<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No. 0-5734
PIONEER-STANDARD ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-0907152
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
4800 East 131st Street, Cleveland, Ohio 44105
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 587-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares, without par value
Common Share Purchase Rights
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 requirement for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K Annual Report
or any amendment to this Form 10-K. [ ]
The aggregate market value of voting shares of the Registrant held by
non-affiliates was $289,882,855 as of June 7, 1999, computed on the basis of the
last reported sale price per share ($11.375) of such shares on the Nasdaq
National Market. Common Shares held by each officer, Director and person who
owns or may be deemed to own 10% or more of the outstanding Common Shares have
been excluded because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 7, 1999, the Registrant had the following number of Common
Shares outstanding: 31,134,741.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Shareholders to be held on July 27, 1999
are incorporated by reference into Part III of this Form 10-K.
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended March 31, 1999 are incorporated by reference into Parts II and
IV of this Form 10-K.
Except as otherwise stated, the information contained in this Annual
Report on Form 10-K is as of March 31, 1999.
PART I
ITEM 1. BUSINESS
(a) Pioneer-Standard Electronics, Inc. was organized as an Ohio
corporation in 1963 and maintains its principal office at 4800 East 131st
Street, Cleveland, Ohio 44105 (telephone number (216) 587-3600). Except as
otherwise stated, the term "Company" as used herein shall mean Pioneer-Standard
Electronics, Inc. and its wholly-owned subsidiaries.
DESCRIPTION OF SEGMENTS - The Company's business may be classified into
two segments: Computer Systems and Industrial Electronics.
Computer Systems. The Company's computer systems distribution and
value-added services business is conducted by its Computer Systems segment.
Through this segment the Company distributes a wide variety of systems products,
including mid-range computer systems and high-end platforms, storage subsystems,
software, servers, computers (primarily mini and personal), display terminals
and networking products. As a complement to its systems distributor operations,
the Company provides value-added services including systems integration,
enterprise resource planning systems design and network consulting. The
Company's system products and value-added services accounted for 50% of the
Company's sales in fiscal 1999 compared with 40% in 1998 and 31% in 1997.
Industrial Electronics. The Company's Industrial Electronics segment
conducts the operations of the Company related to industrial electronics
products distribution. Products sold by this segment may be classified into two
broad categories: semiconductors and interconnect, passive and electromechanical
components. The semiconductor products distributed by this segment include
microprocessors, memory devices, programmable logic devices and analog and
digital integrated circuits and other semiconductor devices. This segment's
interconnect, passive and electromechanical product offerings include
capacitors, connectors, resistors, switches and power conditioning equipment.
This segment also provides value-added services associated with industrial
electronic products, such as point of use inventory management, just-in-time
kitting operations, turnkey assembly, memory and logic device programming,
connector and cable
2
<PAGE> 3
assemblies to customer specifications and power products integration. Sales of
industrial electronics products constituted 50% of the Company's total sales in
fiscal 1999, compared with 60% in 1998 and 69% in 1997.
For information regarding the total assets and operating income of each
segment of the Company's business, see Note 6 of Notes to Financial Statements
of the Company.
PRODUCTS DISTRIBUTED AND SOURCES OF SUPPLY - The Company distributes
products supplied by more than 100 manufacturers. A majority of the Company's
revenues comes from products sourced by relatively few suppliers. During the
1999 fiscal year, products purchased from the Company's three largest suppliers
accounted for 64% of the Company's sales volume. The largest three suppliers,
IBM, Compaq (including Digital Equipment Corporation) and Intel Corporation,
supplied 25%, 20% and 19%, respectively, of the Company's sales volume. The loss
of any one of the top three 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.
INVENTORY - The Company believes that it must maintain certain levels
of inventory in order to ensure that the lead times to its customers remain
competitive. However, to minimize its inventory exposure, the Company has
arrangements with certain of its suppliers for "just in time" product delivery.
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. Both of the Company's segments have a varied customer
base which includes original equipment manufacturers (which constitute the core
customer base of the Industrial Electronics segment), value-added resellers,
research laboratories, government agencies and commercial end-users, including
manufacturing companies and service and other non-manufacturing organizations.
No single customer accounted for more than ten percent of the Company's total
sales or the sales of either segment during the fiscal year 1999.
BACKLOG - The Company historically has not had a significant backlog of
orders, although some shipments may be scheduled for delivery over an extended
period of time. There was not a significant backlog during the last fiscal year.
COMPETITION - The sale and distribution of industrial electronic and
computer systems products are highly competitive, primarily with respect to
price and product availability, but also with respect to service, variety and
availability of products carried, number of locations and promptness of service.
Many of the distributors with which 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
3
<PAGE> 4
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, 1999, the Company had 2,440 employees. 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.
(d) The Company distributes its products principally in the United
States and Canada. Export sales are not a significant portion of the Company's
sales.
ITEM 2. PROPERTIES
The Company owns the 87,000 square foot facility, located in Cleveland,
Ohio, that houses its corporate headquarters and the 106,000 square foot
facility, located in Twinsburg, Ohio, that houses its corporate distribution
center. Commencing in fiscal 2000, the Company intends to relocate certain of
its corporate offices to a 60,000 square foot facility located in Mayfield
Heights, Ohio, as to which the Company entered into an 11 year lease in April
1999. The Company's operations occupy a total of approximately 1,601,000 square
feet, with the majority, approximately 1,481,000 square feet, devoted to product
distribution facilities. Of the approximately 1,601,000 square feet occupied,
253,000 square feet are owned and 1,348,000 square feet are occupied under
operating leases. The Company's facilities of 100,000 square feet or larger, as
of March 31, 1999, are set forth in the table below.
4
<PAGE> 5
<TABLE>
<CAPTION>
TYPE OF APPROXIMATE LEASED OR SEGMENT
LOCATION FACILITY SQUARE FOOTAGE OWNED USING FACILITY
- -------- -------- -------------- ----- --------------
<S> <C> <C> <C> <C>
Gaithersburg, Maryland Distribution 102,600 Leased Industrial Electronics
and Computer Systems
Solon, Ohio Distribution 174,000 Leased Industrial Electronics
and Computer Systems
Solon, Ohio Distribution 224,600 Leased Industrial Electronics
and Computer Systems
Solon, Ohio Distribution 108,700 Leased Industrial Electronics
and Computer Systems
Solon, Ohio Distribution 102,500 Leased Industrial Electronics
and Computer Systems
Twinsburg, Ohio Distribution 106,000 Owned Industrial Electronics
</TABLE>
The Company's major leases contain renewal options for periods of up to
ten years. For information concerning the Company's rental obligations, see Note
4 (Leases) of Notes to Financial Statements of the Company. The Company believes
that its distribution and office facilities are well maintained and suitable for
the operations of the Company.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 1999, the Company was not a party to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended March 31, 1999.
5
<PAGE> 6
EXECUTIVE OFFICERS OF THE COMPANY (1)
The name, age and positions of each executive officer of the Company as
of June 1, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James L. Bayman 62 Chairman of the Board of the Company since
April 1, 1996 and Chief Executive Officer of
the Company since April 3, 1995. President
of the Company from June, 1984 to April 29,
1997. Chief Operating Officer of the Company
from June, 1984 to April 3, 1995.
Arthur Rhein 53 President and Chief Operating Officer of the
Company since April 29, 1997; Senior Vice
President of the Company from 1993 to April
29, 1997 and Vice President - Marketing of
the Company from 1986 to 1993.
Gregory T. Geswein 44 Senior Vice President and Chief Financial
Officer of the Company since April 27, 1999.
Prior thereto, Vice President and Controller
of Mead Corporation from February 1997 to
March 1999; Controller of Mead Corporation
from April 1995 to February 1997; and
Treasurer of Mead Corporation from October
1993 to April 1995.
John V. Goodger 63 Vice President, Treasurer and Assistant
Secretary of the Company since 1990. Prior
thereto, Vice President, Treasurer and
Assistant Secretary of Ferro Corporation
from 1987 to 1990 and Vice President and
Treasurer of Ferro Corporation from 1984 to
1990.
William A. Papenbrock 60 Secretary of the Company since 1986. Partner
of the law firm of Calfee, Halter & Griswold
LLP (2).
</TABLE>
- --------------------------
(1) The description of Executive Officers called for in this Item is
included pursuant to Instruction 3 to Section (b) of Item 401 of
Regulation S-K.
(2) The law firm of Calfee, Halter & Griswold LLP serves as counsel to the
Company.
6
<PAGE> 7
There is no relationship by blood, marriage or adoption among the
above-listed officers. Messrs. Bayman, Rhein, Geswein and Goodger hold office
until terminated as set forth in their employment agreements. Mr. Papenbrock
holds office until his successor is elected by the Board of Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares, without par value, are traded on the
Nasdaq National Market. Common Share prices are quoted daily under the symbol
"PIOS." The high and low sales prices for the Common Shares, the cash dividends
paid on the Common Shares and additional information for each quarter of the two
most recent fiscal years required by this Item are set forth at page 36 of the
Company's 1999 Annual Report to Shareholders, which information is incorporated
herein by reference.
Cash dividends are payable quarterly upon authorization by the Board of
Directors. Regular payment dates are the first day of August, November, February
and May. 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.
On April 27, 1999, the Company adopted a Common Share Purchase Rights
Plan. For further information about the Common Share Purchase Rights Plan, see
Note 8 (Shareholders' Equity) of Notes to Financial Statements of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth at page 37 of the
Company's 1999 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1999 Compared with Fiscal 1998
Consolidated Sales
Fiscal 1999 was the 13th consecutive year of record sales and the 27th
year in the 28 years the Company has been public in which sales increased. Net
sales for the year ended March 31, 1999, of $2,259.1 million increased 34
percent over sales of the prior year of $1,685.3 million. The increase was
primarily attributable to higher net sales volume of
7
<PAGE> 8
computer products resulting from the acquisition of Dickens Data Systems, Inc.
("Dickens") on March 31, 1998. Including sales of Dickens with the prior year on
a pro forma basis, fiscal 1999 sales increased 10 percent compared with fiscal
1998.
Segment Sales
The Company's business is classified into two operating segments:
Computer Systems products include mid-range computer systems and high-end
platforms, storage subsystems, software, servers, personal computers, display
terminals and networking products. Computer systems accounted for 50 percent of
the Company's sales in fiscal 1999 compared with 40 percent a year ago. Sales of
computer systems increased 68 percent in fiscal 1999, primarily due to added
sales resulting from the Dickens acquisition discussed above. Including sales of
Dickens with the prior year on a pro forma basis, computer systems sales
increased 9 percent in fiscal 1999.
Industrial Electronics products comprise semiconductors, and
interconnect, 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.
Interconnect, passive and electromechanical products are devices that move or
use an electrical signal and include capacitors, connectors, resistors,
potentiometers, switches and power conditioning equipment.
Industrial electronics accounted for 50 percent of sales in fiscal 1999
compared with 60 percent a year ago. The increase in industrial electronics
sales of 12 percent in fiscal 1999 is primarily attributable to the increased
sales of the high-volume, low-margin semiconductor products.
Gross Margins
The gross margin for the consolidated operations decreased to 15.6
percent for fiscal 1999 from 17.7 percent in the prior year. Both operating
segments experienced declines as described below.
The gross margin for computer systems declined to 16.4 percent of sales
in fiscal 1999 from 18.7 percent a year ago. The decrease is primarily
attributable to the Dickens sales earning a lower gross margin compared with the
other computer systems sales.
