities. The fair value of the interest rate swap is the amount at
which it could be settled, based on market estimates.
9. OPERATING WORKING CAPITAL CHANGES AND SUPPLEMENTAL INFORMATION FOR THE
STATEMENTS OF CASH FLOWS
THE COMPONENTS OF THE CHANGES IN OPERATING WORKING CAPITAL WERE:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Accounts receivable.......................... $(18,456,000) $(47,595,000) $(18,808,000)
Merchandise inventory........................ (57,702,000) (32,049,000) (18,653,000)
Prepaid expenses............................. (894,000) (682,000) (146,000)
Accounts payable............................. 41,911,000 35,879,000 22,566,000
Income taxes................................. (3,107,000) 858,000 (31,000)
Accrued salaries, wages and commissions...... 2,156,000 1,480,000 2,073,000
Other accrued liabilities.................... 4,194,000 3,543,000 1,364,000
------------ ------------ ------------
Increase in operating working capital........ $(31,898,000) $(38,566,000) $(11,635,000)
============ ============ ============
</TABLE>
F-12
<PAGE> 30
SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid or received during the year for:
Interest................................... $ 7,824,000 $ 4,255,000 $ 2,623,000
Income taxes............................... 21,195,000 17,064,000 12,659,000
============ ============ ============
Non-cash investing and financing activities:
Common shares retired...................... -- -- 614,000
============ ============ ============
Non-cash assets and liabilities of business
acquired:
Working capital............................ $ 57,817,000 $ 7,684,000 $ --
Intangible assets.......................... 33,208,000 2,174,000 --
Other assets............................... 5,648,000 210,000 --
Long-term debt assumed..................... (30,000,000) -- --
Investment in 50%-owned company at date of
acquisition............................. (16,790,000) -- --
============ ============ ============
</TABLE>
10. EMPLOYEE RETIREMENT PLAN
The Company maintains various profit-sharing and thrift plans for all
employees meeting certain service requirements. Generally, the plans allow
eligible employees to contribute a portion of their compensation, with the
Company matching a percentage thereof. The Company may also make contributions
each year for the benefit of all eligible employees under the plans. Total
profit sharing and Company matching contributions were $2,622,000, $2,129,000
and $1,899,000 for 1996, 1995 and 1994, respectively.
F-13
<PAGE> 31
PROSPECTUS
LOGO
$200,000,000
PIONEER-STANDARD ELECTRONICS, INC.
DEBT SECURITIES AND COMMON SHARES
Pioneer-Standard Electronics, Inc. (the "Company") may from time to time
offer, together or separately, its (i) debt securities (the "Debt Securities")
and (ii) common shares, without par value (the "Common Shares"), in amounts, at
prices and on terms to be determined at the time of the offering. The Debt
Securities and Common Shares are collectively called the "Securities."
The Securities offered pursuant to this Prospectus may be issued in one or
more series or issuances and will be limited to $200,000,000 aggregate public
offering price (or its equivalent, based on the applicable exchange rate at the
time of sale, in one or more foreign currencies, currency units or composite
currencies as shall be designated by the Company). Certain specific terms of the
particular Securities in respect of which this Prospectus is being delivered are
set forth in the accompanying Prospectus Supplement (the "Prospectus
Supplement"), including, where applicable, (i) in the case of Debt Securities,
the title, aggregate principal amount, currency or currencies in which the
principal (and premium, if any) and any interest are payable, denominations,
maturity, rate (which may be fixed or variable) and time of payment of any
interest, any terms for redemption at the option of the Company or the holder,
any terms for sinking fund payments, any listing on a securities exchange and
any initial public offering price and other terms in connection with the
offering and sale of the Debt Securities and (ii) in the case of Common Shares,
the terms of the offering and the sales thereof.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY MISREPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
The Securities will be sold directly, through agents, underwriters or
dealers, as designated from time to time, or through a combination of such
methods. See "Plan of Distribution." If agents of the Company or any dealers or
underwriters are involved in the sale of the Securities in respect of which this
Prospectus is being delivered, the names of such agents, dealers or underwriters
and any applicable commissions or discounts will be set forth in or may be
calculated from the Prospectus Supplement with respect to such Securities.
------------------------
LAZARD FRERES & CO. LLC
------------------------
The date of this Prospectus is July 11, 1996.
<PAGE> 32
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"), all of which may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can also be obtained
from the Commission at prescribed rates through its Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common Shares are
traded on the Nasdaq National Market, and reports, proxy statements and other
information concerning the Company may be inspected at the office of the Nasdaq
National Market at 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of the Registration Statement on Form
S-3 filed by the Company with the Commission under the Securities Act. This
Prospectus and the accompanying Prospectus Supplement omit certain of the
information contained in the Registration Statement in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company and the Securities, reference is made to the Registration Statement and
to the schedules and exhibits filed therewith. Statements contained in this
Prospectus as to the contents of certain documents are not necessarily complete,
and, with respect to each such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, reference is made to the copy
of the document so filed. Each statement is qualified in its entirety by such
reference.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained or incorporated by
reference in this Prospectus or the Prospectus Supplement, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus and the Prospectus Supplement do not constitute an
offer of any securities other than those to which it relates or an offer to
sell, or a solicitation of an offer to buy, to any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus or any Prospectus Supplement nor any sale made hereunder or
thereunder shall, under any circumstance, create any implication that the
information contained herein or therein is correct as of any time subsequent to
their respective dates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended March 31, 1996,
which was filed by the Company with the Commission under the Exchange Act, is
incorporated herein by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering shall be deemed to be incorporated by reference
in this Prospectus or in any Prospectus Supplement from the date of filing or
furnishing of such documents or reports. Any statement contained in a document
incorporated by reference herein or in any Prospectus Supplement shall be deemed
to be modified or superseded for purposes of this Prospectus and such Prospectus
Supplement to the extent that a statement contained herein or therein or in any
other subsequently filed document which also is incorporated by reference herein
or therein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or any Prospectus Supplement.
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<PAGE> 33
The Company will provide without charge to each person to whom a copy of
this Prospectus or any Prospectus Supplement is delivered, upon the written or
oral request of any such person, a copy of any or all of the documents referred
to above which have been or may be incorporated herein or therein by reference
(other than exhibits to such documents unless such exhibits are specifically
incorporated by reference into such documents). Requests for such documents
should be directed to the Vice President, Treasurer and Assistant Secretary,
4800 East 131st Street, Cleveland, Ohio 44105. Telephone requests for such
copies should be directed to the Vice President, Treasurer and Assistant
Secretary at (216) 587-3600.
THE COMPANY
The Company is engaged in the distribution of industrial and end-user
electronic components and computer products. The Company distributes its
products principally in the United States and Canada. The Company was organized
as an Ohio corporation in 1963, and its Common Shares are traded on the Nasdaq
National Market under the symbol PIOS. The Company's executive offices are
located at 4800 East 131st Street, Cleveland, Ohio 44105 and its telephone
number is (216) 587-3600.
