SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 29, 1997 Commission file number 1-5522
STERLING ELECTRONICS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
NEVADA 74-1261194
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
4201 Southwest Freeway, Houston, TX 77027
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (713) 627-9800
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each Exchange on Which Registered
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Common Stock--Par Value $.50 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 by check mark if disclosure of delinquent filers pursuant to item
405 of Regulations S-K (Par. 229.405) is not contained herein , and will not be
contained , to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-K
or any amendment to this Form 10-K. ( )
Aggregate market value of voting stock held by nonaffiliates as of June 2,
1997 was $66,554,000.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period of this report:
7,114,203 Common Shares Outstanding as of June 2, 1997
------------------------------------------------------
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated: (1) Any annual
report to security holders; (2) Any proxy or information statement, and (3) Any
prospectus filed pursuant to Rule 424(b) or 6 under the Securities Act of 1933.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's 1997 annual shareholders' report are incorporated
by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders' meeting to be
held August 26, 1997 are incorporated by reference into Part III.
<PAGE>
PART I.
ITEM 1. BUSINESS
Sterling Electronics Corporation was incorporated under the laws of the
State of Nevada on July 6, 1967. It succeeded to the business of Sterling
Electronics, Inc., a Texas corporation, by merger in October 1967. The term
"Company" as used herein refers to Sterling Electronics Corporation and, unless
the text indicates otherwise, its subsidiaries and its predecessors.
Sterling Electronics Corporation has been engaged in the distribution of
electronic parts since inception. In April 1988, when the Company was operating
from thirteen geographic locations, Sterling began an expansion program to place
its distribution operations in additional geographic markets. These expansion
moves bring Sterling's distribution network, as of June 1997, to 38 locations
covering over 80% of the United States' and Canada's geographic markets for
electronic components.
Customers are principally manufacturers of capital goods containing
electronic circuitry such as electronic measurement devices, personal computers,
computer workstations, computer peripherals, process control systems, medical
monitoring equipment and telecommunications devices. Products purchased by these
manufacturers are part of their raw material requirements and quantities
purchased are usually less than the order minimums established for direct sales
by manufacturers of such components. Total sales to governmental units in the
last fiscal year were less than 1% of sales. Distribution business is solicited
by a force of field sales and telephone sales personnel.
At March 29, 1997, operations were conducted from three regional service
centers/warehouses and 38 sales offices in office-warehouse type buildings
generally located in industrial park sites. Each sales location has an array of
product authorizations granted by approximately 40 total suppliers. Most
authorizations are common to several or all sales branches. Each service center
supplies products to customers in all geographic areas the Company covers. Sales
locations are in Boston, Massachusetts; Parsippany and Mt. Laurel, New Jersey;
Richmond, Virginia; Houston, Austin and Dallas, Texas; Albuquerque, New Mexico;
Phoenix, Arizona; Wallingford, Connecticut; Tulsa, Oklahoma; Denver, Colorado;
Kansas City, Kansas; Minneapolis, Minnesota; Irvine, Westlake Village, San Diego
and San Jose, California; Salt Lake City, Utah; Columbia, Maryland; Chicago,
Illinois; Cleveland, Ohio; Raleigh, North Carolina; Atlanta, Georgia; Portland,
Oregon; Orlando, Florida; Calgary, Alberta; Vancouver, British Columbia; Ottawa
and Toronto, Ontario; Montreal, Quebec; Seattle, Washington; Huntsville,
Alabama; Appleton and Milwaukee, Wisconsin; Indianapolis, Indiana; and Detroit
Michigan. Early in fiscal 1998 the Company completed the construction phase of
its new warehouse and distribution center which is located adjacent to the
Dallas/Ft. Worth International Airport. The Company intends to consolidate the
distribution operations of its three existing distribution centers into this new
state-of-the-art facility during the second and third quarters of fiscal 1998.
All locations are connected by a data communications network to a
computerized on-line, real-time order entry, inventory management system. The
enterprise computer is in Houston, Texas. The system allows Sterling to provide
rapid customer service to all geographic locations from central inventories
concentrated in three service centers.
Products consisting of approximately 80,000 items include connectors,
integrated circuits, microprocessors, power supplies, resistors, capacitors,
relays, switches, and liquid crystal displays. Products are purchased from
approximately 40 vendors and distributed to approximately 14,000 customers; no
single customer's volume accounted for as much as 3% of the sales of the Company
during the last fiscal year. Sterling assembles connectors to customers'
specifications and fabricates custom flat and round cable assemblies. Dallas,
the largest of the assembly centers, provides design support and fast turnaround
of customer requirements for both connectors and cable assemblies. In addition,
other products requiring added value are produced at the Dallas assembly center.
A substantial portion of the products sold are purchased pursuant to
distributor-manufacturer authorization agreements; the agreements are largely
nonexclusive, provide for a specified amount of inventory to be carried and may
be canceled by either party on short notice. They provide, in most instances,
for return of the manufacturers' inventory in the event of cancellation. In the
opinion of the Company, cancellation of any particular agreement would not have
a material adverse effect upon its business.
The ten largest suppliers providing merchandise to the Company are AMP
Special Products, Dallas Semiconductor, Hitachi America Ltd., Mitel, Inc., Molex
Connector Co., NEC Electronics, Inc., OKI Semiconductor, Seiko Instruments,
Sharp Electronics Corporation and Toshiba America, Inc. During fiscal 1997,
Toshiba America, Inc. supplied approximately 11% of the products sold. No other
single manufacturer supplied more than 10% of the products sold.
<PAGE>
In the business of distributing electronic components, the Company competes
with many concerns in each market area, including its own suppliers in certain
quantities. A number of them are significantly larger and possess greater
financial resources than the Company. The Company's sales volume places it among
the fifteen largest industrial electronic parts distributing firms in the United
States.
EMPLOYEES
At March 29, 1997, the Company and its subsidiaries employed 860 persons.
None are employed subject to a collective bargaining agreement. In the opinion
of the Company, it enjoys a good relationship with its employees. The Company
provides its full time employees with group health, dental, life insurance and
disability income benefits.
BACKLOG
At March 29, 1997, the Company's total backlog of confirmed, unfilled
orders was approximately $86,418,000. The Company expects almost all of this
backlog to be shipped before the end of fiscal 1998. Backlog at March 30, 1996
was $95,842,000. The backlog at year end is not necessarily indicative of sales
for any specific subsequent period.
COMPETITION
In each of the fields of business engaged in by the Company, it is subject
to intense competition from many firms of varying size and resources, including
many which are larger and financially stronger than the Company.
INDUSTRY SEGMENT DATA
Industry segment data included on page 26 in the Company's 1997 annual
shareholders' report is incorporated herein by reference.
ITEM 2. PROPERTIES
At March 29, 1997, the Company utilized facilities containing a total of
approximately 477,000 square feet of floor space which are well maintained and
satisfactory for the purpose used. All properties are leased for varying terms.
