<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-07665
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS
PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 11, 1996)
[LOGO]
3,000,000 SHARES
PIONEER-STANDARD ELECTRONICS, INC.
COMMON SHARES
------------------------
All of the 3,000,000 common shares, without par value (the "Common
Shares"), of Pioneer-Standard Electronics, Inc. (the "Company" or
"Pioneer-Standard") offered hereby are being sold by the Company. The Common
Shares are listed on the Nasdaq National Market under the symbol "PIOS." On
February 13, 1997, the last reported sales price for the Common Shares was
$15.25 per share. See "Price Range of Common Shares and Dividend Policy."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-7 OF THE PROSPECTUS SUPPLEMENT FOR
A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS IN THE COMMON SHARES.
------------------------
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
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................................... $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total(3)..................................... $ $ $
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $225,000 payable by the Company.
(3) The Company has granted the Underwriters an option exercisable for 30 days
to purchase up to an additional 450,000 Common Shares at the Price to
Public, less the Underwriting Discount and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The Common Shares offered hereby are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and
accepted by the Underwriters, subject to approval of certain legal matters by
counsel for the Underwriters and certain other conditions. The Underwriters
reserve their right to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of share certificates
for the Common Shares will be made at the offices of Lazard Freres & Co. LLC,
New York, New York, on or about , 1997.
------------------------
LAZARD FRERES & CO. LLC
CLEARY GULL REILAND & MCDEVITT INC.
MCDONALD & COMPANY
SECURITIES, INC.
------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1997.
<PAGE> 2
[LOGO]
[MAP]
MAJOR PRODUCT SUPPLIERS
<TABLE>
<CAPTION>
SEMICONDUCTORS COMPUTER SYSTEMS PASSIVE AND ELECTROMECHANICAL
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Actel Cisco Systems Astec Standard Power
Analog Devices Digital Equipment Bourns
Atmel IBM Kemet Electronics
Cirrus Logic Intel Molex
Digital Semiconductors Network General Murata
Intel Oracle Opto 22
Lucent Technologies Tatung Optrex America
Microchip Technology 3Com Power-One
Micron Technology Thomas & Betts
National Semiconductor
Siemens
SGS-Thomson
Temic
</TABLE>
------------------
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 A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL 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
accompanying 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 systems 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, and in the last twelve months ended December 31, 1996 recorded
sales of approximately $1.5 billion.
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 mid-range
computer systems and high-end platforms, storage subsystems, software, 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 and Intel. Other major suppliers include Actel, Analog Devices,
Bourns, Cisco Systems, IBM, Kemet Electronics, Lucent Technologies, Micron
Technology, National Semiconductor, Oracle, Power-One, Siemens, SGS-Thomson,
3Com and Thomas & Betts.
The Company has more than 1,000 sales personnel, sales support personnel
and technical experts throughout North America who work closely together to
provide customers with individualized services and solutions. The Company has
approximately one field application engineer for every three salespersons, which
the Company believes is one of the highest ratios of technical to sales
personnel in the industry. 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 system. The Company provides customers
with same-day shipment of substantially all orders received by 3:00 p.m.
Fiscal 1996 was the tenth consecutive year of record sales and the 24th
year in the 25 full fiscal years the Company has been public in which sales have
increased. The Company's business strategy has resulted in average annual
compound growth rates between fiscal years 1992 and 1996 of 32.2% and 39.2% for
sales and earnings per share, respectively. The Company believes that its growth
has benefited from substantial increases in sales in North America of industrial
electronic components and the percentage of such products sold through
distributors, as well as from an increase in the Company's share of the
industrial electronics components distribution market.
S-3
<PAGE> 4
The Company employs a number of strategies to maintain and enhance its
growth and profitability, including:
- Expanded Market Coverage and Acquisitions. The Company plans to expand
its extensive North American coverage primarily through internal growth,
focusing on providing additional value-added services to its customers. The
Company's strategy to gain entry into new markets includes pursuing acquisitions
and, where appropriate, joint ventures. In recent years, the Company has
utilized acquisitions as a means to achieve economies of scale and capitalize on
consolidation opportunities. In 1994, the Company purchased United Westburne
Inc.'s Zentronics Division, which the Company believes is one of the largest
distributors of electronic components and computer products in Canada.
Additionally, 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 United States. These
acquisitions expanded the Company's product base and service offerings and
improved the Company's geographic coverage and its ability to service its
customers effectively and efficiently. Significant benefits include cost savings
from overhead reductions and operational improvements. The Company estimates
that the Pioneer Maryland acquisition will result in pre-tax savings of
approximately $4.5 million in fiscal 1997.
- Enhanced Breadth of Product Lines. Over the years, the Company has
established strong relationships with many leading electronic components
suppliers. The Company continues to add new suppliers of state-of-the-art
technologies, such as Cisco Systems, IBM and Lucent Technologies, to further
strengthen its core business of semiconductors, computer systems products and
passive and electromechanical products. The acquisition of the remaining 50% of
Pioneer Maryland in November 1995 has enabled the Company to accelerate the
process of expanding its product line.
- Innovation in Value-added Services. The Company is continuing to expand
its value-added services to provide more complete solutions for customers who
are increasingly seeking to outsource non-core functions. The Company develops
and offers innovative value-added services to enable its customers to reduce
costs and deliver their products to market faster. The Company believes it is
well positioned to leverage its substantial purchasing and distribution
strengths by providing value-added services emphasizing the Company's logistics,
marketing and on-line information expertise. The Company utilizes its strong
sales and technical organization, efficient and effective distribution system,
including same-day shipment of substantially all orders, and attention to
quality control to strengthen the effectiveness and marketability of its
value-added services.
- Continued Realization of Operating Efficiencies. The Company is focused
on further improving operating efficiencies through continued cost reduction
initiatives and economies of scale. In the nine months ended December 31, 1996,
as compared to the comparable period from the previous year, the Company's
operating expenses as a percentage of sales improved to 13.5% from 13.9%.
S-4
<PAGE> 5
THE OFFERING
Common Shares offered by the
Company....................... 3,000,000 Shares(1)
Common Shares to be outstanding
after the Offering............ 25,579,229 Shares(1)(2)
Nasdaq National Market Symbol... PIOS
Use of Proceeds................. The net proceeds from the sale of the Common
Shares will be used to repay bank
indebtedness. See "Use of Proceeds."
- ---------------
(1) Does not include 450,000 Common Shares that may be issued by the Company
pursuant to an over-allotment option granted to the Underwriters.
