<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 30, 1995 Commission File No.: 1-5522
STERLING ELECTRONICS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 74-1261194
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4201 SOUTHWEST FREEWAY, HOUSTON, TEXAS 77027
-------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's area code and telephone number: (713) 627-9800
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 stock, as of the close of the period by this report.
CLASS OUTSTANDING AT FEBRUARY 9, 1996
- ---------------------------- -------------------------------
Common Stock, $.50 par value 6,839,172
Page 1 of 12
<PAGE>
INDEX
STERLING ELECTRONICS CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of financial position
December 30, 1995 and April 1, 1995
Condensed consolidated statements of income - thirteen weeks and
thirty-nine weeks ended December 30, 1995 and December 31, 1994
Condensed consolidated statements of cash flows - thirty-nine weeks
ended December 30, 1995 and December 31, 1994
Notes to condensed consolidated financial statements - December 30,
1995
Item 2. Management's Discussion and Analysis of the Results of Operations
Page 2 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 30, APRIL 1,
ASSETS 1995 1995
------------ ---------------
RESTATED-NOTE D
<S> <C> <C>
Current assets
Cash $ 2,714,050 $ 3,110,397
Receivables-net of reserve
for doubtful accounts 41,374,043 34,594,615
Inventory 60,009,027 36,968,153
Other current assets 656,519 320,043
Net assets of discontinued
operations - Note D 0 1,812,546
------------ ------------
Total current assets 104,753,639 76,805,754
Property & equipment-net of depreciation 6,434,337 5,055,234
Goodwill, net of amortization 4,310,894 1,757,107
Other assets 3,750,506 2,729,925
------------ ------------
$119,249,376 $86,348,020
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable & accrued
expenses $ 34,923,851 $ 29,540,584
Current portion - long term obligations 294,397 303,233
------------ ------------
Total current liabilities 35,218,248 29,843,817
Long-term obligations - net of amounts
due within one year 34,576,792 12,950,129
Postemployment benefits and other
non-current liabilities 4,104,174 4,057,205
Shareholders' Equity
Common stock, $.50 par value 3,350,927 3,343,005
Additional paid-in capital 16,901,601 16,410,284
Retained earnings 27,298,845 20,535,094
------------ ------------
47,551,373 40,288,383
Less treasury stock, at cost 2,201,211 791,514
------------ ------------
45,350,162 39,496,869
------------ ------------
$119,249,376 $86,348,020
------------ ------------
------------ ------------
</TABLE>
Page 3 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THIRTEEN WEEKS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------------
RESTATED-NOTE D
<S> <C> <C>
Net sales $79,347,305 $58,143,111
Cost of sales 62,296,312 45,092,760
Selling, administrative and
other operating expenses 12,367,684 9,694,638
----------- -----------
74,663,996 54,787,398
Operating income from continuing operations 4,683,309 3,355,713
Interest expense 504,371 337,820
----------- -----------
Income from continuing operations before income taxes 4,178,938 3,017,893
Income taxes 1,676,000 1,219,000
----------- -----------
Income from continuing operations $ 2,502,938 $ 1,798,893
Discontinued operations - Note D
Income (loss) from operations less
applicable income taxes of $0
and $6,000, respectively 0 11,698
Loss on disposal 0 0
----------- -----------
Net income $2,502,938 $1,810,591
----------- -----------
----------- -----------
Income per common share and common share
equivalents - Note E:
Primary
Income from continuing operations $0.35 $0.26
Income (loss) from discontinued operations 0.00 0.00
----------- -----------
0.35 0.26
----------- -----------
----------- -----------
Fully diluted
Income from continuing operations $0.35 $0.26
Income (loss) from discontinued operations 0.00 0.00
----------- -----------
$0.35 $0.26
----------- -----------
----------- -----------
Number of common shares and common share
equivalents used in computing per share
amounts - Note E
Primary 7,102,698 6,978,080
Fully diluted 7,102,698 6,978,649
</TABLE>
Page 4 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THIRTY-NINE WEEKS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
Caption
1995 1994
------------ ---------------
RESTATED-NOTE D
<S> <C> <C>
Net sales $230,152,806 $171,947,037
Cost of sales 180,775,591 133,175,856
Selling, administrative and
other operating expenses 36,047,767 28,835,290
------------ ------------
216,823,358 162,011,146
Operating Income from continuing operations 13,329,448 9,935,891
Interest expense 1,147,323 929,899
------------ ------------
Income from continuing operations before income taxes 12,182,125 9,005,992
Income taxes 4,884,000 $ 3,645,000
