<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 No. 0-22064
ELEK-TEK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3042018
- ------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
7350 N. Linder Ave., Skokie, Illinois 60077
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(847) 677-7660
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
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
- -
Number of shares outstanding at November 13, 1996 6,300,000
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ELEK-TEK, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
- ------- ----------------------
<S> <C> <C>
Item I. Financial Statements
Balance Sheets
September 30, 1996 (Unaudited) and December 31, 1995 3
Statements of Operations
(Unaudited) - for the three months ended
September 30, 1996 and 1995 and the nine months
ended September 30, 1996 and 1995 4
Statements of Cash Flows 5
(Unaudited) - for the nine months ended
September 30, 1996 and 1995
Notes to Condensed Financial Statements (Unaudited) 6
Item II. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7
Part II. Other Information
- -------- -----------------
Item 3 Default Upon Senior Securities 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
</TABLE>
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ELEK-TEK, INC
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------- -----------------
<S> <C> <C>
(Unaudited)
ASSETS
Current Assets:
Cash and cash equvialents $ 220 $ 8,064
Accounts receivable, trade 26,083 23,040
Inventories 35,715 37,852
Deferred taxes 5,144 821
Other 6,936 6,578
------------------- -----------------
Total current assets 74,098 76,355
Property, plant and equipment, net 15,432 15,780
Other assets 40 69
------------------- -----------------
Total assets $ 89,570 $ 92,204
=================== =================
LIABILITIES AND STOCKHOLDEERS' EQUITY
Current liabilities:
Account payable $ 40,448 $ 36,295
Accrued expenses 4,566 2,570
Customer deposits 338 641
Short-Term debt 24,548 26,300
Subordinated notes payable to stockholders, current 1,857 -
------------------- -----------------
Total current liabilties 71,757 65,806
------------------- -----------------
Subordinated notes payable to stockholders, net of
current maturities 2,572 4,571
------------------- -----------------
Stockholders' equity:
Preferred stock, $.01 par value; 500,000 shares
authorized; none issued or outstanding
Common stock, $.01 par value; 20,000,000 shares authorized;
6,300,000 shares issued and outstanding 64 63
Paid-in capital 14,356 14,356
Retained earnings 822 7,408
------------------- -----------------
Total stockholders' equity 15,241 21,827
------------------- -----------------
Total liabilities and stockholders' equity $ 89,570 $ 92,204
=================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
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ELEK-TEK, INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
Net Sales $ 82,695 $ 78,959 $ 248,610 $ 241,792
Cost of sales 71,288 68,467 223,426 207,485
------------- --------------- ------------ -------------
Gross profit 11,407 10,492 25,184 34,307
Selling, general, and 10,424 10,200 34,479 30,921
administrative expenses -------------- --------------- ------------- -------------
Income (loss) from operations 983 292 (9,295) 3,386
Other (income) expense:
Other income, net (76) (61) (224) (196)
Interest expense 545 658 1,693 1,985
-------------- --------------- ------------ -------------
469 597 1,469 1,789
-------------- --------------- ----------- -------------
Income (loss) before income
tax provision 514 (305) (10,764) 1,597
Income tax provision (benefit) 200 (118) (4,178) 620
-------------- --------------- ----------- -------------
Net income (loss) $ 314 $ (187) $ (6,586) $ 977
=============== =============== =========== =============
Net income (loss) per share $ 0.05 $ (0.03) $ (1.05) $ 0.16
=============== =============== =========== =============
Weighted average number of
common shares outstanding 6,300,000 6,300,000 6,300,000 6,300,000
=============== =============== =========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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ELEK-TEK, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: ------ --------
<S> <C> <C>
Net income ($6,586) $ 977
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 1,732 1,702
Deferred taxes (4,323) -
Changes in assets and liabilities:
Accounts receivable, trade (3,043) (3,370)
Inventories 2,137 (5,687)
Other assets (329) 2,754
Accounts payable 4,153 (1,176)
Accrued expenses and customer deposits 1,693 276
----- -------
Net cash used in operating activities (4,566) (4,524)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,384) (1,502)
----- -----
Net cash used in investing activities (1,384) (1,502)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving bank line of credit 57,943 64,800
Payments on revolving bank line of credit (59,695) (61,300)
Payments on subordinated notes payable to stockholders (142) (857)
------ -----
Net cash (used in) provided by financing activities (1,894) 2,643
----- -----
Net decrease in cash and cash equivalents (7,844) (3,383)
Cash and cash equivalents, beginning of period 8,064 8,164
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 220 $ 4,781
======= =======
</TABLE>
The accompanying notes are integral part of the financial statements.