(2) Does not include 1,508,492 Common Shares that may be issued upon the
exercise of stock options outstanding at a weighted average exercise price
of $9.28 per share and 5,000,000 Common Shares issued pursuant to the
Company's Share Subscription Agreement and Trust (the "Trust") which are not
deemed outstanding for purposes of calculating earnings per share under
generally accepted accounting principles until payment is received for the
Common Shares over the 15-year term of the Trust. See "Description of
Capital Stock -- Share Subscription Agreement and Trust" in the accompanying
Prospectus.
S-5
<PAGE> 6
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five fiscal years ended March 31, 1992 through 1996,
which have been derived from the audited consolidated financial statements of
the Company. Also set forth below are selected consolidated financial data of
the Company for the nine months ended December 31, 1996 and 1995, which have
been derived from the unaudited financial statements for those periods. The
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended December 31, 1996 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending March 31, 1997. This data should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein or
incorporated by reference in the accompanying Prospectus. See "Incorporation of
Certain Documents by Reference" in the accompanying Prospectus. 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>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------- YEARS ENDED MARCH 31,
1996 1995(1) -----------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) 1996(2) 1995 1994 1993 1992
---------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................. $1,117,224 $ 723,577 $ 1,105,281 $ 832,152 $ 580,757 $ 430,013 $ 362,386
Operating income.......... 42,051 36,223 51,948 43,679 31,389 21,061 12,393
Interest expense.......... 13,326 5,032 8,136 3,966 2,687 3,581 4,505
Net income................ 16,309 17,610 25,252 25,009 19,676 12,913 5,327
Earnings per share(3)..... .71 .76 1.09 1.09 .87 .63 .29
Weighted average Common
Shares outstanding...... 23,037,580(4) 23,156,263 23,127,486 22,886,877 22,677,034 20,674,152 18,460,401
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets.............. $584,578 $ 500,747 $559,110 $ 327,415 $ 220,039 $ 171,860 $ 150,871
Long-term debt............ 213,587 181,953 164,447 56,318 22,272 21,328 44,717
Shareholders' equity...... 165,173 143,316 150,693 126,415 102,740 84,117 57,455
OTHER DATA:
EBITDA(5)................. 52,092 42,902 60,946 49,909 36,653 25,707 16,520
Depreciation and
amortization............ 10,041 6,679 8,998 6,230 5,264 4,646 4,127
Capital expenditures...... 10,634 15,269 21,004 11,326 7,626 4,160 5,110
</TABLE>
- ---------------
(1) Results for the nine months ended December 31, 1995 include Pioneer Maryland
under the equity method of accounting prior to the acquisition of the
remaining 50% of Pioneer Maryland on November 30, 1995. If Pioneer
Maryland's results were included on a consolidated basis for the full nine
months ended December 31, 1995, net sales, operating income, interest
expense, net income and earnings per share would have been $943,343,000,
$39,827,000, $9,087,000, $17,062,000 and $.74, respectively.
(2) Results for the fiscal year ended March 31, 1996 include Pioneer Maryland
under the equity method of accounting prior to the acquisition of the
remaining 50% of Pioneer Maryland 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,
net income and earnings per share would have been $1,325,047,000,
$55,552,000, $12,191,000, $24,704,000, and $1.07, respectively.
(3) Included in the results for the fiscal year ended March 31, 1996 and the
nine months ended December 31, 1995 is an after-tax non-recurring
discontinuance charge of $.11 per share recorded by Pioneer Maryland to
conform to the Company's accounting methods.
(4) Does not include the 5,000,000 Common Shares issued pursuant to the Trust
which are not deemed outstanding for purposes of calculating earnings per
share under generally accepted accounting principles until payment is
received for the Common Shares over the 15-year term of the Trust. See
"Description of Capital Stock -- Share Subscription Agreement and Trust" in
the accompanying Prospectus.
(5) Excludes equity earnings (loss) of 50% owned company. "EBITDA" is defined as
income before income taxes, equity in earnings of affiliate, plus
depreciation and amortization, and interest expense. EBITDA is presented
solely as a supplement to the other information provided above. EBITDA is
not a substitute for operating and cash flow data as determined in
accordance with generally accepted accounting principles.
S-6
<PAGE> 7
RISK FACTORS
Prospective investors should consider, in addition to the information set
forth elsewhere in this Prospectus Supplement and the accompanying Prospectus,
the following matters in evaluating the Company and the Common Shares offered
hereby.
COMPETITION
The electronic components and computer products industry is highly
competitive. The Company competes with many local, regional and national
distributors for both supplier and customer relationships. The Company competes
for customer relationships with semiconductor and computer systems product
manufacturers, including some of its own suppliers. Although the Company is one
of the leading distributors in the North American markets in terms of sales,
certain of its competitors are larger, more established and have greater
financial and other resources than the Company. Furthermore, decreased prices,
as a result of increasing competition, may have a negative impact on gross
margins. There can be no assurance that the Company will be able to compete
successfully with existing or new competitors, and failure to do so would have a
material adverse effect on the Company's results of operations.
DEPENDENCE ON THE COMPUTER NETWORK AND PLATFORM MARKET
Many of the products sold by the Company are used in the manufacture or
configuration of mid-range computer systems and high-end platforms. These
products are characterized by rapid technological change, short product life
cycles and intense competition. The mid-range computer systems and high-end
platforms industry has experienced significant unit volume growth in recent
years that has, in turn, increased demand for many of the products distributed
by the Company. Slowdown in the growth of this market could adversely affect the
Company's ability to continue its recent revenue growth.
CYCLICAL NATURE OF THE SEMICONDUCTOR MARKET
Semiconductors have represented 38%, 37% and 41% of the Company's sales in
fiscal years 1996, 1995 and 1994, respectively. The semiconductor market has
historically been characterized by fluctuations in product supply and demand
and, consequently, significant variations in price. While the Company's
distribution agreements are intended to protect the Company from price erosion,
there can be no assurance that price erosion will not occur. In the event of an
excess supply of semiconductors, the Company's gross margins may be adversely
affected. In the event of a shortage of supply of semiconductors, the Company's
results of operations will depend on the amount of product allocated to the
Company by its suppliers and the timely receipt of such allocations. Moreover,
technological changes that affect the demand for and prices of the products
distributed by the Company may further affect the Company's gross margins.
INVENTORY OBSOLESCENCE AND TECHNOLOGY CHANGE
The markets for electronic components and computer products are
characterized by rapidly changing technology and evolving industry standards,
often resulting in product obsolescence or short product life cycles.
