<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________.
Commission file number 0-5734
Pioneer-Standard Electronics, Inc.
--------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0907152
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 East 131st Street, Cleveland, OH 44105
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 587-3600
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Shares, as of the latest practical date: COMMON SHARES, WITHOUT PAR
VALUE, AS OF NOVEMBER 1, 1999: 27,090,291. (Excludes 4,056,202 Common Shares
subscribed by the Pioneer Stock Benefit Trust.)
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1999
(Unaudited) March 31, 1999
----------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 39,105 $ 28,898
Accounts receivable - net 358,076 323,461
Merchandise inventory 358,212 314,362
Prepaid expenses 2,837 2,475
Deferred income taxes 9,462 8,049
----------- ----------
Total current assets 767,692 677,245
Intangible assets 152,478 154,405
Investments 32,345 13,964
Other assets 7,908 7,898
Property and equipment, at cost 173,161 163,602
Accumulated depreciation (77,976) (72,645)
----------- ----------
Net 95,185 90,957
----------- ----------
$1,055,608 $ 944,469
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 229,985 $ 161,379
Accrued liabilities 34,470 36,415
Long-term debt due within one year 3,071 3,104
----------- ----------
Total current liabilities 267,526 200,898
Long-term debt 333,158 313,240
Other long-term liabilities 20,568 15,078
Mandatorily redeemable convertible trust preferred securities 143,750 143,750
Shareholders' equity
Common stock, at stated value 9,479 9,258
Capital in excess of stated value 138,851 93,324
Retained earnings 218,459 202,056
Unearned compensation (76,467) (31,369)
Accumulated other comprehensive income (loss) 284 (1,766)
----------- ----------
290,606 271,503
----------- ----------
$ 1,055,608 $ 944,469
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $631,322 $559,501 $1,207,295 $1,103,828
Cost and expenses:
Cost of goods sold 535,104 474,024 1,021,803 931,881
Warehouse, selling and
administrative expense 71,852 66,364 138,806 134,778
--------- -------- ---------- ----------
Operating profit 24,366 19,113 46,686 37,169
Other (income) expense (1,845) --- (1,845) ---
Interest expense 6,326 6,465 12,422 13,219
--------- -------- ---------- ----------
Income before income taxes 19,885 12,648 36,109 23,950
Provision for income taxes 8,125 4,845 15,181 9,113
Distributions on mandatorily redeemable
convertible trust preferred securities, net of tax 1,462 1,464 2,921 2,919
--------- -------- ---------- ----------
Net income $10,298 $ 6,339 $18,007 $11,918
========= ======== ========== ==========
Weighted average shares outstanding
Basic 26,360,601 26,348,554 26,357,687 26,348,554
Diluted 36,207,912 35,705,123 35,988,684 35,701,579
Earnings per share:
$ .39 $ .24 $ .68 $ .45
Basic
$ .32 $ .22 $ .58 $ .42
Diluted
Dividends per share $ .03 $ .03 $ .06 $ .06
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,007 $ 11,918
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 7,454 7,689
Amortization 4,864 4,566
Gain on sale of property and equipment (1,845) ---
(Increase) decrease in operating working
capital (9,589) 7,682
Increase in other assets (10) (2,953)
Deferred taxes (1,066) 1,157
--------- -----------
Total adjustments (192) 18,141
--------- -----------
Net cash provided by operating activities 17,815 30,059
Cash flows from investing activities:
Additions to property and equipment (15,299) (10,637)
Investment in affiliates (13,029) (7,433)
Proceeds from sale of property and equipment 2,712 ---
--------- -----------
Net cash used in operating (25,616) (18,070)
Cash flows from financing activities:
Increase in revolving credit borrowings 20,000 (30,000)
Decrease in other long-term debt obligations (115) (123)
Issuance of common shares under company
stock option plan 102 ---
Proceeds from issuance of mandatorily redeemable
convertible trust preferred securities --- 18,750
Dividends paid (1,603) (1,580)
--------- -----------
Net cash provided (used in) by
financing activities 18,384 (12,953)
Effect of exchange rate changes on cash (376) (257)
--------- -----------
Net increase (decrease) in cash 10,207 (1,221)
Cash at beginning of period 28,898 31,999
--------- -----------
Cash at end of period $ 39,105 $ 30,778
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and six months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended March 31, 1999.