The gross margin for industrial electronics declined to 14.8 percent in
fiscal 1999 from 17.1 percent a year ago. The decrease is attributable primarily
to the increase in sales of high-volume, low-margin products and to the
industry's excess semiconductor supply versus demand conditions adversely
impacting average selling prices.
Management expects gross margin pressure to continue in the next fiscal
year.
8
<PAGE> 9
Operating Efficiencies
Warehouse, selling and administrative expenses for consolidated
operations were 11.8 percent of sales in fiscal 1999, down from 13.4 percent of
sales in the prior year. During 1999, gains resulted from improvements by
leveraging expenses on higher sales volume, coupled with the effects of cost
controls.
Efficiencies were realized through improved employee productivity and
inventory turnover. Sales per employee increased to $879,000 from $766,000 in
1998. Sales per employee have reflected an annual average efficiency gain of
approximately 9 percent over the past five years. Accounts receivable remained
at 44 days in 1999. Inventory turnover of 5.5 times increased from 4.4 times in
the prior year.
The resulting consolidated operating profit of $84.9 million was up 16
percent from $73.0 million in 1998. Consolidated operating profit was 3.8
percent of sales in 1999 compared with 4.3 percent of sales in 1998, reflecting
the gross margin erosion in fiscal 1999 discussed above.
The operating profit margin percent of computer systems decreased from
5.4 percent of sales in fiscal 1998 to 4.4 percent of sales in fiscal 1999
primarily due to the integration of Dickens.
The operating profit margin percent of industrial electronics declined
to 3.1 percent of sales from 3.6 percent of sales in fiscal 1998 primarily
because of the gross margin erosion from excess capacity in the semiconductor
industry referred to above.
Interest Expense
Interest expense was $24.3 million in fiscal 1999 compared with $20.7
million a year ago. The increased interest expense is primarily attributable to
the additional debt to fund working capital and capital expenditures needed to
support the ongoing growth needs of the business, as well as the effect of the
acquisition of Dickens.
Taxes
The effective tax rate for fiscal 1999 was 39.6 percent compared with
41.4 percent a year ago. The tax rate decrease was primarily due to the
utilization of the operating loss carryforward of the Canadian subsidiary.
Net Income
Primarily as a result of the factors noted above, the Company's net
income for fiscal 1999 reached a record high of $30.8 million - an increase of
$0.3 million, or 1 percent over fiscal 1998 net income of $30.5 million.
9
<PAGE> 10
Diluted earnings per share for fiscal 1999 decreased to $1.03 from
$1.14 in the previous year. The average diluted shares outstanding increased to
35.7 million in fiscal 1999 from 26.9 million the prior year primarily due to
the issuance of convertible trust preferred securities a year ago.
Fiscal 1998 Compared with Fiscal 1997
Sales
Fiscal 1998 consolidated net sales of $1,685.3 million increased 12
percent over sales of the prior year of $1,508.7 million. The increase was
attributable to higher sales volume of computer systems.
Computer systems sales increased 43 percent in fiscal 1998, reflecting
strong demand for computer systems products. This segment accounted for 40
percent of sales in fiscal 1998 compared with 31 percent in the prior year.
Industrial electronics net sales decreased 2 percent in fiscal 1998
reflecting a steady demand for interconnect, passive and electromechanical
products, which was offset by a weaker sales comparison experienced by the
Company's semiconductor lines. The slower pace of the Company's semiconductor
sales was reflective of the industry's excess of supply versus demand for that
product category.
Gross Margins
The fiscal 1998 consolidated gross margin of 17.7 percent increased
from 17.2 percent in the prior year.
Computer systems gross margin percent decreased to 18.7 percent from
19.1 percent and industrial electronics gross margin increased to 17.1 percent
from 16.3 percent the prior year. The gross margin percent changes for both
segments are primarily attributable to sales mix changes.
Operating Efficiencies
Warehouse, selling and administrative consolidated expenses were 13.4
percent of sales in fiscal 1998 and 1997. During 1998, gains resulting from
improvements from leveraging expenses on higher sales volume, coupled with the
effects of implementation of cost controls, were offset both by added sales
personnel for administration of the Company's new and expanding lines and by an
acceleration of expenses associated with the Company's multi-year computer
platform project.
10
<PAGE> 11
Efficiencies were realized through improved employee productivity and
receivable collections. Sales per employee increased to $766,000 from $739,000
in 1997. Sales per employee have reflected an annual average efficiency gain of
approximately 11 percent over the past five years. Receivable collections were
reduced to 44 days in 1998 from 47 days in the previous year. However, inventory
turnover of 4.4 times declined from 5.2 times in 1997, reflecting a combination
of increased stocking levels for recent product line additions as well as for
certain of the Company's existing product lines, for improved customer
satisfaction.
The resulting consolidated operating profit of $73.0 million was up 27
percent from $57.4 million in 1997. Consolidated operating profit was 4.3
percent of sales in 1998 compared with 3.8 percent of sales in 1997, reflecting
the increased gross margin percent gain for both operating segments in fiscal
1998, discussed above. Computer systems operating profit percent of sales
increased to 5.4 percent from 4.9 percent and industrial electronics gross
margin increased to 3.6 percent from 3.3 percent the prior year.
Interest Expense
Interest expense was $20.7 million in fiscal 1998 compared with $17.1
million in fiscal 1997. The increased interest expense is attributable to
additional debt to fund working capital and capital expenditure requirements
necessary to support the ongoing growth needs of the business.
Taxes
The effective tax rate was 41.4 percent for fiscal 1998 compared with
42.3 percent in fiscal 1997. The downward trend is reflective primarily of the
reduction of various local and state taxes relative to the Company's operations.
Net Income
Primarily as a result of the factors noted above, the Company's net
income for fiscal 1998 of $30.5 million increased $7.2 million, or 31 percent
over 1997 net income of $23.3 million.
Diluted earnings per share for fiscal 1998 increased to $1.14 from
$1.00 in the previous year.
Risk Control
Systems are in place 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.
11
<PAGE> 12
The Company has entered into several interest rate swap agreements for
purposes of serving as a hedge of the Company's variable rate credit agreement
borrowings. The effect of the swaps is to establish fixed rates on the variable
rate debt and to reduce exposure to interest rate fluctuations. At March 31,
1999, the Company had interest rate swaps with a notional amount of $70 million.
Pursuant to these agreements, Pioneer pays interest at a weighted average fixed
rate of 5.47 percent. The weighted average LIBOR rates applicable to these
agreements were 5.36 percent at March 31, 1999.
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 a nominal effect on the Company's operations.
Accounting Changes
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Company will adopt the Statement in fiscal year 2002.
Adoption of the new Standard is not expected to have a material impact on the
results of operations or financial position of the Company.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Startup
Activities," which requires that the cost of startup activities, including
organization costs, be expensed as incurred. Adoption of the new Standard is not
expected to have a material impact on the results of operations or financial
position of the Company and is required for the Company's fiscal year ending
March 31, 2000.
Acquisitions
On March 31, 1998, the Company acquired 100 percent of the outstanding
capital stock of Dickens Data Systems, Inc. for $121.0 million in cash. Dickens
Data Systems, Inc. was one of IBM's largest distributors of mid-range computer
systems, and had total sales approximating $367.1 million for the fiscal year
ended March 31, 1998. Management believes the acquisition will expand the
Company's customer base and product offerings and enhance the Company's ability
to take advantage of growth opportunities in the mid-range computer systems
market. The acquisition was funded with borrowings under the Company's revolving
credit facility. The excess of the purchase price over the fair value of the net
assets acquired approximated $119.1 million, and is being amortized over 40
years.
12
<PAGE> 13
In November 1997, the Company purchased an initial minority equity
interest in World Peace Industrial Co., Ltd. ("WPI") of Taiwan. Subsequent to
year-end, in April 1999, the Company added to its investment in WPI. Management
believes this investment will provide the Company with access to an extensive
distribution network in the Asia-Pacific region. Headquartered in Taipei, WPI
has offices in countries throughout the region, including Singapore, South
Korea, Thailand, Malaysia, mainland China and Hong Kong. This minority interest
investment is recorded on the cost basis and is included in other assets.
In April 1998, the Company purchased an initial minority equity
interest in Eurodis Electron PLC ("Eurodis"), a pan-European distributor of
electronic components. Subsequent to year-end, in May 1999, the Company added to
its investment in Eurodis. This investment furthers the Company's growth
strategy by offering it access to what management believes is a very broad
industrial electronic components market, as well as one of the world's largest
telecommunications markets. Headquartered near London, Eurodis employs 1,100
people in 13 countries and has operating centers in the United Kingdom, Austria,
the Netherlands, Belgium, France, Germany, Italy, Switzerland and Eastern
Europe.
Liquidity and Capital Resources
Current assets including cash and cash equivalents decreased $23.4
million and current liabilities decreased $38.3 million for the year ended March
31, 1999, resulting in an increase of $14.9 million of working capital. Despite
increased sales in the fourth quarter of fiscal 1999 over the same quarter a
year ago, improved inventory turnover for the current year quarter of 5.5 times
compared with 4.4 times a year ago resulted in reduced current asset needs. The
decrease in current liabilities is primarily attributable to reduced inventory
funding requirements and to timing differences in payments. The current ratio
was 3.4:1 at March 31, 1999, and 2.9:1 at year-end March 31, 1998.
In April 1998, the Company issued an additional $18.7 million of
preferred securities upon exercise of an overallotment option in connection with
issuance of convertible trust preferred securities by the Company in March 1998
of $125 million.
The Company's revolving credit facility has a total capacity of $260.0
million, substantially all of which may be borrowed as of March 31, 1999, in
accordance with availability requirements which are subject to meeting certain
minimum ratios. As of March 31, 1999, $160.0 million was borrowed under the
facility. A year ago, such borrowings aggregated $180.0 million.
Capital expenditures were $22.2 million in fiscal 1999 compared with
$44.3 million in fiscal 1998. This spending reflects ongoing initiatives
designed to improve efficiencies through computer enhancement of operating
processes as well as expanded facilities. Management estimates that capital
expenditures will be in the range of $35.0 million in fiscal 2000.
13
<PAGE> 14
During fiscal 1999, total interest-bearing debt decreased by $23.0
million. The decrease in debt is primarily attributable to improved inventory
turnover in fiscal 1999 and application of proceeds of the April 1998 sale of
preferred securities. The ratio of interest-bearing debt to capitalization
(including convertible trust preferred securities as equity) was 43 percent at
March 31, 1999 compared with 48 percent a year ago.
The Company believes that cash generated from operations and amounts
available under its credit facility are sufficient to fund its working capital
and capital expenditure requirements.
Information Technology Systems
The Company capitalized approximately $34.2 million over the past two
years in connection with the acquisition and installation of an upgraded
information technology 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 2000. 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 plans for completing the balance of the information
technology (IT) system installation will be finalized in fiscal 2000.
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 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 currently Year 2000 ready.
Remediation and testing of the balance of the IT systems are expected to be
completed by July 1999. The Company continues with analyzing the readiness of
non-IT systems and anticipates that remediation and testing of any non-compliant
systems will be completed by October 1999. The
14
<PAGE> 15
Company also 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 October 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 with developing 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 actions
of such third parties on the financial status of the Company. The Company has
not become aware of any third party non-compliance not in the process of
remediation that might result in a major disruption.
Costs of the initiative to date approximate $2.1 million. It is
anticipated that an additional $1.0 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. Costs
of the initiative are being funded from operating cash flows. 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 products 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 losses, if any, it may incur as a result of any Year 2000 non-compliant
products or services 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 lawsuits, the Company is unable to
estimate its potential litigation expenses resulting from any Year 2000
non-compliance of products or services sold by it.