Accordingly, the Company's success is dependent upon its ability to anticipate
technological changes in the industry and to continually identify, obtain and
successfully market new products that satisfy evolving industry and customer
requirements. While the Company's distribution agreements are intended to
protect the Company from obsolescence, there can be no assurance that product
obsolescence will not occur. Additional concentrations of capital in inventory
increase the risk of loss from possible inventory obsolescence. There can be no
assurance that competitors or manufacturers of electronic components and
computer products will not market products which have perceived advantages over
products distributed by the Company or which render the products currently sold
by the Company obsolete or less marketable. There can be no assurance that the
Company's existing customers or consumers will be willing, for financial or
other reasons, to purchase the new equipment necessary to utilize these new
technologies or that product obsolescence will not result in significantly
increased inventories of unsold products.
S-7
<PAGE> 8
DEPENDENCE ON KEY SUPPLIERS
During fiscal year 1996, products purchased from the Company's five largest
suppliers accounted for 69% of total sales, with Digital Equipment and Intel
representing 27% and 18% of sales, respectively. Although the Company believes
it has good relationships with its suppliers, there can be no assurance that
these relationships will continue. 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 business, financial condition and results of operations.
IMPACT OF ACQUISITIONS
An important element of the Company's business strategy is to review
acquisition prospects that would complement its existing business, augment its
market coverage or provide expansion opportunities. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, any of which could materially adversely
affect the Company's financial condition and results of operations and/or the
price of the Company's Common Shares. Acquisitions entail inherent risks and
uncertainties. There can be no assurance that the Company will be able to
successfully integrate and manage the significantly larger operations resulting
from new businesses acquired in the future, and the failure of the Company to do
so could have a material adverse effect on the Company.
LEVERAGE; COVENANT RESTRICTIONS
As a result of the Company's use of long-term debt to support its growth
strategy, its debt to capitalization ratio was 57% as of December 31, 1996. In
August 1996, the Company extended the terms of its existing revolving credit
facility (the "Revolving Credit Facility") with National City Bank, Cleveland,
Ohio, agent for the group of banks, providing for borrowings under a line of
credit of up to $125 million. Also, the Company issued $150 million principal
amount of 8 1/2% Senior Notes due 2006 (the "Notes"). As of December 31, 1996,
the Company was in compliance with the terms of the Indenture under which the
Notes were issued and the Revolving Credit Facility. There can be no assurance
that the Company will be able to comply with the terms of its Revolving Credit
Facility and the Indenture in the future. See "Description of Certain
Indebtedness -- Revolving Credit Facility; 8 1/2% Senior Notes due 2006;"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
SHARES ELIGIBLE FOR FUTURE SALE
The Company has entered into a Share Subscription Agreement and Trust (the
"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 Company
anticipates that the Trust will sell at least 220,000 Common Shares by the end
of fiscal 1998. The Trustee, as well as the Company and certain of its executive
officers and Directors, have been requested to enter into lockup agreements
providing that they will not, subject to certain limited exceptions, without the
prior written consent of Lazard Freres & Co. LLC, offer, sell or otherwise
dispose of any shares of capital stock of the Company for a period of 90 days
after the date of this Prospectus Supplement. Sales of substantial amounts of
Common Shares by the Trust, or the perception that such sales may occur, may
adversely affect the trading price of the Common Shares. See "Underwriting" and
"Description of Capital Stock -- Share Subscription Agreement and Trust" in the
accompanying Prospectus.
ANTI-TAKEOVER PROVISIONS AND STATE ANTI-TAKEOVER LAWS
Certain provisions of the Company's Articles of Incorporation and Code of
Regulations, as well as provisions of Ohio law may, together or separately, have
the effect of discouraging potential acquisition proposals or delaying or
preventing changes in control of the Company or the management of the Company.
In addition, the Company has adopted a shareholders' rights plan that includes
certain provisions which could have similar anti-takeover effects.
S-8
<PAGE> 9
USE OF PROCEEDS
Net proceeds to be received by the Company from the sale of the Common
Shares, after deducting the underwriting discount and estimated offering
expenses, are estimated to be approximately $ million (approximately
$ million if the over-allotment option granted by the Company to the
Underwriters is exercised in full). The Company will apply the entire net
proceeds from the sale of the Common Shares to the repayment of a portion of the
amount outstanding under the Company's Revolving Credit Facility, which matures
on August 12, 1999. At December 31, 1996, the Company had an aggregate of $55
million in borrowings outstanding under the Revolving Credit Facility, which
currently bears interest at a rate of 6.5625% per annum. The indebtedness
incurred under the Revolving Credit Facility was used to finance working capital
needs, capital expenditures and certain acquisitions. See "Description of
Certain Indebtedness -- Revolving Credit Facility."
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996, and as adjusted to give effect to this offering and the
application of the estimated net proceeds therefrom to reduce bank borrowings
under the Revolving Credit Facility. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
(UNAUDITED)
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT:
Short-term debt....................................................... $ -- $ --
Current maturities of long-term debt.................................. 2,878 2,878
-------- --------
Total short-term debt......................................... 2,878 2,878
LONG-TERM DEBT:
Credit Agreement due 1999............................................. 55,000 11,991
8 1/2% Senior Notes due 2006.......................................... 150,000 150,000
9.79% Senior Notes due 2000........................................... 8,560 8,560
Capitalized leases.................................................... 27 27
-------- --------
Total long-term debt.......................................... 213,587 170,578
SHAREHOLDERS' EQUITY:
Common shares, $.30 stated value; Authorized - 80,000,000 shares(2)
Issued and outstanding, actual - 22,578,104; and as adjusted -
25,578,104(3)...................................................... 8,210 9,110
Capital in excess of stated value..................................... 81,735 123,844
Deferred compensation................................................. (65,625) (65,625)
Retained earnings..................................................... 140,786 140,786
Foreign currency translation adjustment............................... 67 67
-------- --------
Total shareholders' equity.................................... 165,173 208,182
-------- --------
Total capitalization.......................................... $381,638 $381,638
======== ========
</TABLE>
- ---------------
(1) As adjusted to reflect the sale by the Company of 3,000,000 Common Shares at
an estimated price per share of $15.25 (the last reported sales price on
February 13, 1997) and the receipt of estimated net proceeds (after
deducting estimated underwriting discount and offering expenses of the
Company) to the Company of $43.0 million. Does not include 450,000 Common
Shares that may be issued by the Company pursuant to an over-allotment
option granted to the Underwriters.
(2) On July 23, 1996, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation, as amended, to increase the authorized
capital stock of the Company to 80,000,000 Common Shares.
(3) Does not include 1,509,617 Common Shares that may be issued upon the
exercise of stock options outstanding as of December 31, 1996 at a weighted
average exercise price of $9.28 per share and 5,000,000 Common Shares
subscribed for by Wachovia Bank of North Carolina, N.A., as Trustee of the
Trust. Under Ohio law, the subscribed for Common Shares are deemed to be
issued and outstanding for voting and dividend purposes, but are not fully
paid and nonassessable until payment for such Common Shares is received.