Pertinent details with respect to the properties considered by the Company to be
its principal operating facilities are as follows:
LOCATION Square Lease Expires
Feet Fiscal Year
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Grapevine, Texas 181,215 2007
Houston, Texas - Corporate Offices 63,540 2002
Dallas, Texas 45,507 2000
Phoenix, Arizona 23,000 2000
Woburn, Massachusetts 18,400 1998
Minneapolis, Minnesota 14,844 2004
San Jose, California 16,302 2003
ITEM 3. LEGAL PROCEEDINGS
There are no significant active legal proceedings against the Company or
any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company had approximately 1,843, 1,887, and 2,259 shareholders of
record at March 29, 1997, March 30, 1996, and April 1, 1995 respectively. Pages
16 and 27 of the Company's 1997 annual shareholders' report are incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data included on page 12 of the Company's 1997 annual
shareholders' report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of the Financial Condition and Results
of Operations included on pages 13 through 15 of the Company's 1997 annual
shareholders' report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and its
subsidiaries, included on pages 16 through 27 of the Company's 1997 annual
shareholders' report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management", "Election of Directors" and "Executive
Officers" in the Company's annual proxy statement dated July 18, 1997 is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading "Directors Compensation" and
"Executive Compensation and Other Matters" in the Company's annual proxy
statement dated July 18, 1997 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors" in the Company's
annual proxy statement dated July 18, 1997 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. 1. FINANCIAL STATEMENTS AND OTHER FINANCIAL DATA (incorporated by
reference to the pages shown below of the Sterling Electronics Corporation 1997
annual shareholders' report):
Page No.
--------
Consolidated statements of operations -
Fiscal years ended March 29, 1997,
March 30, 1996 and April 1, 1995 16
Consolidated statements of financial position -
March 29, 1997 and March 30, 1996 17
Consolidated statements of shareholders'
equity-March 29, 1997,
March 30, 1996 and April 1, 1995 18
Consolidated statements of cash flows -
Fiscal years ended March 29, 1997,
March 30, 1996 and April 1, 1995 19
Notes to consolidated financial statements 20-25
Report of Independent Auditors 26
With the exception of the financial statements and other financial data
listed above or incorporated under items 1, 5, 6, 7 and 8 of this form 10-K, the
Sterling Electronics Corporation 1997 annual shareholders' report is not deemed
filed as part of this report. The financial statement Schedule II listed below
should be read in conjunction with the financial statements listed above.
2. FINANCIAL STATEMENT SCHEDULE :
Schedule II - Valuation and Qualifying Accounts - fiscal years ended March
29, 1997, March 30, 1996, and April 1, 1995.
All other schedules have been omitted because the required information is
not present in amounts sufficient to require submission of the schedule or
because the information required is included in the financial statements
including the notes thereto.
3. EXHIBITS:
3.1* -- Articles of Incorporation of Sterling Electronics
Corporation, incorporated by reference to Exhibit 3.1 on
Form S-1, Registration No. 33-28665.
3.2* -- Amended Bylaws of Sterling Electronics Corporation,
incorporated by reference to Exhibit 3.2 on Form S-1,
Registration No. 33-28665.
10.1* -- 1967 Stock Option Plan of Sterling Electronics
Corporation incorporated by reference on Form S-8,
Registration No.
33-48097. (1)
10.2* -- 1968 Stock Option Plan of Sterling Electronics
Corporation incorporated by reference on Form S-8,
Registration No.
33-48097. (1)
10.3* -- Incentive Bonus Plan of Sterling Electronics Corporation
incorporated by reference on Form S-8, Registration No.
33-48097. (1)
10.4* -- Sterling Electronics Corporation 1992 Incentive Stock
Option Plan, incorporated by reference on Form S-8,
Registration No. 33-81140. (1)
10.5* -- Sterling Electronics Corporation 1993 Directors'
Non-Qualified Stock Option Plan, incorporated by
reference on Form S-8, Registration No. 33-81140. (1)
10.6* -- Sterling Electronics Corporation Non-Qualified Stock
Option Grant dated August 2, 1993, incorporated by
reference on Form S-8, Registration No. 33-81140. (1)
<PAGE>
10.7* -- Sterling Electronics Corporation Non-Qualified Stock
Option Grant dated February 16, 1994, incorporated by
reference on Form S-8, Registration No. 33-81140. (1)
10.8* -- Incentive Bonus Plan of Sterling Electronics Corporation,
incorporated by reference on Form S-8, Registration No.
33-81138. (1)
10.9* -- Sterling Electronics Corporation 1994 Stock Option Plan,
incorporated by reference on Form S-8, Registration
No. 33-60777. (1)
10.10* -- Employment Agreement dated September 18, 1995 between
Ronald S. Spolane and Sterling Electronics Corporation
incorporated by reference to Exhibit 10.10 to the
company's Annual Report on Form 10-K for the year ended
March 30, 1996, Commission File No. 1-5522. (1)
10.11* -- Employment Agreement dated September 18, 1995 between
David S. Spolane and Sterling Electronics Corporation
incorporated by reference to Exhibit 10.11 to the
company's Annual Report on Form 10-K for the year ended
March 30, 1996, Commission File No. 1-5522. (1).
10.12* -- Sterling Electronics Corporation Broad Base Severance
Plan dated November 14, 1995 incorporated by reference to
Exhibit 10.12 to the company's Annual Report on Form 10-K
for the year ended March 30, 1996, Commission File
No. 1-5522. (1)
10.13* -- Sterling Electronics Corporation Upper Management
Severance Plan dated November 14, 1995 incorporated by
reference to Exhibit 10.13 to the company's Annual Report
on Form 10-K for the year ended March 30, 1996, Commission
File No. 1-5522. (1)
10.14* -- Bank Agreement dated February 16, 1996 between Sterling
Electronics Corporation and NationsBank of Texas, N.A.
incorporated by reference to Exhibit 10.12 to the
company's Annual Report on Form 10-K for the year ended
March 30, 1996, Commission File No. 1-5522.
10.15* -- Sterling Electronics Corporation 1996 Employee Stock
Purchase Plan incorporated by reference to Form S-8,
Registration No. 333-19343. (1)
10.16* -- Option Agreement by and between the Company and Ronald S.
Spolane incorporated by reference to Form S-8,
Registration No. 333-19343. (1)
10.17* -- Option Agreement by and between the Company and David A.
Spolane incorporated by reference to Form S-8,
Registration No. 333-19343. (1)
11 -- Statement Re: Computation of Per Share Earnings.
13 -- Pages 12 through 27 of the Sterling Electronics
Corporation 1997 annual shareholders' report.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Ernst & Young LLP.
27 -- Financial Data Schedule.
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* Incorporated by reference.
(1) Management contract or compensatory plan or agreement.
B. REPORTS ON FORM 8-K:
None.
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STERLING ELECTRONICS CORPORATION
ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS RECEIVABLES
FISCAL YEARS ENDED MARCH 29, 1997,
MARCH 30, 1996 AND APRIL 1, 1995
<TABLE>
<CAPTION>
===============================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
===============================================================================================
ADDITIONS DEDUCTIONS
--------- ----------
BALANCE CHARGED UNCOLLECTABLE BALANCE
DESCRIPTION AT BEGINNING TO COSTS ACCOUNTS AT END
OF PERIOD & EXPENSES WRITTEN OFF OF PERIOD
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the period ended
March 29, 1997 $ 908,303 $ 512,723 $ 557,380 $ 863,646
For the period ended
March 30, 1996 $ 653,669 $ 614,240 $ 359,606 $ 908,303
For the period ended
April 1, 1995 $ 691,901 $ 527,770 $ 566,002 $ 653,669
</TABLE>
Note: Balances exclude those of discontinued operations.
