1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) X OF THE SECURITIES EXCHANGE ACT OF 1934 - For the quarterly period ended June 30, 1996. -------------- OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________. Commission file number 0-5734 ------ Pioneer-Standard Electronics, Inc. ---------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0907152 - - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4800 East 131st Street, Cleveland, OH 44105 - - ------------------------------------- ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (216) 587-3600 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of Common Shares, as of the latest practical date: COMMON SHARES, WITHOUT PAR VALUE, AS OF AUGUST 1, 1996: 22,534,167.
2 PART I - FINANCIAL INFORMATION PIONEER-STANDARD ELECTRONICS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> June 30, 1996 (Unaudited) March 31, 1996 ----------- -------------- ASSETS Current assets <S> <C> <C> Cash $ 31,713 $ 24,440 Accounts receivable - net 204,973 189,296 Merchandise inventory 263,914 238,370 Prepaid expenses 1,802 2,922 Deferred income taxes 11,454 11,454 -------- -------- Total current assets 513,856 466,482 Intangible assets 42,148 42,446 Other assets 1,488 1,503 Property and equipment, at cost 86,572 84,024 Accumulated depreciation 38,611 35,345 -------- -------- Net 47,961 48,679 -------- -------- $605,453 $559,110 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable to banks $ 29,500 $ 21,000 Accounts payable 163,576 184,946 Accrued liabilities 38,212 32,825 Long-term debt due within one year 2,888 2,871 -------- -------- Total current liabilities 234,176 241,642 Long-term debt 212,481 164,447 Deferred income taxes 2,328 2,328 Shareholders' equity Common stock, at stated value 6,675 6,667 Capital in excess of stated value 17,517 17,221 Retained earnings 131,982 126,506 Foreign currency translation adjustment 294 299 -------- -------- Net 156,468 150,693 -------- -------- $605,453 $559,110 ======== ======== </TABLE> See accompanying notes. 2
3 PIONEER-STANDARD ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in Thousands Except Per Share Amounts) <TABLE> <CAPTION> Quarter ended June 30, 1996 1995 ---- ---- <S> <C> <C> Net sales $375,156 $224,724 Cost and expenses: Cost of goods sold 308,990 181,114 Warehouse, selling and administrative expense 51,348 31,148 ----------- ----------- Operating profit 14,818 12,462 Interest expense 3,904 1,449 Equity in earnings of 50%-owned company -- 451 ----------- ----------- Income before income taxes 10,914 11,464 Provision for income taxes 4,763 4,648 ----------- ----------- Net income $6,151 $6,816 =========== =========== Average shares outstanding 23,138,433 23,085,351 Shares outstanding at end of period 22,534,167 22,427,731 Earnings per share - primary and fully diluted $.27 $.29 Dividends per share $.03 $.023 </TABLE> See accompanying notes. 3
4 PIONEER-STANDARD ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands) <TABLE> <CAPTION> Three months ended, June 30, 1996 1995 ---- ---- Cash flows from operating activities: <S> <C> <C> Net income $6,151 $6,816 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 3,554 2,173 Undistributed earnings of affiliate -- (451) Increase in operating working capital (56,132) (12,491) Increase in other assets 15 1 Deferred taxes -- 36 -------- -------- Total adjustments (52,563) (10,732) -------- -------- Net cash used in operating activities (46,412) (3,916) Cash flows from investing activities: Additions to property and equipment (2,554) (6,018) -------- -------- Net cash used in investing activities (2,554) (6,018) Cash flows from financing activities: Increase (decrease) in short-term financing 8,500 (4,000) Increase in revolving credit borrowings 48,000 21,000 Increase (decrease) in other long-term debt obligations 51 (64) Issuance of common shares under company stock option plan 304 400 Dividends paid (675) (522) -------- -------- Net cash provided by financing activities 56,180 16,814 Effect of exchange rate changes on cash 59 (24) -------- -------- Net increase in cash 7,273 6,856 Cash at beginning of period 24,440 9,598 -------- -------- Cash at end of period $31,713 $16,454 ======== ======== </TABLE> See accompanying notes. 4
5 NOTES - Pioneer-Standard Electronics, Inc. 1. PER SHARE DATA Net income per common share is computed using the weighted average common shares and common share equivalents outstanding during the quarters ended June 30, 1996 and 1995. Common share equivalents consist of shares issuable upon exercise of stock options computed by using the treasury stock method. 2. STOCK SPLIT On July 25, 1995, the Board of Directors declared a three-for-two stock split effected in the form of a 50% share dividend of the Company's common shares payable September 6, 1995 to shareholders of record August 16, 1995. The share and per share data have been restated for the periods presented to reflect the stock split. 3. MANAGEMENT OPINION The information furnished herein reflects all normal and recurring adjustments which are, in the opinion of management, necessary to provide a fair statement of the results of operations for the quarters ended June 30, 1996 and 1995. The results of operations for the three month period are not necessarily indicative of results which may be expected for a full year. 5