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 over the
15-year term of the Trust.
S-9
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five fiscal years ended March 31, 1992 through 1996,
which have been derived from the audited consolidated financial statements of
the Company. Also set forth below are selected consolidated financial data of
the Company for the nine months ended December 31, 1996 and 1995, which have
been derived from the unaudited financial statements for those periods. The
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended December 31, 1996 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending March 31, 1997. The selected consolidated financial data should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere herein or incorporated by reference in the accompanying
Prospectus. See "Incorporation of Documents by Reference" in the accompanying
Prospectus. 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>
NINE MONTHS ENDED
DECEMBER 31,
------------------------- YEARS ENDED MARCH 31,
1996 1995(1) --------------------------------------------------------------
(UNAUDITED) (UNAUDITED) 1996(2) 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................... $1,117,224 $723,577 $1,105,281 $832,152 $580,757 $430,013 $362,386
Cost of goods sold................. 924,848 587,061 902,629 677,171 465,614 336,589 284,897
Warehousing, selling and
administrative expenses.......... 150,325 100,293 150,704 111,302 83,754 72,363 65,096
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit................... 42,051 36,223 51,948 43,679 31,389 21,061 12,393
Equity in earnings (loss) of 50%
owned company.................... -- (173) (173) 2,500 3,001 2,505 654
Interest expense................... 13,326 5,032 8,136 3,966 2,687 3,581 4,505
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations before
income taxes..................... 28,725 31,018 43,639 42,213 31,703 19,985 8,542
Provision for income taxes......... 12,416 13,408 18,387 17,204 12,027 7,072 3,215
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $16,309 $17,610 $25,252 $25,009 $19,676 $12,913 $5,327
========== ========== ========== ========== ========== ========== ==========
Earnings per share:
Primary(3)....................... $.71 $.76 $1.09 $1.09 $.87 $.63 $.29
Fully diluted.................... .59 .28
Dividends per share................ .090 .077 .106 .075 .058 .049 .047
Weighted average Common Shares
outstanding:
Primary.......................... 23,037,580(4) 23,156,263 23,127,486 22,886,877 22,677,034 20,674,152 18,460,401
Fully diluted.................... 22,449,755 22,310,802
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital.................... $288,025 $235,065 $224,840 $131,438 $85,132 $70,781 $69,325
Total assets....................... 584,578 500,747 559,110 327,415 220,039 171,860 150,871
Long-term debt..................... 213,587 181,953 164,447 56,318 22,272 21,328 44,717
Shareholders' equity............... 165,173 143,316 150,693 126,415 102,740 84,117 57,455
OTHER DATA:
EBITDA(5).......................... 52,092 42,902 60,946 49,909 36,653 25,707 16,520
Depreciation and amortization...... 10,041 6,679 8,998 6,230 5,264 4,646 4,127
Capital expenditures............... 10,634 15,269 21,004 11,326 7,626 4,160 5,110
</TABLE>
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<PAGE> 11
- ---------------
(1) Results for the nine months ended December 31, 1996 include Pioneer Maryland
under the equity method of accounting prior to the acquisition of the
remaining 50% of Pioneer Maryland on November 30, 1995. If Pioneer
Maryland's results were included on a consolidated basis for the full nine
months ended December 31, 1995, net sales, operating income, interest
expense, net income and earnings per share would have been $943,343,000,
$39,827,000, $9,087,000, $17,062,000 and $.74, respectively.
(2) Results for the fiscal year ended March 31, 1996 include Pioneer Maryland
under the equity method of accounting prior to the acquisition of the
remaining 50% of Pioneer Maryland 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,
net income and earnings per share would have been $1,325,047,000,
$55,552,000, $12,191,000, $24,704,000, and $1.07, respectively.
(3) Included in the results for the fiscal year ended March 31, 1996 and the
nine months ended December 31, 1995 is an after-tax non-recurring
discontinuance charge of $.11 per share recorded by Pioneer Maryland to
conform to the Company's accounting methods.
(4) Does not include the 5,000,000 Common Shares issued pursuant to the Trust
which are not deemed outstanding for purposes of calculating earnings per
share under generally accepted accounting principles until payment is
received for the Common Shares over the 15-year term of the Trust. See
"Description of Capital Stock -- Share Subscription Agreement and Trust" in
the accompanying Prospectus.
(5) Excludes equity in earnings (loss) of 50% owned company. "EBITDA" is defined
as income before income taxes, equity in earnings of affiliate, plus
depreciation and amortization, and interest expense. EBITDA is presented
solely as a supplement to the other information provided above. EBITDA is
not a substitute for operating and cash flow data as determined in
accordance with generally accepted accounting principles.
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<PAGE> 12
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY
The following table sets forth, for the quarterly periods indicated, the
high and low sales prices per share for the Common Shares, as reported on the
Nasdaq National Market, and the cash dividends paid on the Common Shares.
<TABLE>
<CAPTION>
DIVIDENDS PAID
HIGH LOW PER SHARE
------ ----- --------------
<S> <C> <C> <C>
FISCAL 1995
First Quarter................................ $12.45 $9.67 $ .015
Second Quarter............................... 12.67 9.17 .020
Third Quarter................................ 13.17 9.50 .020
Fourth Quarter............................... 13.17 10.67 .020
FISCAL 1996
First Quarter................................ 17.83 11.67 .023
Second Quarter............................... 19.25 14.67 .023
Third Quarter................................ 17.75 12.75 .030
Fourth Quarter............................... 15.75 10.75 .030
FISCAL 1997
First Quarter................................ 16.50 12.50 .030
Second Quarter............................... 14.25 11.00 .030
Third Quarter................................ 13.75 10.25 .030
Fourth Quarter (through February 13, 1997)... 15.63 12.75 .030
</TABLE>
On February 13, 1997, the last sale price of the Common Shares as reported
by the Nasdaq National Market was $15.25 per share. As of February 11, 1997,
there were approximately 2,737 holders of record of the Common Shares.
Cash dividends are payable quarterly, upon authorization of the Board of
Directors. Regular payment dates are August 1, November 1, February 1 and May 1.
The payment of cash dividends by the Company has been and will continue to be at
the discretion of the Board of Directors and will depend on numerous factors,
including the cash flow of the Company, its financial condition, capital
requirements, restrictions imposed by financing arrangements and such other
factors as the Board of Directors deems relevant.
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, the quarterly
cash dividend 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.