<PAGE>
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 hereunto duly authorized.
STERLING ELECTRONICS CORPORATION
Date: June 26, 1997 By: /s/ R. S. Spolane
---------------------------------------
R. S. Spolane, Chairman, President
and Chief Executive Officer
/s/ Mac McConnell
---------------------------------------
Mac McConnell, Vice President and Chief
Financial Officer
MAJORITY OF THE BOARD OF DIRECTORS
/s/ Jay H. Golding
---------------------------------------
Jay H. Golding
/s/ S. M. Lambert
---------------------------------------
S. M. Lambert
/s/ H. G. Maltz
---------------------------------------
H. G. Maltz
/s/ D. A. Spolane
---------------------------------------
D. A. Spolane
/s/ R. S. Spolane
---------------------------------------
R. S. Spolane
/s/ D. R. Toomim
---------------------------------------
D. R. Toomim
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. ITEM NUMBERED PAGES
- ----------- ---- --------------
11 Statement Re: Computation of Per Share Earnings.
13 Pages 12 through 27 of the Sterling Electronics
Corporation 1997 annual shareholders' report.
21.1 Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
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EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
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<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
Year Ended
---------------------------------------------
March 29, March 30, April 1,
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 7,110 7,235 7,194
Net effect of dilutive stock options -- based on the
treasury stock method using average market price 170 186 129
---------------------------------------------
Total shares 7,280 7,421 7,323
=============================================
Income from continuing operations $ 9,598 $10,373 $ 7,761
Income (loss) from discontinued operations -0- (534) 31
---------------------------------------------
Net income $ 9,598 $9,839 $ 7,792
=============================================
Per share amounts
Income from continuing operations $ 1.32 $ 1.40 $ 1.06
Income (loss) from discontinued operations (0.00) (0.07) 0.00
---------------------------------------------
Net income $ 1.32 $ 1.33 $ 1.06
=============================================
(Amounts in thousands, except per share data)
Year Ended
------------------------------------------
March 29, March 30, April 1,
1997 1996 1995
==========================================
FULLY DILUTED
Average shares outstanding 7,110 7,236 7,194
Net effect of dilutive stock options -- based on the
treasury stock method using the year-end market
price, if higher than average market price 173 204 132
------------------------------------------
Total shares 7,283 7,440 7,326
==========================================
Income from continuing operations $ 9,598 $10,373 $ 7,761
Income (loss) from discontinued operations 0 (534) 31
------------------------------------------
Net Income $ 9,598 $ 9,839 $ 7,792
==========================================
Per share amounts
Income from continuing operation $ 1.32 $ 1.39 $ 1.06
Income (loss) from discontinued operations (0.00) (0.07) 0.00
------------------------------------------
$ 1.32 $ 1.32 $ 1.06
==========================================
</TABLE>
EXHIBIT 13
FIVE-YEAR REVIEW OF SELECTED FINANCIAL DATA
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(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
<TABLE>
<CAPTION>
Fiscal Year Ended (Note A)
-----------------------------------------------------------------------------------
MARCH 29, MARCH 30, April 1, April 2, April 3,
1997 (NOTE B) 1996 (Note C) 1995 1994 1993 (Note D)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 343,764 $ 322,135 $ 239,024 $ 196,987 $ 144,892
Income from continuing operations
and before cumulative effect
of change in accounting principle $ 9,598 $ 10,373 $ 7,761 $ 5,634 $ 2,124
Discontinued operations -0- (534) 31 12 41
Cumulative effect of change
in accounting principle (Note E) -0- -0- -0- (1,742) -0-
------------- ------------- ------------- ------------- -------------
Net income $ 9,598 $ 9,839 $ 7,792 $ 3,904 $ 2,165
Income per common share:
Primary
Continuing operations $ 1.32 $ 1.40 $ 1.06 $ .91 $ .46
Discontinued operations -0- (.07) -0- -0- .01
Cumulative effect of change
in accounting principle -0- -0- -0- (.28) -0-
------------- ------------- ------------- ------------- -------------
Net income $ 1.32 $ 1.33 $ 1.06 $ .63 $ .47
Fully diluted
Continuing operations $ 1.32 $ 1.39 $ 1.06 $ .82 $ .42
Discontinued operations -0- (.07) -0- -0- .01
Cumulative effect of change
in accounting principle -0- -0- -0- (.24) -0-
------------- ------------- ------------- ------------- -------------
Net income $ 1.32 $ 1.32 $ 1.06 $ .58 $ .43
Total assets $ 151,530 $ 126,838 $ 86,348 $ 76,307 $ 57,217
Working capital $ 77,833 $ 71,391 $ 47,343 $ 41,960 $ 31,816
Ratio of current assets
to current liabilities 2.5 2.8 2.6 2.6 2.7
Long-term debt $ 39,301 $ 33,719 $ 12,950 $ 15,058 $ 21,249
Shareholders' equity $ 56,484 $ 48,453 $ 39,497 $ 31,364 $ 16,863
</TABLE>
Note A: Restated for discontinued operations and five percent stock dividends
paid to shareholders of record as of December 9, 1996 and January 11,
1996.
Note B: Includes operations of Marsh Electronics from date acquired (November
19, 1996).
Note C: Includes Canadian operations from date acquired (August 22, 1995).
Note D: Fifty-three-week year.
Note E: Cumulative effect as of April 4, 1993 of adopting Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Post Employment
Benefits".
Note F: No cash dividends were paid during the periods presented.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Fiscal 1997 sales of $343.8 million were 7 percent ahead of the prior
year's sales of $322.1 million. If the sales of Marsh Electronics, Inc.
("Marsh") acquired in November 1996, and the Canadian locations, acquired in
August 1995, were excluded from both periods, sales would decline 1 percent.
Such decrease would be the result of decreased semiconductor revenues partially
offset by increased passive and electromechanical and connector revenues.
GROSS MARGIN
Gross margin of 21.9 percent reflects a 0.5 point increase from 21.4
percent a year ago. This increase in gross margin is the result of improved
gross margins on semiconductor sales and sales of higher margin connector
products increasing while lower margin semiconductor sales declined.
SELLING AND ADMINISTRATIVE COSTS
Operating expenses increased to 16.6 percent of sales compared to 15.5
percent of sales a year ago. The majority of the dollar increase is due to the
cost of operating the four Marsh sales offices and the Marsh service center for
the nineteen weeks since acquisition. The second largest contribution to the
dollar increase is the cost of operating for a full year the Canadian operations
which were included for only thirty-three weeks a year ago. In addition to the
four Marsh locations the Company operated two more sales locations (Portland and
Huntsville) during fiscal 1997 than during fiscal 1996. Warehouse expenses,
management information system costs and the cost of the recently established
team of field application engineers increased significantly in fiscal 1997
compared to fiscal 1996.
LEASE COMMITMENT PROVISION
The Company's decision to consolidate the distribution operations of its
three existing distribution centers into the new facility in Grapevine, Texas
resulted in excess leased facilities. The related decision to sublease these
excess facilities resulted in a $400,000 (before tax) charge.