2. COMPREHENSIVE INCOME
The components of comprehensive income for the three and six months ended
September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 10,298 $ 6,339 $ 18,007 $ 11,918
Unrealized gain on investments (1,787) -- 2,508 --
Foreign currency translation adjustment (1,017) (710) (458) (1,519)
------------ ------------ ---------- -----------
Comprehensive income $ 7,494 $ 5,629 $ 20,057 $ 10,399
=========== ========== ========= =========
</TABLE>
3. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
during each period. Diluted computations include dilutive common share
equivalents of outstanding stock options, restricted stock and assumed
conversion of company-obligated mandatorily redeemable convertible trust
preferred securities and the elimination of related distributions, net of income
taxes.
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The computation of basic and diluted earnings per common share for the three and
six months ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic
Net income applicable to common shareholders $ 10,298,000 $ 6,339,000 $ 18,007,000 $ 11,918,000
Weighted average shares outstanding 26,360,601 26,348,554 26,357,687 26,348,554
Basic earnings per share $.39 $ .24 $ .68 $ .45
Diluted
Net income applicable to common shareholders $ 10,298,000 $ 6,339,000 $ 18,007,000 $ 11,918,000
Add back:
Distributions on mandatorily redeemable
convertible trust preferred securities,
net of tax 1,462,000 1,464,000 2,921,000 2,919,000
------------- ------------- -------------- ---------------
Net income applicable to common
shareholders after assumed conversion $ 11,760,000 $ 7,803,000 $ 20,928,000 $ 14,837,000
============ ============ ============ =============
Weighted average shares outstanding 26,360,601 26,348,554 26,357,687 26,348,554
Effect of diluted securities:
Common share equivalents 720,327 229,585 504,013 245,557
Common shares issuable upon conversion of
mandatorily redeemable convertible trust
preferred securities 9,126,984 9,126,984 9,126,984 9,103,641
------------- ------------ -------------- --------------
Diluted weighted average shares outstanding 36,207,912 35,705,123 35,988,684 35,701,579
========== =========== ============= =============
Diluted earnings per share $ .32 $ .22 $ .58 $ .42
</TABLE>
4. BUSINESS SEGMENT INFORMATION
The Company's operations are classified into two reporting segments: Computer
Systems and Industrial Electronics. The Company's two reportable business
segments are managed separately based on product and market differences.
Computer Systems products include mid-range computer systems, high-end
platforms, personal computers, display terminals and networking products.
Industrial Electronics products include semiconductors and interconnect, passive
and electromechanical products.
The Company measures segment profit or loss based on earnings before interest
and income taxes (EBIT). Corporate expenses are allocated to each segment based
on headcount, sales and asset utilization.
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Business Segment Information
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
SALES
Computer Systems $ 293,832 $ 267,026 $ 571,945 $ 541,267
Industrial Electronics 337,490 292,475 635,350 562,561
------------ ----------- ------------ ------------
Total Sales $ 631,322 $ 559,501 $1,207,295 $1,103,828
=========== ========== ========== ==========
OPERATING INCOME
Computer Systems $ 9,456 $ 10,030 $ 18,824 $ 20,709
Industrial Electronics 14,910 9,083 27,862 16,460
------------ ------------- ------------ ------------
Total Operating Income $ 24,366 $ 19,113 $ 46,686 $ 37,169
=========== =========== =========== ===========
RECONCILIATION TO INCOME BEFORE
INCOME TAXES
Other income $ (1,845) --- $ (1,845) ---
Interest expense 6,326 6,465 12,422 13,219
------------- ------------- ------------- ------------
Income Before Income Taxes $ 19,885 $ 12,648 $ 36,109 $ 23,950
=========== =========== ============= ===========
</TABLE>
5. COMPANY-OBLIGATED MANDORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
In March 1998 and April 1998, Pioneer-Standard Financial Trust (the "Trust")
issued a total of $143.7 million of 6 3/4% Mandatorily Redeemable Convertible
Trust Preferred Securities (the "Trust Preferred Securities"). The Trust, a
statutory business trust, is a wholly-owned consolidated subsidiary of the
Company, with its sole asset being $148.2 million aggregate principal amount of
6 3/4% Junior Convertible Subordinated Debentures due March 31, 2028 of
Pioneer-Standard Electronics, Inc. (the "Trust Debenture"). The Company has
executed a guarantee with regard to the Trust Preferred Securities. The
guarantee, when taken together with the Company's obligations under the Trust
Debenture, the indenture pursuant to which the Trust Debenture was issued and
the applicable Trust Document, provides a full and unconditional guarantee of
the Trust's obligations under the Trust Preferred Securities.
