-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QF18BrG3w8AmKWpwOJXqkYM7sSXTa64U7n0tkrci6YB/LPxkbBCaK9FLeYpaKhjs ckQhke0aBymfYy6rpKTROA== 0000950152-99-005651.txt : 19990630 0000950152-99-005651.hdr.sgml : 19990630 ACCESSION NUMBER: 0000950152-99-005651 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER STANDARD ELECTRONICS INC CENTRAL INDEX KEY: 0000078749 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 340907152 STATE OF INCORPORATION: OH FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05734 FILM NUMBER: 99654595 BUSINESS ADDRESS: STREET 1: 4800 E 131ST ST CITY: CLEVELAND STATE: OH ZIP: 44105 BUSINESS PHONE: 2165873600 MAIL ADDRESS: STREET 1: 4800 E 131ST ST CITY: CLEVELAND STATE: OH ZIP: 44105 10-K 1 PIONEER-STANDARD ELECTRONICS, INC. 10-K 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. 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 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 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 5
TYPE OF APPROXIMATE LEASED OR SEGMENT LOCATION FACILITY SQUARE FOOTAGE OWNED USING FACILITY - -------- -------- -------------- ----- -------------- 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
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 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:
NAME AGE POSITION ---- --- -------- 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).
- -------------------------- (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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
23 24
SIGNATURE TITLE DATE --------- ----- ---- /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
24 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 26 PIONEER-STANDARD ELECTRONICS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1999, 1998 AND 1997
DEDUCTIONS BALANCE AT CHARGED TO (NET WRITE- BEGINNING OF COST AND OFFS) BALANCE AT THE PERIOD EXPENSES NET RECOVERIES END OF PERIOD 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
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 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 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 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 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 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 EX-10.K 2 EXHIBIT 10(K) 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 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 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 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 EX-13 3 EXHIBIT 13 1 Exhibit 13 CONSOLIDATED BALANCE SHEETS
March 31, 1999, and 1998 1999 1998 ======================================================================================================== 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 ========================================================================================================
See accompanying notes to consolidated financial statements. 23 2 CONSOLIDATED STATEMENTS OF INCOME
Years ended March 31, 1999, 1998 and 1997 1999 1998 1997 ====================================================================================================== 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 ======================================================================================================
See accompanying notes to consolidated financial statements. 24 3 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 25 4 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 1999, 1998 and 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 26 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 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 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:
1999 1998 - ------------------------------------------------------------ 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) - ------------------------------------------------------------
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 8 Business Segment Information (continued)
(in thousands) 1999 1998 1997 ================================================================================================ 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 ================================================================================================
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 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 10 NOTE 9 - Earnings per Share The computation of basic and diluted earnings per share is as follows:
For the years ended March 31 1999 1998 1997 =================================================================================================================== 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 ===================================================================================================================
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 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:
1999 1998 - -------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair amount value amount value - -------------------------------------------------------------------------------------------------------------------- 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
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:
1999 1998 1997 ==================================================================================================================== 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) ====================================================================================================================
33 12
SUPPLEMENTAL CASH FLOW INFORMATION: - ------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- 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) -- - -------------------------------------------------------------------------------------------------------------
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 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 14 QUARTERLY FINANCIAL DATA
(Unaudited) - ---------------------------------------------------------------------------------------------------------- Fiscal year First Second Third Fourth ended March 31 quarter quarter quarter quarter Year - ---------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------
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 15 FINANCIAL REVIEW FIVE-YEAR SUMMARY OF OPERATIONS
(Dollars in thousands except per share amounts) For the years ended March 31 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- 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
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 EX-21 4 EXHIBIT 21 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 EX-23 5 EXHIBIT 23 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 EX-27 6 EXHIBIT 27
5 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. YEAR MAR-31-1999 MAR-31-1999 28,898 0 329,496 6,035 314,362 677,245 163,602 72,645 944,469 200,898 456,990 0 0 9,258 262,245 944,469 2,259,083 2,259,083 1,906,657 1,906,657 267,505 0 24,253 60,668 24,018 30,809 0 0 0 30,809 1.17 1.03
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