OPERATING INCOME
As a result of selling and administrative expenses increasing more rapidly
than gross margin dollars, operating income decreased $1.2 million, a 6 percent
decline from the previous fiscal year.
INTEREST
Interest costs increased by $366,000 (21 percent). The increase in interest
expense is primarily the result of the $5 million (20 percent) increase in
average indebtedness outstanding. Outstanding indebtedness increased as a result
of the $16 million increase in accounts receivable and inventories during fiscal
1997, the $15.9 million used to purchase Marsh and $3.1 million of capital
expenditures.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a high level of current assets, primarily accounts
receivable and inventories. Current assets as a percentage of total assets were
approximately 85 percent and 88 percent at the end of fiscal 1997 and 1996,
respectively.
At fiscal year end, Sterling's current assets were 2.5 times current
liabilities and working capital was $77.8 million, compared to current assets of
2.8 times current liabilities and $71.4 million in working capital a year ago.
Working capital continues to increase, reflected principally in greater
inventories and receivables required to support increasing sales, partially
offset by increased accounts payable and accrued expenses. Average inventory
turnover for fiscal 1997 was 4.3, down from 5.4 for fiscal 1996.
Cash flow from operations, along with $15 million of proceeds from the term
loan from an insurance company, were sufficient to fund the $16 million fiscal
1997 increase in accounts receivable and inventories, the November 1996
acquisition of Marsh for $15.9 million and $3.1 million of capital expenditures,
principally for computer hardware and software.
The Company's need for additional investment in receivables and inventories
is expected to continue in connection with anticipated sales growth.
At March 29, 1997, the Company had $16 million in available credit under
the $40 million bank credit line which matures on February 16, 1999. Management
expects to extend the maturity of the existing bank credit line and/or enter
into a new bank credit line before February 16, 1999. 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 should be sufficient to meet liquidity needs over the
coming fiscal year.
On April 15, 1996 the Company borrowed $15 million at a fixed interest rate
of 6.45% from an insurance company under a ten year agreement with a seven year
average maturity. Proceeds from this loan were used to reduce amounts borrowed
under the bank credit line.
On June 5, 1996, the Company agreed to lease a 181,000 square foot
warehouse which was constructed during fiscal 1997 adjacent to the Dallas/Fort
Worth International Airport. The lease term is ten years with monthly rental
payments of approximately $82,000, plus the Company is responsible for all
property taxes, insurance and maintenance. As of March 29, 1997, the Company
also has leased material handling equipment, computer equipment and material
management software for this warehouse and distribution center. The lease term
on the equipment lease is five years with monthly rental payments of
approximately $57,000, plus the Company is responsible for all property taxes,
insurance and maintenance. As of March 29, 1997 the Company intends to lease
and/or purchase $3 million to $4 million of additional equipment and software
for the warehouse during fiscal 1998. The Company intends to consolidate the
distribution operations of its three existing regional distribution centers into
this new state-of-the-art facility during the second and third quarters of
fiscal 1998. Management believes that the capital resources described above
should be adequate to fund the cost of this consolidation and the operation of
the new distribution center.
-14-
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES: Fiscal 1996 sales of $322.1 million were 35 percent ahead of the
fiscal 1995 sales of $239.0 million. This increase was the result of improved
market conditions, especially increased demand for semiconductor products.
Semiconductor product, connector product and passive and electromechanical
product sales increased 45%, 26% and 25%, respectively, in fiscal 1996 over
fiscal 1995. Fiscal 1996 includes $13.2 million of sales from the operations in
Canada which were acquired on August 22, 1995.
GROSS MARGIN: Fiscal 1996 consolidated gross margins of 21.4 percent
reflect a 0.9 point decrease from 22.3 percent in fiscal 1995. The decline stems
principally from competitive pricing pressures in all product segments, and
semiconductor sales increasing more rapidly than sales of higher margin passive
and connector products.
SELLING AND ADMINISTRATIVE COSTS: Fiscal 1996 consolidated operating
expenses as a percentage of sales declined to 15.5 percent, the lowest in the
Company's history, compared to 16.5 percent in fiscal 1995. 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 selling and administrative expenses, fiscal 1996 operating income
increased $5,144,000, a 37 percent improvement over fiscal 1995.
INTEREST Interest costs increased by $648,000 (60 percent). The increase in
interest expense is primarily the result of the $10 million (63 percent)
increase in average indebtedness outstanding under the Company's bank credit
line. Outstanding indebtedness increased as a result of the $29 million increase
in accounts receivable and inventories during fiscal 1996, the $7.4 million used
to purchase the Company's Canadian operations and $2.9 million of capital
expenditures.
-15-
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
Fiscal years ended March 29, 1997, March 30, 1996, and April 1, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 343,764 $ 322,135 $ 239,024
Cost of sales 268,466 253,310 185,754
-------------- ------------- -------------
Gross profit 75,298 68,825 53,270
Selling and administrative costs 57,015 49,775 39,364
Lease commitment provision 400 -0- -0-
-------------- ------------- -------------
Operating income 17,883 19,050 13,906
Interest expense 2,101 1,735 1,087
-------------- ------------- -------------
Income from continuing operations before income taxes 15,782 17,315 12,819
Provision for income taxes 6,184 6,942 5,058
-------------- ------------- -------------
Income from continuing operations 9,598 10,373 7,761
Discontinued operations:
Income (loss) from operations, net of income taxes of
$(378) in 1996 and $8 in 1995 -0- (522) 31
Loss on disposition -0- (12) -0-
-------------- ------------- -------------
Net income $ 9,598 $ 9,839 $ 7,792
============== ============= =============
Income per common share and common share equivalent:
Primary
Continuing operations $ 1.32 $ 1.40 $ 1.06
Discontinued operations -0- (.07) -0-
-------------- ------------- -------------
$ 1.32 $ 1.33 $ 1.06
============== ============= =============
Fully diluted
Continuing operations $ 1.32 $ 1.39 $ 1.06
Discontinued operations -0- (.07) -0-
-------------- ------------- -------------
$ 1.32 $ 1.32 $ 1.06
============== ============= =============
Number of common shares and common share
equivalents used in computing per share amounts
Primary 7,280,000 7,421,000 7,323,000
Fully diluted 7,283,000 7,440,000 7,326,000
See notes to consolidated financial statements.