RECENT ACQUISITIONS
On June 1, 1994, Pioneer-Standard Canada Inc., a newly-formed Canadian
subsidiary of the Company, ("P-S Canada"), purchased from United Westburne Inc.
certain of the assets and assumed certain liabilities of United Westburne's
Zentronics Division, which the Company believes is one of the largest
distributors of electronic components and computer products in Canada. On
November 30, 1995, the Company acquired the remaining 50% of the Common Stock of
Pioneer-Standard of Maryland, Inc., a Maryland corporation, then known as
Pioneer/Technologies Group Inc. ("Technologies"). Prior to this acquisition, the
Company owned 50% of the Common Stock of Technologies. Except as otherwise
stated, the term "Company" as used herein includes P-S Canada and Technologies.
INDUSTRIAL AND END-USER DISTRIBUTION
The Company distributes a broad range of electronics components and
computer products manufactured by others. These products are sold to original
equipment manufacturers, value-added resellers, research laboratories,
government agencies, and end-users, including manufacturing companies and
service and other non-manufacturing organizations. These products are classified
into three broad categories: semiconductors, computer products, and passive and
electromechanical components. During fiscal 1996, semiconductor products
accounted for 38% of the Company's sales compared with 37% in 1995 and 41% in
1994. These products include microprocessors, memory devices, programmable logic
devices, analog and digital integrated circuits and other semiconductor devices.
During fiscal 1996, computer products accounted for 40% of the Company's sales
compared with 38% in 1995 and 33% in 1994. These products include computers
(primarily mini and personal), display terminals, disk drives, development
systems and networking products. During fiscal 1996, passive and
electromechanical products accounted for 20% of the Company's sales, compared
with 22% in 1995 and 24% in 1994. These products include capacitors, connectors,
resistors, potentiometers, switches and power conditioning equipment.
As a part of its distributor operations, the Company provides value-added
services including point of use inventory management, systems integration,
just-in-time kitting operations, memory and logic device programming and
connector assemblies to customer specifications. Sales amounts for these
services are included among the three broad categories discussed above.
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<PAGE> 34
PRODUCTS DISTRIBUTED AND SOURCES OF SUPPLY
The Company is the fourth largest of the approximately 1,500 electronics
distributors serving North American markets on the basis of total sales, which
includes combined sales of the Company and Technologies prior to November 30,
1995. The Company markets electronic components supplied by over 100
manufacturers. A majority of the Company's revenues comes from products sourced
by relatively few suppliers. During the 1996 fiscal year, products purchased
from the Company's five largest suppliers accounted for 69% of total sales
volume, with Digital Equipment Corporation (27%) and Intel Corporation (18%)
being the largest two suppliers. The loss of any one of the top five suppliers
and/or a combination of certain other suppliers could have a material adverse
effect on the Company's sales and earnings unless alternative products
manufactured by others are available to the Company.
The majority of the products sold by the Company are purchased pursuant to
distributor agreements which generally provide for inventory return privileges
by the Company upon cancellation of a distributor agreement. The distributor
agreements also typically provide protection to the Company for product
obsolescence and price erosion. The Company believes it has good relationships
with its suppliers.
CUSTOMERS
The Company serves over 24,000 customers in many major markets of North
America. No single customer accounted for more than 5% of the Company's total
sales for the 1996 fiscal year.
COMPETITION
The sale and distribution of industrial electronic components and computer
products is highly competitive, primarily with respect to price and product
availability, but also with respect to service, variety, number of locations and
promptness of service. Many of the distributors with whom the Company competes
are regional or local distributors. However, several of the Company's strongest
competitors have national and international distribution businesses. The Company
also experiences competition from manufacturers, including some of the Company's
suppliers, who may sell directly to the industrial and end-user account base.
EMPLOYEES
As of March 31, 1996, the Company had 2,052 employees, with approximately
2,016 of these persons employed on a full-time basis and the balance on a
part-time basis. The Company is not a party to any collective bargaining
agreement, has had no strikes or work stoppages and considers its employee
relations to be excellent.
USE OF PROCEEDS
Unless otherwise specified in the Prospectus Supplement, the net proceeds
from the sale of the Securities will be used by the Company for the reduction of
bank indebtedness, working capital, and general corporate purposes. Until the
proceeds are used for these purposes, the Company may deposit them in
interest-bearing accounts or invest them in short-term investment securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the Company for each of the last five fiscal years. In computing the ratio of
earnings to fixed charges, income used in the calculation of the ratio of
earnings to fixed charges consists of income before income taxes plus fixed
charges. Fixed charges consist of interest on debt and the portion of rental
expense which is deemed representative of the interest factor. The computation
of the ratio of earnings to fixed charges includes the Company's 50% pro rata
share of Technologies prior to November 30, 1995.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED MARCH 31,
----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges (unaudited).......... 5.08x 7.90x 8.74x 5.15x 2.37x
</TABLE>
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<PAGE> 35
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities offered by any Prospectus Supplement and
the extent, if any, to which such general provisions may apply to the Debt
Securities so offered will be described in the Prospectus Supplement relating to
such Debt Securities.
The Debt Securities are to be issued under an Indenture, dated as of August
1, 1996, as supplemented
from time to time (the "Indenture") between the Company and Star Bank, N.A., as
trustee (the "Trustee"), which is an exhibit to the Registration Statement of
which this Prospectus is a part. The following summaries of certain provisions
of the Debt Securities and the Indenture do not purport to be complete and are
subject to, and are qualified in their entirety by express reference to, all the
provisions of the Indenture, including the definitions therein of certain terms.
Certain terms defined in the Indenture are capitalized herein. Particular
section numbers refer to sections in the Indenture.
GENERAL
The Debt Securities will be unsecured obligations of the Company and will
rank on a parity with all other unsecured and unsubordinated indebtedness of the
Company. The Indenture does not limit the aggregate principal amount of Debt
Securities which may be issued thereunder and provides that Debt Securities may
be issued thereunder from time to time in one or more series.
Reference is made to the Prospectus Supplement relating to the Debt
Securities for the following terms thereof: (1) the title of the Debt
Securities; (2) any limit on the aggregate principal amount of the Debt
Securities; (3) whether the Debt Securities of any such series are to be
issuable in permanent global form with or without coupons; (4) the date or dates
on which the principal of the Debt Securities is payable; (5) the rate or rates
(which may be fixed or variable) per annum at which the Debt Securities will
bear interest, if any, and the date from which such interest will accrue; (6)
the dates on which such interest will be payable and the Regular Record Dates
for such Interest Payment Dates; (7) the place or places where the principal of
(and premium, if any) and interest on the Debt Securities will be payable; (8)
the dates, if any, on which and the price or prices at which the Debt Securities
may, pursuant to any mandatory or optional sinking fund provisions, be redeemed
by the Company and other terms and provisions of such sinking funds; (9) the
date, if any, after which and the price or prices at which the Debt Securities
may, pursuant to any optional redemption provisions, be redeemed at the option
of the Company or of the Holder thereof and other detailed terms and provisions
of such optional redemption; (10) the currency or units based on or relating to
currencies in which the Debt Securities are denominated and in which principal
of (and premium, if any) and any interest on the Debt Securities will or may be
payable; and (11) any additional Events of Default or covenants with respect to
the Debt Securities or the terms and conditions thereof other than those set
forth in the Indenture (Section 301). For a description of the terms of the Debt
Securities, reference must be made to both the Prospectus Supplement relating
thereto and to the description of Debt Securities set forth herein.