5
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ELEK-TEK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial information included herein is unaudited, but in the
opinion of management reflects all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the results for the
interim periods. The interim results of operations and cash flows are not
necessarily indicative of such results and cash flows for the entire year. The
year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
ELEK-TEK, Inc. (the "Company") Form 10-K for the year ended December 31, 1995.
2. DEBT
On April 15, 1996, the Company had extended its revolving bank credit agreement
through April, 1997. The agreement required the Company to maintain financial
covenants, including a minimum tangible net worth amount, a profitability
ratio, and a leverage ratio, as defined in the agreement. The facility was
subject to certain conditions, including that the Company be profitable for the
third quarter and calendar year of 1996. Based upon the results of the second
quarter, the Company was in violation of the tangible net worth, profitability
ratio and leverage ratio covenants. The Company obtained a waiver from the
bank of these defaults through September 13, 1996 which was extended through
November 13, 1996.
On October 30, 1996 the Company entered into a new three year revolving credit
agreement that replaced its existing credit agreement. Under the new agreement,
borrowings are limited to the lesser of (1) the borrowing base of certain
percentages of trade accounts receivable and inventories or (2) the $35.0
million limit under the revolving credit facility. The Company also entered
into a new floor plan facility agreement which replaced an existing floor plan
facility. Under this agreement, borrowings for inventory financing are limited
to $15.0 million. These agreements require the Company to maintain financial
covenants, including a minimum tangible net worth amount, a leverage ratio and
an interest coverage ratio as defined by the agreements. The Company was in
compliance with these financial covenants at September 30, 1996. Interest on
the outstanding borrowings under the credit agreement is at the bank's prime
rate plus 1.5%. The Company's vendors pays all finance charges, fees and
expenses associated with the floor plan facility. The Company decided that the
financing needs of the Company would be better served under this new
arrangement because of the increased financing capacity. In accordance with
the Financial Accounting Standards Board Emerging Issues Task Force Abstract
95-22, the debt associated with the new credit agreement is classified as
short-term and the inventory financing is included in accounts payable on the
balance sheet at September 30, 1996.
During the third quarter, the Company did not make the principal payment on its
subordinated notes. Under the new senior lending agreements, the Company is no
longer prohibited from making these payments, and intends to do so as the
increase in earnings from operations permit.
3. INCOME TAXES
The Company's effective income tax rate in 1996 and 1995 varies from the
federal statutory tax rate of 34% principally due to state income taxes.
4. RECLASSIFICATION
Certain reclassifications have been made to conform prior years' data to the
current presentation. These reclassifications have no effect on operations or
total stockholders' equity of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
The following table sets forth, for the periods indicated, items in the
condensed statements of operations, expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
---------------------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales
Cost of sales
Gross profit 100.0% 100.0% 100.0% 100.0%
Selling, general and 86.2% 86.7% 89.9% 85.8%
administrative 13.8% 13.3% 10.1% 14.2%
expenses 12.6% 12.9% 13.8% 12.8%
Income from operations 1.2% .4% -3.7% 1.4%
Other income, net .1% .1% .1% .1%
Interest expense .7% .8% .7% .8%
Income before taxes .6% -.3% -4.3% .7%
Net income .4% -.2% -2.6% .4%
</TABLE>
Three Months Ended September 30, 1996
- -------------------------------------
Net sales for the three month period ended September 30, 1996 were $82.7
million, an increase of $3.7 million (4.7%) from the $79.0 million for the
comparable 1995 quarter. Mail order sales decreased $1.7 million (10.9%) and
retail superstore sales decreased $3.5 million (9.8%). This was offset by an
increase in sales from the corporate sales channel of $8.9 million (32.0%).