The Company maintains a Dividend Reinvestment Plan whereby cash dividends,
and a maximum of an additional $5,000 per month, may be invested in the
Company's Common Shares at no commission cost.
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<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1995
Net sales for the three-month period ended December 31, 1996 of $384.4
million increased 46% over sales of the prior year three-month period of $263.9
million. The current quarter sales include the sales of Pioneer Maryland, the
Company's former 50%-owned affiliate which Pioneer acquired in November, 1995.
Including the former affiliate's sales on a pro forma basis for the prior year
period, net sales increased to $384.4 million from $324.0 million a year ago, or
a 19% increase. Semiconductor products accounted for 42% of the Company's sales
in the current quarter, compared with 36% a year ago. Computer systems products
were 39% of sales in 1996 versus 42% last year. Passive and electromechanical
products were 16% of the Company's business in 1996 compared with 19% a year
earlier. Miscellaneous products accounted for 3% of the Company's business in
both 1996 and 1995.
Cost of goods sold increased 48% compared with the prior year quarter,
resulting in a gross margin of 16.9% in the current quarter compared with 18.0%
a year ago. A shift in product mix, particularly with respect to a higher volume
of lower gross margin products within the semiconductor line, such as
microprocessors, was a principal factor impacting current year margins.
Typically, semiconductor products have the highest gross margin percentage of
the three product categories, but the increased sales of high volume, low margin
products, such as microprocessors in the semiconductor category, rank the gross
margin percentage of semiconductors below the other two product categories.
Passives had the highest gross margin percentage.
Warehouse, selling and administrative expenses of $50.7 million increased
by 39% over the $36.5 million incurred during the prior year three-month period.
This resulted in a ratio of these expenses to sales of 13.2% for the current
quarter compared with 13.8% a year ago, reflecting expense controls and
efficiencies.
The operating profit resulting from the activity described above of $14.2
million, or 3.7% of sales, in the current period rose by 28% compared with $11.1
million, or 4.2% of sales a year ago.
Interest expense was $4.8 million in the current quarter compared with $2.1
million a year ago. The higher interest expense is due to increased debt
incurred in connection with the purchase of the Company's former 50%-owned
affiliate and to fund working capital needs to support ongoing growth needs of
the business.
The consolidated statement of income for the three-month period of the
current year includes the operating results of Pioneer Maryland, whereas results
for the same period in 1995 included a net loss of $1.1 million, representing
the Company's 50% equity interest in Pioneer Maryland's net loss for the two
months ended in November and the consolidated operating results for December.
The net loss for Pioneer Maryland for the two-month period in 1995 included an
after-tax non-recurring discontinuance charge of $2.4 million recorded by
Pioneer Maryland to conform to the Company's methods of accounting.
The effective tax rate for the current year three-month period was 40.3%
compared with 48.5% for the same period a year ago. In the prior year, the
equity in the net loss of the Company's former 50%-owned affiliate of $1.1
million was included in pre-tax income in accordance with the equity basis of
accounting. This is the primary factor causing the difference in the effective
tax rates for the two periods.
Primarily as a result of the factors above, the Company's net income for
the three-month period ending December 31, 1996 of $5.6 million was $1.5 million
greater than the $4.1 million earned a year earlier.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THE NINE MONTHS ENDED
DECEMBER 31, 1995
Net sales for the nine-month period ended December 31, 1996 of $1,117.2
million were 54% greater than sales of the prior year nine-month period of
$723.6 million. The current nine-month sales include the sales of Pioneer
Maryland, the Company's former 50%-owned affiliate, which Pioneer acquired in
November, 1995. Including the former affiliate's sales on a pro forma basis for
the prior year period, net sales increased to $1,117.2 million from $943.3
million a year ago, or an 18% increase. During the first nine months of 1996,
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<PAGE> 14
semiconductor products accounted for 42% of the Company's sales compared with
35% in the prior year. Computer systems products accounted for 38% of the
Company's sales in 1996 and 40% in 1995. Passive and electromechanical products
accounted for 17% of the Company's sales in 1996 and 22% of sales in 1995.
Miscellaneous products accounted for 3% of sales in both 1996 and 1995.
The percentage increase in cost of goods sold of 58% resulted in a gross
margin of 17.2% in the first nine months of the current year compared with 18.9%
a year ago. A shift in product mix, particularly with respect to a higher volume
of lower gross margin products within the semiconductor line was the principal
factor impacting current year margins. Typically, semiconductor products have
the highest gross margin percentage of the three product categories, but the
increased sales of high volume, low margin products, such as microprocessors in
the semiconductor category, rank the gross margin percentage of semiconductors
below the other two product categories. Passives had the highest gross margin
percentage.
Warehouse, selling and administrative expenses of $150.3 million increased
by 50% as compared with the $100.3 million incurred during the prior year
nine-month period. This resulted in a ratio of these expenses to sales of 13.5%
for the current nine months compared with 13.9% a year ago, reflecting expense
controls and efficiencies.
The operating profit resulting from the activity described above of $42.1
million in 1996 or 3.8% of sales rose by 16% compared with $36.2 million or 5.0%
of sales a year ago.
Interest expense was $13.3 million in the current nine-month period
compared with $5.0 million a year ago. The higher interest expense is due to
increased debt resulting from the purchase of the Company's former 50%-owned
affiliate and to fund working capital needs to support ongoing growth needs of
the business.
The consolidated statement of income for the nine-month period of the
current year includes the operating results of Pioneer Maryland, whereas the
same period in 1995 included a net loss of $1.1 million, representing the
Company's 50% equity interest in Pioneer Maryland's net loss for the eight
months through November, and the consolidated operating results for December.
The net loss for Pioneer Maryland for the eight-month period in 1995 included an
after-tax non-recurring discontinuance charge of $2.4 million recorded by
Pioneer Maryland to conform to the Company's methods of accounting.
The effective tax rate was 43.2% in both nine-month periods.
Primarily as a result of the factors noted above, the Company's net income
for the nine-month period ending December 31, 1996 of $16.3 million was $1.3
million lower than the $17.6 million earned a year ago.
FISCAL 1996 COMPARED TO FISCAL 1995 AND FISCAL 1994
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>
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<PAGE> 15
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.
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
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<PAGE> 16
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.
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 increased by $25.0 million and current liabilities decreased by
$38.2 during the nine-month period ended December 31, 1996, resulting in an
increase of $63.2 million in working capital. The decrease in liabilities is
primarily attributable to a $26.8 million reduction in accounts payable levels
reflecting timing differences and to a $21.0 million reduction of short-term
bank borrowings. The current ratio was 2.4:1 at December 31, 1996 compared with
1.9:1 at year-end, March 31, 1996.