</TABLE>
-16-
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)
Sterling Electronics Corporation
<TABLE>
<CAPTION>
March 29, 1997 March 30,1996
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,818 $ 4,377
Receivables-net of reserve for doubtful accounts of $864 in
1997 and $908 in 1996 55,722 50,083
Inventories 67,531 56,759
Deferred income taxes 1,022 230
Prepaid expenses and other current assets 450 416
-------------- --------------
Total current assets 128,543 111,865
PROPERTY AND EQUIPMENT
Land and buildings 1,366 0
Capitalized leases 407 1,227
Furniture, fixtures and equipment 12,522 9,061
Leasehold improvements 1,401 1,401
-------------- --------------
15,696 11,689
Less: accumulated depreciation 5,987 4,780
-------------- --------------
9,709 6,909
EXCESS OF COST OVER FAIR VALUE of net assets acquired net of accumulated
amortization of $644 in 1997 and $451 in 1996 9,205 4,141
OTHER ASSETS 4,073 3,923
-------------- --------------
$ 151,530 $ 126,838
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 38,831 $ 29,843
Accrued compensation 5,453 5,816
Other accrued expenses 4,707 3,719
Current portion of long-term debt 239 291
Income taxes 1,480 805
-------------- --------------
Total current liabilities 50,710 40,474
LONG-TERM DEBT 39,301 33,719
OTHER NON-CURRENT LIABILITIES 5,035 4,192
SHAREHOLDERS' EQUITY
Preferred stock; none issued
Common stock, ($.50 par value) 7,391,225 and 7,385,660 shares issued for
1997 and 1996, respectively 3,696 3,517
Additional paid-in capital 26,795 22,054
Retained earnings 29,971 24,984
Less foreign currency translation adjustment 72 -0-
-------------- --------------
60,390 50,555
Less common stock in treasury, at cost - 328,388 shares in 1997
and 189,925 shares in 1996 3,906 2,102
-------------- --------------
56,484 48,453
-------------- --------------
$ 151,530 $ 126,838
============== ==============
</TABLE>
See notes to consolidated financial statements.
-17-
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Foreign
Additional Currency
Common Paid-In Retained Translation Treasury
Stock Capital Earnings Adjustment Stock
--------- --------- ---------- ----------- --------
BALANCE, April 2, 1994 $ 3,302 $15,729 $ 12,743 0 $( 410)
Stock issued under
employee plans 41 681 0 0 25
Purchases of treasury stock 0 0 0 0 (406)
Net income 0 0 7,792 0 0
-------- -------- -------- --------- -------
BALANCE, April 1, 1995 $ 3,343 $16,410 $ 20,535 $ 0 $( 791)
Stock issued under
employee plans 12 560 0 0 597
Purchases of treasury shares 0 0 0 0 (2,052)
Cancellation of treasury
shares (4) (140) 0 0 144
Issuance of stock dividend 166 5,224 (5,390) 0 0
Net income 0 0 9,839 0 0
-------- -------- -------- --------- --------
BALANCE, March 30, 1996 $ 3,517 $22,054 $ 24,984 $ 0 $(2,102)
Stock issued under
employee plans 3 317 0 0 1,398
Purchases of treasury stock 0 0 0 0 (3,202)
Translation adjustment 0 0 0 (72) 0
Issuance of stock dividend 176 4,424 (4,611) 0 0
Net income 0 0 9,598 0 0
-------- -------- -------- --------- -------
BALANCE, March 29, 1997 $ 3,696 $26,795 $ 29,971 $ (72) $(3,906)
======== ======== ======== ========= ========
See notes to consolidated financial statements
-18-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Dollars in thousands)
Sterling Electronics Corporation
Fiscal years ended March 29, 1997, March 30, 1996 and April 1, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,598 $ 9,839 $ 7,792
Adjustments needed to reconcile net income to
net cash provided by operating activities:
Amortization 230 136 360
Depreciation 2,040 1,184 634
Loss on disposals of property and equipment -0- -0- 46
Provision for losses on accounts receivable 513 614 527
Deferred taxes (447) (297) 305
Changes in operating assets and liabilities net of effects of acquisitions:
Decrease (increase) in accounts receivable 731 (13,461) (4,883)
(Increase) in inventories ( 3,263) (15,499) (4,923)
Decrease in prepaid and other current assets 32 1,125 108
Increase in accounts payable and accrued expenses 5,950 9,324 4,690
Increase (decrease) in other non-current liabilities 843 101 (68)
----------- ---------- ----------
Net cash provided (used) by operating activities 16,227 (6,934) 4,588
INVESTING ACTIVITIES
Purchases of property and equipment (3,110) (2,883) (1,820)
Acquisition of Marsh and Sterling Canada (15,862) (7,416) -0-
(Increase) in other assets (519) (511) (146)
----------- ---------- ----------
Net cash used in investing activities (19,491) (10,810) (1,966)
FINANCING ACTIVITIES
Proceeds from borrowings under revolving line of credit 64,133 90,237 40,600
Repayments of borrowings under revolving line of credit (73,326) (69,203) (42,440)
----------- ---------- ----------
Net (decrease) increase in revolving line of credit (9,193) 21,034 (1,840)
Proceeds from other long-term borrowings 15,000 -0- -0-
Principal payments on other long-term debt (276) (279) (273)
Purchases of treasury stock (3,214) (2,052) (406)
Issuance of common stock under employee plans 388 308 147
----------- ---------- ----------
Net cash provided (used) by financing activities 2,705 19,011 (2,372)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (559) 1,267 250
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,377 3,110 2,860
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,818 $ 4,377 $ 3,110
=========== ========== ==========
</TABLE>
During fiscal 1997, 1996, and 1995 the Company issued $1,223, $862, and $600,
respectively, of common stock under the Company's Incentive Bonus Plan and
401(k) Plan.
See notes to consolidated financial statements.
-19-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sterling Electronics Corporation (the Company) and its subsidiaries after
elimination of all significant intercompany accounts and transactions.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to the end of March.
The fiscal years ended March 29, 1997, March 30, 1996, and April 1, 1995 each
consisted of 52 weeks.
REVENUE RECOGNITION
The Company recognizes revenue as products are shipped to customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company's presentation of cash includes cash equivalents. Cash
equivalents are defined as short-term investments with maturity dates of ninety
days or less at time of purchase. The carrying amount reported in the balance
sheet approximates fair value.
INVENTORIES
Inventories, consisting primarily of merchandise purchased for resale, are
valued at the lower of cost (first-in, first-out) or market.
RECEIVABLES AND ACCOUNTS PAYABLE
The carrying amounts reported in the statements of financial position for
receivables and accounts payable approximate their fair value. See Note C for
additional fair value disclosures.
PROPERTY AND DEPRECIATION
Property and equipment are stated at cost. For financial reporting purposes
depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets (generally 3 to 10 years).
Leasehold improvements are amortized over the life of the lease or the service
life of the improvements, whichever is shorter. For income tax purposes
depreciation is computed principally by accelerated methods.
EXCESS OF COST OVER FAIR VALUE
The excess of the purchase price over the fair value of assets acquired in
business acquisitions is amortized on a straight line basis over 40 years.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred taxes
reflect the tax consequences on future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Canadian subsidiary have been translated
into U.S. dollars in accordance with FASB Statement No. 52, Foreign Currency
Translation. All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported separately as a component of shareholders' equity.
The effect on the statements of operations of transaction gains and losses
was not significant.
-20-
<PAGE>
EARNINGS PER SHARE
Primary: Primary earnings per common share are determined by dividing net
income by the weighted average number of common shares outstanding plus the
effect of dilution using the treasury stock method for stock options.
Fully Dilutive: Earnings per common share assuming full dilution are
determined from the primary earnings per share computation. Net income is
divided by the average outstanding common shares and equivalents.
RESTATEMENT
Previous years' results were restated for the effect of the stock dividends
(see Note E). Certain reclassifications have been made in the prior years'
financial statements to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is effective for financial statements
issued for periods ending after December 15, 1997. At such time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The method of calculating fully diluted earnings per share
will remain unchanged. The impact of Statement 128 on the calculation of
earnings per share is not expected to be material.