------------ ------------
Income from continuing operations 7,298,125 5,360,992
Discontinued operations - Note D
Income (loss) from operations less
applicable income taxes of $378,000
and $19,000, respectively (522,374) 36,745
Loss on disposal (12,000) 0
------------ ------------
Net income $ 6,763,751 $ 5397737
------------ ------------
------------ ------------
Income per common share and common share
equivalents - Note E:
Primary
Income from continuing operations $ 1.03 $ 0.77
Income (loss) from discontinued operations (0.08) 0.00
------------ ------------
$ 0.95 $ 0.77
------------ ------------
------------ ------------
Fully diluted
Income from continuing operations $ 1.03 $ 0.77
Income (loss) from discontinued operations (0.08) 0.00
------------ ------------
$ 0.95 $ 0.77
------------ ------------
------------ ------------
Number of common shares and common share
equivalents used in computing per share
amounts - Note E
Primary 7,098,108 6,976,114
Fully diluted 7,116,048 6,978,358
</TABLE>
Page 5 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-NINE WEEKS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------------
RESTATED-NOTE D
<S> <C> <C>
OPERATING ACTIVITIES
Net income $6,763,751 $5,397,734
Adjustments needed to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 909,971 715,585
Provision for losses on accounts receivable 995,515 622,104
----------- -----------
8,669,237 6,735,423
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (5,129,003) 522,277
(Increase) in inventories (18,748,903) (5,370,046)
(Increase) decrease in other current assets 692,399 (244,362)
Increase decrease in accounts payable and
accrued expenses 2,222,454 (2,175,789)
Increase (decrease) in post employment benefits
and other non-current liabilities 12,911 (44,356)
----------- -----------
Net cash used in operating activities (12,280,905) (576,853)
INVESTING ACTIVITIES
Purchases of property and equipment (2,039,210) (1,450,072)
Acquisition of DGW Electronics Corporation (5,807,745) 0
(Increase) in other assets (353,581) (76,358)
----------- -----------
Net cash used in investing activities (8,200,536) (1,526,430)
FINANCING ACTIVITIES
Proceeds from borrowings under revolving line of credit 65,894,476 28,050,552
Repayments of borrowings under revolving line of credit (44,054,553) (25,050,552)
----------- -----------
Net change in revolving line of credit 21,839,923 3,000,000
Principal payments on long-term debt, capital lease
obligations and other (222,096) (217,538)
Proceeds from excercise of stock options 101,517 92,529
Purchase of treasury stock (1,634,250) (315,644)
----------- -----------
Net cash provided by financing activities 20,085,094 2,559,347
Decrease in cash and cash equivalents (396,347) 456,064
Cash and cash equivalents at beginning of period 3,110,397 2,859,647
----------- -----------
Cash and cash equivalents at end of period $2,714,050 $3,315,711
----------- -----------
----------- -----------
</TABLE>
During fiscal 1996 and 1995 the Company issued $622,000 and $600,000,
respectively, of common stock under the Company's Incentive Bonus Plan
Page 6 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 30, 1995
Note A - Accounting Policies
The accompanying unaudited condensed consolidated financial statements include
the accounts of Sterling Electronics Corporation and its majority-owned
subsidiaries after elimination of all significant intercompany accounts and
transactions. In the opinion of the company, the unaudited condensed
consolidated financial statements contain all the adjustments (consisting of
only normal accruals) necessary to present fairly the financial position as of
December 30, 1995 and the results of operations for the thirteen and thirty-nine
weeks then ended. The results of operations for the thirteen and thirty-nine
weeks ended December 30, 1995 are not necessarily indicative of the results to
be expected for the full year.
Note B - Long-term Debt
Long-term debt as of December 30, 1995 and the amounts due within one year are
as follows:
<TABLE>
<CAPTION>
AMOUNTS DUE LONG-TERM MATURING IN
DESCRIPTION WITHIN ONE YEAR PORTION FISCAL YEAR
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Revolving credit line $ -0- $34,000,000 1998
Capitalized lease
obligations 119,882 171,968 1996-2000
Equipment loans 174,515 404,824 1999-2001
------- ----------
$294,397 $34,576,792
</TABLE>
Note C - Acquisition of Canadian Subsidiary
The Company completed the acquisition of DGW Electronics Corporation ("DWG")
on August 22, 1995. DGW is a distributor of electronic parts with five
locations in Canada. The operating results of DGW are included with those of
the Company from the date of the acquisition forward. Sales of DGW from
August 22, 1995 through December 30, 1995 were approximately $7.8 million.