6 PIONEER-STANDARD ELECTRONICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION Current assets increased by $47.4 million and current liabilities decreased by $7.5 million during the three-month period ended June 30, 1996, resulting in an increase of $54.8 million of working capital. The increase in working capital is attributable to the increased level of business activity. The current ratio was 2.2:1 at June 30, 1996 compared with 1.9:1 at year-end, March 31, 1996. During the first three months of the current year, total interest-bearing debt increased by $56.5 million. The increase in debt is attributable to funding the working capital and capital expenditure needs arising from an increased level of business activity. The ratio of interest-bearing debt to capitalization was 61% at June 30, 1996 compared with 56% at March 31, 1996. A Form S-3 Registration Statement for $200 million of debt and/or equity related securities filed with the Securities and Exchange Commission became effective July 11, 1996. On August 12, 1996, the Company completed a public offering of $150 million principal amount of 8.50% Senior Notes due 2006. The indenture under which the notes were issued limits (i) the creation of liens, (ii) sale and leaseback transactions, (iii) consolidations, mergers and transfers of all or substantially all of the Company's assets, and (iv) indebtedness of the Company's restricted subsidiaries. These limitations are subject to a number of important qualifications and exceptions. In addition, the Notes are subject to mandatory purchase by the Company at the option of the holders in the event of a change of control of the Company. The indebtedness evidenced by the Notes rank pari passu in right of payment with all other unsubordinated indebtedness of the Company. Net proceeds from the sale of the Notes were applied to the repayment of a portion of the borrowings under the Company's revolving credit facility. The remainder of the revolving credit facility was repaid with the proceeds of borrowings under a new revolving credit facility with four banks effective August 12, 1996. The new revolving credit facility of $125 million has an initial term of three years and replaces the former $200 million facility which was due to expire in 1998. In addition, on an annual basis, the new facility may be extended for a three-year period upon the Company's request, with the consent of all members of the bank group. All or any portion of the outstanding loans may be prepaid at any one time and the commitments may be terminated, in whole or in part, at the Company's option with no prepayment penalty. Interest rates on borrowings are based on various floating rate alternative pricing mechanisms. There is a commitment fee on the unborrowed amount. The terms of the credit facility provide for, among other things, restrictions regarding minimum working capital requirements, limitations on other borrowings and capital expenditures and the maintenance of certain financial ratios. At the close of business on August 12, 1996, borrowings under the new facility totaled $53 million. 6
7 The Company also has unsecured short-term lines of credit aggregating $40 million available for use. These lines, which may be withdrawn at the option of the lenders, permit the Company to borrow at varying interest rates. There were no borrowings under these lines as of August 12, 1996. Effective July 2, 1996, the Company entered into a Share Subscription Agreement and Trust with Wachovia Bank of North Carolina, N.A., as Trustee, pursuant to which the Trustee subscribed for 5,000,000 Common Shares of the Company which will be paid for over the 15 year term of the Trust. The proceeds from the sale of the Common Shares will be used to fund Company obligations under various employee benefit plans, to pay cash bonuses and other similar employee related Company obligations. Under Ohio law, the subscribed for Common Shares are deemed to be issued and outstanding for voting and dividend purposes, but will not be fully paid and nonassessable until payment for such Common Shares is received as provided in the Trust. According to generally accepted accounting principles, none of the 5,000,000 Common Shares will be deemed outstanding for purposes of calculating earnings per share until payment is received for the Common Shares as provided in the Trust. Management estimates that capital expenditures for the current year will approximate $23 million ($2.6 million was expended in the first three months of the current year). Under present business conditions, it is anticipated that funds from current operations and available financial facilities will be sufficient to finance both capital spending and working capital needs for the balance of the current fiscal year. RESULTS OF OPERATIONS Three Months ended June 30, 1996 Compared with the Three Months ended June 30, 1995 Net sales for the three-month period ended June 30, 1996 of $375.2 million increased 67% over sales of the prior year three-month period of $224.7 million. The current quarter sales include the sales of Pioneer-Standard of Maryland, Inc., the Company's former affiliate which Pioneer acquired in November, 1995. The Company's net sales, excluding the newly acquired affiliate were $268.5 million, up 19% over the comparable period a year ago. The increase in net sales reflect strong demand especially for computer systems products. Semiconductor products accounted for 41% of the Company's sales in the current quarter, compared with 34% a year ago. Computer systems products were 38% of sales in 1996 versus 40% last year. Passive and electromechanical products were 18% of the Company's business in 1996 compared with 24% a year earlier. Miscellaneous products accounted for 3% and 2% of sales in 1996 and 1995, respectively. Cost of goods sold increased 71% compared with the prior year quarter, resulting in a gross margin of 17.6% in the current quarter compared with 19.4% a year ago. A shift in product mix was the principal factor impacting current year margins. Warehouse, selling and administrative expenses of $51.3 million increased by 65% over the $31.1 million incurred during the prior year three-month period. This resulted in a ratio of these expenses to sales of 13.7% for the current quarter compared with 13.9% a year ago. 7
