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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________.
Commission file number 0-5734
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Pioneer-Standard Electronics, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-0907152
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4800 East 131st Street, Cleveland, OH 44105
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 587-3600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Shares, as of the latest practical date: COMMON SHARES, WITHOUT PAR
VALUE, AS OF AUGUST 2, 1999: 27,086,354. (Excludes 4,056,202 Common Shares
subscribed by the Pioneer Stock Benefit Trust.)
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, 1999
(Unaudited) March 31, 1999
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ASSETS
Current assets
Cash $ 20,408 $ 28,898
Accounts receivable - net 338,106 323,461
Merchandise inventory 334,478 314,362
Prepaid expenses 1,449 2,475
Deferred income taxes 9,929 8,049
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Total current assets 704,370 677,245
Intangible assets 153,472 154,405
Investments 34,132 13,964
Other assets 8,106 7,898
Property and equipment, at cost 167,257 163,602
Accumulated depreciation 77,771 72,645
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Net 89,486 90,957
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$ 989,566 $ 944,469
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 185,694 $ 161,379
Accrued liabilities 38,396 36,415
Long-term debt due within one year 3,070 3,104
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Total current liabilities 227,160 200,898
Long-term debt 316,163 313,240
Other long-term liabilities 19,219 15,078
Mandatorily redeemable convertible trust preferred securities 143,750 143,750
Shareholders' equity
Common stock, at stated value 9,258 9,258
Capital in excess of stated value 119,315 93,324
Retained earnings 208,973 202,056
Unearned compensation (57,360) (31,369)
Accumulated other comprehensive income (loss) 3,088 (1,766)
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283,274 271,503
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$ 989,566 $ 944,469
========= =========
See accompanying notes to consolidated financial statements.
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PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
Quarter Ended
June 30,
1999 1998
---- ----
Net sales $ 575,973 $ 544,327
Cost and expenses:
Cost of goods sold 486,699 457,857
Warehouse, selling and
administrative expense 66,954 68,414
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Operating profit 22,320 18,056
Interest expense 6,096 6,754
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Income before income taxes 16,224 11,302
Provision for income taxes 7,056 4,268
Distributions on mandatorily redeemable
convertible trust preferred securities,
net of tax 1,459 1,455
----------- -----------
Net income $ 7,709 $ 5,579
=========== ===========
Weighted average shares outstanding
Basic 26,354,741 26,348,554
Diluted 35,818,273 35,792,921
Earnings per share:
Basic $ .29 $ .21
Diluted $ .26 $ .20
Dividends per share $ .03 $ .03
See accompanying notes to consolidated financial statements.
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PIONEER-STANDARD ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three months ended
June 30,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 7,709 $ 5,579
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 3,691 3,707
Amortization 2,432 2,283
Increase in operating working capital (3,978) (18,856)
Increase in other assets (3,052) (4,412)
Deferred taxes (398) 1,606
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Total adjustments (1,305) (15,672)
Net cash provided by (used in) operating
activities 6,404 (10,093)
Cash flows from investing activities:
Additions to property and equipment (3,655) (4,769)
Investment in affiliates (13,029) (7,433)
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Net cash used in operating (16,684) (12,202)
Cash flows from financing activities:
Increase in revolving credit borrowings 3,000 5,000
Decrease in other long-term
debt obligations (111) (51)
Proceeds from issuance of mandatorily redeemable
convertible trust preferred securities -- 18,750
Dividends paid (791) (790)
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Net cash provided by financing activities 2,098 22,909
Effect of exchange rate changes on cash (308) (127)
Net (decrease) increase in cash (8,490) 487
Cash at beginning of period 28,898 31,999
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Cash at end of period $ 20,408 $ 32,486
======== ========
See accompanying notes to consolidated financial statements
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Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the full fiscal
year. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended March 31, 1999.
2. COMPREHENSIVE INCOME
The components of comprehensive income for the three months ended June 30, 1999
and 1998 are as follows (in thousands):
1999 1998
Net income $ 7,709 $ 5,579
Unrealized gain on investments, net of tax 4,295 --
Foreign currency translation adjustment 559 (809)
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Comprehensive income $12,563 $ 4,770
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3. NET INCOME PER SHARE DATA
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
during each period. Diluted computations include dilutive common share
equivalents of outstanding stock options and assumed conversion of
company-obligated mandatorily redeemable convertible trust preferred securities
and the elimination of related distributions, net of income taxes.