15
<PAGE> 16
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 business, operating results and
financial condition.
Subsequent Event
On May 13, 1999, ProGen Technologies, Inc., 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. ProGen subsequently filed a
motion, which was granted on June 18, 1999, to convert its Chapter 11 proceeding
to a Chapter 7 proceeding. At the time of its initial filing, ProGen owed the
Company approximately $9.3 million for the shipment of microprocessors ($5.7
million at March 31, 1999). The Company intends to pursue its rights in the
bankruptcy proceedings, and, at this time, management anticipates any effects
resulting from this matter will not result in a material adverse effect on the
consolidated financial condition or results of operations of the Company.
Forward-Looking Information
Portions of this report contain current management expectations which
may constitute forward-looking information. The Company's performance may differ
materially from that contemplated by such statements as a result of certain risk
factors, including but not limited to those set forth below.
Competition
The Company is a distributor in the industrial electronics and computer
systems industry, which has been highly competitive in recent years. The Company
faces intense competition in two major respects: in obtaining sources of supply
for the products distributed, and in developing relationships with customers. In
the case of semiconductor and computer systems products, the Company competes
for customers with other distributors as well as with some of its suppliers.
Some of the Company's competitors are larger and more established and have
greater financial and other resources, which may enable them to compete more
effectively. Also, it is possible that an increasing number of suppliers may
decide to distribute their products directly to the customer, which will
heighten competitive pressures further. Due to continuing competitive pressures,
the Company's gross margins have declined in recent years, and the Company
expects a continued downward pressure on gross margins in the foreseeable
future.
16
<PAGE> 17
Softening in the Computer Network and Platform Market
The Company distributes many products that are used in the manufacture
or configuration of mid-range computer systems and high-end platforms. The
technology used in these products has changed rapidly over the last several
years, resulting in short life cycles for these products. Because the Company's
customers have been forced to replace systems that have become technologically
obsolete in a relatively short period of time, the Company has experienced
substantial demand for these products that has contributed significantly to its
revenue growth. A slowdown in this market could have a substantial negative
effect on the Company's revenues and results of operations.
Fluctuations in Semiconductor Supply and Demand
The semiconductor market historically has experienced fluctuations in
product supply and demand associated with technology changes and supply
capability occurring from time to time. At times when product supply has been
high relative to demand, prices for those products have declined. The Company
has attempted to minimize the effect of these price fluctuations in its
distribution arrangements. The Company's gross margins may nevertheless be
negatively affected if an excess supply of semiconductors causes a general
decline in prices for those products. If there is a shortage of semiconductor
supply, the Company's results of operations will depend on how much product it
is able to obtain from suppliers to sell and how quickly the Company receives
shipments of those products. There can be no assurance that supply and demand
fluctuations in the semiconductor market will not have a material adverse effect
on the Company's results of operations and business.
Risks Related to Rapidly Changing Technology
The Company's results of operations will depend in part on successful
management of the challenges of rapidly changing technology and evolving
industry standards characteristic of the market for industrial electronics and
computer systems products. These challenges include predicting the nature and
timing of technological changes and the direction of evolving industry
standards; identifying, obtaining and successfully marketing new products as
they emerge; and minimizing the risk of loss due to inventory obsolescence. Some
of the Company's competitors may be able to market products that have perceived
advantages over the products distributed by the Company or that render the
products distributed by the Company obsolete or more difficult to market.
Although the Company attempts to minimize the effects of inventory obsolescence
in its distribution arrangements, the Company may have high inventories of
unsold product if a new technology renders a product distributed by the
Company less desirable or obsolete. In addition, customers may be less willing,
for financial or other reasons, to purchase the new products necessary to use
new technologies.
Dependence on Key Suppliers
During fiscal 1999 the Company's three largest suppliers accounted for
64 percent of total sales, with IBM, Compaq (including Digital Equipment
Corporation) and Intel Corporation supplying 25 percent, 20 percent and 19
percent, respectively, of the Company's sales volume.
17
<PAGE> 18
Although the Company believes that its relationships with suppliers are good,
there can be no assurance that the Company's suppliers will continue to supply
products to the Company on terms acceptable to the Company. The loss of any of
the Company's three top suppliers or a combination of other suppliers could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Industry Consolidation
The industrial electronics and computer systems products distribution
industry has become increasingly concentrated in recent years as companies have
combined or formed strategic alliances. If this trend continues, new business
combinations or strategic alliances may have a competitive advantage if their
potentially greater financial, technical, marketing or other resources allow
them to negotiate relationships with suppliers that are more favorable than the
Company's relationships with its suppliers. If such relationships develop, these
new business combinations or strategic alliances may be able to offer lower
prices that could precipitate an industry-wide decline in prices. This decline
would have a negative impact on the Company's gross margins, and could cause a
decline in the Company's revenues and loss of market share.
Risks Related to Growth through Acquisitions
The Company constantly reviews acquisition prospects that would
complement its existing business, augment its market coverage or provide
opportunities to expand into new markets. The Company's continued growth depends
in part on its ability to find suitable acquisition candidates and to consummate
strategic acquisitions. If the consolidation trend in the industry continues,
the cost of completing acquisitions could increase significantly. To fund rising
acquisition costs, the Company may issue equity securities, which could dilute
the holdings of existing equity holders, or incur debt, which could reduce the
fixed charge ratio and result in overleveraging. These actions, and the
amortization of expenses related to goodwill and other intangible assets, could
have a material adverse effect on the Company's financial condition and results
of operations or the price of the Company's Common Shares. Furthermore,
acquiring businesses always entails risk and uncertainties. The Company's may
not be able to integrate the operations of the acquired businesses successfully,
and the failure to do so could have a material adverse impact on the Company's
business and results of operations.
Leverage
At March 31, 1999, the Company's borrowings under a $260 million
revolving credit facility with National City Bank, Cleveland, Ohio, as agent for
itself and a syndicate of other lenders, totaled $160 million. In addition, the
Company issued $150 million principal amount of 8 1/2 percent Senior Notes due
2006 in August 1996. In March and April 1998, the Company's wholly owned
subsidiary, the Pioneer-Standard Financial Trust, issued a total of $143.7
million of 6 3/4 percent mandatorily redeemable convertible preferred
securities, which is an equity-related security. The sole assets of the
Pioneer-Standard Financial Trust are $148.2 million aggregate principal amount
of 6 3/4 percent Series A Junior Convertible Subordinated Debentures due March
31, 2028. The Company has executed a guarantee providing a full and
unconditional guarantee of the trust's obligations under the trust preferred
securities. As a consequence of the
18
<PAGE> 19
Company's obligations, a substantial portion of its cash flow from operations
must be dedicated to servicing these obligations and will not be available for
other purposes. Furthermore, the Company's obligations may limit its ability to
obtain additional financing in the future for working capital, capital
expenditures and acquisitions, and its flexibility to react to changes in the
industry and changing business and economic conditions. The Company's ability to
satisfy its existing obligations will depend upon its future operating
performance, which may be affected by prevailing economic conditions and
financial, business and other factors described in this prospectus, many of
which are beyond its control. The Company currently anticipates that funds from
current operations, available credit facilities and access to capital markets
will provide adequate funds to finance capital spending and working capital
needs and to service its obligations as they become due. If the Company
experiences difficulty in servicing its obligations, the Company may have to
reduce or delay capital expenditures, sell assets, restructure or refinance its
indebtedness or seek additional equity capital. There can be no assurance that
any of these strategies could be effected on satisfactory terms, if at all.
Uneven Pattern of Quarterly Sales
In the Company's recent experience, a disproportionate percentage of
quarterly sales have occurred in the last week or last day of the fiscal
quarter. This uneven sales pattern makes the prediction of revenues, earnings
and working capital for each financial period especially difficult, and
increases the risk of unanticipated variations in quarterly results and
financial condition. The Company believes that this pattern of sales has
developed as a result of several factors. One such factor is the recent tendency
of customers to delay purchases until the end of a quarter in the hope of
receiving more favorable pricing. Another factor is that customers may not be
able to determine until close to the end of their fiscal year whether there are
available funds in their capital budgets for the purchase of industrial
electronics and computer systems products. Although the Company is unable to
predict whether this uneven sales pattern will continue over the long term, the
Company anticipates that, for the foreseeable future, the majority of its sales
will continue to occur in the final days of the quarter.
Year 2000
See the discussion above under the caption "Year 2000 Readiness
Disclosure."
ITEM 7A. 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
19
<PAGE> 20
dates. If interest rates were to increase 200 basis points (2%) from March 31,
1999 rates, and assuming no changes in debt from the March 31, 1999 levels, the
additional annual expense would be approximately $1.8 million on a pre-tax
basis.
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 March 31, 1999, one
forward exchange contract existed with a maturity of thirty days.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth at pages 23 through
36 of the Company's 1999 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item as to the Directors of the Company
appearing under the caption "Election of Directors" in the Company's Proxy
Statement to be used in connection with the Company's 1999 Annual Meeting of
Shareholders to be held on July 27, 1999 (the "1999 Proxy Statement") is
incorporated herein by reference. Information required by this Item as to the
executive officers of the Company is included in Part I of this Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's
1999 Proxy Statement under the caption "Compensation of Executive Officers,"
which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's
1999 Proxy Statement under the caption "Share Ownership," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
20
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) FINANCIAL STATEMENTS. The following consolidated financial
statements of the Company and its subsidiaries and the report of independent
auditors thereon, included in the Company's 1999 Annual Report to Shareholders
on pages 23 through 35, are incorporated by reference in Item 8 of this Annual
Report on Form 10-K:
Consolidated Balance Sheets as of March 31, 1999 and
1998 For the years ended March 31, 1999, 1998 and
1997:
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
Quarterly financial data, included in the Company's 1999 Annual
Report to Shareholders at page 36, are incorporated by reference in Item 8 of
this Annual Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES. The following consolidated
financial statement schedule of the Company and its subsidiaries and the report
of independent auditors thereon are filed as part of this Annual Report on Form
10-K, and should be read in conjunction with the consolidated financial
statements of the Company and its subsidiaries included in the Company's 1999
Annual Report to Shareholders:
Report of Independent Auditors
Schedule II -- Valuation and Qualifying Accounts
for the years ended March 31, 1999, 1998 and 1997
All other schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
(3) EXHIBITS
See the Index to Exhibits at page E-1 of this Form 10-K.
21
<PAGE> 22
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of fiscal 1999.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Pioneer-Standard Electronics, Inc. has duly caused this
Annual Report of Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cleveland, State of Ohio, June 29,
1999.
PIONEER-STANDARD ELECTRONICS, INC.
By /S/ John V. Goodger
-----------------------------------------
John V. Goodger
Vice President, Treasurer and Assistant
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James L. Bayman Chairman, Chief Executive June 29, 1999
- --------------------------- Officer and Director (Principal
James L. Bayman Executive Officer)
/s/ Arthur Rhein President, Chief Operating June 29, 1999
- -------------------------- Officer and Director
Arthur Rhein
/s/ Gregory T. Geswein Senior Vice President and Chief June 29, 1999
- ------------------------- Financial Officer (Principal
Gregory T. Geswein Financial Officer)
/s/ John V. Googer Vice President, Treasurer and June 29, 1999
- ------------------------- Assistant Secretary (Principal
John V. Googer Accounting Officer)
/s/ Charles F. Christ Director June 29, 1999
- -------------------------
Charles F. Christ
/s/ Victor Gelb Director June 29, 1999
- -------------------------
Victor Gelb
/s/ Gordon E. Heffern Director June 29, 1999
- -------------------------
Gordon E. Heffern
/s/ Keith M. Kolerus Director June 29, 1999
- -------------------------
Keith M. Kolerus
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edwin Z. Singer Director June 29, 1999
- ---------------------------
Edwin Z. Singer
/s/ Thomas C. Sullivan Director June 29, 1999
- ---------------------------
Thomas C. Sullivan
/s/ Karl E. Ware Director June 29, 1999
- ---------------------------
Karl E. Ware
</TABLE>
24
<PAGE> 25
REPORT OF INDEPENDENT AUDITORS
Shareholders and the Board of Directors
Pioneer-Standard Electronics, Inc.