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the principal of, and any premium or interest on, the Debt Securities will be
payable, and the Debt Securities will be exchangeable and transfers thereof will
be registrable, at the Corporate Trust Office of the Trustee at 425 Walnut
Street, Cincinnati, Ohio 45201-1118, provided that, at the option of the
Company, payment of interest may be made by check mailed to the address of the
Person entitled thereto as it appears in the Security Register (Sections 202,
305, 307, 308 and 1002).
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the Debt Securities will be issued in United States dollars in fully registered
form, without coupons, in denominations of $1,000 or any integral multiple
thereof (Section 302). Unless otherwise provided in the Debt Securities to be
transferred or exchanged, no service charge will be made for any transfer or
exchange of the Debt Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith (Section 305).
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<PAGE> 36
Debt Securities may be issued under the Indenture as Original Issue
Discount Securities to be offered and sold at a substantial discount from the
principal amount thereof. Special federal income tax, accounting and other
considerations applicable to any such Original Issue Discount Securities will be
described in the Prospectus Supplement relating thereto. "Original Issue
Discount Security" means any security which provides for an amount less than the
principal amount thereof to be due and payable upon the declaration of
acceleration of the Maturity thereof upon the occurrence of an Event of Default
and during the continuation thereof (Section 101).
RESTRICTIVE COVENANTS
Restrictions Upon Secured Debt
The Company covenants that it will not, and will not permit any Restricted
Subsidiary to, create, incur, issue, assume or guarantee any indebtedness for
borrowed money (hereinafter called "indebtedness") secured by a mortgage,
security interest, pledge or lien (hereinafter called "mortgage") of or upon any
Principal Property or any shares of capital stock or indebtedness of any
Restricted Subsidiary, whether owned at the date of the Indenture or thereafter
acquired, without effectively providing that the Debt Securities (together with,
if the Company shall so determine, any other indebtedness created, incurred,
issued, assumed or guaranteed by the Company or any Restricted Subsidiary and
then existing or thereafter created) shall be secured by such mortgage equally
and ratably with (or, at the option of the Company, prior to) such indebtedness.
The foregoing restrictions, however, shall not apply to (1) mortgages of or upon
any property acquired, constructed or improved by, or of or upon any shares of
capital stock or indebtedness acquired by, the Company or any Restricted
Subsidiary after the date of the Indenture to secure the payment of all or any
part of the purchase price of such property, shares of capital stock or
indebtedness or of the cost of any acquisition, completion of construction or
commencement of commercial operation of such property, which indebtedness is
incurred prior to, at the same time as or within 270 days after such
acquisition, completion of such construction or the commencement of commercial
operation of such property; (2) mortgages of or upon any property, shares of
capital stock or indebtedness existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary; (3) mortgages of or upon any property of a
corporation existing at the time such corporation is merged with or into or
consolidated with the Company or any Restricted Subsidiary or existing at the
time of a sale or transfer of the properties of a corporation as an entirety or
substantially as an entirety to the Company or any Restricted Subsidiary; (4)
mortgages of or upon any property of, or shares of capital stock or indebtedness
of, a corporation existing at the time such corporation becomes a Restricted
Subsidiary; (5) mortgages to secure indebtedness in favor of the Company or any
Restricted Subsidiary; (6) mortgages in favor of governmental bodies to secure
partial, progress, advance or other payments pursuant to any contract or statute
or to secure indebtedness incurred or guaranteed to finance or refinance all or
any part of the purchase price of the property, shares of capital stock or
indebtedness subject to such mortgages, or the cost of constructing or improving
the property subject to such mortgages; (7) mortgages to secure payment of taxes
or assessments or other governmental charges or levies being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted
and for which such reserve or other appropriate provision, if any, as is
required is made; (8) mortgages to secure obligations under workers'
compensation or similar legislation; (9) mortgages to secure performance of
statutory obligations, surety bonds or appeal bonds, performance or
return-of-money bonds or other obligations of a like nature incurred in the
ordinary course of business; (10) attachment and judgment mortgages for which an
insurance carrier shall have acknowledged in writing liability in respect of the
full amount thereof or shall have been ordered by a court of competent
jurisdiction to pay; and (11) extensions, renewals or replacements of any
mortgage existing on the date of the Indenture or any mortgage referred to in
the foregoing clauses (1) through (10), inclusive (Section 1010).
Notwithstanding the restrictions outlined above, the Company or any
Restricted Subsidiary may, without equally and ratably securing the Debt
Securities, issue, assume or guarantee indebtedness secured by a mortgage not
excepted under clauses (1) through (11) above, if the aggregate amount of such
indebtedness, together with all other indebtedness of, or indebtedness
guaranteed by, the Company and its Restricted Subsidiaries existing at such time
and secured by mortgages not so excepted and the Attributable Debt existing in
respect of Sale and Leaseback Transactions (other than Sale and Leaseback
Transactions in
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<PAGE> 37
respect of which amounts equal to the Attributable Debt relating to the
transactions shall have been applied, within 270 days after the effective date
of the arrangement, to the prepayment or retirement (other than any mandatory
prepayment or retirement) of long-term indebtedness and Sale and Leaseback
Transactions in which the property involved would have been permitted to be
mortgaged under clause (1) or (6) above) does not at the time such indebtedness
is issued, assumed or guaranteed exceed 10% of Consolidated Net Tangible Assets
(Section 1010).
Restrictions upon Sale and Leaseback Transactions
Sale and Leaseback Transactions by the Company or any Restricted Subsidiary
of any Principal Property are prohibited unless (a) the Company or such
Restricted Subsidiary would be entitled, without equally and ratably securing
the Debt Securities, to incur indebtedness secured by a mortgage on the property
to be leased pursuant to clause (1) or (6) under the subsection Restrictions
Upon Secured Debt above; (b) the Company or such Restricted Subsidiary would be
entitled, without equally and ratably securing the Debt Securities, to issue,
assume or guarantee indebtedness secured by a mortgage on such property in an
amount at least equal to the Attributable Debt in respect of the Sale and
Leaseback Transaction; or (c) the Company shall apply, within 270 days after the
effective date of the arrangement, an amount equal to the Attributable Debt in
respect of the transaction to the prepayment or retirement (other than any
mandatory prepayment or retirement) of long-term indebtedness of the Company or
any Restricted Subsidiary (Section 1011).