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The computation of basic and diluted earnings per common share for the quarters
ended June 30, 1999 and June 30, 1998 is shown below:
Quarter ended
June 30,
1999 1998
---- ----
Basic
Net income applicable to common shareholders $ 7,709,000 $ 5,579,000
Weighted average shares outstanding 26,354,741 26,348,554
Basic earnings per share $ .29 $ .21
Diluted
Net income applicable to common shareholders $ 7,709,000 $ 5,579,000
Add back:
Distributions on mandatorily redeemable
convertible trust preferred securities, net of tax 1,459,000 1,455,000
----------- -----------
Net income applicable to common shareholders
after assumed conversion $ 9,168,000 $ 7,034,000
=========== ===========
Weighted average shares outstanding 26,354,741 26,348,554
Effect of diluted securities:
Common share equivalents of outstanding stock options 336,548 375,931
Common shares issuable upon conversion of mandatorily
redeemable convertible trust preferred securities 9,126,984 9,068,436
----------- -----------
Diluted weighted average shares outstanding 35,818,273 35,792,921
=========== ===========
Diluted earnings per share $ .26 $ .20
4. BUSINESS SEGMENT INFORMATION
The Company's operations are classified into two reporting segments: Computer
Systems and Industrial Electronics. The Company's two reportable business
segments are managed separately based on the product and market 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.
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The Company measures segment profit or loss based on earnings before interest
and income taxes (EBIT). Corporate expenses are allocated to each segment based
on headcount, sales and asset utilization.
Quarter ended
June 30,
Business Segment Information
(in thousands) 1999 1998
SALES
Computer Systems $278,113 $274,240
Industrial Electronics 297,860 270,087
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Total Sales $575,973 $544,327
OPERATING INCOME
Computer Systems $ 9,807 $ 10,668
Industrial Electronics 12,513 7,388
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Total Operating Income $ 22,320 $ 18,056
RECONCILIATION TO INCOME BEFORE INCOME TAXES
Interest Expense 6,096 6,754
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Income Before Income Taxes $ 16,224 $ 11,302
5. 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 the
Year 2000 non-compliance. However, the Company is not currently aware of any
threatened litigation. Based on currently available information, the Company is
unable to quantify 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 potential 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.
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6. OTHER 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 June 18, 1999, to convert its Chapter 11 proceeding to a Chapter 7
proceeding. At the time of this filing, ProGen owed the Company approximately
$9.3 million. 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.
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PIONEER-STANDARD ELECTRONICS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH
THE THREE MONTHS ENDED JUNE 30, 1998
Net sales for the three-month period ended June 30, 1999 of $576.0 million
increased 6% over the prior year three-month period of $544.3 million. The
increase in sales was primarily due to higher sales of industrial electronics
which were up 10% over the prior year. Computer systems sales increased 1% over
the prior year three-month period. Industrial electronics comprised 52% of sales
and computer systems were 48% of sales in the first quarter of the current year
compared with 50% and 50%, respectively, a year ago.
Cost of goods sold also increased 6% compared with the prior year quarter,
resulting in a gross margin of 15.5% in the current quarter compared with 15.9%
a year ago.
Warehouse, selling and administrative expenses were $67.0 million compared with
$68.4 million incurred during the prior year three-month period. This resulted
in a ratio of these expenses to sales of 11.6% for the current quarter compared
with 12.6% a year ago. The reduced ratio of operating expenses to sales in the
current year reflects a combination of the effects of ongoing cost containment
programs as well as leveraging costs on higher sales volume.
The operating profit resulting from the activity described above of $22.3
million, or 3.9% of sales in the current period, was up 24% compared with $18.1
million, or 3.3% of sales a year ago. Operating profit of the computer systems
segment was 3.5% of sales for the current quarter compared with 3.9% of a year
ago. Operating profit of the industrial electronics segment was 4.2% of sales
compared with 2.7% a year ago.
Interest expense was $6.1 million in the current quarter compared with $6.8
million a year ago. The decreased interest expense is primarily attributable to
the reduction in debt required to fund the reduced average working capital and
capital expenditure requirements compared with a year ago.
The effective tax rate for the current year three-month period was 43.5%
compared with 37.8% for the same period a year ago. The tax rate increase was
primarily due to the unrecognized tax benefit of operating losses of the
Canadian subsidiary.
Primarily as a result of the factors above, the Company's net income for the
three-month period ending June 30, 1999 increased 38% to $7.7 million from $5.6
million earned in the prior year.
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FINANCIAL CONDITION
Current assets increased by $27.1 million and current liabilities increased by
$26.3 million during the three-month period ended June 30, 1999, resulting in an
increase of $.8 million in working capital. The current ratio was 3.1:1 at June
30, 1999 and 3.4:1 at year-end March 31, 1999.