Page 7 of 12
<PAGE>
Note D - Sale of Phaostron Instruments
The Company completed the sale of its Phaostron Instruments subsidiary in
September 1995. The operating results, assets and liabilities of Phaostron
have been classified as discontinued operations for all periods presented.
Previously reported amounts have been restated to conform to this
presentation. Phaostron Instruments accounted for 1%, 2% and 4%,
respectively, of total Company sales in fiscal years 1995, 1994 and 1993.
Note E - Common Stock Dividend
On December 4, 1995, the Company announced a five percent common stock
dividend. The new shares were distributed on February 1, 1996 to shareholders
of record on January 11, 1996. All per share amounts have been retroactively
adjusted for the five percent common stock dividend.
Page 8 of 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
THIRTY-NINE WEEKS ENDED DECEMBER 30, 1995 COMPARED TO THIRTY-NINE WEEKS
ENDED DECEMBER 31, 1994.
NET SALES - Consolidated net sales for the current thirty-nine week period
were 34% ahead of sales for the thirty-nine week period a year ago. Sales
increased 26% for passive/electromechanical components, 20% for connector
products and 45% for semiconductor products, compared to the thirty-nine week
period a year ago.
GROSS MARGIN - Sterling's consolidated gross margin for the thirty-nine weeks
declined to 21.5% from 22.5% for the thirty-nine weeks a year ago stemming
principally from competitive pressures in all product groups and
semiconductor sales increasing more rapidly than sales of higher margin
passive and connector products.
SELLING AND ADMINISTRATIVE COSTS - Consolidated operating expenses declined
to 15.7% of sales compared to 16.8% of sales for the thirty-nine weeks a year
ago. This improvement resulted from economies of scale from sales growth
(fixed costs were spread over an increasing sales base) coupled with
continuing cost controls.
OPERATING INCOME - As a result of gross margin dollars increasing more
rapidly than operating expenses, operating income increased $3,394,000, a 34%
improvement over the previous fiscal year.
INTEREST EXPENSE - The 23% increase in interest expense is the result of the
$6.6 million increase from the comparable period in average indebtedness
under the revolving credit line partially offset by the effect of slightly
lower interest rates.
THIRTEEN WEEKS ENDED DECEMBER 30, 1995 COMPARED TO THIRTEEN WEEKS ENDED
DECEMBER 31, 1994.
NET SALES - Consolidated net sales for the current thirteen week period were
36% ahead of sales for the thirteen week period a year ago. Sales increased
28% for passive/electromechanical components, 23% for connector products and
49% for semiconductor products, compared to the thirteen week period a year
ago.
GROSS MARGIN - Sterling's consolidated gross margin for the thirteen weeks
declined to 21.5% from 22.4% for the thirteen weeks a year ago stemming
principally from competitive pressures in all product groups and
semiconductor sales increasing more rapidly than sales of higher margin
passive and connector products.
SELLING AND ADMINISTRATIVE COSTS - Consolidated operating expenses declined
to 15.6% of sales compared to 16.7% of sales for the thirteen
Page 9 of 12
<PAGE>
weeks a year ago. This improvement resulted from economies of scale from
sales growth (fixed costs were spread over an increasing sales base) coupled
with continuing cost controls.
OPERATING INCOME - As a result of gross margin dollars increasing more
rapidly than operating expenses, operating income increased $1,328,000, a 40%
improvement over the previous fiscal year.
INTEREST EXPENSE - The 49% increase in interest expense is the result of the
$13.9 million increase from the comparable period in average indebtedness
under the revolving credit line partially offset by the effect of slightly
lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of the current fiscal year, Sterling has invested $23.9
million in receivables and inventory to support higher sales volume. In
connection with this increased investment, the Company increased its
borrowings under the bank line by $21.8 million. A secondary use of funds was
the $5.8 million used to acquire DGW Electronics Corporation in Canada.
Another use of funds has been capital expenditures of $2.1 million,
principally for new computer hardware and software. The expenditures in
excess of the $21.8 million increase in borrowings under the bank line were
financed by cash flow from operations.