6. RESTRICTED STOCK
On July 27, 1999, the shareholders of the Company approved the 1999 Restricted
Stock Plan which provided for an award of 723,798 shares of the Company's common
stock to certain officers. All eligible shares have been issued. Plan
participants are entitled to cash dividends and to vote their respective shares.
Unvested shares, are restricted as to disposition and subject to forfeiture
under certain circumstances.
Unearned compensation was charged for the market value of the restricted shares
upon issuance. The unearned compensation is shown as a reduction of shareholders
equity in the accompanying consolidated balance sheet and is being amortized
over the vesting period.
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<PAGE> 8
7. CONTINGENCIES
The Company is the subject of various threatened or pending legal actions and
contingencies in the normal course of conducting its business. The Company
provides for costs related to these matters when a loss is probable and the
amount is reasonably estimable. The effect of the outcome of these matters on
the Company's future results of operations and liquidity cannot be predicted
because any such effect depends on future results of operations and the amount
or timing of the resolution of such matters. While it is not possible to predict
with certainty, management believes that the ultimate resolution of such matters
will not have a material adverse effect on the consolidated financial position
or results of operations of the Company.
The Company believes that the greatest threat posed to it by the Year 2000
problem is potential litigation arising out of any failure of products sold or
services performed by the Company due to the Year 2000 non-compliance. However,
the Company is not currently aware of any threatened litigation. Based on
currently available information, the Company is unable to quantify what losses,
if any, it may incur as a result of any Year 2000 non-compliant products or
services that may have been sold by it, and cannot provide any assurance that
such losses may not be material. The Company believes that its exposure to
liability resulting from the malfunction of Year 2000 non-compliant products is
mitigated in substantial part by certain manufacturers' warranties that are
passed through to the customer. Regardless of whether the Company is ultimately
held liable for any customer's losses, the costs of defending customer lawsuits
could have a material adverse effect on the Company's business, results of
operations and financial condition, depending on the number and nature of such
actions. Due to the uncertain number and nature of such potential lawsuits, the
Company is unable to estimate its potential litigation expenses resulting from
any Year 2000 non-compliance of products or services that may have been sold by
it.
8. PROGEN TECHNOLOGIES
On May 13, 1999, ProGen Technologies, Inc. (ProGen), one of the Company's major
customers, filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
the Central District of the State of California. On June 18, 1999, ProGen made a
motion, which was granted, to convert its Chapter 11 proceeding to a Chapter 7
proceeding. At the time of the bankruptcy filing, ProGen owed the Company
approximately $9.3 million. The bankruptcy court has appointed a Trustee who has
proceeded with liquidation of the assets of ProGen. The Company continues to
assert its rights in the bankruptcy proceedings. At this time, management
believes any effects resulting from this matter will not have a material adverse
effect on the consolidated financial condition or results of operations of the
Company.
8
<PAGE> 9
PIONEER-STANDARD ELECTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Net sales for the three-month period ended September 30, 1999 were $631.3
million, an increase of 13% over net sales in the prior year three-month period
of $559.5 million. Both of the Company's segments contributed to the increased
sales. Industrial Electronics sales increased 15% over the prior year
three-month period and Computer Systems sales increased 10% over the same prior
year period. Industrial Electronics comprised 53% of sales and Computer Systems
were 47% of sales in the second quarter of the current year compared with 52%
and 48%, respectively, a year ago.
Cost of goods sold also increased 13% compared with the prior year quarter,
resulting in a gross margin of 15.2% in the current quarter compared with 15.3%
a year ago.
Warehouse, selling and administrative expenses were $71.9 million compared with
$66.4 million incurred during the prior year three-month period, resulting in a
ratio of these expenses to sales of 11.4% for the current quarter compared with
11.9% a year ago. The reduced ratio of operating expenses to sales in the
current year reflects a combination of the effects of cost containment as well
as leveraging costs on higher sales volume.
Operating profit resulting from the activity described above was $24.4 million,
or 3.9% of sales in the current period, up 27% compared with $19.1 million, or
3.4% of sales a year ago. Operating profit of the Computer Systems segment was
3.2% of sales for the current quarter compared with 3.8% a year ago. Operating
profit of the Industrial Electronics segment was 4.4% of sales compared with
3.1% a year ago.
Other income of $1.8 million in the current quarter reflects the sale and
disposal of assets no longer required in the business.
Interest expense was $6.3 million in the current quarter compared with $6.5
million a year ago.