NOTE B -- ACQUISITIONS
The Company completed the acquisition of Marsh Electronics, Inc. ("Marsh")
on November 19, 1996. Marsh is a distributor of electronic parts which had
facilities in Milwaukee and Appleton, Wisconsin; Indianapolis, Indiana and
Detroit, Michigan. Additional Marsh facilities in Chicago, Illinois and
Minneapolis, Minnesota were closed and personnel were relocated into existing
Sterling facilities in those geographic areas. The $15.9 million purchase price
was paid in cash and was financed through borrowings under the Company's bank
revolving credit line. This acquisition was accounted for using the purchase
method of accounting. The excess of cost over the fair value of the net assets
acquired at the date of acquisition was approximately $5.3 million. The
operating results of Marsh are included with those of the Company from the date
of the acquisition forward. Sales by Marsh from November 19, 1996 through March
29, 1997 were approximately $15.3 million.
On August 22, 1995 the Company acquired all of the outstanding common stock
of DGW Electronics Corporation, a Canadian electronic parts distributor with
five sales offices in Canada. The name of the Canadian corporation was changed
to Sterling Electronics (Canada) Corporation ("Sterling-Canada"). The $7.4
million cost of the acquisition was paid in cash and was financed through
borrowings under the Company's bank revolving line of credit. This acquisition
was accounted for using the purchase method of accounting. The excess of cost
over the fair value of the net assets acquired at the date of acquisition was
$2.5 million. The Company's consolidated statements of operations include the
revenues and expenses of the Canadian operations subsequent to August 22, 1995.
The following pro forma results assume the acquisitions of Sterling-Canada
and Marsh had occurred at the beginning of the earliest period presented.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Pro Forma Year Ended
(Unaudited) March 29, 1997 March 30, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 375,160 $ 375,111
Net income 9,824 9,949
Earnings per share $ 1.35 $ 1.34
- --------------------------------------------------------------------------------
</TABLE>
This unaudited pro forma sales and earnings information is not necessarily
indicative of the combined results that would have occurred had the acquisitions
been completed as of such date, nor are they necessarily indicative of results
that may occur in the future.
NOTE C -- LONG-TERM DEBT
Long-term debt at March 29, 1997 and March 30, 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Bank revolving credit line $ 24,000 $ 33,194
Notes payable 15,000 -0-
Other long-term debt 540 816
--------- ---------
39,540 34,010
--------- ---------
Less: amounts due within
one year 239 291
--------- ---------
Long-term debt $ 39,301 $ 33,719
========= =========
</TABLE>
The maturity schedule of debt due after one year is as follows: $24,194 in
fiscal 1999, $85 in fiscal 2000, $2,165 in fiscal 2001, and $2,143 in fiscal
2002 and $10,714 thereafter.
-21-
<PAGE>
Effective February 16, 1996, the Company entered into a revolving credit
agreement with two banks (the "Banks") to provide a $40 million revolving line
of credit through February 16, 1999. At the Company's option, the interest rate
is at the Banks' prime rate (8.50% at March 29, 1997) or at the Banks' U.S.
dollar LIBOR (5.5625% at March 29, 1997) plus 0.75% to 1.5%, adjusted quarterly,
depending on the debt to capitalization ratio and the fixed charge coverage
ratio. These ratios resulted in an addition to LIBOR of 0.75% at March 29, 1997.
To reduce the impact of potential increases in interest rates on the
floating rate revolving credit debt, effective December 9, 1993, the Company
entered into an interest rate swap agreement with one of the Banks. The
agreement effectively fixed the interest rate through December 9, 1996 on $12
million of the revolving credit debt at 4.79% plus the addition to LIBOR
described above. The Company entered into an additional interest rate swap
agreement with one of the Banks which effectively fixes the interest rate from
December 6, 1996 through December 6, 2000 on $15 million of the revolving credit
debt at approximately 5.98% plus the addition to LIBOR described above. The
differential to be paid or received as interest rates change is recognized as an
adjustment to interest expense related to the floating rate debt. The fair value
of the swap agreement is not recognized in the financial statements. The Company
is exposed to credit loss in the event of nonperformance of the Banks, but the
Company does not anticipate nonperformance by either of these parties. The
amount of such exposure is generally the unrealized gain in the agreement.
The borrowings under the revolving credit agreement are unsecured. The
borrowing base for the agreement is 85% of the qualified trade receivables of
the Company, which exceeded $40 million at March 29, 1997. The agreement
requires a commitment fee of 1/4 of 1% per annum on the unused portion of the
line.
During the years ended March 29, 1997, March 30, 1996, and April 1, 1995,
average indebtedness outstanding under the revolving credit line was $16,947,
$26,160 and $16,036 at an average interest rate of 6.5% each year.
On April 15, 1996 the Company borrowed $15 million from an insurance
company under a ten year agreement with a fixed interest rate of 6.45%. The loan
agreement requires semiannual interest payments with seven equal annual
principal payments of $2,143 commencing on April 15, 2000. Proceeds from this
loan were used to reduce amounts borrowed under the revolving credit line.
Covenants of the bank and insurance agreements require maintenance of
working capital and tangible net worth in excess of specified dollar amounts.
The agreements restrict liens on the Company's assets and limit additional
capital leases. Other conditions provided in the agreements require the Company
to be in compliance with regard to quick ratio, fixed charge coverage and debt
to total capital. Under the terms of these agreements, as of March 29, 1997 the
Company is restricted from paying cash dividends in excess of approximately $6
million. At March 29, 1997, the Company was in compliance with all covenants of
the agreements.
Total interest paid on long-term debt was $1,542 in fiscal 1997, $1,696 in
fiscal 1996, $1,090 in fiscal 1995.
The estimated market value of the interest rate swap agreement and the $15
million insurance loan at March 29, 1997 was approximately $370 and $14 million,
respectively. The fair values of the Company's long-term fixed rate debt and the
interest rate swap are estimated using discounted cash flow analyses, based upon
the Company's estimate of its current incremental borrowing rates for similar
types of borrowing arrangements. The balance of the Company's borrowings
approximate their fair value.
NOTE D -- FEDERAL AND
STATE INCOME TAXES
Under the liability method, deferred taxes are determined by applying the
marginal tax rate to the temporary differences between the financial statement
and tax bases of assets and liabilities. Significant components of the Company's
deferred tax liabilities and assets are as follows:
1997 1996
---------- ----------
Deferred tax liabilities
Tax over book depreciation $ 430 $ 453
Other - net 50 2
---------- ----------
Total deferred tax liabilities 480 455
---------- ----------
Deferred tax assets
Employee benefit accruals 1,553 1,426
Allowance for doubtful accounts 260 328
Reserves 884 471
---------- ----------
Total deferred tax assets 2,697 2,225
---------- ----------
Net deferred tax assets $ 2,217 $ 1,770
========== ==========
-22-
<PAGE>
The differences between the consolidated effective income tax rate and the
federal statutory rate are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Taxes on income at
statutory rate $ 5,524 $ 6,060 $ 4,358
State income taxes, net
of federal benefit 515 548 453
Expenses not deductible
for tax purposes 145 84 112
Other - net -0- 250 135
-------- -------- --------
Income tax provision $ 6,184 $ 6,942 $ 5,058
======== ======== ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Current
Federal $ 5,838 $ 6,398 $ 4,066
State 793 841 687
--------- --------- --------
6,631 7,239 4,753
Deferred (447) (297) 305
--------- --------- --------
Income tax provision $ 6,184 $ 6,942 $ 5,058
========= ========= ========
</TABLE>
Total income tax payments made in fiscal years 1997, 1996 and 1995 were
$6,016, $6,258, and $5,132 respectively.