Restrictions on Indebtedness of Restricted Subsidiaries
The Company is prohibited from permitting any Restricted Subsidiary from
creating, incurring, issuing, assuming or guaranteeing any indebtedness;
provided, however, that the restriction will not apply if: (1) such indebtedness
is owed to the Company; (2) such indebtedness existed at the time the
corporation that issued such indebtedness became a Restricted Subsidiary of the
Company, or was merged with or into or consolidated with such Restricted
Subsidiary, or at the time of a sale, lease or other disposition of the
properties of such corporation as an entirety to such Restricted Subsidiary; (3)
such indebtedness is guaranteed by a governmental agency; (4) such indebtedness
is issued, assumed or guaranteed in connection with, or with a view to,
compliance by such Restricted Subsidiary with the requirements of any program
adopted by a governmental authority and applicable to such Restricted Subsidiary
and providing financial or tax benefits to such Restricted Subsidiary which are
not available directly to the Company; (5) such indebtedness is nonrecourse to
the Restricted Subsidiary; or (6) such indebtedness is incurred for the purpose
of extending, renewing, substituting, replacing or refunding indebtedness
permitted by the foregoing clauses (1) through (5), provided that the principal
amount of such indebtedness cannot exceed the principal amount of indebtedness
being extended, renewed, replaced or refunded. Notwithstanding the restriction
on indebtedness contained in the Indenture and summarized above, the Company's
Restricted Subsidiaries may create, incur, issue, assume or guarantee
indebtedness which would otherwise be subject to the foregoing restrictions in
an aggregate principal amount which, together with the aggregate outstanding
principal amount of all other indebtedness of the Company and its Restricted
Subsidiaries which would otherwise be subject to the restrictions (which
calculation includes and excludes certain indebtedness as specifically set forth
in the Indenture), does not at the time such indebtedness is incurred exceed an
amount equal to 10% of Consolidated Net Tangible Assets (Section 1012).
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (the "Change of Control Date"),
each Holder will have the right, at the Holder's option, to require that the
Company purchase all or any part (provided that the principal amount must be
$1,000 or an integral multiple thereof) of such Holder's Debt Securities
pursuant to the offer described below (the "Change of Control Offer") at a
purchase price equal to 100% of the principal amount of such Debt Securities
plus accrued and unpaid interest, if any, to the date of such purchase (Section
1013).
Within ten days after the Change of Control Date, the Company will mail a
notice (which notice will contain all instructions and materials necessary to
enable Holders to tender their Debt Securities) to each Holder of Debt
Securities of each applicable series. All Debt Securities of each applicable
series properly
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<PAGE> 38
tendered will be accepted for payment on a date (the "Change of Control Payment
Date") which will be no earlier than 30 days nor later than 40 days from the
date such notice is mailed (Section 1013).
On the Change of Control Payment Date, the Company will accept for payment
all Debt Securities of each applicable series or portions thereof properly
tendered pursuant to the Change of Control Offer, deposit with the applicable
Paying Agent money sufficient to pay the purchase price of all Debt Securities
of each applicable series or portions thereof so accepted and deliver to the
Trustee Debt Securities so accepted, together with an Officer's Certificate
stating the Debt Securities or portions thereof tendered to the Company. The
Paying Agent will promptly mail to the Holder of Debt Securities of each series
so accepted payment in an amount equal to the purchase price, and the Trustee
will promptly authenticate and mail or make available for delivery to such
Holder a new Debt Security of the same series as, and equal in principal amount
to, any unpurchased portion of the Debt Security surrendered. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date (Section 1013).
In the event that the aggregate principal amount of the Debt Securities
that are surrendered pursuant to a Change of Control Offer on a Change of
Control Payment Date is at least 80% of the aggregate principal amount of the
Debt Securities outstanding, the remaining Debt Securities will be subject to
the Company's purchase as a whole, at the Company's option, upon not less than
30 days notice mailed to each Holder thereof on a date selected by the Company
that is within 30 days after such Change of Control Payment Date, at a price
equal to 100% of the principal amount, plus accrued interest to such date of
purchase (Section 1013).
Whether a Change of Control has occurred depends on the accumulation of
Common Shares of the Company, on certain changes in the composition of the
Company's Board of Directors or on the disposition of all or substantially all
of the assets of the Company. As a result, the Company can enter into certain
highly leveraged transactions, including certain recapitalizations, mergers or
stock repurchases, that would not result in the application of the Change of
Control provisions. With respect to any Change of Control Offer, the Company
intends to comply with the requirements of Section 14(e) and Rule 14e-1 under
the Exchange Act, if then applicable.
The Change of Control purchase feature of the Debt Securities may in
certain circumstances make more difficult or discourage a takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature, however, is not the result of management's knowledge of any
specific effort to accumulate Common Shares or obtain control of the Company by
means of a merger, tender offer, solicitation or otherwise, or part of a plan by
management to adopt a series of anti-takeover provisions. The Change of Control
purchase feature is a provision commonly found in similar debt offerings.
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the required purchase price for all
the Debt Securities tendered by the Holders thereof. The Company's ability to
purchase the Debt Securities tendered upon a Change of Control may be limited by
the terms of its then-existing borrowing and other agreements.
CERTAIN DEFINITIONS
The term "Acquiring Person" generally means any person or group (as defined
in Section 13(d)(3) of the Exchange Act) who or which, together with all
affiliates and associates (as defined in Rule 12b-2 under the Exchange Act),
becomes the beneficial owner of common shares of the Company having more than
50% of the total number of votes that may be cast for the election of directors
of the Company (Section 101).
The term "Attributable Debt" in respect of a Sale and Leaseback Transaction
means, at any particular time, the present value (discounted at the rate of
interest implicit in the lease involved in such Sale and Leaseback Transaction,
as determined in good faith by the Company) of the obligation of the lessee
thereunder for rental payments (excluding, however, any amounts required to be
paid by such lessee, whether or not designated as rent or additional rent, on
account of maintenance and repairs, insurance, taxes, assessments, water rates
or similar charges or any amounts required to be paid by such lessee thereunder
contingent upon the amount of sales, maintenance and repairs, insurance, taxes,
assessments, water rates or
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<PAGE> 39
similar charges) during the remaining term of such lease (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended) (Section 101).
The term "Change of Control" means any event by which (a) an Acquiring
Person has become such, (b) Continuing Directors cease to comprise a majority of
the members of the Board of Directors of the Company or (c) all or substantially
all the properties and assets of the Company as an entirety or substantially as
an entirety are sold, assigned, transferred or leased (Section 101).
The term "Consolidated Net Tangible Assets" means, as of any particular
time, the total amount of assets (less applicable reserves) after deducting
therefrom (a) all current liabilities (excluding any thereof which are by their
terms extendible or renewable at the option of the obligor thereon to a time
more than 12 months after the time as of which the amount thereof is being
computed and excluding current maturities of long-term indebtedness) and (b) all
goodwill, trade names, trademarks, patents, unamortized debt discount and
expense and other like intangible assets, all as shown in the audited
consolidated balance sheet of the Company and subsidiaries contained in the
Company's then most recent annual report to shareholders, except that assets
will include an amount equal to the Attributable Debt in respect of any Sale and
Leaseback Transaction not capitalized on such balance sheet (Section 101).