The effective tax rate for the current year three-month period was 40.9%
compared with 38.3% for the same period a year ago. The tax rate increase in the
current quarter was primarily due to the unrecognized tax benefit of operating
losses of the Canadian subsidiary.
Primarily as a result of the factors above, the Company's net income for the
three-month period ending September 30, 1999 was $10.3 million, an increase of
4.0 million, or 63%, from the $6.3 million earned in the prior year.
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<PAGE> 10
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
THE SIX MONTHS ENDED SEPTEMBER 30, 1998
Net sales for the six-month period ended September 30, 1999 were $1,207.3
million, an increase of 9% over the prior year six-month period of $1,103.8
million. The increase in sales was due to both higher sales of Industrial
Electronics which were up 13% over the prior year, and sales of Computer
Systems, which were up 6% over the prior year six-month period. Industrial
Electronics comprised 53% of sales and Computer Systems were 47% of sales in the
first two quarters of the current year compared with 51% and 49%, respectively,
a year ago.
Cost of goods sold increased 10% compared with the prior year, resulting in a
gross margin of 15.4% in the current period compared with 15.6% a year ago.
Warehouse, selling and administrative expenses were $138.8 million compared with
$134.8 million incurred during the prior year six-month period, resulting in a
ratio of these expenses to sales of 11.5% for the current period compared with
12.2% a year ago. The reduced ratio of operating expenses to sales in the
current year reflects a combination of the effects of cost containment programs
as well as leveraging costs on higher sales volume.
Operating profit resulting from the activity described above was $46.7 million,
or 3.9% of sales in the current period, up 26% compared with $37.2 million, or
3.4% of sales, a year ago. Operating profit of the Computer Systems segment was
3.3% of sales for the current six-months compared with 3.8% of a year ago.
Operating profit of the Industrial Electronics segment was 4.4% of sales
compared with 2.9% a year ago.
Other income of $1.8 million included in the six-month results reflects the sale
and disposal of assets no longer required in the business.
Interest expense was $12.4 million in the current period compared with $13.2
million a year ago. This decrease in interest expense is primarily attributable
to the reduction in debt required to fund the reduced average working capital
used in the businesses.
The effective tax rate for the current year six-month period was 42.0% compared
with 38.1% for the same period a year ago. The tax rate increase for the current
period was primarily due to the unrecognized tax benefit of operating losses of
the Canadian subsidiary.
Primarily as a result of the factors above, the Company's net income for the
six-month period ending September 30, 1999 was $18.0 million, an increase of
$6.1 million, or 51%, from the $11.9 million earned in the prior year.
FINANCIAL CONDITION
Current assets increased by $90.4 million and current liabilities increased by
$66.6 million during the six-month period ended September 30, 1999, resulting in
a $23.8 million increase in working capital. This increase is attributable to
the increased sales for the current quarter compared with
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the sales in the fiscal fourth quarter of the prior year. The current ratio was
2.9:1 at September 30, 1999 and 3.4:1 at year-end March 31, 1999.
During the first six months of the current year, total interest-bearing debt
increased by $19.9 million primarily as a result of the change in working
capital noted above. The ratio of interest-bearing debt to capitalization was
44% at September 30, 1999 compared with 43% at March 31, 1999.
The Company's investments in affiliates increased $18.4 million during the six
months primarily due to cash investments and net unrealized gains in the market
value of these investments.
Management estimates that capital expenditures for the fiscal year 2000 will
approximate $35.0 million. Capital expenditures in the six months of the current
fiscal year were $15.3 million. Under present business conditions, it is
anticipated that funds from current operations and available credit facilities
will be sufficient to finance both capital spending and working capital needs
for the balance of the current fiscal year.
The Company capitalized approximately $34.2 million in fiscal 1998 and 1999 in
connection with the acquisition and installation of an enterprise-wide
information technology (IT) system. Amounts representing approximately $11.5
million of these expenditures were operational in fiscal 1999 and $8.5 million
are planned to become operational in fiscal 2001. The balance of $14.2 million
represents work-in-process components which are not yet operational. The Company
is evaluating these components and presently has no reason to believe that they
will not become operational. In addition, management believes there would be no
material adverse effect on the financial condition or results of operations of
the Company should such components require further modification or replacement.
It is contemplated that implementation for completing the balance of the IT
system installation will commence in fiscal 2001.