We have audited the consolidated financial statements of Pioneer-Standard
Electronics, Inc. as of March 31, 1999 an 1998, and for each of the three years
in the period ended March 31, 1999 and have issued our report thereon dated May
5, 1999, incorporated by reference in this Annual Report (Form 10-K). Our audits
also included the consolidated financial statement schedule of Pioneer-Standard
Electronics, Inc. as of March 31, 1999 and 1998 and for each of the three years
in the period ended March 31, 1999, listed in item 14(a) of this Annual Report
(Form 10-K). This schedule is the responsibility of the Company's management.
Our responsibility if to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 5, 1999
<PAGE> 26
PIONEER-STANDARD ELECTRONICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
DEDUCTIONS
BALANCE AT CHARGED TO (NET WRITE-
BEGINNING OF COST AND OFFS) BALANCE AT THE
PERIOD EXPENSES NET RECOVERIES END OF PERIOD
<S> <C> <C> <C> <C>
1999
Allowance for doubtful accounts $7,798,000 $(1,277,000) $ (486,000) $6,035,000
Inventory valuation reserve $5,661,000 $ 3,157,000 $(3,421,000) $5,397,000
1998
Allowance for doubtful accounts $7,541,000 $ (803,000) $ 1,060,000 $7,798,000
Inventory valuation reserve $6,659,000 $ 2,031,000 $(3,029,000) $5,661,000
1997
Allowance for doubtful accounts $6,982,000 $ 193,000 $ 366,000 $7,541,000
Inventory valuation reserve $8,777,000 $ 987,000 $(3,105,000) $6,659,000
</TABLE>
<PAGE> 27
Pioneer-Standard Electronics, Inc.
Exhibit Index
Exhibit No. Description
----------- -----------
3(a) Amended Articles of Incorporation of
Pioneer-Standard Electronics, Inc., which is
incorporated by reference to Exhibit 2 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, as
amended on March 18, 1998 (File No. 0-5734).
(b) Amended Code of Regulations, as amended, of
Pioneer-Standard Electronics, Inc., which is
incorporated by reference to Exhibit 3(b) to
the Company's Annual Report on Form 10-K for
the year ended March 31, 1997 (File No.
0-5734).
4(a) Rights Agreement, dated as of April 27, 1999,
by and between the Company and National City
Bank, which is incorporated herein by
reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A ( (File No.
0-5734).
(b) (Reserved.)
(c) Note Purchase Agreement, dated as of October
31, 1990, by and between the Company and
Teachers Insurance and Annuity Association of
America, which is incorporated herein by
reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3 (Reg. No.
333-26697).
(d) Amendment No. 1 to Note Purchase Agreement,
dated as of November 1, 1991, by and between
the Company and Teachers Insurance and Annuity
Association of America, which is incorporated
herein by reference to Exhibit 4(d) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1993 (File No. 0-5734).
(e) Amendment No. 2 to Note Purchase Agreement,
dated as of November 30, 1995, by and between
the Company and Teachers Insurance and Annuity
Association of America, which is incorporated
herein by reference to Exhibit 4(a) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1996 (File No. 0-5734).
E-1
<PAGE> 28
Exhibit No. Description
----------- -----------
(f) Amendment No. 3 to Note Purchase Agreement,
dated as of August 12, 1996 by and between the
Company and Teachers Insurance and Annuity
Association of America, which is incorporated
herein by reference to Exhibit 4(f) to the
Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 (File No.
0-5734).
(g) Amendment No. 4 to Note Purchase Agreement,
dated as of March 23, 1998 by and between the
Company and Teachers Insurance and Annuity
Association of America, which is incorporated
herein by reference to Exhibit 4(g) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734)..
(h) Amendment No. 5 to Note Purchase Agreement,
dated as of March 23, 1998 by and between the
Company and Teachers Insurance and Annuity
Association of America, which is incorporated
herein by reference to Exhibit 4(h) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734).
(i) Amendment No. 6 to Note Purchase Agreement,
dated as of March 31, 1998 by and between the
Company and Teachers Insurance and Annuity
Association of America, which is incorporated
herein by reference to Exhibit 4(i) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734).
(j) Indenture, dated as of August 1, 1996, by and
between the Company and Star Bank, N.A., as
Trustee, which is incorporated herein by
reference to Exhibit 4(g) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1997 (File No. 0-5734).
(k) Share Subscription Agreement and Trust,
effective July 2, 1996, by and between the
Company and Wachovia Bank of North Carolina,
N.A., which is incorporated herein by
reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-3 (Reg. No.
333-07665).
(l) Certificate of Trust of Pioneer-Standard
Financial Trust, dated March 23, 1998, which
is incorporated herein by reference to Exhibit
4(l) to the Company's Annual Report on Form
10-K for the year ended March 31, 1998 (File
No. 0-5734).
E-2
<PAGE> 29
Exhibit No. Description
----------- -----------
(m) Amended and Restated Trust Agreement among
Pioneer-Standard Electronics, Inc., as
Depositor, Wilmington Trust Company, as
Property Trustee and Delaware Trustee, and the
Administrative Trustees named therein, dated
as of March 23, 1998, which is incorporated
herein by reference to Exhibit 4(m) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734).
(n) Junior Subordinated Indenture, dated March 23,
1998, between the Company and Wilmington
Trust, as trustee, which is incorporated
herein by reference to Exhibit 4(n) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734).
(o) First Supplemental Indenture, dated March 23,
1998, between the Company and Wilmington
Trust, as trustee, which is incorporated
herein by reference to Exhibit 4(o) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734).
(p) Form of 6 3/4% Convertible Preferred
Securities (Included in Exhibit 4(m), which is
incorporated herein by reference to Exhibit
4(p) to the Company's Annual Report on Form
10-K for the year ended March 31, 1998 (File
No. 0-5734).
(q) Form of Series A 6 3/4% Junior Convertible
Subordinated Debentures (Included in Exhibit
4(o)), which is incorporated herein by
reference to Exhibit 4(q) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1998 (File No.
0-5734).
(r) Guarantee Agreement, dated March 23, 1998,
between the Company and Wilmington Trust, as
guarantee trustee, which is incorporated
herein by reference to Exhibit 4(r) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734).
E-3
<PAGE> 30
Exhibit No. Description
----------- -----------
(s) Agreement and Plan of Merger, dated as of
January 15, 1998, by and among Dickens Data
Systems, Inc., the Selling Shareholders
named therein, Pioneer-Standard Electronics,
Inc. and Pioneer-Standard of Georgia, Inc.,
which is incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report
on Form 8-K for February 27, 1998 (File No.
0-5734). (Schedules omitted pursuant to Item
601(b)(2) of Regulation S-K. The Company
agrees to furnish supplementally a copy of
any omitted schedule to the Commission upon
request.)
*10(a) Retirement Agreement, effective March 31,
1996, by and between the Company and Preston
B. Heller, Jr., which is incorporated herein
by reference to Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1996 (File No. 0-5734).
*(b) Employment Agreement, dated July 29, 1997, by
and between the Company and James L. Bayman,
which is incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September
30, 1997, as amended on March 18, 1998 (File
No. 0-5734).
*(c) Employment Agreement, dated July 29, 1997, by
and between the Company and Arthur Rhein,
which is incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September
30, 1997, as amended on March 18, 1998 (File
No. 0-5734).
(d) (Reserved.)
*(e) Employment Agreement, dated July 29, 1997, by
and between the Company and John V. Goodger,
which is incorporated herein by reference to
Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September
30, 1997, as amended on March 18, 1998 (File
No. 0-5734).
*(f) The Company's 1982 Incentive Stock Option
Plan, as amended, which is incorporated by
reference to Exhibit 3(e) to the Company's
Annual Report on Form 10-K for the year ended
March 31, 1997 (File No. 0-5734).
E-4
<PAGE> 31
Exhibit No. Description
----------- -----------
*(g) The Company's Amended and Restated 1991
Stock Option Plan, which is incorporated
herein by reference to Exhibit 4.1 to the
Company's Form S-8 Registration Statement
(Reg. No. 33-53329).
*(h) The Company's Amended 1995 Stock Option Plan
for Outside Directors, which is incorporated
herein by reference to Exhibit 99.1 to the
Company's Form S-8 Registration Statement
(Reg. No. 333-07143).
(i) Credit Agreement, dated as of March 27,
1998, among Pioneer-Standard Electronics,
Inc., National City Bank, the several
lending institutions party to the agreement
and National City Bank, as Agent, which is
incorporated herein by reference to Exhibit
10(j) to the Company's Annual Report on Form
10-K for the year ended March 31, 1998 (File
No. 0-5734).
(j) First Amendment to Credit Agreement, dated
as of May 1, 1998, by and among
Pioneer-Standard Electronics, Inc., the
several lending institutions party to the
agreement and National City Bank, as Agent,
which is incorporated herein by reference to
Exhibit 10(k) to the Company's Annual Report
on Form 10-K for the year ended March 31,
1998 (File No. 0-5734).
(k) Second Amendment to Credit Agreement, dated
as of March 31, 1999, by and among
Pioneer-Standard Electronics, Inc., the
several lending institutions party to the
agreement and National City Bank, as Agent.
13 Portions of the Company's 1999 Annual
Report to Shareholders incorporated by
reference into this Annual Report on Form
10-K.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent
Auditors.
27 Financial Data Schedule.
E-5
<PAGE> 32
Exhibit No. Description
----------- -----------
99(a) Certificate of Insurance Policy, effective
November 1, 1997, between Chubb Group of
Insurance Companies and Pioneer-Standard
Electronics, Inc., which is incorporated
herein by reference to Exhibit 99(a) to the
Company's Annual Report on Form 10-K for the
year ended March 31, 1998 (File No. 0-5734).
99(b) Forms of Amended and Restated
Indemnification Agreement entered into by
and between the Company and each of its
Directors and Executive Officers, which are
incorporated herein by reference to Exhibit
99(b) to the Company's Annual Report on Form
10-K for the year ended March 31, 1994 (File
No. 0-5734).
- ---------------------------------
*Denotes a management contract or compensatory plan or arrangement.
E-6
<PAGE> 1
EXHIBIT 10(k)
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment")
is made as of March 31, 1999, by and among Pioneer-Standard Electronics, Inc.,
an Ohio corporation, and its successors and assigns (the "Borrower"), National
City Bank, a national banking association, and the several banks, financial
institutions and other entities from time to time parties to the Credit
Agreement (as defined below) (sometimes collectively, "Lenders" and sometimes
individually, a "Lender"), and National City Bank, not individually, but as
"Agent." Capitalized terms used herein, and not otherwise defined herein, shall
have the meaning ascribed to those terms in the Credit Agreement (as defined
herein).