The Company's needs for additional investment in receivables and inventories
is expected to continue in connection with anticipated sales growth and
geographic expansion.
Management believes that internal generation of cash flow (net income plus
non-cash items such as depreciation and amortization), available equipment
financing, funds available under the bank credit line plus possible increases
in the bank credit line will be sufficient to meet liquidity needs over the
next two fiscal years.
Working capital was $69.5 million at December 30, 1995 compared to $47.0
million at April 1, 1995. The current ratio was 3.0 compared to 2.6 at the
beginning of the year. Working capital continues to increase, reflected
principally in higher receivables and inventory required to support higher
sales, partially offset by increased accounts payable and accrued expenses.
The ratio of long-term debt to total capital was 43% at December 30, 1995
compared to 25% at the beginning of the year.
Page 10 of 12
<PAGE>
OTHER INFORMATION
ITEM 1 THROUGH ITEM 5
The Company was not required to report on Items 1 through 5.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(11) Statement re: computation of earnings per share
(b) Reports of Form 8-K -- There were no reports on Form 8-K filed
during the thirteen weeks ended December 30, 1995
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.
STERLING ELECTRONICS CORPORATION
DATE: February 12, 1996 MAC MCCONNELL
- ----------------------- ---------------------------------
Mac McConnell, Vice-President
Chief Financial Officer
Page 11 of 12
<PAGE>
EXHIBIT 11
STERLING ELECTRONICS CORPORATION
(11) - Statement Re: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRY-NINE WEEKS ENDED
---------------------------- ----------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 30, DECEMBER 31,
1995 1994 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 6,910,401 6,865,666 6,910,510 6,850,295
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 192,297 112,414 187,598 125,819
---------- ---------- ---------- ----------
Total 7,102,698 6,978,080 7,098,108 6,976,114
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income applicable to common stock
Income from continuing operations $2,502,938 $1,798,893 $7,298,125 $5,360,992
Income (loss) from discontinued operations 0 11,698 (534,374) 36,745
---------- ---------- ---------- ----------
$2,502,938 $1,810,591 $6,763,751 $5,397,737
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share amount
Income from continuing operations $0.35 $0.26 $1.03 $0.77
Income (loss) from discontinued operations 0.00 0.00 (0.08) 0.00
---------- ---------- ---------- ----------
$0.35 $0.26 $0.95 $0.77
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED
Average shares outstanding 6,910,401 6,865,666 6,910,509 6,850,295
Net effect of dilutive stock options-
based on the treasury stock method
using the end of period market price,
if higher than average market price 192,297 112,983 205,539 128,063
---------- ---------- ---------- ----------
Total 7,102,698 6,978,649 7,116,048 6,978,358
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income applicable to common stock
Income from continuing operations $2,502,938 $1,798,893 $7,298,125 $5,360,992
Income (loss) from discontinued operations 0 11,698 (534,374) 36,745
---------- ---------- ---------- ----------
$2,502,938 $1,810,591 $6,763,751 $5,397,737
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share amount
Income from continuing operations $0.35 $0.26 $0.71 $0.77
Income (loss) from discontinued operations 0.00 0.00 (0.08) 0.00
---------- ---------- ---------- ----------
$0.35 $0.26 $0.63 $0.77
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Page 12 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 30, 1995. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> DEC-30-1995
<CASH> 2,714,050
<SECURITIES> 0
<RECEIVABLES> 43,099,199
<ALLOWANCES> 1,725,156
<INVENTORY> 60,009,027
<CURRENT-ASSETS> 104,753,639
<PP&E> 10,900,189
<DEPRECIATION> 4,465,852
<TOTAL-ASSETS> 119,249,376
<CURRENT-LIABILITIES> 35,218,248
<BONDS> 34,576,792
0
0
<COMMON> 3,350,927
<OTHER-SE> 41,999,235
<TOTAL-LIABILITY-AND-EQUITY> 119,249,376
<SALES> 230,152,806
<TOTAL-REVENUES> 230,152,806
<CGS> 180,775,591
<TOTAL-COSTS> 216,823,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 995,515
<INTEREST-EXPENSE> 1,147,323
<INCOME-PRETAX> 12,182,125
<INCOME-TAX> 4,884,000
<INCOME-CONTINUING> 7,298,125
<DISCONTINUED> (534,374)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,763,751
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
</TABLE>