NOTE E -- SHAREHOLDERS' EQUITY
CUMULATIVE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of Cumulative
Convertible Preferred Stock and 2,000,000 shares of Preferred Stock, par value
$2.50 per share, which may be issued in series with terms and conditions
determined by the Board of Directors. At March 29, 1997 and March 30, 1996 none
of these shares were issued.
COMMON STOCK
In August 1996, the shareholders approved an amendment to the Company's
certificate of incorporation to increase the number of authorized shares of
common stock from 9,000,000 to 20,000,000.
The Company paid five percent common stock dividends to shareholders of
record as of January 11, 1996 and December 9, 1996. All share and per share data
for all periods presented have been restated for the five percent common stock
dividends.
At March 29, 1997, 1,690,437 shares of common stock were reserved for
issuance as follows:
Exercise of stock options granted or reserved for
future grant (see Note G -- Employee Stock Plans) 1,127,339
Stock grants under incentive bonus plan 195,127
Sales to employees under employee stock purchase plan 301,466
401(k) matching contributions 66,505
In July 1996, the Company's board of directors authorized management to
implement a stock repurchase program under which the Company may purchase, from
time to time, up to 1,000,000 shares of the Company's common stock. Purchases
are made in the open market. The timing and amount of the purchases depend,
among other things, on market conditions and corporate requirements. As of March
29, 1997, the Company had acquired approximately 156,000 shares of its common
stock under this authorization.
-23-
<PAGE>
NOTE F -- COMMITMENTS AND
CONTINGENT LIABILITIES
The Company leases various types of equipment and facilities under
operating leases of varying lengths. Lease rental expense was approximately
$2,353 in fiscal 1997, $2,461 in fiscal 1996, and $2,270 in fiscal 1995. Below
are approximate amounts of future minimum lease payments under noncancellable
operating leases:
Fiscal Future Lease
Year Payments
---- ------------
1998 $ 3,855
1999 3,684
2000 3,043
2001 2,434
2002 2,224
2003 and thereafter 4,839
------------
$ 20,079
============
NOTE G -- EMPLOYEE STOCK PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation", requires the use
of option valuation models which were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options generally equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Options granted under the 1992 and 1994 Stock Option Plans are at fair
market value at the date of grant and, subject to termination of employment,
expire five years from date of grant; are not transferable other than on death;
and become exercisable in equal annual installments over two-year or three-year
periods from date of grant.
Options granted under the 1993 Directors' Non-Qualified Stock Option Plan
are at fair market value at the date of grant and, subject to termination of
directorship, expire five years from the date of grant; are not transferrable
other than on death; and are exercisable immediately upon grant.
Nonqualified options to purchase 367,500 shares at $10.71 per share (fair
market value at date of grant) were granted on July 18, 1996, subject to
shareholder approval. The options were approved by the Company's shareholders on
August 27, 1996, expire ten years from date of grant and vest in four equal
annual installments commencing one year from date of grant. As a result of the
market price at the date of shareholder approval exceeding the market price at
the date of grant, compensation expense of $700 ($107 in fiscal 1997) will be
recognized over the four year vesting period.
The following is a summary of transactions for fiscal years 1995, 1996 and
1997 for all Company stock option plans:
Number of shares Option price
under option range per share
- ---------------------------------------------------------------------
Outstanding at April 2, 1994 287,752 $ 4.535 - 9.864
Granted 263,497 $10.431
Exercised (46,140) $ 4.535
- ---------------------------------------------------------------------
Outstanding at April 1,1995 505,109 $ 4.535 - 10.431
Granted 33,075 $14.643
Exercised (73,151) $ 4.535 - 10.431
Forfeited (42,997) $10.431 - 14.643
- ---------------------------------------------------------------------
Outstanding at March 30, 1996 422,036 $ 4.535 - 10.431
Granted 694,050 $10.714 - 10.952
Exercised (31,647) $ 4.535 - 10.431
Forfeited ( 6,666) $10.431
- ---------------------------------------------------------------------
Outstanding at March 29, 1997 1,077,773 $ 4.535 - 10.952
=====================================================================
Available for grant
April 1, 1995 359,525
March 30, 1996 369,447
March 29, 1997 49,566
The following table summarizes information about stock options outstanding
at March 29, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Exercisable Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- ------------------------------------------------------- -----------------------
under $10.00 170,335 16 months $ 6.598 170,335 $ 6.598
over $ 9.99 907,438 75 months $10.729 213,388 10.431
--------- -------
All 1,077,773 69 months $10.076 383,723 $ 8.729
-24-
<PAGE>
Had stock-based compensation costs been determined as prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", net income would have been reduced by $0.5 million ($.07 per
share on a primary and fully diluted basis) in fiscal 1997. Because all options
granted in fiscal 1996 were forfeited in fiscal 1996, net income and earnings
per share under Statement 123 do not differ materially from the amounts reported
for fiscal 1996. The pro forma effect on net income for fiscal 1997 is not
likely to be representative of the effects on reported net income for future
years because the fiscal 1997 amount includes the effect of awards granted in
fiscal 1997 and excludes the effect of awards granted before fiscal 1997.
Additionally, future amounts are likely to be affected by the number of grants
awarded since additional awards are generally expected to be made at varying
amounts.
In determining these amounts, the estimated weighted average fair value,
utilizing the Black-Scholes option-pricing model, at date of option grant during
fiscal 1997 was $4.55 for options whose exercise price equals the market price
on the date of grant and $8.49 for options whose exercise price is less than the
market price on the date of grant. The assumptions used to estimate the weighted
average fair value are: expected life - 6 years, risk-free interest rate - 6.3
percent and expected volatility 46 percent. There is no expected dividend yield.
The Company has a defined contribution plan for eligible employees, which
qualifies under Section 401(k) of the Internal Revenue Code. The Company's
contribution to the plan, which is based on a specified percentage of employees'
contributions, amounted to $486, $473 and $415 in fiscal years 1997, 1996 and
1995, respectively. The Company may elect to make its contribution to the plan
in the form of the Company's common stock. During fiscal years 1997 and 1996 the
Company contributed 28,308 and 14,702 shares of common stock, respectively.
NOTE H -- DISCONTINUED OPERATIONS
The Company completed the sale of its manufacturing subsidiary, Phaostron
Instrument and Electronic Company ("Phaostron") to the management of Phaostron
in September 1995. The Company accepted a note receivable with a recorded value
of approximately $700 ($562 at March 29, 1997) as the sole consideration for the
sale. The recorded value of the note approximates the fair value. The operating
results, assets and liabilities of Phaostron have been classified as
discontinued operations for all periods presented. Phaostron sales which are
included in discontinued operations were $1,398 and $3,246, respectively, in
fiscal years 1996 and 1995.