The term "Continuing Director" generally means any member of the Board of
Directors, while such person is a member of such Board of Directors, who is not
an Acquiring Person, or affiliated with an Acquiring Person and who (a) was a
member of the Board of Directors prior to the date of the Indenture or (b)
subsequently becomes a member of such Board of Directors and whose nomination
for election or election to such Board of Directors is recommended or approved
by a majority of the Continuing Directors or who is included as a nominee in a
proxy statement of the Company distributed when a majority of such Board of
Directors consists of Continuing Directors (Section 101).
The term "Principal Property" means any manufacturing or assembly plant or
warehouse owned at the date of the Indenture or acquired after such date by the
Company or any Restricted Subsidiary which is located within the United States
or Canada and has gross book value (including land and improvements, machinery
and equipment thereon) which exceeds 2% of Consolidated Net Tangible Assets at
the time of determination thereof other than (a) any such manufacturing or
assembly plant or warehouse or any other real property or any portion thereof
(together with the land and fixtures comprising a part thereof) which is
financed by certain tax exempt industrial development bonds, (b) any property
which, in the opinion of the Board of Directors of the Company, is not of
material importance to the total business conducted by the Company and its
Restricted Subsidiaries taken as a whole or (c) any portion of a particular
property which is similarly found not to be of material importance to the use or
operation of such property (Section 101).
The term "Restricted Subsidiary" means any Subsidiary (a) substantially all
of the property of which is located, or substantially all of the business of
which is carried on, within the United States of America (other than its
territories or possessions and other than Puerto Rico) or Canada and (b) which
owns a Principal Property; provided, however, that any Subsidiary which is
principally engaged in financing operations outside the United States of America
or which is principally engaged in leasing or in financing installment
receivables shall not be a Restricted Subsidiary (Section 101).
The term "Sale and Leaseback Transaction" means any arrangement with any
Person providing for the leasing by the Company or any Restricted Subsidiary of
any Principal Property, whether owned at the date of the Indenture or thereafter
acquired (except for temporary leases for a term, including any renewal thereof,
of not more than three years and except for leases between the Company and any
Restricted Subsidiary, between any Restricted Subsidiary and the Company or
between Restricted Subsidiaries) which property has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to such Person with the
intention of taking back a lease of such property (Section 1011).
The term "Subsidiary" means any corporation more than 50% of the
outstanding voting stock of which is at the time owned, directly or indirectly,
by the Company and/or one or more of its other Subsidiaries (Section 101).
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EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to
Debt Securities of any series: (1) failure, for a period of two days, to pay any
interest on any Debt Security of that series when due; (2) failure to pay
principal of (or premium, if any) on any Debt Security of that series when due;
(3) failure to deposit any sinking fund payment in respect of any Debt Security
of that series when due; (4) failure to perform any other covenant of the
Company in the Indenture (other than a covenant included in the Indenture solely
for the benefit of a series of Debt Securities other than that series),
continued for 60 days after written notice as provided in the Indenture; (5) an
event of default, as defined in any mortgage, indenture, or instrument under
which there may be issued, or by which there may be secured or evidenced, any
Indebtedness in excess of $15,000,000 of the Company or a Subsidiary, continued
for 15 days after written notice to the Company from the Trustee or to the
Company and to the Trustee from the Holders of at least 10% in aggregate
principal amount of the Debt Securities of that series at the time outstanding;
(6) certain events of bankruptcy, insolvency or reorganization relating to the
Company; and (7) any other Event of Default provided with respect to Debt
Securities of that series (Section 501).
If an Event of Default with respect to any series of Outstanding Debt
Securities shall occur and be continuing, either the Trustee or the Holders of
at least 25% in principal amount of the Outstanding Debt Securities of that
series may declare the principal amount (or, if the Debt Securities of that
series are Original Issue Discount Securities, such portion of the principal
amount as may be specified in the terms of that series) to be due and payable
immediately. However, at any time after a declaration of acceleration with
respect to Debt Securities of any series has been made, but before a judgment or
decree based on such acceleration has been obtained, the Holders of a majority
in principal amount of Outstanding Debt Securities of that series may, subject
to certain conditions, rescind and annul such acceleration if all Events of
Default, other than the nonpayment of accelerated principal, with respect to
Debt Securities of that series have been cured or waived as provided in the
Indenture (Section 502). Notwithstanding the foregoing, if an Event of Default
occurs under clause (6) above, all unpaid principal of and accrued interest on
the Outstanding Securities of that series (or specified principal amount) ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder of any Security of that series. For
information as to waiver of defaults, see "Modification and Waiver." Reference
is made to the Prospectus Supplement relating to any series of Debt Securities
which are Original Issue Discount Securities for the particular provisions
relating to acceleration of the Maturity of a portion of the principal amount of
such Original Issue Discount Securities upon the occurrence of any Event of
Default and the continuation thereof.
The Indenture provides that, subject to the duties of the Trustee to act
with the required standard of care if an Event of Default shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders, unless such Holders shall have offered to the Trustee reasonable
security or indemnity (Sections 601 and 603). Subject to such provisions for
security or indemnification of the Trustee, the Holders of a majority in
principal amount of the Outstanding Debt Securities of any series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Debt Securities of that series (Section 512).
No Holder of any Debt Security of any series will have any right to
institute any proceeding with respect to the indenture or for any remedy
thereunder, unless (1) such Holder has previously given to the Trustee written
notice of a continuing Event of Default with respect to Debt Securities of that
series; (2) the Holders of at least 25% in principal amount of the Outstanding
Debt Securities of that series has made written request to the Trustee to
institute such proceedings; (3) such Holder has offered reasonable security or
indemnity to the Trustee to institute such proceeding as trustee; (4) the
Trustee has not received from the Holders of a majority in principal amount of
the Outstanding Debt Securities of that series a direction inconsistent with
such request; and (5) the Trustee has failed to institute such proceeding within
60 days (Section 507). However, the Holder of any Debt Security will have an
absolute right to receive payment of the principal of (and premium, if any) and
any interest on such Debt Security on or after the due dates expressed in such
Debt Security and to institute suit for the enforcement of any such payment
(Section 508).
The Indenture requires the Company to furnish to the Trustee annually a
statement as to the existence of any Default or Event of Default under the
Indenture (Section 1006). The Indenture provides that the Trustee
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may withhold notice to the Holders of Debt Securities of any series of any
default (except in payment of principal or any premium or interest or in sinking
fund payments) with respect to Debt Securities of that series if it considers it
in the interest of the Holders of Debt Securities of that series to do so
(Section 602).
MODIFICATION AND WAIVER
Modification and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate principal
amount of the Outstanding Debt Securities of each series affected thereby;
provided, however, that no such modification or amendment may, without the
consent of the Holder of each Outstanding Debt Security affected thereby, (1)
change the Stated Maturity of the principal of, or any installment of principal
of or interest on, any Debt Security; (2) reduce the principal amount of (or
premium, if any) or interest on, any Debt Security; (3) reduce the amount of
principal of an Original Issue Discount Security payable upon acceleration of
the Maturity thereof; (4) change the place or currency of payment of principal
of (or premium, if any) or interest on, any Debt Security; (5) impair the right
to institute suit for the enforcement of any payment on or with respect to any
Debt Security after the Stated Maturity; (6) change the redemption provisions in
a manner adverse to the Holders; or (7) reduce the percentage in principal
amount of Outstanding Debt Securities of any series, the consent of the Holders
of which is required for modification or amendment of the Indenture, waiver of
compliance with certain provisions of the Indenture or waiver of certain
Defaults or Events of Default (Section 902).