On May 13, 1999, ProGen Technologies, Inc. (ProGen), one of the Company's major
customers, filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
the Central District of the State of California. On June 18, 1999, ProGen made a
motion, which was granted, to convert its Chapter 11 proceeding to a Chapter 7
proceeding. At the time of the bankruptcy filing, ProGen owed the Company
approximately $9.3 million. The bankruptcy court has appointed a Trustee who has
proceeded with liquidation of the assets of ProGen. The Company continues to
assert its rights in the bankruptcy proceedings. At this time, management
believes any effects resulting from this matter will not have a material adverse
effect on the consolidated financial condition or results of operations of the
Company.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 problem - software, hardware or an embedded chip that does not
correctly process date information for years after 1999 - results from the
practice of storing date information with only the last two digits of the year.
The Company began to address Year 2000 issues in 1996. Since 1997, the Company
has employed internal and external resources to assist it in identifying,
remediating and testing Year 2000 problems. The Company has also assembled a
multi-departmental Year 2000 task force to
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<PAGE> 12
coordinate and facilitate its Year 2000 efforts and provide regular updates to
the board of directors.
The scope of the Year 2000 readiness effort includes the Company's internal IT
systems, such as hardware and software; non-IT systems with date-sensitive
characteristics; and the status of key third parties, including suppliers,
service providers and customers.
The Company's major IT applications are Year 2000 ready. Remediation and testing
of the balance of the IT systems is nearing completion and is anticipated to be
competed by November 30, 1999. The Company continues to analyze the readiness of
non-IT systems and anticipates that testing of any non-compliant systems will
also be completed by November 30, 1999. Furthermore, the Company is taking steps
to determine the compliance of key third parties and expects that it will have
received and reviewed responses from the majority of such parties by November
30, 1999.
Although the Company expects to meet the target dates for completion of
remediation and testing and for determining the status of key third parties, the
task force continues to develop contingency plans should the programs not be
completed when anticipated or should the third parties not be ready on a timely
basis. Although the Company anticipates the adoption of contingency plans
including the use of manual systems, use of alternative systems or other means
to prevent the more important IT systems from failure should serve to mitigate
potential losses arising from Year 2000 disruptions in connection with the
Company's IT system, there can be no assurances that disruptions will not have a
material adverse effect on the Company.
Despite the Company's efforts of canvassing its more critical third-party
suppliers for compliance with Year 2000 issues and identifying alternate
sources, it is more difficult to anticipate the effect of the compliance efforts
of such third parties on the financial status of the Company. The Company is not
aware of any third party non-compliance which, if not remediated, might result
in a major disruption.
Costs of the initiative to date approximate $2.6 million and are being funded
from operating cash flows. It is anticipated that an additional $ 0.4 million
will be incurred to complete the program. Substantially all of these outlays are
expected to result from remediation of existing systems as opposed to replacing
existing systems. The actual costs of the Company's Year 2000 efforts may vary
from current estimates, which are based on information available at the time.
At the present time, the Company believes that the greatest threat posed to it
by the Year 2000 problem is potential litigation arising out of any failure of
product sold or services performed by the Company due to Year 2000
non-compliance. However, the Company is not currently aware of any threatened
litigation. Based on currently available information, the Company is unable to
quantify what losses, if any, it may incur as a result of any Year 2000
non-compliant products or services that may have been sold by it, and cannot
provide any assurance that such losses may not be material. The Company believes
that its exposure to liability resulting from the malfunction of Year 2000
non-compliant products is mitigated in substantial part by certain
manufacturers' warranties that are passed through to the customer. Regardless of
whether the Company is ultimately held liable for any customer's losses, the
costs of defending customer lawsuits could have a material adverse effect on the
Company's business, results of operations or financial
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condition, depending on the number and nature of such actions. Due to the
uncertain number and nature of such lawsuits, the Company is unable to estimate
its potential litigation expenses resulting from any Year 2000 non-compliance of
products or services that may have been sold by it.
Although the Company believes that it is taking appropriate precautions against
disruption of its systems due to the Year 2000 issue, there can be no assurance
that the Company will identify all Year 2000 problems in advance of their
occurrence, or that the Company will be able to successfully remedy all problems
that are discovered. Furthermore, there can be no assurance that the Company's
third-party relationships will not be adversely affected by Year 2000 issues.
While the Company does not anticipate that costs of Year 2000 disruptions will
have a material adverse effect, Year 2000 disruptions, arising either from
within the Company or through third-party relationships, could have a material
adverse effect on the Company's operating results or financial condition.