NOTE I -- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is engaged in one business, the distribution of electronic
parts and components throughout the United States and Canada. The Company
purchases a wide variety of electronic components, including semiconductors,
connector products and passive and electromechanical components, and distributes
these products to manufacturers of telecommunications equipment, electronic
instruments, computers, computer peripherals, medical monitoring instruments and
other electronic subsystems.
The distribution of semiconductors accounted for approximately 44%, 51%,
and 48% of total Company sales in fiscal years 1997, 1996, and 1995,
respectively. Connector products accounted for approximately 25%, 20%, and 21%,
and passive and electromechanical products accounted for approximately 31%, 29%,
and 31% of total Company sales in fiscal years 1997, 1996, and 1995,
respectively.
Prior to the acquisition of its Canadian operations on August 22, 1995 the
Company did not conduct operations outside the United States. Sales in Canada
during fiscal 1997 and 1996 were $22.8 million and $13.2 million, respectively.
Identifiable assets in Canada at March 29, 1997 and March 30, 1996 were
approximately $11.9 million and $12.2 million, respectively.
-25-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Sterling Electronics Corporation
We have audited the accompanying consolidated statements of financial
position of Sterling Electronics Corporation as of March 29, 1997 and March 30,
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
March 29, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Electronics Corporation at March 29, 1997 and March 30, 1996, and the
consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended March 29, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Houston, Texas
May 23, 1997
-26-
<PAGE>
QUARTERLY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
FOR FISCAL YEARS ENDED MARCH 29, 1997 AND MARCH 30, 1996
<TABLE>
<CAPTION>
April-June July-September
1996 1995+ 1996 1995
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 82,123 $ 70,423 $ 77,277 $ 80,383
Gross profit $ 18,158 $ 15,122 $ 17,585 $ 17,203
Income from continuing operations $ 2,391 $ 2,273 $ 2,340 $ 2,522
Income (loss) from discontinued operations -0- 24 -0- (558)
----------- ----------- ----------- -----------
Net income $ 2,391 $ 2,297 $ 2,340 $ 1,964
=========== =========== =========== ===========
Income per common share:*
Primary
Continuing operations $ .32 $ .30 $ .32 $ .33
Discontinued operations -0- -0- -0- (.07)
----------- ----------- ----------- -----------
Net income $ .32 $ .30 $ .32 $ .26
=========== =========== =========== ===========
Fully diluted
Continuing operations $ .32 $ .30 $ .32 $ .33
Discontinued operations -0- -0- -0- (.07)
----------- ----------- ----------- -----------
Net income $ .32 $ .30 $ .32 $ .26
=========== =========== =========== ===========
Price range of common stock per share*
HIGH $ 16.667 $ 15.306 $ 13.095 $ 18.368
LOW 12.857 10.657 10.476 14.626
</TABLE>
<TABLE>
<CAPTION>
October-December January-March
1996 1995 1997 1996
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 82,181 $ 79,347 $ 102,184 $ 91,982
Gross profit $ 17,975 $ 17,051 $ 21,581 $ 19,449
Income from continuing operations $ 2,232 $ 2,503 $ 2,635 $ 3,075
Income (loss) from discontinued operations -0- -0- -0- -0-
----------- ----------- ----------- -----------
Net income $ 2,232 $ 2,503 $ 2,635 $ 3,075
=========== =========== =========== ===========
Income per common share:*
Primary
Continuing operations $ .31 $ .34 $ .36 $ .42
Discontinued operations -0- -0- -0- -0-
----------- ----------- ----------- -----------
Net income $ .31 $ .34 $ .36 $ .42
=========== =========== =========== ===========
Fully diluted
Continuing operations $ .31 $ .34 $ .36 $ .42
Discontinued operations -0- -0- -0- -0-
----------- ----------- ----------- -----------
Net income $ .31 $ .34 $ .36 $ .42
=========== =========== =========== ===========
Price range of common stock per share*
HIGH $ 13.750 $ 17.460 $ 14.500 $ 18.214
LOW 11.071 14.286 12.125 13.810
</TABLE>
* Traded on the New York Stock Exchange (symbol - SEC). Amounts have been
restated for five percent common stock dividendS paid to shareholders of
record as of December 9, 1996 and January 11, 1996.
+ Restated for discontinued operations.
-27-
EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT
Following is a list of all subsidiaries of Sterling Electronics Corporation
<TABLE>
<CAPTION>
Jurisdiction Percentage
or State of of Voting
Name of Subsidiary (2) Notes Incorporation Stock Owned
------------------ ----- -------------- -----------
<S> <C> <C> <C>
Sterling Partners, Inc. (1) Nevada 100.0
Marsh Electronics, Inc. (1) Wisconsin 100.0
Sterling Electronics (Canada) Corporation (1) Canada 100.0
(1) Included in consolidated financial statements of the Company.
No separate financial statements filed.
(2) Certain subsidiaries are omitted since the aggregate
of such subsidiaries is not material.
</TABLE>
- --------------------------------------------------------------------------------
EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Sterling Electronics Corporation of our report dated May 23, 1997,
included in the 1997 Annual Report to Shareholders of Sterling Electronics
Corporation.
Our audits also included the financial statement schedule of Sterling
Electronics Corporation listed in item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-48097) pertaining to the 1967 Stock Option Plan, 1968
Stock Option Plan and Incentive Bonus Plan of Sterling Electronics Corporation;
the incorporation by reference in the Registration Statement (Form S-8 No.
33-81138) pertaining to the Incentive Bonus Plan of Sterling Electronics
Corporation; the incorporation by reference in the Registration Statement (Form
S-8 No. 33-81140) pertaining to the 1992 Incentive Stock Option Plan of Sterling
Electronics Corporation; the incorporation by reference in the Registration
Statement (Form S-8 No. 33-60777) pertaining to the Sterling Electronics
Corporation 1994 Stock Option Plan; the incorporation by reference in the
Registration Statement (Form S-8 No.333-19343) pertaining to the Sterling
Electronics Corporation 1996 Employee Stock Purchase Plan of our report dated
May 23, 1997, with respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report (Form
10-K) of Sterling Electronics Corporation for the fiscal year ended March 29,
1997.
/s/ERNST & YOUNG LLP
Houston, Texas
June 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
form 10-K for the year ended March 29, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000094136
<NAME> Sterling Electronics Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-29-1997
<EXCHANGE-RATE> 1
<CASH> 3,818
<SECURITIES> 0
<RECEIVABLES> 56,586
<ALLOWANCES> 864
<INVENTORY> 67,531
<CURRENT-ASSETS> 128,543
<PP&E> 15,696
<DEPRECIATION> 5,987
<TOTAL-ASSETS> 151,530
<CURRENT-LIABILITIES> 50,710
<BONDS> 39,301
0
0
<COMMON> 3,696
<OTHER-SE> 52,788
<TOTAL-LIABILITY-AND-EQUITY> 151,530
<SALES> 343,764
<TOTAL-REVENUES> 343,764
<CGS> 268,466
<TOTAL-COSTS> 325,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 513
<INTEREST-EXPENSE> 2,101
<INCOME-PRETAX> 15,782
<INCOME-TAX> 6,184
<INCOME-CONTINUING> 9,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,598
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
</TABLE>