Corporate sales accounted for 44.4% of the Company sales for the third quarter
in the current year versus 35.2% in the same quarter last year. Total
corporate sales increased $8.9 million (32.0%) to $36.7 million for the third
quarter of 1996 from $27.8 million for the third quarter of 1995. The sales
increase was primarily due to an increase in sales to new and existing
corporate customers in the Chicago market which resulted in a $3.7 million
(35.8%) increase for this market. Sales from the Kansas City, Denver and the
Indianapolis markets also increased. Sales in Kansas City, Denver and
Indianapolis were up $1.1 million (43.0%), $2.4 million (75.5%), and $1.0
million (21.8%), respectively from the same period last year by reason of
continuing efforts to aggressively seek additional market share and by
capitalizing on the additional services that ELEK-TEK provides to its existing
customers, such as extended warranties, on-site technical support, and network
services. Government and educational sales increased by $1.0 million (14.3%)
due in part to the implementation of a new strategy that focuses on expanding
sales to new customers outside of the Chicago market and the distribution of
the first government and education catalog in late August of 1996.
The Company's mail order channel generated sales of $13.7 million in the third
quarter of 1996, which was a decrease of $1.7 million (10.9%) from the same
period one year ago. The mail order business represented 16.5% of total sales
in the third quarter of 1996 versus 19.4% for the same quarter in the prior
year. The decrease in sales is due to the distribution of a smaller catalog
and the timing of the distribution. In 1996, there were two catalogs mailed,
one in July and the other in mid-September, versus one in 1995 that was
distributed in late August. The catalogs distributed in 1996 included only 68
and 84 pages in comparison to 116 in 1995, reducing the number and type of
products featured, which was due in part to a planned product catagory
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reorganization. Due to the late distribution of the September, 1996 catalog,
the majority of the sales volume generated by this catalog should be reflected
in the fourth quarter. As the Company receives additional vendor advertising
support, the Company intends to increase the page count with each additional
catalog distributed during the remainder of 1996. Also, the Company is making
efforts to reduce catalog distribution expenses and increase catalog revenues
by improved targeting of selected customers.
The retail superstore channel accounted for 39.1% of the third quarter sales
in 1996 versus 45.4% for the same period in 1995. Retail sales decreased for
the third quarter of 1996 by 9.8% from $35.8 million in 1995 to $32.3 million
in 1996, despite one additional store opening at the Chicago-Lakeview location
in June of 1996. This decrease is due in part to the timing of product
releases in 1995, lower price points on products and the transition to the
Company's new advertising and promotional strategies. In 1995, sales were
positively impacted by the release of Intel's Pentium chip and Microsoft's
Windows 95 operating system. The 1996 unit price threshold was lower than in
1995 due to increased pressures to remain competitive in the market place.
Advertising has a significant impact on sales in the mail order channel and to
a greater degree in the retail superstore channel. Management feels that the
third quarter marketing efforts were below what is adequate in order to compete
in this more highly competitive environment. The Company intends to
substantially increase marketing efforts beginning in the fourth quarter with
the roll-out of a new marketing campaign that was developed to increase
consumer awareness. The new campaign uses radio, print and direct mail
pieces.