WHEREAS, Borrower, the Lenders and Agent entered into that
certain Credit Agreement dated as of March 27, 1998, as amended by that certain
First Amendment to Credit Agreement, dated as of May 1, 1998 (collectively, the
"Original Credit Agreement");
WHEREAS, Borrower, the Lenders and Agent are desirous of
amending the Original Credit Agreement on the terms and conditions hereinafter
set forth; and
WHEREAS, the Original Credit Agreement as modified by this
Amendment shall hereafter be the "Credit Agreement."
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, Borrower, the Lenders and Agent agree as
follows:
1. Section 5.14(c) of the Original Credit Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
(c) Investments in (i) Eurodis Electron PLC (in an amount not
to exceed a value of $7,433,463) and World Peace Industrial Co. Ltd. (in an
amount not to exceed a value of $6,531,259) and (ii) Eurodis Electron PLC (in
excess of a value of $7,433,463), World Peace Industrial Co. Ltd. (in excess of
a value of $6,531,259) and other Persons not to exceed, in the aggregate, at any
time, a value of $35,000,000; provided that any Investment permitted under this
Section 5.14(c) may only consist of Investments in Persons in the business of
the manufacturing or the distributing of industrial and consumer electronic
products or related consulting or support services.
2. Subsection 5.15(v) of the Original Credit Agreement is
hereby deleted in its entirety and the following substituted in lieu thereof:
(v) any lease other than any Capitalized Lease (it being
agreed that a Capitalized Lease is a lien rather than a lease for the purposes
of this Agreement) so long as the aggregate annual rentals of all such leases do
not exceed Fifteen Million Dollars ($15,000,000) on a consolidated basis.
3. Section 5.21(a) of the Original Credit Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
5.21 RATIO OF EBIT TO INTEREST. (a) Borrower and its
Subsidiaries shall have a ratio of Consolidated EBIT to Consolidated Interest
Expense of no less than 3.0 to 1.0 on the Closing Date, and on the last calendar
day of each fiscal quarter thereafter, until December 31, 2000. Thereafter, on
the last calendar day of each fiscal quarter until and including the Facility
Termination Date, Borrower and its Subsidiaries shall have a ratio of
Consolidated EBIT to Consolidated Interest Expense of no less than 3.50
<PAGE> 2
to 1.0. The ratio of Consolidated EBIT to Consolidated Interest Expense shall be
calculated for the most recent preceding four fiscal quarters, including the
fiscal quarter ending on the date of determination.
4. Section 5.22 of the Original Credit Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
5.22 RATIO OF DEBT TO EBITDA. Borrower and its Subsidiaries
shall have a ratio of Consolidated Funded Debt to Consolidated EBITDA of no
greater than 3.75 to 1.0 on the Closing Date, and on the last calendar day of
each fiscal quarter thereafter, until December 31, 1999; and no greater than
3.50 to 1.00 on the last calendar day of each fiscal quarter thereafter, until
December 31, 2000; and no greater than 3.00 to 1.00 on the last calendar day of
each fiscal quarter thereafter, until December 31, 2001; and no greater than
2.75 to 1.0 on the last calendar day of each fiscal quarter thereafter, until
the Facility Termination Date. The ratio of Consolidated Funded Debt to
Consolidated EBITDA shall be calculated for the most recent preceding four
fiscal quarters, including the fiscal quarter ending on the date of
determination and shall exclude any debt relating to the Convertible Debentures
or the securities sold pursuant to the Preferred Securities Offering.
5. Section 5.33 of the Original Credit Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
5.33 INVENTORY FINANCE LIMITATION. Borrower and its
Subsidiaries shall have a ratio of Consolidated Funded Debt plus Indebtedness
for Borrowed Money arising under the Agreement for Inventory Financing to
Consolidated EBITDA of no greater than 4.75 to 1.0 on the Closing Date, and on
the last calendar day of each fiscal quarter thereafter, until December 31,
1999; and no greater than 4.50 to 1.00 on the last calendar day of each fiscal
quarter thereafter, until December 31, 2000; and no greater than 4.00 to 1.00 on
the last calendar day of each fiscal quarter thereafter, until December 31,
2001; and no greater than 3.75 to 1.0 on the last calendar day of each fiscal
quarter thereafter, until the Facility Termination Date. The ratio of
Consolidated Funded Debt plus Indebtedness for Borrowed Money arising under the
Agreement for Inventory Financing to Consolidated EBITDA shall be calculated for
the most recent preceding four fiscal quarters, including the fiscal quarter
ending on the date of determination and shall exclude any debt relating to the
Convertible Debentures or the securities sold pursuant to the Preferred
Securities Offering.
IN WITNESS WHEREOF, the parties have caused this Amendment to
be duly executed and delivered by their proper and duly authorized officers.
PIONEER-STANDARD ELECTRONICS, INC.
By: /s/ JOHN V. GOODGER
-----------------------------
Print Name: John V. Goodger
Title: Vice President
Page 2
<PAGE> 3
NATIONAL CITY BANK,
Individually and as Agent
By: /s/ Anthony J. DiMare
-----------------------------
Print Name: Anthony J. DiMare
Title: Senior Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Brendan A. Lawlor
-----------------------------
Print Name: Brendan Lawlor
Title: Vice President
MELLON BANK, N.A.
By: /s/ Mark Johnston
-----------------------------
Print Name: Mark Johnston
Title: Vice President
FIRSTAR BANK, N.A.
By: /s/ John D. Barrett
-----------------------------
Print Name: John Barrett
Title: Vice President
NBD BANK
By: /s/ Paul R. DeMelo
-----------------------------
Print Name: Paul R. DeMelo
Title: Vice President
COMERICA BANK
By: /s/ Jeffrey J. Judge
-----------------------------
Print Name: Jeffrey J. Judge
Title: Vice President
Page 3
<PAGE> 4
ABN - AMRO BANK N.V.
By: /s/ Christopher S. Helmeci
-----------------------------
Print Name: Chris Helmeci
Title: Vice President
By: /s/ Louis K. McLinden, Jr.
-----------------------------
Print Name: Louis K. McLinden, Jr.
Title: Vice President
MERCANTILE BANK
By: /s/ Timothy W. Hassler
-----------------------------
Print Name: Tim Hassler
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Robert J. Joyce
-----------------------------
Print Name: Robert Joyce
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By:
-----------------------------
Print Name: Michael Piken
Title: Vice President
Page 4
<PAGE> 1
Exhibit 13
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999, and 1998 1999 1998
========================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,898,000 $ 31,999,000
Accounts receivable, less allowance for doubtful accounts 323,461,000 303,599,000
(1999-$6,035,000, 1998-$7,798,000)
Merchandise inventory 314,362,000 349,100,000
Prepaid expenses 2,475,000 5,799,000
Deferred income taxes 8,049,000 10,113,000
- --------------------------------------------------------------------------------------------------------
Total current assets 677,245,000 700,610,000
INTANGIBLE ASSETS 154,405,000 154,908,000
INVESTMENTS 13,964,000 6,531,000
OTHER ASSETS 7,898,000 7,727,000
PROPERTY AND EQUIPMENT, AT COST:
Land 828,000 828,000
Buildings 10,264,000 10,067,000
Furniture and equipment 87,000,000 69,221,000
Software 53,310,000 46,279,000
Leasehold improvements 12,200,000 9,408,000
- --------------------------------------------------------------------------------------------------------
163,602,000 135,803,000
Less accumulated depreciation and amortization 72,645,000 48,076,000
- --------------------------------------------------------------------------------------------------------
Net property and equipment 90,957,000 87,727,000
- --------------------------------------------------------------------------------------------------------
$ 944,469,000 $ 957,503,000
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 161,379,000 $ 197,167,000
Income taxes 1,216,000 1,275,000
Accrued salaries, wages and commissions 8,649,000 7,908,000
Other accrued liabilities 26,550,000 29,710,000
Long-term debt due within one year 3,104,000 3,101,000
- --------------------------------------------------------------------------------------------------------
Total current liabilities 200,898,000 239,161,000
LONG-TERM DEBT 313,240,000 336,234,000
DEFERRED INCOME TAXES 13,971,000 10,380,000
MINORITY INTEREST 1,107,000 1,732,000
COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF TRUST, HOLDING SOLELY 6 3/4% CONVERTIBLE SUBORDINATED
DEBENTURES OF THE COMPANY 143,750,000 125,000,000
SHAREHOLDERS' EQUITY:
Serial preferred shares, without par value: authorized 5,000,000;
issued and outstanding-none -- --
Common shares, without par value, $.30 stated value:
authorized 80,000,000 shares; 31,134,741 outstanding shares
(including 4,780,000 subscribed-for shares) in 1999 and
31,128,554 shares (including 4,780,000 subscribed shares) in 1998 9,258,000 9,256,000
Capital in excess of stated value 93,324,000 120,465,000
Retained earnings 202,056,000 174,411,000
Unearned compensation (31,369,000) (58,555,000)
Accumulated other comprehensive loss (1,766,000) (581,000)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 271,503,000 244,996,000
- --------------------------------------------------------------------------------------------------------
$ 944,469,000 $ 957,503,000
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 2
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended March 31, 1999, 1998 and 1997 1999 1998 1997
======================================================================================================
<S> <C> <C> <C>
Net sales $2,259,083,000 $1,685,265,000 $1,508,709,000
Operating costs and expenses:
Cost of goods sold 1,906,657,000 1,386,666,000 1,249,873,000
Warehouse, selling and administrative expenses 267,505,000 225,649,000 201,449,000
- ------------------------------------------------------------------------------------------------------
2,174,162,000 1,612,315,000 1,451,322,000
- ------------------------------------------------------------------------------------------------------
Operating profit 84,921,000 72,950,000 57,387,000
Interest expense 24,253,000 20,717,000 17,066,000
- ------------------------------------------------------------------------------------------------------
Income before income taxes 60,668,000 52,233,000 40,321,000
Income taxes:
Federal
Current 14,825,000 13,584,000 9,598,000
Deferred 5,655,000 5,124,000 4,269,000
- ------------------------------------------------------------------------------------------------------
20,480,000 18,708,000 13,867,000
State 3,538,000 2,916,000 3,200,000
- ------------------------------------------------------------------------------------------------------
24,018,000 21,624,000 17,067,000
Distributions on mandatorily redeemable convertible
trust preferred securities, net of tax 5,841,000 112,000 --
- ------------------------------------------------------------------------------------------------------
Net income $ 30,809,000 $ 30,497,000 $ 23,254,000
======================================================================================================
Earnings per common share:
Basic $1.17 $1.16 $1.02
Diluted $1.03 $1.14 $1.00
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended March 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Stated value Capital in other
Common of common excess of Retained Unearned comprehensive
shares shares stated value earnings compensation income (loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
MARCH 31, 1996 22,498,510 $6,667,000 $17,221,000 $126,506,000 $299,000 $150,693,000
Net income 23,254,000 23,254,000
------------
Unrealized translation
adjustments (342,000) (342,000)
Total comprehensive
income 22,912,000
Issuance of
common shares 3,450,000 1,035,000 41,331,000 42,366,000
Subscription of
common shares 5,000,000 1,500,000 62,250,000 $(63,750,000) --
Cash dividends
($.12 per share) (2,705,000) (2,705,000)
Shares issued upon
exercise of stock options 86,035 26,000 468,000 494,000
Tax benefit related to
exercise of stock options 219,000 219,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
MARCH 31, 1997 31,034,545 9,228,000 121,489,000 147,055,000 (63,750,000) (43,000) 213,979,000
Net income 30,497,000 30,497,000
Unrealized translation
adjustments (538,000) (538,000)
------------
Total comprehensive
income 29,959,000
Shares sold by trust 504,000 2,805,000 3,309,000
Value change in
subscribed-for shares (2,390,000) 2,390,000 --
Cash dividends
($.12 per share) (3,141,000) (3,141,000)
Shares issued upon
exercise of stock options 94,009 28,000 737,000 765,000
Tax benefit related to
exercise of stock options 125,000 125,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
MARCH 31, 1998 31,128,554 9,256,000 120,465,000 174,411,000 (58,555,000) (581,000) 244,996,000
Net income 30,809,000 30,809,000
Unrealized translation
adjustments (1,185,000) (1,185,000)
------------
Total comprehensive
income 29,624,000
Value change in subscribed-
for shares (27,186,000) 27,186,000 --
Cash dividends
($.12 per share) (3,164,000) (3,164,000)
Shares issued upon
exercise of stock options 6,187 2,000 36,000 38,000
Tax benefit related to
exercise of stock options 9,000 9,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
MARCH 31, 1999 31,134,741 $9,258,000 $93,324,000 $202,056,000 $(31,369,000) $(1,766,000) $271,503,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended March 31, 1999, 1998 and 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,809,000 $ 30,497,000 $ 23,254,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 14,379,000 11,193,000 9,914,000
Amortization 8,611,000 3,788,000 4,659,000
Gain on sale of property and equipment -- -- (221,000)
Increase in operating working capital (23,436,000) (115,151,000) (68,421,000)
Decrease in other assets and other liabilities (796,000) (7,068,000) (1,099,000)
Deferred taxes 5,655,000 5,124,000 4,269,000
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments 4,413,000 (102,114,000) (50,899,000)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 35,222,000 (71,617,000) (27,645,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (22,137,000) (44,283,000) (20,179,000)
Acquisition of businesses, net of cash acquired -- (123,253,000) --
Investments in affiliates (7,433,000) (6,531,000) --
Proceeds from sale of property and equipment -- -- 1,468,000
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,570,000) (174,067,000) (18,711,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term financing -- (20,500,000) (500,000)
Increase (decrease) in revolving credit borrowings (20,000,000) 146,859,000 (137,000,000)
Principal payments under long-term debt obligations (2,991,000) (2,883,000) (2,860,000)
Proceeds from issuance of senior notes -- -- 150,000,000
Proceeds from issuance of common shares -- -- 42,366,000
Proceeds from sale of trust securities -- 3,309,000 --
Proceeds from issuance of mandatorily redeemable
convertible trust preferred securities 18,750,000 125,000,000 --
Issuance of common shares under stock option plans 38,000 765,000 494,000
Tax benefit related to exercise of stock options 9,000 125,000 219,000
Dividends paid (3,164,000) (3,141,000) (2,705,000)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (7,358,000) 249,534,000 50,014,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,395,000) 33,000 18,000
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,101,000) 3,883,000 3,676,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,999,000 28,116,000 24,440,000
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,898,000 $ 31,999,000 $ 28,116,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Operations and Significant
Accounting Policies
The Company distributes a broad range of electronic components and
computer systems 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, Canada and affiliates in Europe and the Asia-Pacific region.