Under certain circumstances, the Holders of a majority in aggregate
principal amount of the Outstanding Debt Securities of any series may on behalf
of the Holders of all Debt Securities of that series waive, insofar as that
series is concerned, compliance by the Company with certain restrictive
covenants of the Indenture (Section 1015). The Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
may on behalf of the Holders of all Debt Securities of that series waive any
past Default or Event of Default under the Indenture with respect to that
series, except a Default or Event of Default in the payment of the principal of
(or premium, if any) or any interest on any Debt Security of that series or in
respect of a provision which under the Indenture cannot be modified or amended
without the consent of the Holder of each Outstanding Debt Security of that
series affected (Section 513).
DEFEASANCE
Defeasance and Discharge. If the Debt Securities of any series so provide,
the Company will be discharged (hereinafter, "defeasance") from any and all
obligations in respect of Debt Securities of that series (except for certain
obligations to pay to Holders of Outstanding Securities of such series any
payments in respect of the principal of (and premium, if any) and any interest
on such Debt Securities when such payments are due, to prepare and make
available temporary securities, to register the transfer or exchange of Debt
Securities of that series, to replace stolen, lost or mutilated Debt Securities
of that series, to maintain paying agencies, to compensate and indemnify the
Trustee and to furnish the Trustee (if the Trustee is not the registrar) with
the names and addresses of the holders of Debt Securities of that series) upon
the irrevocable deposit with the Trustee, in trust, of money and/or obligations
of the United States government or securities issued by United States government
agencies backed by the full faith and credit of the United States government
which, through the payment of interest and principal in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of (and premium, if any) and the interest on the Debt Securities
of that series on the Stated Maturity of such payments in accordance with the
terms of the Debt Securities of that series (Sections 1302 and 1304). Such a
defeasance may be effected only if, among other things, the Company has
delivered to the Trustee a ruling directed to the Trustee received from the
Internal Revenue Service to the effect that the Holders of the Debt Securities
of that series will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance had not occurred, or an Opinion of Counsel (who
may be an employee of or counsel to the Company), based on such ruling or on a
change in the applicable federal income tax law since the date of the Indenture,
to the same effect (Section 1304). In addition, the Company may also obtain a
discharge of the Indenture with respect to all Debt Securities issued under the
Indenture by depositing with the Trustee, in trust, money sufficient to pay at
Stated Maturity or upon redemption all of such Debt
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Securities, provided that such Debt Securities are by their terms to become due
and payable within one year or are to be called for redemption within one year
(Section 401).
Defeasance of Certain Covenants and Certain Events of Default. If the Debt
Securities of any series so provide, the Company may omit to comply
(hereinafter, "covenant defeasance") with the restrictive covenants described
under Restrictive Covenants -- Restrictions Upon Secured Debt, -- Restrictions
Upon Sale and Leaseback Transactions, -- Restrictions on Indebtedness of
Restricted Subsidiaries and Consolidation, Merger and Sale of Assets, and no
Default or Event of Default shall arise with respect to Debt Securities of such
series by reason of any failure to comply therewith, upon the irrevocable
deposit with the Trustee, in trust, of money and/or obligations of the United
States government or securities issued by United States government agencies
backed by the full faith and credit of such government which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of (and premium, if
any) and the interest on the Debt Securities of that series on the Stated
Maturity of such payments in accordance with the terms of the Debt Securities of
that series (Section 1303 and 1304). The obligations of the Company under the
Debt Securities of that series other than with respect to the covenants referred
to above and all Defaults and Events of Default other than with respect to such
covenants shall remain in full force and effect. Such a covenant defeasance may
be effected only if, among other things, the Company has delivered to the
Trustee an Opinion of Counsel (who may be an employee of or counsel for the
Company), or a ruling directed to the Trustee received from the Internal Revenue
Service, to the effect that the Holders of the Debt Securities of that series
will not recognize income, gain or loss for federal income tax purposes as a
result of such covenant defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times, as would have been
the case if such covenant defeasance had not occurred (Section 1304).
Covenant Defeasance and Certain Other Events of Default. In the event the
Company exercises its option to effect a covenant defeasance with respect to the
Debt Securities of any series as described above and the Debt Securities of that
series are thereafter declared due and payable because of the occurrence of any
Event of Default other than the Event of Default caused by failing to comply
with the covenants which are defeased, if the amount of money and securities on
deposit with the Trustee would be sufficient to pay amounts due on the Debt
Securities of that series at the time of their Stated Maturity but are not
sufficient to pay amounts due on the Debt Securities of that series at the time
of the acceleration resulting from such Event of Default, the Company would
remain liable for such payments (Sections 1303 and 1304).
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with, or merge with or into any other
Person (whether or not the Company shall be the surviving corporation), or sell,
assign, transfer or lease all or substantially all of its properties and assets
as an entirety or substantially as an entirety to any Person or group of
affiliated Persons, in one transaction or a series of related transactions,
unless (1) either the Company shall be the continuing Person or the Person (if
other than the Company) formed by such consolidation or with which or into which
the Company is merged or the Person (or the group of affiliated Persons) to
which all or substantially all the properties and assets of the Company as an
entirety or substantially as an entirety are sold, assigned, transferred or
leased shall be a corporation (or constitute corporations) organized and
existing under the laws of the United States of America or any State thereof or
the District of Columbia and shall expressly assume, by an indenture
supplemental to the Indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Securities and the Indenture; and (2) immediately before and after giving effect
to such transaction or series of related transactions, no Default or Event of
Default shall have occurred and be continuing (Section 801).
GOVERNING LAW
The Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York (Section 112).
REGARDING THE TRUSTEE
The Trustee, Star Bank, N.A., is one of a number of banks with which the
Company maintains ordinary banking relationships and credit facilities.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 Common
Shares, without par value. The shareholders of the Company are being asked to
approve, at the July 23, 1996 Annual Meeting of Shareholders, an amendment to
the Company's Articles of Incorporation, as amended (the "Articles of
Incorporation") to increase the authorized capital stock of the Company to
80,000,000 Common Shares, without par value. The principal purpose for the
proposal is to make available additional Common Shares for possible stock splits
or dividends, employee benefit plans, acquisitions, private or public stock
offerings and other corporate purposes. The following summary description of the
capital stock of the Company does not purport to be complete and is qualified in
its entirety by reference to the Company's Articles of Incorporation, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is part.
COMMON SHARES
The holders of Common Shares are entitled to receive dividends when, as and
if declared from time to time by the Board of Directors out of funds legally
available therefor. The Common Shares have no preemptive rights or conversion
rights and are not subject to further calls or assessments by the Company. There
are no redemption or sinking fund provisions applicable to the Common Shares.