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 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. Management
estimates that capital expenditures for the current fiscal year
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<PAGE> 17
will approximate $15 million ($10.6 million was expended in the first nine
months of the current year). The increase in 1996 and significant 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 million of unsecured borrowings on a revolving credit basis for two
years. On August 12, 1996, the Company completed a public offering of the Notes.
The indenture under which the Notes were issued 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 are subject to mandatory purchase by the Company at the option of the
holders in the event of a change of control of the Company. The indebtedness
evidenced by the Notes rank pari passu in right of payment with all other
unsubordinated indebtedness of the Company. See "Description of Certain
Indebtedness -- 8 1/2% Senior Notes Due 2006."
Net proceeds from the sale of the Notes were applied to the repayment of a
portion of the borrowings under the Company's revolving credit facility. The
remainder of the revolving credit facility was repaid with the proceeds of
borrowings under a new revolving credit facility with four banks effective
August 12, 1996. The new revolving credit facility of $125 million has an
initial term of three years and replaces the former $200 million facility which
was due to expire in 1997. In addition, on an annual basis, the new facility may
be extended for a three-year period upon the Company's request, with the consent
of all members of the bank group. All or any portion of the outstanding loans
may be prepaid at any one time and the commitments may be terminated, in whole
or in part, at the Company's option with no prepayment penalty. Interest rates
on borrowings are based on various floating rate alternative pricing mechanisms.
There is a commitment fee on the unborrowed amount. The terms of the credit
facility provide for, among other things, restrictions regarding minimum working
capital requirements, limitations on other borrowings and capital expenditures
and the maintenance of certain financial ratios. As of December 31, 1996,
borrowings under the new facility totaled $55 million. See "Description of
Certain Indebtedness -- Revolving Credit Facility."
Effective July 2, 1996, the Company entered into a Share Subscription
Agreement and Trust (the "Trust") with Wachovia Bank of North Carolina, N.A., as
Trustee, pursuant to which the Trustee 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.
In addition to the revolving credit line, unsecured short-term lines of
credit are available whereby a maximum of $40 million may be borrowed to meet
short-term fluctuations in cash needs. At December 31, 1996, the Company had no
outstanding borrowings under these short-term lines leaving $40 million
available for use. During the first nine months of the current year, total
interest-bearing debt increased by $28.1 million. The increase in debt is
attributable to funding working capital requirements and capital expenditures.
The ratio of interest-bearing debt to capitalization was 57% at December 31,
1996 compared with 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.
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<PAGE> 18
THE COMPANY
GENERAL
The Company is a leading distributor of a broad range of industrial and
end-user electronic components and computer systems 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 Actel, Analog Devices, Atmel,
Cirrus Logic, Digital Semiconductors, Intel, Microchip Technology, Micron
Technology, National Semiconductor, Siemens and SGS-Thomson. Recent additions to
and expansions of the Company's list of semiconductor suppliers include
Integrated Silicon Solution, Lucent Technologies, Temic and Celistica.
Semiconductor products accounted for approximately $420 million, or 38%, of net
sales in fiscal 1996 and $466 million, or 42%, of net sales for the nine month
period ended December 31, 1996.
Computer Systems Products. The Company distributes a wide spectrum of
computer systems products, including high-end platform and mid-range computer
systems, storage subsystems, software services, servers, personal computers,
display terminals and networking products. The Company's computer systems
suppliers include Digital Equipment, Intel, Oracle and Tatung. Recent additions
to the list of suppliers include Cisco Systems, IBM, Network General, RadiSys
and 3Com. Computer systems products accounted for approximately $442 million, or
40%, of net sales in fiscal 1996 and $425 million, or 38%, of net sales for the
nine month period ended December 31, 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 Astec Standard Power, Bourns,
Kemet Electronics, Molex, Murata, Opto 22, Optrex America, Power-One and Thomas
& Betts. Passive and electromechanical products accounted for approximately $221
million, or 20%, of net sales in fiscal 1996 and $193 million, or 17%, of net
sales for the nine month period ended December 31, 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
S-18
<PAGE> 19
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.
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. IBM recently
named the Company as its first Authorized Assembler under a new program for
IBM's RS/6000(TM) mid-range computer systems.
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 or contract manufacturers. 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, outsourced
manufacturing, 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,
S-19
<PAGE> 20
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.
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 network and/or 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.
RECENT ACQUISITIONS
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 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 resulted primarily from the elimination of
duplicative administrative functions. The Company estimates that cost savings
from overhead reductions and operational improvements associated with the
Pioneer Maryland acquisition will result in pre-tax savings of approximately
$4.5 million in fiscal 1997.
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.
S-20
<PAGE> 21
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.
BUSINESS STRATEGIES
Fiscal 1996 was the tenth consecutive year of record sales and the 24th
year in the 25 full fiscal years the Company has been public in which sales have
increased. The Company's business strategy has resulted in average annual
compound growth rates between fiscal years 1992 and 1996 of 32.2% and 39.2% for
sales and earnings per share, respectively. The Company believes that its growth
has benefited from substantial increases in sales in North America of industrial
electronic components and the percentage of such products sold through
distributors, as well as from an increase in the Company's share of the
industrial electronics components distribution market.
The Company employs a number of strategies to maintain and enhance its
growth and profitability, including:
Expanded Market Coverage and Acquisitions. The Company plans to expand its
extensive North American coverage primarily through internal growth, focusing on
providing additional value-added services to its customers. The Company's
strategy to gain entry into new markets includes pursuing acquisitions and,
where appropriate, joint ventures. In recent years, the Company has utilized
acquisitions as a means to achieve economies of scale and capitalize on
consolidation opportunities. In 1994, the Company purchased United Westburne
Inc.'s Zentronics Division, which the Company believes is one of the largest
distributors of electronic components and computer products in Canada.
Additionally, 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 United States. These
acquisitions expanded the Company's product base and service offerings and
improved the Company's geographic coverage and its ability to service its
customers effectively and efficiently. Significant benefits include cost savings
from overhead reductions and operational improvements. The Company estimates
that the Pioneer Maryland acquisition will result in pre-tax savings of
approximately $4.5 million in fiscal 1997.
Enhanced Breadth of Product Lines. Over the years, the Company has
established strong relationships with many leading electronic components
suppliers. The Company continues to add new suppliers of state-of-the-art
technologies, such as Cisco Systems, IBM and Lucent Technologies, to further
strengthen its core business of semiconductors, computer systems products and
passive and electromechanical products. The acquisition of the remaining 50% of
Pioneer Maryland in November 1995 has enabled the Company to accelerate the
process of expanding its product line.