The Company maintains the following significant accounting policies:
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
Cash Equivalents - The Company considers highly liquid instruments with a
maturity of 90 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 $5,397,000 in 1999 and $5,661,000 in 1998.
Investments - The Company has investments in two affiliates that are
accounted for by the cost method. The Company has a minority equity interest
(6.1%) in World Peace Industrial Co., Ltd. ("WPI"), a pan-Asian distributor of
electronics headquartered in Taipei, and a minority equity interest (4.8%) in
Eurodis Electron PLC ("Eurodis"), a pan-European distributor of electronic
components. Eurodis is headquartered near London. Dividends are recognized in
income as received.
Long-Lived Assets - 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 the straight-line method based
on the estimated useful lives of the assets as follows: buildings, 40 years;
furniture, 10 years; equipment, 5 to 10 years; software, 5 to 7 years; and
leasehold improvements, the lease periods. Accelerated methods are used for tax
reporting purposes.
Intangible assets represent the excess of cost over fair value assigned
to net assets of purchased businesses, which is being amortized on the
straight-line method over 40 years. Accumulated amortization at March 31 was
$7,827,000 in 1999 and $3,684,000 in 1998. Impairment of long-lived assets and
related intangible assets is recognized when events or changes in circumstances
indicate that the carrying amount of the asset, or related groups of assets, may
not be recoverable. Measurement of the amount of impairment may be based on
appraisal, market values of similar assets or estimated discounted future cash
flows resulting from the use and ultimate disposition of the asset.
Revenue Recognition - Revenue is recognized when customers' orders are
complete and shipped.
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 as a separate component of shareholders' equity. Gains
or losses resulting from realized foreign currency transactions are included in
net income.
Advertising Promotion - All costs associated with advertising and
promoting products are expensed in the year incurred. Advertising and promotion
expense was $3,214,000 in 1999, $2,784,000 in 1998 and $2,176,000 in 1997.
Stock-Based Compensation - The Company accounts for stock-based employee
compensation in accordance with the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Earnings per Common Share - Basic earnings per share is computed by
dividing net income available to common shareholders by the weighted average
number of Common Shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities to issue Common
Shares were converted into Common Shares. Such Common Shares consist of shares
issuable upon exercise of stock options computed by using the treasury stock
method, and of shares issuable upon conversion of the Convertible Trust
Preferred Securities. Due to the application of the treasury stock method, the
4,780,000 shares subscribed for by the Trust (see Note 8) have no effect on
earnings per share. In addition, the subscribed-for shares are excluded when
determining shareholders' equity per share.
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.
Reclassification - Certain 1998 and 1997 amounts have been reclassified
to conform with the 1999 presentation.
27
<PAGE> 6
New Accounting Standards - In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in years beginning
after June 15, 2000. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
Management is currently analyzing what the effect of Statement No.133
will be on its earnings and financial position and has not yet determined the
timing of adoption.
Effective June 30, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however the adoption of this Statement had no impact
on the Company's net income or shareholders' equity.
NOTE 2 - Acquisition
On March 31, 1998, the Company acquired 100 percent of the outstanding
capital stock of Dickens Data Systems, Inc. for $121.0 million in cash. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities of Dickens Data Systems, Inc. were
included in the consolidated balance sheet at their estimated fair value as of
March 31, 1998. The excess of the purchase price over the fair value of the net
assets acquired approximated $119.1 million and is being amortized over 40
years.
The following unaudited pro forma information presents a summary of
consolidated results of operations for the Company and Dickens Data Systems,
Inc. for the fiscal year 1998 as if the acquisition had occurred at the
beginning of the fiscal year, 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:
1998
- ---------------------------------------------------------
Net sales $2,052,405,000
Net income 32,665,000
Net income per share
Basic $1.25
Diluted 1.22
- ---------------------------------------------------------
NOTE 3 - Long-Term Debt
Long-term debt at March 31, 1999, and 1998 consisted of the following:
1999 1998
- ---------------------------------------------------------
Revolving credit facility $160,000,000 $180,000,000
8.5% Senior Notes 150,000,000 150,000,000
9.79% Senior Notes 5,700,000 8,560,000
Other 644,000 775,000
- ---------------------------------------------------------
316,344,000 339,335,000
Less amounts due
within one year 3,104,000 3,101,000
- ---------------------------------------------------------
$313,240,000 $336,234,000
- ---------------------------------------------------------
The Company has a revolving credit facility with various banks providing
for up to an aggregate amount of $260 million of unsecured borrowings on a
revolving credit basis for an initial term until March 27, 2003. In addition, on
an annual basis, the facility may be extended for a one-year period with the
consent of all members of the bank group. Interest rates on borrowings are based
on various floating rate alternative pricing mechanisms. The weighted average
interest rate at March 31, 1999 was 6.08 percent. There is a fee ranging from
0.25 percent to 0.375 percent on the amount of the total facility, and there is
no prepayment penalty.
In August 1996, the Company completed a public offering of $150 million
principal amount of its 8.5 percent Senior Notes due August 2006. The indenture
under which the Notes were issued limits the creation of liens; sale and
leaseback transactions; consolidations, mergers and transfers of all or
substantially all of the Company's assets; and indebtedness of the Company's
restricted subsidiaries. The Notes are subject to mandatory repurchase by the
Company at the option of the holders in the event of a change in control of the
Company.
Principal payments of $2.86 million and $2.84 million are due November 1,
1999 and 2000, respectively, on the 9.79 percent Senior Notes. Interest is
payable semi-annually.
The terms of the credit facility and 9.79 percent 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, 1999, under the most restrictive covenants
are $56.5 million.
Aggregate maturities of long-term debt for the next five fiscal years
are: 2000-$3,104,000; 2001- $2,872,000; 2002-$23,000; 2003-$160,000,000 and
2004-$0.
28
<PAGE> 7
NOTE 4 - Lease Commitments
The Company is committed under lease agreements ranging up to seven
years, which contain renewal options for periods up to 10 years, for certain
facilities and equipment.
Future minimum lease payments for operating leases at March 31, 1999,
are: 2000-$8,924,000; 2001 -$6,352,000; 2002-$4,930,000; 2003-$4,047,000;
2004-$3,310,000; and thereafter $8,127,000.
Rental expense for operating leases was $9,200,000, $6,602,000 and
$6,416,000 for 1999, 1998 and 1997, respectively.
NOTE 5 - Income Taxes
The following is a reconciliation of the Company's effective income tax
rate to the federal statutory rate:
1999 1998 1997
- ---------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Provision for state taxes 3.8 3.6 5.2
Foreign losses with
(recognized) unrecog-
nized tax benefits (.3) 1.2 (.3)
Non-deductible and other 1.1 1.6 2.4
- ---------------------------------------------------------
Effective rate 39.6% 41.4% 42.3%
- ---------------------------------------------------------
Deferred tax assets and (liabilities) as of March 31, 1999, and 1998 are
presented below:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Capitalized inventory costs $ 2,697,000 $ 2,722,000
Accrued expenses 1,908,000 2,446,000
Allowance for doubtful
accounts 1,616,000 2,648,000
Inventory valuation reserve 1,233,000 1,552,000
Foreign loss carryforward 1,048,000 1,202,000
Other 595,000 745,000
- ------------------------------------------------------------
9,097,000 11,315,000
Less valuation allowance (1,048,000) (1,202,000)
- ------------------------------------------------------------
Total deferred tax assets 8,049,000 10,113,000
Deferred tax liabilities:
Depreciation expense (865,000) (1,289,000)
Software amortization (11,324,000) (8,789,000)
Goodwill (1,782,000) --
Other -- (302,000)
- ------------------------------------------------------------
Total deferred tax liabilities (13,971,000) (10,380,000)
- ------------------------------------------------------------
Net deferred tax assets
(liabilities) $ (5,922,000) $ (267,000)
- ------------------------------------------------------------
</TABLE>
NOTE 6 - Business Segment Information
Effective March 31, 1999, the Company adopted
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of Statement 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information.
The Company operations are classified into two reportable business
segments: Computer Systems and Industrial Electronics. The Company's two
reportable business segments are managed separately based on the product
differences.
Computer Systems products include mid-range computer systems and high-end
platforms, personal computers, display terminals and networking products.
Industrial Electronics products include semiconductors, and interconnect,
passive and electromechanical products.
The Company evaluates performance and allocates resources based on return
on capital and profitable growth. Specifically, the Company measures segment
profit or loss based on earnings before interest and income taxes (EBIT). The
accounting policies of the reportable segments are the same as those described
in Note 1. Corporate assets and capital expenditures include costs of certain
centralized functions not directly attributable to the individual segments.