All currently outstanding Common Shares are, and the Common Shares being sold by
the Company in this offering will be, duly authorized, validly issued, fully
paid and nonassessable. The holders of Common Shares, upon proper notice, have
the right to vote cumulatively in the election of directors. The Board of
Directors consists of ten members divided into three classes of three, four and
three members, respectively. The directors of the class elected at each Annual
Meeting of Shareholders hold office for a term of three years. The Articles can
be amended by the affirmative vote of the holders of at least two-thirds of the
Company's then outstanding shares having voting power thereon.
SHARE SUBSCRIPTION AGREEMENT AND TRUST
The Company has entered into a Share Subscription Agreement and Trust with
Wachovia Bank of North Carolina, N.A., as Trustee, pursuant to which the Trustee
has subscribed for 5,000,000 Common Shares of the Company which will be paid for
over the 15 year term of the Trust. The proceeds from the sale of the Common
Shares will be used to fund Company obligations under various employee benefit
plans, to pay cash bonuses and other similar employee related Company
obligations. Under Ohio law, the subscribed for Common Shares are deemed to be
issued and outstanding for voting and dividend purposes, but will not be fully
paid and nonassessable until payment for such Common Shares is received as
provided in the Trust. According to generally accepted accounting principles,
none of the 5,000,000 Common Shares will be deemed outstanding for purposes of
calculating earnings per share until payment is received for the Common Shares
as provided in the Trust.
OTHER MATTERS
Code of Regulations. The Company's Code of Regulations, as amended (the
"Code"), provides that the Board of Directors shall be divided into three
classes and requires that any proposal to increase or decrease the number of
directors be approved by the vote of the holders of a majority of shares
entitled to vote on the proposal; provided, however, that the number of
directors of any class shall not consist of less than three directors. Moreover,
the Code provides that directors may be removed from office by the vote of the
holders of two-thirds of the voting power entitled to elect directors in place
of those removed; provided, however, that unless all the directors of a
particular class are removed, no individual director may be removed without
cause if a sufficient number of shares are cast against such removal, such
number being that which, if cumulatively voted at an election for all the
directors, or all the directors of a particular class, as the case may be, would
be sufficient to elect at least one director. The purpose of these provisions is
to prevent directors from being removed from office prior to the expiration of
their respective terms, thus protecting the safeguards inherent in the
classified Board structure unless dissatisfaction with the performance of one or
more directors is widely shared by the Company's shareholders. These provisions
could also have the effect of increasing the amount of time required for an
acquiror to obtain control of the Company by electing a majority of the Board of
Directors
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and may also make the removal of incumbent management more difficult and
discourage or render more difficult certain mergers, tender offers, proxy
contests, or other potential takeover proposals. To the extent that these
provisions have the effect of giving management more bargaining power in
negotiations with a potential acquiror, they could result in management using
the bargaining power not only to try to negotiate a favorable price for an
acquisition, but also to negotiate favorable terms for management.
Business Combinations. Under the Articles, the affirmative vote of not
less than 80% of the outstanding Common Shares is required for the approval or
authorization of any Business Combination (as hereinafter defined) involving the
Company and an Interested Party (as hereinafter defined). This provision does
not apply to Business Combinations with Interested Parties which have been
approved by a majority of Continuing Directors (as hereinafter defined) or which
satisfy certain provisions of the Articles relating to the consideration to be
paid to the holders of Common Shares by the Interested Party. For purposes of
the Articles, the term "Business Combination" means (i) any merger or
consolidation involving both the Company and the Interested Party, or a
subsidiary of either of them, (ii) any sale, lease, transfer or other
disposition of assets of the Interested Party, (iii) adoption of a plan of
liquidation or dissolution, (iv) issuance or transfer by the Company or a
subsidiary to an Interested Party of any securities with a market value of $2
million or more, or (v) any recapitalization, reclassification or other
transaction which would have the effect of increasing the Interested Party's
voting power in the Company. The term "Interested Party" means (i) any
individual, corporation, partnership or other person or entity which, together
with its affiliates or associates, is a beneficial owner of 10% or more of the
aggregate voting power of any class of capital stock of the Company entitled to
vote generally in the election of directors, and (ii) any affiliate or associate
of such individual, corporation, partnership or other person or entity. The term
"Continuing Director" means any director who is not an affiliate of an
Interested Party and who was a member of the Board of Directors of the Company
immediately prior to the time that the Interested Party involved in a Business
Combination became an Interested Party, and any successor to a Continuing
Director who is not such an affiliate and who is nominated to succeed a
Continuing Director by a majority of the Continuing Directors in office at the
time of such nomination.
Certain Provisions of Ohio Law. The Company is subject to certain
provisions of Ohio law which may discourage or render more difficult an
unsolicited takeover of the Company. Among these are provisions that (i)
prohibit certain mergers, sales of assets, issuance or purchases of securities,
liquidation or dissolution, or reclassification of the then outstanding shares
of an Ohio corporation involving certain holders or stock representing 10% or
more of the voting power (other than present shareholders), unless (a) such
transactions are approved by the directors prior to the 10% shareholder becoming
such, (b) the acquisition of 10% of the voting power is approved by the
directors prior to the 10% shareholders becoming such, or (c) such transactions
involve a 10% shareholder which has been such for at least three years and the
transaction is approved by holders of two-thirds of the voting power of the
Company and the holders of a majority of the voting power not owned by the 10%
shareholders or certain minimum price and form of consideration requirements are
met; and (ii) provide Ohio corporations, or in certain circumstances the
shareholders of an Ohio corporation, a cause of action to recover profits
realized under certain circumstances by persons who dispose of securities of a
corporation within 18 months of proposing to acquire such corporation.
In addition, the acquisition of shares entitling the holder to execute
certain levels of voting power of the Company (one-fifth or more, one-third or
more, or a majority) can be made only with the prior authorization of (i) the
holders of at least a majority of the total voting power and (ii) the holders of
at least a majority of the total voting power held by shareholders other than
the proposed acquirer, officers of the Company elected or appointed by the
directors, and directors who are also employees and excluding certain shares
that are transferred after the announcement of the proposed acquisition and
prior to the vote with respect to the proposed acquisition.
Rights Plan. On April 25, 1989, the Board of Directors of the Company
adopted a Shareholder Rights Plan pursuant to a Rights Agreement (the "Rights
Agreement"), which is an exhibit to the Registration Statement of which this
Prospectus is a part, entered into by and between the Company and a Cleveland,
Ohio bank, and declared a dividend distribution of one Right (as defined in the
Rights Agreement) for each
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outstanding Common Share, which was paid to shareholders on May 10, 1989. The
Rights are also issuable to all holders of Common Shares issued after May 10,
1989. The Rights are not exercisable until the earlier to occur of (i) ten days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
20% or more of the outstanding Common Shares of the Company or (ii) ten business
days following the commencement of, or announcement of an intention to make a
tender offer or exchange offer for 20% or more of the outstanding Common Shares
of the Company (the earlier of such dates being called the "Distribution Date").
Once exercisable, each Right entitles the registered holder to purchase from the
Company one Common Share at the then-current exercise price per Common Share,
which currently is $11.85.