Gross margin for the three month period ending September 30, 1996 increased to
$11.4 million (13.8% of net sales) as compared to $10.5 million (13.3% of net
sales) for the same period one year ago. The margin improvement is primarily
due to the increased focus on targeting higher margin sales and new cost
effective purchasing strategies. The Company is making efforts to move away
from the purchasing practices implemented by the previous senior management
team which promoted availability over product cost. ELEK-TEK has begun to
implement a purchasing strategy that focuses on relationships with fewer
vendors to attract better pricing with higher volumes, improved management of
product mix to emphasize sales of products with a higher gross profit, and
increased marketing participation by vendors. The Company has taken steps to
help lower vendor costs such as freight by centralizing all shipments to its
distribution center. In conjunction with these efforts, the Company has begun
to renegotiate distribution arrangements to obtain better pricing and vendor
rebates. In addition, better tracking procedures have been established to
collect vendor rebates, price protection, and purchasing credits. The margin
improvement is also due to improved inventory management practices.
For the third quarter of 1996, selling, general and administrative expenses
were $10.4 million (12.6% of net sales) compared to $10.2 million (12.9% of net
sales) for the comparable three month period in 1995. Due to management's
emphasis on containing costs, these expenses have decreased as a percentage of
net sales from the same period last year. Total compensation costs remained
relatively the same despite the 4.7% increase in net sales. Salary expenses
decreased by $.3 million, which was associated with the headcount reduction
that occurred in 1996. Consulting costs also decreased by $.1 million in 1996.
As new management becomes more familiar with the Company's operations,
reliance on outside consultants is diminishing. Management continues to focus
on improving operational efficiencies and reduce costs.
Interest expense for the three month period ended September 30, 1996 was $.5
million compared to $.7 million for the same period one year ago. The main
reason for the decrease was lower average borrowings during the third quarter
in 1996. Borrowings decreased due to lower inventory levels and improved cash
management practices.
Net income for the third quarter of 1996 was $.3 million, compared to net loss
for the same period in 1995 of $.2 million.
Nine Months Ended September 30, 1996
- ------------------------------------
For the nine months ending September 30, 1996 net sales increased from $241.8
million to $248.6 million, an increase of $6.8 million (2.8%). Sales increases
of $19.3 million (23.6%) were generated by the corporate sales
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channel which were partially offset by the decreases in the mail order
channel of $5.6 million (11.2%) and retail superstore sales channel of $6.9
million (6.3%) during the period. Corporate sales, mail order and retail
superstore contributed 40.7%, 17.9% and 41.4% of the total sales respectively.
Corporate sales grew by 23.6% from $81.9 million in 1995 to $101.2 million in
1996. Contributing to this growth were the Chicago, Kansas City, Denver and
Indianapolis sales regions. The largest growth was from the Chicago sales
region with an increase of $8.4 million (24.7%) as a result of sales to new and
existing corporate customers. The Kansas City, Denver and Indianapolis
markets increased by $4.0 million (64.5%), $5.1 million (52.8%) and $1.9
million (15.0%) respectively, as these operations continue to aggressively seek
additional market share by capitalizing on the services that ELEK-TEK can
provide and offering expanded services to existing customers, such as extended
warranties, on-site technical support, and network services. The Kansas City
and Denver markets were opened in September and December of 1994, respectively.
The Company's strongest base, the Chicago region, accounted for 42.1% of total
corporate sales.
Mail order sales decreased for the nine month period ending September 30, 1996
over the same period last year. Mail order sales declined from $50.1 million
to $44.5 million, an 11.2% decrease. The mail order channel represented 17.9%
of total sales during the first nine months of 1996. In 1996, the Company has
taken steps to improve the design and quality of its catalog, and is working
toward the implementation of a new circulation strategy that will reduce
catalog distribution costs and improve the targeting of selected customers.
While doing so, the Company temporarily reduced the circulation of its current
catalog and reduced the page count, which the Company believes has resulted in
decreased catalog sales for the first nine months of 1996. As additional
vendor advertising support is received, the Company intends to increase the
page count with each additional catalog distributed during the remainder of
1996. Since the first quarter of 1996, the catalog page count has increased by
30% , from 64 to 84 pages.