Corporate expenses are allocated to each segment based on head- count, sales and
asset utilization.
29
<PAGE> 8
Business Segment Information (continued)
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
================================================================================================
<S> <C> <C> <C>
SALES
Computer Systems $1,125,383 $ 669,604 $ 469,170
Industrial Electronics 1,133,700 1,015,661 1,039,539
- ------------------------------------------------------------------------------------------------
Total Sales $2,259,083 $1,685,265 $1,508,709
OPERATING INCOME
Computer Systems $ 49,810 $ 36,158 $ 23,044
Industrial Electronics 35,111 36,792 34,343
- ------------------------------------------------------------------------------------------------
Total Operating Income $ 84,921 $ 72,950 $ 57,387
RECONCILIATION TO INCOME BEFORE INCOME TAXES
Interest Expense 24,253 20,717 17,066
- ------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 60,668 $ 52,233 $ 40,321
ASSETS
Computer Systems $ 522,959 $ 496,563 $ 109,261
Industrial Electronics 395,175 438,390 483,252
Corporate 26,335 22,550 --
- ------------------------------------------------------------------------------------------------
Total Assets $ 944,469 $ 957,503 $ 592,513
CAPITAL EXPENDITURES
Computer Systems $ 10,801 $ 6,277 $ 6,663
Industrial Electronics 7,551 15,456 13,516
Corporate 3,785 22,550 --
- ------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 22,137 $ 44,283 $ 20,179
DEPRECIATION AND AMORTIZATION EXPENSE
Computer Systems $ 11,530 $ 4,792 $ 4,812
Industrial Electronics 11,460 10,189 9,761
- ------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 22,990 $ 14,981 $ 14,573
GEOGRAPHIC AREAS
Net Sales
United States $2,107,099 $1,574,006 $1,401,149
Foreign 151,984 111,259 107,560
- ------------------------------------------------------------------------------------------------
Total $2,259,083 $1,685,265 $1,508,709
Long-Lived Assets
United States $ 97,931 $ 94,368 $ 53,910
Foreign 14,888 7,617 1,286
- ------------------------------------------------------------------------------------------------
Total $ 112,819 $ 101,985 $ 55,196
================================================================================================
</TABLE>
NOTE 7 - Mandatorily Redeemable Convertible Trust Preferred Securities
In March 1998 and April 1998, Pioneer-Standard Financial Trust (the
"trust") issued $143.7 million of 6 3/4 percent Mandatorily Redeemable
Convertible Trust Preferred Securities (the "trust preferred securities").
Pioneer-Standard Financial 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 percent Junior Convertible Subordinated
Debentures due March 31, 2028 of Pioneer-Standard Electronics, Inc.
(the "trust debenture").
The trust preferred securities are non-voting (except in limited
circumstances), pay quarterly distributions at an annual rate of 6 3/4 percent,
carry a liquidation value of $50 per share and are convertible into the
Company's Common Shares at any time prior to the close of business on March 31,
2028, at the option of the holder. The trust preferred securities are
convertible into Common Shares at the rate of 3.1746 per Common Share for each
trust preferred security (equivalent to a conversion price of $15.75 per
Common Share). The Company has executed a guarantee with regard to the trust
preferred securities. The guarantee, when taken together
30
<PAGE> 9
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.
After March 31, 2002, the trust preferred securities are redeemable, at
the option of the Company, for a redemption price of 104.05 percent of par
reduced annually by .675 percent to a minimum of $50 per trust preferred
security. The trust preferred securities are subject to mandatory redemption on
March 31, 2028, at a redemption price of $50 per trust preferred security.
The Company may cause the trust to delay payment of distributions on the
trust preferred securities for 20 consecutive quarters. During such deferral
periods, distributions, to which holders of the trust preferred securities are
entitled, will compound quarterly, and the Company may not declare or pay any
dividends on its Common Shares.
NOTE 8 - Shareholders' Equity
During fiscal 1998, the Company's shareholders approved an amendment to
the Company's Amended Articles of Incorporation authorizing 5,000,000 serial
preferred shares, without par value. The amendment empowers the Board of
Directors to authorize issuance of the preferred shares from time to time and to
determine all relevant terms thereof.
Holders of preferred shares will be entitled to one vote per preferred
share upon all matters presented to shareholders, and vote together with holders
of Common Shares as one class on all matters, except as otherwise provided by
the Company's Amended Articles of Incorporation. In addition, the Board of
Directors represented that such shares would not be used to thwart any attempted
acquisition of the Company. No preferred shares have been issued to date.
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,
whereby 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 the Trust are used to fund
Company obligations under various benefit plans. As of March 31, 1999, 220,000
shares have been released from the Trust. The following details the fair market
value of the 4,780,000 Common Shares subscribed for by the Trust, reflected in
shareholders' equity at March 31, 1999:
Common Shares at stated value
(4,780,000 @ $.30) $ 1,434,000
Capital in excess of stated value
(4,780,000 shares) 29,935,000
Unearned compensation (4,780,000
shares @ $6.5625 fair market value) (31,369,000)
- ------------------------------------------------------
Net effect on shareholders' equity $ --
=======================================================
On April 27, 1999, the Company's Board of Directors approved a new
Shareholder Rights Plan, which is effective upon expiration of the existing plan
on May 10, 1999. A dividend of one Right per Common Share was distributed to
shareholders of record as of May 10, 1999. Each Right, upon the occurrence of
certain events, entitles the holder to buy from the Company one-tenth of a
Common Share at a price of $4.00, or $40.00 per whole share, subject to
adjustment. The Rights may be exercised only if a person or group acquires 20
percent or more of the Company's Common Shares, or announces a tender offer for
at least 20 percent of the Company's Common Shares. The Rights trade with the
Company's 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. 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. Prior to the acquisition by a person or group of beneficial
ownership of 20 percent or more of the Company's Common Shares, the Rights are
redeemable for $.001 per Right at the option of the Board of Directors. The
Rights will expire May 10, 2009.
31
<PAGE> 10
NOTE 9 - Earnings per Share
The computation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
For the years ended March 31
1999 1998 1997
===================================================================================================================
<S> <C> <C> <C>
Basic
Net income applicable to common shareholders $30,809,000 $30,497,000 $23,254,000
Weighted average shares outstanding 26,350,690 26,204,520 22,731,951
Basic earnings per share $1.17 $1.16 $1.02
- -------------------------------------------------------------------------------------------------------------------
Diluted
Net income applicable to common shareholders $30,809,000 $30,497,000 $23,254,000
Add back:
Distributions on mandatorily redeemable convertible
trust preferred securities, net of tax 5,841,000 112,000 --
- -------------------------------------------------------------------------------------------------------------------
Net income applicable to common shareholders $36,650,000 $30,609,000 $23,254,000
- -------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 26,350,690 26,204,520 22,731,951
Effect of diluted securities:
Common share equivalents of outstanding stock options 243,485 570,863 503,919
Common shares issuable upon conversion of mandatorily
redeemable convertible trust preferred securities 9,117,199 173,950 --
- -------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 35,711,374 26,949,333 23,235,870
Diluted earnings per share $1.03 $1.14 $1.00
===================================================================================================================
</TABLE>
NOTE 10 - Stock Options
The Company has stock option plans which provide for the granting of
nonqualified or incentive options to key employees and directors to purchase its
Common Shares.
Options are granted at the fair market value of the Company's Common
Shares on the date of grant and expire 10 years from date of grant. The Company
makes no recognition of the options in the financial statements until they are
exercised.
Transactions involving the stock option plans are summarized as follows:
Number Average option
of shares price per share
- -----------------------------------------------------------
Outstanding at March 31, 1996 1,620,574 $ 9.12
Exercised (86,035) $ 5.74
Granted 7,500 $15.25
Forfeited (59,053) $11.68
---------
Outstanding at March 31, 1997 1,482,986 $ 9.24
Exercised (94,009) $ 8.13
Granted 266,800 $12.43
Forfeited (57,855) $13.74
---------
Outstanding at March 31, 1998 1,597,922 $ 9.68
Exercised (6,187) $ 6.11
Granted 1,244,500 $10.36
Forfeited (75,024) $12.89
---------
Outstanding at March 31, 1999 2,761,211 $ 9.91
=========
Exercisable at March 31, 1999 1,174,839 $ 9.32
Available for future grant at
March 31, 1999 732,052
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF MARCH 31, 1999
Options Outstanding
- -----------------------------------------------------------------
Weighted-
average
Outstanding remaining Weighted-
Range of as of contractual average
exercise prices 3/31/1999 life exercise price
- -----------------------------------------------------------------
$ 0.00 - $ 3.00 125,550 1.0 $ 2.96
$ 3.00 - $ 6.00 82,350 3.1 $ 4.52
$ 6.00 - $ 9.00 1,141,319 7.2 $ 7.67
$ 9.00 - $12.00 214,692 5.1 $11.33
$12.00 - $15.00 1,018,800 8.0 $12.44
$15.00 - $18.00 178,500 7.0 $15.38
- -----------------------------------------------------------------
2,761,211 7.0 $ 9.91
Options Exercisable
- ------------------------------------------------------------
Exercisable
Range of as of Weighted-average
exercise prices 3/31/1999 exercise price
- ------------------------------------------------------------
$ 0.00 - $ 3.00 125,550 $ 2.96
$ 3.00 - $ 6.00 82,350 $ 4.52
$ 6.00 - $ 9.00 344,992 $ 6.11
$ 9.00 - $12.00 169,917 $11.33
$12.00 - $15.00 294,613 $12.72
$15.00 - $18.00 157,417 $15.38
- ------------------------------------------------------------
1,174,839 $ 9.32
32
<PAGE> 11
The fair market value of each option granted during 1999, 1998 and 1997
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
1999 1998 1997
- --------------------------------------------------------------
Dividend yield 1.0% 1.0% 1.0%
Expected volatility 39.0% 33.1% 34.0%
Risk-free interest rate 5.25% 5.60% 6.39%
Expected life 8.2 years 7.3 years 8 years
The weighted average fair value of options granted during 1999, 1998, and
1997 was $5.00, $5.29 and $7.27, respectively.
If compensation expense had been recognized for the 1999, 1998 and 1997
grants for stock-based compensation plans in accordance with provisions of SFAS
123, the Company would have recorded net income and diluted earnings per share
of $28,457,000 and $ .96, respectively, in 1999; and $29,851,000 and $1.11
respectively, in 1998 and $22,603,000 and $.97 respectively, in 1997.
The impact of applying SFAS 123 in this pro forma disclosure is not
indicative of future amounts. Additional grants in future years are anticipated.
NOTE 11 - Financial Instruments and Estimated Fair Values
The Company has entered into several interest rate swap agreements for
purposes of serving as a hedge of the Company's variable rate credit agreement
borrowings. The effect of the swap agreements is to establish fixed rates on the
variable rate debt and to reduce exposure to interest rate fluctuations. At
March 31, 1999 the Company had interest rate swaps with a notional amount of $70
million. Pursuant to these agreements, Pioneer pays interest at a weighted
average fixed rate of 5.47%. The weighted average LIBOR rates applicable to
these agreements were 5.36% at March 31, 1999.