In the event that the Company is acquired in a merger or other business
combination transaction, or 50% or more of its consolidated assets or earning
power are sold, proper provision shall be made so that each holder of a Right
will thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of Common Shares of the
acquiring company which at the time of such transaction would have a market
value of two times the exercise price of the Right. In the event that (i) any
person becomes an Acquiring Person (unless such person first acquires 20% or
more of the outstanding Common Shares by a purchase pursuant to a tender offer
for all of the Common Shares for cash, which purchase increases such person's
beneficial ownership to 80% or more of the outstanding Common Shares) or (ii)
during such time as there is an Acquiring Person, there shall be a
reclassification of securities or a recapitalization or reorganization of the
Company or other transaction or series of transactions involving the Company
which has the effect of increasing by more than 1% the proportionate share of
the outstanding shares of any class of equity securities of the Company or any
of its subsidiaries beneficially owned by the Acquiring Person, proper provision
shall be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of Common Shares having a
market value of two times the exercise price of the Right.
In addition, if a bidder who does not beneficially own more than 1% of the
Common Shares (and who has not within the past year owned in excess of 1% of the
Common Shares and, at a time he held such greater than 1% stake, disclosed, or
caused the disclosure of, an intention which relates to or would result in the
acquisition or influence of control of the Company) proposes to acquire all of
the Common Shares (and all other shares of capital stock of the Company entitled
to vote with the Common Shares in the election of directors or on mergers,
consolidations, sales of all or substantially all of the Company's assets,
liquidations, dissolutions or windings up) for cash at a price which a
nationally recognized investment banker selected by such bidder states in
writing is fair, and such bidder has obtained written financing commitments (or
otherwise has financing) and complies with certain procedural requirements, then
the Company, upon the request of the bidder, will hold a special shareholders
meeting to vote on a resolution requesting the Board of Directors to accept the
bidder's proposal. If a majority of the outstanding shares entitled to vote on
the proposal vote in favor of such resolution, then for a period of 60 days
after such meeting the Rights will be automatically redeemed at the Redemption
Price (as defined in the Rights Agreement) immediately prior to the consummation
of any tender offer for all of such shares at a price per share in cash equal to
or greater than the price offered by such bidder; provided, however, that no
redemption will be permitted or required after the acquisition by any person or
group of affiliated or associated persons of beneficial ownership of 20% or more
of the outstanding Common Shares. The Rights, which have no voting power, will
expire on May 10, 1999 unless earlier redeemed by the Company as described
above.
Director and Officer Indemnification. The Company's Code contains
provisions indemnifying directors and officers of the Company to the fullest
extent permitted by law and providing for the advancement of expenses incurred
in connection with an action upon the receipt of an appropriate undertaking to
repay said amount if it is determined that the individual in question is not
entitled to indemnification. The Company has also entered into indemnity
agreements pursuant to which it has agreed, among other things, to indemnify its
directors for settlement in derivative actions. The Company also has purchased a
Director and Officer liability insurance policy (the "D & O Insurance"), a copy
of which is an exhibit to the Company's Annual Report on Form 10-K.
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General. It is possible that the division of the Board of Directors of the
Company into classes provided for in the Code and the other provisions of the
Code discussed above, the heightened shareholder voting requirements applicable
to certain proposed business combination transactions, the provisions of Ohio
law, the Rights Plan and the Change of Control provisions of the Indenture may
discourage other persons from making a tender offer for or acquisitions of
substantial amounts of the Company's Common Shares. This could have an
incidental effect of inhibiting changes in management and may also prevent
temporary fluctuations in the market price of the Company's Common Shares which
often result from actual or rumored takeover attempts. In addition, the
indemnification provisions of the Code, certain indemnity agreements between
directors and officers and the Company and the D & O Insurance may have the
effect of reducing the likelihood of derivative litigation against directors and
deterring shareholders from bringing a lawsuit against directors for breach of
their duty of care, even though such an action, if successful, might otherwise
have benefitted the Company and the shareholders.
Transfer Agent and Registrar. The Transfer Agent and Registrar for the
Common Shares is KeyCorp Shareholder Services, Inc., Cleveland, Ohio.
PLAN OF DISTRIBUTION
The Company may sell Securities to or through Lazard Freres & Co. LLC or
other underwriters and also may sell Securities directly to other purchasers or
through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
Sales of Common Shares offered hereby may be effected from time to time in
one or more transactions on the Nasdaq National Market or in negotiated
transactions or a combination of such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at other negotiated prices.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers of Securities for whom
they may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the distribution of
Securities may be deemed to be underwriters, and any discounts or commissions
received by them from the Company and any profit on the resale of Securities by
them may be deemed to be underwriting discounts and commissions, under the
Securities Act. Any such underwriter or agent will be identified, and any such
compensation received from the Company will be described, in the Prospectus
Supplement.
Under agreements which may be entered into by the Company, underwriters,
dealers and agents who participate in the distribution of Securities may be
entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the underwriters, dealers or agents may be required to make in
respect thereof.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase Securities from the Company pursuant to
contracts providing for payment and delivery on a future date. Institutions with
which such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others, but in all cases such institutions must be approved by
the Company. The obligations of any purchaser under any such contract will be
subject to the condition that the purchase of the Securities shall not at the
time of delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
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The Debt Securities may or may not be listed on a national securities
exchange. Any Common Shares sold pursuant to a Prospectus Supplement will be
traded on the Nasdaq National Market. No assurances can be given that there will
be an active trading market for the Debt Securities.
VALIDITY OF SECURITIES
The validity of the Debt Securities and Common Shares will be passed upon
for the Company by Calfee, Halter & Griswold, Cleveland, Ohio, and for any
underwriters and agents by Sidley & Austin, Chicago, Illinois. William A.
Papenbrock, Esq., a partner of Calfee, Halter & Griswold, is the Secretary of
the Company.
EXPERTS
The consolidated financial statements and schedule of the Company
incorporated by reference and included in the Company's Annual Report (Form
10-K) for the year ended March 31, 1996, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon incorporated by
reference and included therein and incorporated herein by reference. Such
consolidated financial statements and schedule are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
17
<PAGE> 48
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary................. S-3
Use of Proceeds............................... S-6
Capitalization................................ S-6
Selected Consolidated Financial Data.......... S-7
Recent Results................................ S-7
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................... S-8
The Company................................... S-11
Proposed Credit Facility...................... S-14
Description of the Notes...................... S-15
Underwriting.................................. S-17
Legal Matters................................. S-17
Experts....................................... S-17
Index to Consolidated Financial Statements.... F-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information......................... 2
Incorporation of Documents by Reference....... 2
The Company................................... 3
Use of Proceeds............................... 4
Ratio of Earnings to Fixed Charges............ 4
Description of Debt Securities................ 5
Description of Capital Stock.................. 13
Plan of Distribution.......................... 16
Validity of Securities........................ 17
Experts....................................... 17
</TABLE>
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$150,000,000
LOGO
PIONEER-STANDARD ELECTRONICS, INC.
8 1/2% SENIOR NOTES DUE 2006
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
LAZARD FRERES & CO. LLC
AUGUST 7, 1996
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