Sales in the retail superstores channel declined 6.3% for the nine month period
ending September 30, 1996 over the same period last year from $109.8 million to
$102.9 million. Sales from stores that were open for more than a year were
down by 8.9% compared to last year. Offsetting this slightly were sales
associated with the new Lakeview store which opened in June of 1996. The
lower sales are due to increased competition coupled with the slow-down in
growth in the retail computer products industry, and lower price points. Also,
a decision was made during management changes to decrease advertising. This
impacted sales in the mail order channel and to a greater degree in the
retail superstore channel. The new senior management team has developed a
marketing campaign to increase consumer awareness. The new campaign uses
radio, print and direct mail pieces and began the fourth quarter of 1996.
For the nine month period ended September 30, 1996 gross margin was $25.2
million (10.1% of net sales) compared to $34.3 million (14.2% of net sales)
for the same period last year. During the second quarter of 1996, there were
special charge adjustments impacting gross margin as previously reported.
Additionally, an adjustment of $2.3 for inventory shrink was recorded in 1996
versus $1.2 million recorded in 1995. The impact of these adjustments lowered
gross margin by $7.3 million or 2.9 % of net sales in 1996. Excluding these
adjustments, gross margin as a percentage of sales would have been 13.0%.
The Company's overall gross margin percentage has also been reduced mainly as a
result of the larger proportion of sales being contributed by the corporate
sales channel, which are at lower margin rates. Corporate sales accounted for
40.7% of the total Company sales in 1996 as compared to 33.9% in 1995. Other
factors that contributed to the decline in gross margin are a higher level of
purchases from secondary sources as well as additional pressure put on gross
margins by the consumer electronic and office products retailers. Whether
significant pricing reductions will continue is uncertain, but it is the
Company's intent not to allow its competitors to gain a pricing advantage in
the markets in which it operates. Offsetting this slightly, the Company has
been successful in its recent efforts to increase gross margin by moving away
from the purchasing practices implemented by the previous senior management
team and has begun to implement a purchasing strategy that focuses on
relationships with fewer vendors to attract better pricing with higher volumes,
improved management of product mix to emphasize sales of products with a
higher gross profit, and increased marketing participation by vendors. Better
tracking procedures are being employed to collect vendor rebates, price
protection, and purchasing credits. Also, the Company has improved inventory
management practices.
9
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Selling, general and administrative expenses for the nine month period ending
September 30, 1996 increased 11.5% from $30.9 ( 12.8% to net sales ) to $34.5
million (13.8% to net sales ) from the same period last year. The major
reasons for the $3.6 million increase were:
Total salaries and wages increased $1.3 million primarily due to
employee severance totaling $.8 million; the Company restructured the
executive and middle management teams in 1996. Commission expense
increased $.7 million, which is related to the increase in corporate sales
(23.6%) this period over the same period last year. These were offset in
part by a reduction in salaries expense due to the 20% head count reduction
in 1996.
The Company incurred $.3 million in recruiting costs associated with the
transition at the senior management level.
In 1996, professional fees were incurred relating to the company-wide
software requirement definition and vendor software selection process which
resulted, in part, in a $.3 million increase in professional fees in the
first nine months of 1996 versus the same period in 1995. In 1995 and in
the first quarter of 1996, consultants were used for an inventory
management project to design and implement a new supply chain purchasing
practice to reduce inventory levels while improving in-stock positions.
Credit and collection expenses increased by $.6 million due to higher
fees and increases in the allowances for uncollectable trade accounts
receivable, returned customer checks and bankcard chargebacks.
Interest expense for the nine month period ended September 30, 1996 was $1.7
million compared to $2.0 million for the same period one year ago, a decrease
of approximately $.3 million. The main reason for the decrease was the lower
average borrowings during the first nine months of 1996. Borrowings decreased
due to lower inventory levels and because of improved cash management
practices.