Innovation in Value-added Services. The Company is continuing to expand its
value-added services to provide more complete solutions for customers who are
increasingly seeking to outsource non-core functions. The Company develops and
offers innovative value-added services to enable its customers to reduce costs
and deliver their products to market faster. The Company believes it is well
positioned to leverage its substantial purchasing and distribution strengths by
providing value-added services emphasizing the Company's logistics, marketing
and on-line information expertise. The Company utilizes its strong sales and
technical organization, efficient and effective distribution system, including
same-day shipment of substantially all orders, and attention to quality control
to strengthen the effectiveness and marketability of its value-added services.
Continued Realization of Operating Efficiencies. The Company is focused on
further improving operating efficiencies through continued cost reduction
initiatives and economies of scale. In the nine months ended December 31, 1996,
as compared to the comparable period from the previous year, the Company's
operating expenses as a percentage of sales improved to 13.5% from 13.9%.
S-21
<PAGE> 22
DESCRIPTION OF CERTAIN INDEBTEDNESS
REVOLVING CREDIT FACILITY
As of August 12, 1996, the Company entered into a revolving credit facility
(the "Revolving Credit Facility") with National City Bank, Cleveland, Ohio
("NCB") and other lending banks. The Revolving Credit Facility provides that NCB
will act as agent and, with the other lenders in the bank syndicate, provide the
Company with loans of up to $125 million on a revolving credit basis. The
Revolving Credit Facility has an initial term of up to three years which, with
the consent of the bank syndicate, may be annually extended for additional
one-year terms upon the Company's request. The interest rate available to the
Company is, 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 certain financial tests or (iii) a
rate per annum ranging from the CD Rate plus .75% to the CD Rate plus 1.5%
depending on the Company's performance with respect to certain financial tests.
Advances under the Revolving Credit Facility will be conditioned upon the
absence of any defaults under the Revolving Credit Facility and other customary
conditions.
The Revolving Credit Facility contains customary restrictive covenants
imposing limitations on the Company and its subsidiaries with respect to, among
other things, incurring future indebtedness or liens, acquiring or conveying
certain assets, changing the nature of the Company's business or failing to
satisfy certain financial tests or maintain certain financial ratios on a
consolidated basis with respect to minimum consolidated tangible net worth,
working capital, current ratio, fixed charge coverage ratio, maximum leverage
ratio and capital expenditures.
8 1/2% SENIOR NOTES DUE 2006
On August 7, 1996, the Company issued $150 million of 8 1/2% Senior Notes
due 2006 (the "Notes") under an indenture agreement (the "Indenture"), dated as
of August 1, 1996, between the Company and StarBank, N.A. Interest on the Notes,
accruing from August 12, 1996, is payable at 8 1/2% per annum, subject to
certain adjustments as provided for in the Indenture, on February 1 and August 1
of each year beginning February 1, 1997. The indebtedness evidenced by the Notes
ranks pari passu in right of payment with all other unsubordinated indebtedness
of the Company. The Notes were issued only in fully registered form, without
coupons, are not redeemable prior to maturity and are subject to defeasance and
discharge and defeasance of certain covenants and certain events of default.
Interest on the Notes may be subject to an increase to 9 1/2% under certain
circumstances. This description of the Notes does not purport to be complete and
is subject to and qualified in its entirety by reference to the Trust Indenture
Act of 1939 and the provisions of the Notes and the Indenture. The foregoing
summary of the Notes should be read in conjunction with the description of the
Notes and the Indenture under "Description of Debt Securities" in the
accompanying Prospectus.
S-22
<PAGE> 23
UNDERWRITING
Under the terms and subject to the conditions set forth in the underwriting
agreement dated the date hereof (the "Underwriting Agreement") among the Company
and each of the Underwriters named below (the "Underwriters"), each of the
Underwriters has severally agreed to purchase, and the Company has agreed to
sell, the respective number of Common Shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- -----------
<S> <C>
Lazard Freres & Co. LLC.........................................................
Cleary Gull Reiland & McDevitt Inc. ............................................
McDonald & Company Securities, Inc..............................................
---------
Total................................................................. 3,000,000
=========
</TABLE>
The Company, certain of the Company's executive officers and directors, and
Wachovia Bank of North Carolina, N.A., as Trustee of the Trust, have been
requested to enter into lockup agreements providing that they will not, without
the prior written consent of Lazard Freres & Co. LLC, offer, sell or otherwise
dispose of any shares of capital stock of the Company for a period of 90 days
after the date of this Prospectus Supplement, subject to certain limited
exceptions.
The Underwriting Agreement provides that the several obligations of the
Underwriters to pay for and accept delivery of the Common Shares offered hereby
are subject to the approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to purchase all Common Shares
(other than the shares covered by the over-allotment option) if any are
purchased.
The Company has been advised by Lazard Freres & Co. LLC that the several
Underwriters propose initially to offer the Common Shares 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 $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
other Underwriters or to certain other dealers. After the Offering, the public
offering price and such concessions may be changed by the Underwriters.
In addition, pursuant to the Underwriting Agreement, the Company has
granted the Underwriters an option exercisable for 30 days from the date hereof,
to purchase up to an additional 450,000 Common Shares to cover over-allotments,
if any, at the public offering price less the underwriting discount and
commissions set forth on the cover page of this Prospectus Supplement.
The Company has agreed to indemnify the Underwriters 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.
VALIDITY OF COMMON SHARES
The validity of the Common Shares will be passed upon for the Company by
Calfee, Halter & Griswold LLP, Cleveland, Ohio, and for the Underwriters by
Sidley & Austin, Chicago, Illinois. William A. Papenbrock, Esq., a partner of
Calfee, Halter & Griswold LLP, is the Secretary of the Company.