8 The operating profit resulting from the activity described above of $14.8 million, or 4.0% of sales in the current period was up 19% compared with $12.5 million, or 5.5% of sales a year ago. Interest expense was $3.9 million in the current quarter compared with $1.4 million a year ago. The higher interest expense is due to increased debt resulting from the purchase of the Company's former affiliate and to fund working capital needs to support the growth of the business. The consolidated statement of income for the current three month period includes the operating results of the Pioneer Maryland. For the prior year three month period ended June 30, 1995, results only included the Company's 50% equity interest in Pioneer Maryland's earnings of $.5 million. The effective tax rate for the current year three-month period was 43.6% compared with 40.5% for the same period a year ago. The increase in the current year rate is primarily attributable to the equity in earnings of the Company's affiliate included in the prior year's pre-tax income. Primarily as a result of the factors above, the Company's net income for the three-month period ending June 30, 1996 of $6.2 million was $.6 million less than the $6.8 million earned a year earlier. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Number Description ------ ----------- 11 Calculation of Primary Earnings Per Share 27 Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities and 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 14, 1996 /s/ James L. Bayman -------------------------- ----------------------------- Chairman, President and CEO Date: August 14, 1996 /s/ John V. Goodger -------------------------- ----------------------------- Vice President & Treasurer 8
9 Pioneer-Standard Electronics, Inc. Exhibit Index <TABLE> <CAPTION> Sequential Exhibit No. Description Page No. - - ----------- ----------- -------- <S> <C> <C> 4.(a) Credit Agreement, dated as of August 12, 1996 by and among Pioneer-Standard Electronics, Inc., the Banks identified on the signature pages thereto and National City Bank, as Agent. (b) Rights Agreement dated as of April 25, 1989 by and between the Company and AmeriTrust Company National Association, which is incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended March 31, 1989. N/A (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 from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1990. N/A (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 from the Company's Annual Report on Form 10-K for the year ended N/A March 31, 1993. (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. N/A (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 from the Company's Annual Report on Form 10-K for the year ended March 31, 1996. (g) Form of Indenture with respect to the 8 1/2% Senior Notes due 2001, which is incorporated from the Company's Registration Statement on Form S-3 (Reg. No. 333-07665). N/A (h) 8 1/2 % Senior Notes due 2001. (i) Officer's Certificate containing terms relating to the 8 1/2% Senior Notes due 2001. 10. (a) Retirement Agreement effective March 31, 1996 by and between the Company and Preston B. Heller, Jr. which is incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended March 31, 1996. N/A </TABLE> 9
10 <TABLE> <CAPTION> Sequential Exhibit No. Description Page No. - - ----------- ----------- -------- <S> <C> <C> <C> (b) Employment Agreement effective as of April 1, 1996 by and between the Company and James L. Bayman, which is incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended March 31, N/A 1996. (c) Employment Agreement effective as of April 1, 1996 by and between the Company and Arthur Rhein, which is incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended March 31, N/A 1996. (d) Employment Agreement effective as of April 1, 1996 by and between the Company and John V. Goodger, which is incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended March 31, N/A 1996. (e) 1982 Incentive Stock Option Plan, as amended, which is incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended March 31, N/A 1988. (f) Amended and Restated 1991 Stock Option Plan, which is incorporated by reference from the Company's Form S-8 Registration Statement dated April 28, 1994. N/A (g) Amended 1995 Stock Option Plan for Outside Directors, which is incorporated by reference from the Company's Form S-8 Registration Statement dated June 28, 1996. N/A (h) Share Subscription Agreement and Trust, effective July 2, 1996, between the Company and Wachovia Bank of North Carolina, N.A., which is incorporated by reference from the Company's Registration Statement on Form S-3 (Reg. N/A No. 333-07665). 11 Calculation of Primary Earnings Per Share 27 Financial Data Schedule </TABLE> 10