Net loss was $6.6 million for the nine month period ended September 30, 1996
compared to $1.0 million net income for the same period last year.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities for the nine month period ended September
30, 1996 was $4.6 million compared to $4.5 million for the same nine month
period a year ago. The increase in net cash used in operating activities
during 1996 primarily resulted from the net operating loss of $6.6 million, the
recognition of a deferred tax asset of $4.3 million resulting from the net
operating loss tax benefit which was offset in part by a reduction in accounts
payable of $4.1 million relating to the timing of payments and a $2.1 million
reduction in inventory.
Net cash used in investing activities consisted of property and equipment
acquisitions of $1.4 million, which primarily relates to the company-wide
computer network, leasehold improvements and equipment purchases. $.5 million
was spent on leasehold improvements and equipment purchases for the new retail
superstore at the Lakeview-Chicago location.
Net cash used in financing activities totaled $1.9 million and was primarily
due to net payments on the Company's revolving credit facility.
The Company expects to continue to finance future operations through cash flows
from operations and its revolving credit facility, floor plan facility and
vendor financing. Management expects cash requirements to increase during the
remainder of 1996 because of seasonal factors. The outstanding balance of the
Company's revolving credit facility at September 30, 1996 was $24.5 million.
Recognition of the second quarter loss placed the company in violation of
certain basic covenants of its lending agreement in place at that time. The
Company
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<PAGE> 11
obtained a waiver from the lender of these defaults through September
13, 1996 which was extended through November 13, 1996.
On October 30, 1996 the Company entered into a new three year revolving credit
agreement that replaced its existing credit agreement. Under the new agreement,
borrowings are limited to the lesser of (1) the borrowing base of certain
percentages of trade accounts receivable and inventories or (2) the $35.0
million limit under the revolving credit facility. The Company also entered
into a new floor plan facility agreement which replaced an existing floor plan
facility. Under this agreement, borrowings for inventory financing are limited
to $15.0 million. These agreements require the Company to maintain financial
covenants, including a minimum tangible net worth amount, a leverage ratio and
an interest coverage ratio as defined by the agreements. The Company was in
compliance with these financial covenants at September 30, 1996. Interest on
the outstanding borrowings under the credit agreement is at the bank's prime
rate plus 1.5%. The Company's vendors pays all finance charges, fees and
expenses associated with the floor plan facility. The Company decided that the
financing needs of the Company would be better served under this new
arrangement because of the increased financing capacity. In accordance with
the Financial Accounting Standards Board Emerging Issues Task Force Abstract
95-22, the debt associated with the new credit agreement is classified as
short-term and the inventory financing is included in accounts payable on the
balance sheet at September 30, 1996.
During the third quarter, the Company did not make the principal payment on its
subordinated notes. Under the new senior lending agreements, the Company is no
longer prohibited from making these payments, and intends to do so as the
increase in earnings from operations permit.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements made in this quarterly report that are not historical facts, are
forward looking statements, and therefore, involve risks and uncertainties,
including, but not limited to, the following risks: interest rates may rise
instead of decreasing, competitors may open more stores in each of the
Company's markets, further intensifying competitive pressures; catalog
production and mailing costs may continue to rise; the new marketing program
may not prove successful; increased competition in all channels may adversely
affect gross margin, as well as other risks; Accordingly, actual results may
differ materially from those set forth in the forward looking statements.
11
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PART II. OTHER INFORMATION
- -------- -----------------
Items 3 - Default upon Senior Securities
On April 15, 1996, the Company had extended its revolving bank credit agreement
through April, 1997. The agreement required the Company to maintain financial
covenants, including a minimum tangible net worth amount, a profitability
ratio, and a leverage ratio, as defined in the agreement. The facility was
subject to certain conditions, including that the Company be profitable for the
third quarter and calendar year of 1996. Based upon the results of the second
quarter, the Company was in violation of the tangible net worth, profitability
ratio, and leverage ratio covenants. The Company obtained a waiver from the
bank of these defaults through September 13, 1996 which was extended through
November 13, 1996.