Portions of this report contain current management expectations which may
constitute forward-looking information. All statements that address operating
performance, events or developments that management anticipates will occur in
the future, including statements relating to future revenue, profits, expenses,
income and earnings per share or statements expressing general optimism about
future results, are forward-looking statements within the meaning to Section 21E
of the Securities Exchange Act of 1934 (the `Exchange Act"). In addition, words
such as "expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words, and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are subject to safe
harbors created in the Exchange Act. The Company's performance may differ
materially from that contemplated by such statements for a variety of reasons,
including, but not limited to: competition, dependence on the computer market,
inventory obsolescence and technology changes, dependence on key suppliers,
effects of industry consolidation, risks and uncertainties involving
acquisitions, instability in world financial markets, downward pressure on gross
margins, uneven patterns of inter-quarter and intra-quarter sales, and
management of growth of the business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
In the normal course of business, operations of the Company are
exposed to continuing fluctuations in foreign currency values
and interest rates that can affect the cost of operating and
financing. Accordingly, the Company addresses a portion of these
risks through a program of risk management that includes the use
of derivative financial instruments. The Company's objective is
to reduce earnings volatility associated with these
fluctuations. The Company does not enter into any derivative
transactions for speculative purposes.
The Company's primary interest rate risk exposure results from
the revolving credit facility's various floating rate pricing
mechanisms. This interest rate exposure is managed by interest
rate swaps to fix the interest rate on a portion of the debt and
the use of multiple maturity dates. If interest rates were to
increase 100 basis points (1%) from September 30, 1999 rates,
and assuming no changes in debt from September 30, 1999 levels,
the additional annualized expense would be approximately $1.1
million or $.02 per diluted share.
The Company has assets, liabilities and cash flows in foreign
currencies creating foreign exchange risk, the primary foreign
currency being the Canadian dollar. Monthly measurement,
evaluation and forward exchange contracts are employed as
methods to reduce this risk. At September 30, 1999, one forward
exchange contract existed with a maturity of twenty-nine days.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on July 27, 1999 (the
"Annual Meeting"), the shareholders voted to elect James L.
Bayman and Karl E. Ware each to an additional three-year term as
a Director of the Company and Thomas A. Commes to a new
three-year term. Following is a summary of the voting:
Votes James L. Bayman Karl E. Ware Thomas A. Commes
----- --------------- ------------ ----------------
For 27,008,395 27,018,153 24,070,467
Withheld 1,943,968 1,934,210 1,881,896
The term of office of the following Directors of the Company
continued after the Annual Meeting: Charles F. Christ, Victor
Gelb, Keith M. Kolerus, Arthur Rhein, Edwin Z. Singer, and
Thomas C. Sullivan.
At the Annual Meeting, shareholders voted to adopt the 1999
Stock Option Plan for Outside Directors providing for the
granting of options for up to 105,000 Common Shares. The
following is a summary of the voting:
14
<PAGE> 15
Votes
-----
For 23,261,381
Against 5,160,829
Abstaining 530,152
Also at the Annual Meeting, shareholders voted for the Approval
of 1999 Restricted Stock Plan issuing 723,798 Common Shares. The
following is a summary of the voting:
Votes
-----
For 19,799,155
Against 8,709,391
Abstaining 443,816
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K - None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER-STANDARD ELECTRONICS, INC.
Date: November 15, 1999 /S/ Gregory T. Geswein
--------------------------- -----------------------------------
Gregory T. Geswein
Senior Vice President & CFO
Date: November 15, 1999 /S/ John V. Goodger
--------------------------- -----------------------------------
John V. Goodger
Vice President & Treasurer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1999
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 39,105
<SECURITIES> 0
<RECEIVABLES> 366,556
<ALLOWANCES> 8,480
<INVENTORY> 358,212
<CURRENT-ASSETS> 767,692
<PP&E> 173,161
<DEPRECIATION> 77,976
<TOTAL-ASSETS> 1,055,608
<CURRENT-LIABILITIES> 267,526
<BONDS> 476,908
0
0
<COMMON> 9,479
<OTHER-SE> 281,127
<TOTAL-LIABILITY-AND-EQUITY> 1,055,608
<SALES> 1,207,295
<TOTAL-REVENUES> 1,207,295
<CGS> 1,021,803
<TOTAL-COSTS> 1,021,803
<OTHER-EXPENSES> 138,806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,422
<INCOME-PRETAX> 36,109
<INCOME-TAX> 15,181
<INCOME-CONTINUING> 18,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,007
<EPS-BASIC> .68
<EPS-DILUTED> .58
</TABLE>