EXPERTS
The consolidated financial statements of the Company at March 31, 1996 and
1995, and for each of the three years in the period ended March 31, 1996,
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-23
<PAGE> 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements:
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
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996.............. F-14
Consolidated Statements of Income for the Three and Nine Month Periods ended
December 31, 1996 and December 31, 1995.......................................... F-15
Consolidated Statements of Cash Flows for the Nine Months ended December 31, 1996
and December 31, 1995............................................................ F-16
Notes to Unaudited Consolidated Financial Statements................................ F-17
</TABLE>
F-1
<PAGE> 25
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 their operations and their 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> 26
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $ 35,042 $ 24,440
Accounts receivable -- net.................................. 195,377 189,296
Merchandise inventory....................................... 247,405 238,370
Prepaid expenses............................................ 2,237 2,922
Deferred income taxes....................................... 11,454 11,454
--------- --------
Total current assets..................................... 491,515 466,482
Intangible assets............................................. 41,562 42,446
Other assets.................................................. 1,385 1,503
Property and equipment, at cost............................... 88,046 84,024
Accumulated depreciation...................................... 37,930 35,345
--------- --------
Net......................................................... 50,116 48,679
--------- --------
$ 584,578 $559,110
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks...................................... $ -- $ 21,000
Accounts payable............................................ 158,143 184,946
Accrued liabilities......................................... 42,469 32,825
Long-term debt due within one year.......................... 2,878 2,871
--------- --------
Total current liabilities................................ 203,490 241,642
Long-term debt................................................ 213,587 164,447
Deferred income taxes......................................... 2,328 2,328
SHAREHOLDERS' EQUITY
Common stock, at stated value............................... 8,210 6,667
Capital in excess of stated value........................... 81,735 17,221
Retained earnings........................................... 140,786 126,506
Deferred compensation....................................... (65,625) --
Foreign currency translation adjustment..................... 67 299
--------- --------
Net...................................................... 165,173 150,693
--------- --------
$ 584,578 $559,110
========= ========
</TABLE>
See accompanying notes.
F-14
<PAGE> 38
PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales............................ $ 384,385 $ 263,940 $ 1,117,224 $ 723,577
Cost and expenses:
Cost of goods sold................. 319,461 216,390 924,848 587,061
Warehouse, selling and
administrative expense.......... 50,713 36,455 150,325 100,293
----------- ----------- ----------- ------------
Operating profit..................... 14,211 11,095 42,051 36,223
Interest expense..................... 4,781 2,067 13,326 5,032
Equity in loss of 50% - owned
company............................ -- (1,082) -- (173)
----------- ----------- ----------- ------------
Income before income taxes........... 9,430 7,946 28,725 31,018
Provision for income taxes........... 3,805 3,857 12,416 13,408
----------- ----------- ----------- ------------
Net income........................... $ 5,625 $ 4,089 $ 16,309 $ 17,610
=========== =========== =========== ============
Weighted average shares
outstanding........................ 22,982,606 23,108,433 23,037,580 23,156,263
Earnings per share -- primary and
fully diluted...................... $ .24 $ .18 $ .71 $ .76
Dividends per share.................. $ .03 $ .03 $ .09 $ .077
</TABLE>
See accompanying notes.
F-15
<PAGE> 39
PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $16,309 $17,610
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization....................................... 10,041 6,679
Undistributed earnings of affiliate................................. -- 173
Increase in operating working capital............................... (31,716) (30,397)
Increase (decrease) in other assets................................. 118 (8,400)
------- -------
Total adjustments................................................. (21,557) (31,945)
------- -------
Net cash used in operating activities............................. (5,248) (14,335)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of remaining 50% of affiliate net of cash acquired............ -- (49,883)
Additions to property and equipment.................................... (10,634) (15,269)
------- -------
Net cash used in investing activities............................. (10,634) (65,152)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term financing....................................... (21,000) (7,000)
Revolving credit borrowings -- net..................................... (97,000) 49,000
Letter of credit commitment secured by revolving credit agreement...... -- 50,000
Proceeds of senior notes............................................... 150,000 --
Decrease in other long-term debt obligations........................... (3,853) (3,468)
Issuance of common shares under company stock option plan.............. 432 589
Dividends paid......................................................... (2,028) (1,720)
------- -------
Net cash provided by financing activities......................... 26,551 87,401
Effect of exchange rate changes on cash.................................. (67) 34
------- -------
Net increase in cash..................................................... 10,602 7,948
Cash at beginning of period.............................................. 24,440 9,598
------- -------
Cash at end of period.................................................... $35,042 $17,546
======= =======
</TABLE>
See accompanying notes.
F-16
<PAGE> 40
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. PER SHARE DATA
Net income per common share is computed using the weighted average common
shares and common share equivalents outstanding during the quarters and
nine-month periods ended December 31, 1996 and 1995. Common share equivalents
consist of shares issuable upon exercise of stock options computed by using the
treasury stock method. Due to the application of the treasury stock method, the
5,000,000 shares subscribed for by the Trust (see Note 2) have no effect on
earnings per share.
2. SHARE SUBSCRIPTION AGREEMENT AND TRUST
On July 2, 1996 the Company entered into a Share Subscription Agreement and
Trust (the "Trust") with Wachovia Bank of North Carolina N.A., as Trustee, and
the Trustee 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 or
direct use of the Common Shares over the life of Trust will be used to fund
company obligations under various benefit plans. As of December 31, 1996 no
shares have been released from the Trust. The following details the fair market
value of the 5,000,000 shares subscribed for by the Trust reflected in
Shareholders Equity at December 31, 1996:
<TABLE>
<S> <C>
Common Stock at stated value (5,000,000 @ $.30) $ 150,000
Capital in excess of stated value (5,000,000 shares) $ 65,475,000
Deferred compensation (5,000,000 shares @ $13.125 fair market value) $ (65,625,000)
-------------
Net effect on shareholders equity $ 0
=============
</TABLE>
3. MANAGEMENT OPINION
The information furnished herein reflects all normal and recurring
adjustments which are, in the opinion of management, necessary to provide a fair
statement of the results of operations for the quarters and nine months ended
December 31, 1996 and 1995. The results of operations for the three and nine
month periods are not necessarily indicative of results which may be expected
for a full year.
F-17
<PAGE> 41
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 42
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> 43
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.
2
<PAGE> 44
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.
3
<PAGE> 45
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>
4
<PAGE> 46
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).
5
<PAGE> 47
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
6
<PAGE> 48
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
7
<PAGE> 49
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
8
<PAGE> 50
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.
16
<PAGE> 58
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
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<PAGE> 60
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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 UNDERWRITERS. 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
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary................... S-3
Risk Factors.................................... S-7
Use of Proceeds................................. S-9
Capitalization.................................. S-9
Selected Consolidated Financial Data............ S-10
Price Range of Common Shares and Dividend
Policy........................................ S-12
Management's Discussion and Analysis of Results
of Operations and Financial Condition......... S-13
The Company..................................... S-18
Description of Certain Indebtedness............. S-22
Underwriting.................................... S-23
Validity of Common Shares....................... S-23
Experts......................................... S-23
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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3,000,000 SHARES
[LOGO]
PIONEER-STANDARD ELECTRONICS, INC.
COMMON SHARES
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PROSPECTUS SUPPLEMENT
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LAZARD FRERES & CO. LLC
CLEARY GULL REILAND & MCDEVITT INC.
MCDONALD & COMPANY
SECURITIES, INC.
, 1997
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