On October 30, 1996 the Company entered into a new three year revolving credit
agreement that replaced its existing credit agreement. Under the new agreement,
borrowings are limited to the lesser of (1) the borrowing base of certain
percentages of trade accounts receivable and inventories or (2) the $35.0
million limit under the revolving credit facility. The Company also entered
into a new floor plan facility agreement which replaced an existing floor plan
facility. Under this agreement, borrowings for inventory financing are limited
to $15.0 million. These agreements require the Company to maintain financial
covenants, including a minimum tangible net worth amount, a leverage ratio and
an interest coverage ratio as defined by the agreements. The Company was in
compliance with these financial covenants at September 30, 1996. Interest on
the outstanding borrowings under the credit agreement is at the bank's prime
rate plus 1.5%. The Company's vendors pays all finance charges, fees and
expenses associated with the floor plan facility. The Company decided that the
financing needs of the Company would be better served under this new
arrangement because of the increased financing capacity. In accordance with
the Financial Accounting Standards Board Emerging Issues Task Force Abstract
95-22, the debt associated with the new credit agreement is classified as
short-term and the inventory financing is included in accounts payable on the
balance sheet at September 30, 1996.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibit 11 - Computation of Earnings Per Share
(b) Exhibit 27 - Financial Data Schedule
(c) No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
12
<PAGE> 13
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.
ELEK-TEK, INC.
--------------
(Registrant)
Date: November 13, 1996 By: _______________________________
Richard L. Rodriguez.
President, Chief Executive Officer,
and Director
Date: November 13, 1996 By: _________________________________
Miguel A. Martinez, Jr.
Vice President, Chief Financial Officer and
Secretary (Principal Financial and Accounting
Officer)
13
<PAGE> 14
ELEK-TEK, INC.
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------- -------------------
11 Computation of Earnings
Per Share
27 Financial Data Schedule
14
<PAGE> 1
- --------------------------------------------------------------------------------
Exhibit 11
ELEK-TEK, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Dollars in thousands, except per share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) $ 314 $ (187) $ (6,586) $ 977
Weighted average common shares standing 6,300,000 6,300,000 6,300,000 6,300,000
Primary earnings (loss) per common share $ 0.05 (0.03) $ (1.05) $ 0.16
====================================================================================================================================
FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) $ 314 $ (187) $ (6,586) $ 977
Weighted average common shares outstanding 6,300,000 6,300,000 6,300,000 6,300,000
Stock options assumed to be exercised 0 0 0 0
Weighted average common shars outstanding, ------------------ ------------- ------------- ----------------
as adjusted 6,300,000 6,300,000 6,300,000 6,300,000
================== ============= ============= ================
Fully diluted earnings (loss) per common share $ 0.05 $ (0.03) $ (1.05) $ 0.16
====================================================================================================================================
There were 196,500 and 306,000 stock options outstanding in 1995 and 1996 respectively, which have not been included in the earnings
per share calculation because most of which were anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 220
<SECURITIES> 0
<RECEIVABLES> 26,686
<ALLOWANCES> (600)
<INVENTORY> 35,715
<CURRENT-ASSETS> 74,098
<PP&E> 27,736
<DEPRECIATION> (12,304)
<TOTAL-ASSETS> 89,570
<CURRENT-LIABILITIES> 47,209
<BONDS> 0
<COMMON> 63
0
0
<OTHER-SE> 15,178
<TOTAL-LIABILITY-AND-EQUITY> 89,570
<SALES> 80,922
<TOTAL-REVENUES> 82,695
<CGS> 70,995
<TOTAL-COSTS> 71,288
<OTHER-EXPENSES> 10,424
<LOSS-PROVISION> 85
<INTEREST-EXPENSE> 545
<INCOME-PRETAX> 514
<INCOME-TAX> 200
<INCOME-CONTINUING> 314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 314
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