During the first three months of the current year, total interest-bearing debt
increased by $2.9 million reflective of the nominal change in working capital
noted above. The ratio of interest-bearing debt to capitalization was 43% at
June 30, 1999 compared with 43% at March 31, 1999.
The Company's investments in affiliates increased $20.1 million during the first
quarter primarily due to cash investments and unrealized gains in the market
value of these investments.
Management estimates that capital expenditures for the fiscal year 2000 will
approximate $35.0 million. Capital expenditures in the first three months of the
current year were $3.7 million. Under present business conditions, it is
anticipated that funds from current operations and available credit facilities
will be sufficient to finance both capital spending and working capital needs
for the balance of the current fiscal year.
The Company capitalized approximately $34.2 million 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.
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 this filing, ProGen owed the Company
approximately $9.3 million for the shipment of microprocessors. 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.
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
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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
September 30, 1999. The Company continues to analyze the readiness of non-IT
systems and anticipates that remediation and testing of any non-compliant
systems will be completed by September 1, 1999. The 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 September
1, 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 compliance efforts
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 $2.4 million. It is anticipated that
an additional $ 0.8 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
product sold or services performed by the Company due to Year 2000
non-compliance; however the Company is not currently aware of any threatened
litigation. Based on currently available information, the Company is unable to
quantify 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
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effect on the Company's business, results of operations or 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.
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 of through third-party relationships, could have a material
adverse effect on the Company's operating results or financial condition.
Portions of this report contain current management expectations which may
constitute forward-looking information. The Company's performance may differ
materially from that contemplated by such statements for a variety of reasons,
including, but not limited to: competition, dependence on the computer market,
inventory obsolescence and technology changes, dependence on key suppliers,
effects of industry consolidation, risks and uncertainties involving
acquisitions, instability in world financial markets, downward pressure on gross
margins, uneven patterns of inter-quarter and intra-quarter sales, and
management of growth of the business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
In the normal course of business, operations of the Company are
exposed to continuing fluctuations in foreign currency values
and interest rates that can affect the cost of operating and
financing. Accordingly, the Company addresses a portion of these
risks through a program of risk management that includes the use
of derivative financial instruments. The Company's objective is
to reduce earnings volatility associated with these
fluctuations. The Company does not enter into any derivative
transactions for speculative purposes.
The Company's primary interest rate risk exposure results from
the revolving credit facility's various floating rate pricing
mechanisms. This interest rate exposure is managed by interest
rate swaps to fix the interest rate on a portion of the debt and
the use of multiple maturity dates. If interest rates were to
increase 200 basis points (2%) from June 30, 1999 rates, and
assuming no changes in debt from June 30, 1999 levels, the
additional annual expense would be approximately $1.9 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 June 30, 1999, one forward
exchange contract existed with a maturity of thirty-one days.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 27, 1999, the Company issued 611,567 Common shares to
James L. Bayman, Chairman and Chief Executive Officer, and
112,231 Common Shares to John V. Goodger, Vice President,
Treasurer and Assistant Secretary, pursuant to the
Pioneer-Standard Electronics, Inc. 1999 Restricted Stock Plan.
The issuance of such Common Shares was exempt from registration
under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Section 4(2) of the Securities Act. The Plan
provides that such Common Shares may not be transferred and will
remain forfeitable to the Company by Mr. Bayman and Mr. Goodger
until they have completed certain required periods of service
with the Company or upon the earlier occurrence of certain
events as set forth in the Plan.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number Description
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10.1 Amended and Restated Employment Agreement, dated
April 27, 1999, between Pioneer-Standard Electronics,
Inc. and James L. Bayman
10.2 Amended and Restated Employment Agreement, dated
April 27, 1999, between Pioneer-Standard Electronics,
Inc. and Arthur Rhein
10.3 Employment Agreement, dated April 27, 1999, between
Pioneer-Standard Electronics, Inc. and Gregory T.
Geswein
10.4 Amended and Restated Employment Agreement, dated
April 27, 1999, between Pioneer-Standard Electronics,
Inc. and John V. Goodger
10.5 Pioneer-Standard Electronics, Inc. 1999 Stock Option
Plan for Outside Directors
10.6 Pioneer-Standard Electronics, Inc. 1999 Restricted
Stock Plan
10.7 Form of Option Agreement between Pioneer Standard
Electronics, Inc. and optionees under the
Pioneer-Standard Electronics, Inc. 1999 Stock Option
Plan for Outside Directors
27 Financial Data Schedule
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIONEER-STANDARD ELECTRONICS, INC.
Date: August 13, 1999 /s/ Gregory T. Geswein
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Gregory T. Geswein
Senior Vice President & CFO
Date: August 13, 1999 /s/ John V. Goodger
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John V. Goodger
Vice President & Treasurer
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