THE CARRYING AMOUNTS AND ESTIMATED FAIR VALUES OF THE COMPANY'S OTHER FINANCIAL
INSTRUMENTS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 28,898,000 $ 28,898,000 $ 31,999,000 $ 31,999,000
Long-term debt:
8.5% Senior Notes 150,000,000 151,500,000 150,000,000 162,000,000
9.79% Senior Notes 5,700,000 5,877,000 8,560,000 8,951,000
Revolving credit borrowings 160,000,000 160,000,000 180,000,000 180,000,000
Interest rate swaps -- 227,948 -- (106,000)
Foreign exchange contracts 1,200,000 1,200,000 2,500,000 2,500,000
Mandatorily redeemable convertible
trust preferred securities 143,750,000 100,625,000 125,000,000 126,250,000
</TABLE>
The fair value of the 9.79 percent Senior Notes is estimated using rates
currently available for securities with similar terms and remaining maturities.
The fair value of the interest rate swaps is the amount at which they could be
settled, based on market estimates. The fair value of the 8.5 percent Senior
Notes and the Mandatorily Redeemable Convertible Trust Preferred Securities
represents their respective market value.
NOTE 12 - Operating Working Capital Changes and Supplemental Cash Flows
THE COMPONENTS OF THE CHANGES IN OPERATING WORKING CAPITAL WERE:
<TABLE>
<CAPTION>
1999 1998 1997
====================================================================================================================
<S> <C> <C> <C>
Accounts receivable $(19,862,000) $(29,921,000) $(20,002,000)
Merchandise inventory 34,738,000 (78,450,000) (5,712,000)
Prepaid expenses 3,324,000 2,381,000 (3,712,000)
Accounts payable (35,788,000) (7,908,000) (40,675,000)
Income taxes (59,000) (442,000) 232,000
Accrued salaries, wages and commissions 741,000 (3,618,000) (1,520,000)
Other accrued liabilities (6,531,000) 2,807,000 2,968,000
- --------------------------------------------------------------------------------------------------------------------
Increase in operating working capital $(23,436,000) $(115,151,000) $(68,421,000)
====================================================================================================================
</TABLE>
33
<PAGE> 12
<TABLE>
<CAPTION>
SUPPLEMENTAL CASH FLOW INFORMATION:
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid or received during the year for:
Interest $23,675,000 $ 20,942,000 $15,260,000
Income taxes 16,472,000 18,001,000 16,471,000
- -------------------------------------------------------------------------------------------------------------
Non-cash assets and liabilities of business acquired:
Working capital $ 23,456,000 --
Intangible assets 116,758,000 --
Other assets 2,912,000 --
Debt assumed (18,141,000) --
Minority interest (1,732,000) --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13 - Employee Retirement Plans
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 $3,742,000, $3,541,000
and $3,034,000 for 1999, 1998 and 1997, respectively.
NOTE 14 - 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.
In connection with the Year 2000 issue, 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 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 losses, if any, it may incur as a result of any Year 2000
non- compliant products or services 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 lawsuits, the Company is
unable to estimate its potential litigation expenses resulting from any Year
2000 non-compliance of products or services sold by it.
NOTE 15 - Subsequent Event (Unaudited)
On May 13, 1999, ProGen Technologies, Inc., 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. At the time of this filing,
ProGen owed the Company approximately $9.3 million for the shipment of
microprocessors ($5.7 million at March 31, 1999). The Company intends to pursue
its rights in the bankruptcy proceedings, and, at this time, management
anticipates any effects resulting from this matter will not result in a material
adverse effect on the consolidated financial condition or results of operations
of the Company.
34
<PAGE> 13
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, 1999, and 1998 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended March 31, 1999. 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, 1999, and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 5, 1999
35
<PAGE> 14
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
Fiscal year First Second Third Fourth
ended March 31 quarter quarter quarter quarter Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Net sales $ 544,327,000 $ 559,501,000 $ 595,985,000 $ 559,270,000 $2,259,083,000
Gross profit 86,470,000 85,477,000 92,477,000 88,002,000 352,426,000
Net income 5,579,000 6,339,000 9,433,000 9,458,000 30,809,000
Net income per share:
Basic .21 .24 .36 .36 1.17
Diluted .20 .22 .30 .31 1.03
- ----------------------------------------------------------------------------------------------------------
1998
Net sales $ 396,264,000 $ 431,284,000 $ 424,148,000 $ 433,569,000 $1,685,265,000
Gross profit 68,711,000 74,490,000 75,742,000 79,656,000 298,599,000
Net income 7,305,000 7,459,000 8,439,000 7,294,000 30,497,000
Net income per share:
Basic .28 .29 .32 .28 1.16
Diluted .28 .28 .31 .27 1.14
- ----------------------------------------------------------------------------------------------------------
</TABLE>
DIVIDEND INFORMATION
AND PRICE RANGE OF COMMON SHARES
Fiscal year First Second Third Fourth
ended March 31 quarter quarter quarter quarter Year
- -----------------------------------------------------------------------
1999
High $ 13.19 $ 10.13 $ 11.38 $ 10.25 $ 13.19
Low 9.13 6.06 5.63 6.25 5.63
Close 9.63 6.31 9.38 6.56 6.56
Dividends paid .03 .03 .03 .03 .12
- -----------------------------------------------------------------------
1998
High $ 14.13 $ 17.75 $ 18.25 $ 16.88 $ 18.25
Low 11.38 13.25 14.00 11.38 11.38
Close 13.50 17.19 15.25 12.25 12.25
Dividends paid .03 .03 .03 .03 .12
- -----------------------------------------------------------------------
As of April 23,1999, there were 31,134,741 Common Shares (including
4,780,000 subscribed Common Shares-see Note 8) of Pioneer-Standard Electronics,
Inc. outstanding, and there were 2,957 shareholders of record.
The market price of Pioneer-Standard Electronics, Inc. Common Shares at
the close of business April 23, 1999, was $7.00.
See Note 3 for information regarding dividend restrictions.
36
<PAGE> 15
FINANCIAL REVIEW
FIVE-YEAR SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands except per share amounts)
For the years ended March 31 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Combined sales
(Pioneer-Standard Electronics, Inc. and
Pioneer-Standard of Maryland, Inc.) $ 2,259,083 $ 1,685,265 $ 1,508,709 $ 1,325,047 $ 1,200,252
Pioneer-Standard Electronics, Inc.
Net sales 2,259,083 1,685,265 1,508,709 1,105,281 832,152
Interest expense 24,253 20,717 17,066 8,136 3,966
Income before income taxes and
equity in earnings of
Pioneer-Standard of Maryland, Inc. 60,668 52,233 40,321 43,812 39,713
Equity in earnings (loss) of
Pioneer-Standard of Maryland, Inc. -- -- -- (173) 2,500
Income taxes 24,018 21,624 17,067 18,387 17,204
Net income 30,809 30,497 23,254 25,252 25,009
- ----------------------------------------------------------------------------------------------------------------------
Year-end position
Accounts receivable 323,461 303,599 209,086 189,296 133,987
Merchandise inventory 314,362 349,100 243,940 238,370 123,008
Working capital 476,371 461,449 298,535 224,840 131,438
Net property and equipment 90,957 87,727 52,594 48,679 30,929
Total assets 944,469 957,503 592,513 559,110 327,415
Long-term debt 313,240 336,234 173,587 164,447 56,318
Shareholders' equity 271,503 244,996 213,979 150,693 126,415
Weighted shares outstanding
Basic 26,350,690 26,204,520 22,731,951 22,436,003 22,355,630
Diluted 35,711,374 26,949,333 23,235,870 23,127,486 22,886,877
Average number of employees 2,568 2,199 2,042 1,647 1,213
- ----------------------------------------------------------------------------------------------------------------------
Per share data
Basic net income per share $ 1.17 $ 1.16 $ 1.02 $ 1.13 $ 1.12
Diluted net income per share 1.03 1.14 1.00 1.09 1.09
Cash dividends paid per share .12 .12 .12 .106 .075
Shareholders' equity per share 10.30 9.30 8.22 6.70 5.65
Price range of common shares
High 13.19 18.25 16.50 19.25 13.17
Low 5.63 11.38 10.25 10.75 9.17
- ----------------------------------------------------------------------------------------------------------------------
Measurement data
Gross margin percent of sales 15.6 17.7 17.2 18.3 18.6
Net income percent of sales 1.4 1.8 1.5 2.3 3.0
Net income percent of average
shareholders' equity 11.9 13.3 14.2 18.2 21.8
Sales per employee $ 879 $ 766 $ 739 $ 671 $ 686
Accounts receivable days
outstanding at year end 44 44 47 45 47
Turns on annual average inventory 5.5 4.4 5.2 5.4 6.5
Interest-bearing debt percent of equity
plus debt (including convertible
trust preferred securities as equity) 43 48 48 56 34
</TABLE>
The Company acquired the remaining 50 percent of the common stock of
Pioneer-Standard of Maryland, Inc. on November 30, 1995. The consolidated
statements include the operating results of Maryland from the date of
acquisition. Prior to the acquisition, the Company accounted for its investment
in Maryland under the equity method of accounting.
37
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF PIONEER-STANDARD ELECTRONICS, INC.
State or jurisdiction of
Subsidiaries of the Company Organization or Incorporation
- --------------------------- -----------------------------
Pioneer-Standard of Maryland, Inc. Maryland
Pioneer-Standard Canada Inc. Ontario
Pioneer-Standard FSC, Inc. Virgin Islands of the United States
Pioneer-Standard Illinois, Inc. Delaware
Pioneer-Standard Minnesota, Inc. Delaware
Pioneer-Standard Electronics, Ltd. Delaware
Dickens Data Systems, Inc. Georgia
The Dickens Services Group, a Pioneer- Delaware
Standard Company, LLC
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Pioneer-Standard Electronics, Inc. of our report dated May 5, 1999 included
in the 1999 Annual Report to Shareholders of Pioneer-Standard Electronics, Inc.
We also consent to the incorporation by reference in the Registration Statements
(Forms S-3 and Forms S-8) listed below and the related prospectuses of
Pioneer-Standard Electronics, Inc. of our reports dated May 5, 1999 with respect
to the consolidated financial statements and schedule of Pioneer-Standard
Electronics, Inc. incorporated by reference and included in this Annual Report
(Form 10-K) for the year ended March 31, 1999:
- Registration of 1,000,000 Common Shares (Form S-3 No.
333-74225)
- Registration of 2,875,000 Trust Preferred Securities (Form S-3
No. 333-57359)
- 1995 Stock Option Plan for Outside Directors of
Pioneer-Standard Electronics, Inc. (Form S-8 No. 333-07143)
- 1991 Incentive Stock Option Plan of Pioneer-Standard
Electronics, Inc. (Forms S-8 No. 33-46008 and 33-53329)
- 1982 Incentive Stock Option Plan of Pioneer-Standard
Electronics, Inc. (Form S-8 No. 33-18790)
/s/ Ernst & Young LLP
Cleveland, Ohio
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION OF THE CONSOLIDATED BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 28,898
<SECURITIES> 0
<RECEIVABLES> 329,496
<ALLOWANCES> 6,035
<INVENTORY> 314,362
<CURRENT-ASSETS> 677,245
<PP&E> 163,602
<DEPRECIATION> 72,645
<TOTAL-ASSETS> 944,469
<CURRENT-LIABILITIES> 200,898
<BONDS> 456,990
0
0
<COMMON> 9,258
<OTHER-SE> 262,245
<TOTAL-LIABILITY-AND-EQUITY> 944,469
<SALES> 2,259,083
<TOTAL-REVENUES> 2,259,083
<CGS> 1,906,657
<TOTAL-COSTS> 1,906,657
<OTHER-EXPENSES> 267,505
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,253
<INCOME-PRETAX> 60,668
<INCOME-TAX> 24,018
<INCOME-CONTINUING> 30,809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,809
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.03
</TABLE>
