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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 DECEMBER 31, 1995
COMMISSION FILE NUMBER: 0-16207
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16115 N.W. 52ND AVENUE
MIAMI, FLORIDA 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. ___
As of March 27, 1996, 19,863,895 shares (including 160,703 held by a
wholly-owned subsidiary of the Registrant) of the common stock of ALL AMERICAN
SEMICONDUCTOR, INC. were outstanding, and the aggregate market value of the
common stock held by non-affiliates was $41,350,000.
Documents Incorporated by Reference:
Portions of the definitive proxy statement to be filed within 120 days after the
end of the Registrant's fiscal year are incorporated by reference into Part III.
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ALL AMERICAN SEMICONDUCTOR, INC.
FORM 10-K - 1995
TABLE OF CONTENTS
PART ITEM PAGE
NO. NO. DESCRIPTION NO.
I 1 Business............................................. 1
2 Properties........................................... 17
3 Legal Proceedings ................................... 17
4 Submission of Matters to a Vote of Security-Holders.. 18
II 5 Market for the Registrant's Common Equity and Related
Stockholder Matters................................ 18
6 Selected Financial Data.............................. 20
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 21
8 Financial Statements and Supplementary Data.......... 30
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 30
III 10 Directors and Executive Officers of the Registrant... 30
11 Executive Compensation............................... 30
12 Security Ownership of Certain Beneficial Owners and
Management......................................... 30
13 Certain Relationships and Related Transactions....... 30
IV 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................ 30
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PART I
ITEM 1. BUSINESS
GENERAL
All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a national
distributor of electronic components manufactured by others. The Company
distributes a full range of semiconductors (active components), including
transistors, diodes, memory devices and other integrated circuits, as well as
passive components, such as capacitors, resistors, inductors and
electromechanical products, including cable, connectors, filters and sockets.
The Company's products are sold primarily to original equipment manufacturers
("OEMs") in a diverse and growing range of industries, including manufacturers
of consumer goods, satellite and communications products, computers and
computer-related products, robotics and industrial equipment, defense and
aerospace equipment and medical instrumentation. In June 1995, the Company began
distributing a very limited offering of computer products, consisting of
motherboards and computer upgrade kits. Approximately 75% of the Company's 1995
sales were derived from the sale of semiconductors (active components), 23% from
passive products and 2% from computer products. The Company expects that this
sales mix may change due to the newly created computer products division as well
as the addition of the products now offered as a result of the Company's
acquisitions of the Added Value Companies (as hereinafter defined) in December
1995. See "Expansion" below.
While the Company reincorporated in Delaware in 1987, it and its predecessors
have operated since 1964. The Company is one of the faster growing distributors
in the industry and, as a result of its growth, the Company was recognized by
industry trade publications as the 18th largest distributor of electronic
components in the United States, as well as the 9th largest distributor of
semiconductors in the United States, out of an industry group that numbers more
than 1,000 distributors.
The Company's principal executive office is located at 16115 N.W. 52nd Avenue,
Miami, Florida 33014.
THE ELECTRONICS DISTRIBUTION INDUSTRY
The electronics industry is one of the largest and fastest growing industries in
the United States. An industry association estimates total U.S. factory sales of
electronic products by OEMs, the Company's primary customer base, at $382
billion for 1995 compared to $276 billion in 1991. The growth of this industry
has been driven by increased demand for new products incorporating sophisticated
electronic components, such as laptop computers and satellite and
telecommunications equipment, as well as the increased utilization of electronic
components in a wide range of industrial, consumer and military products. The
three product groups included in the electronic components industry are
semiconductors,
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which account for approximately 35% of the electronic components
distribution marketplace, passive/electromechanical components, accounting for
approximately 35% and systems or computer products (such as disk drives,
terminals and computer peripherals), accounting for approximately 30%. Until
June 1995, the Company was historically a distributor of only semiconductors and
passive/electromechanical products. At such time, the Company created a new
computer products division. This division presently only carries a very limited
product offering, however, the Company currently intends to expand its computer
products offering in the future.
Distributors are an integral part of the electronics industry. During 1995, an
estimated $20 billion of electronic components were sold through distribution in
the United States, up from $9 billion in 1991. In recent years, there has been a
growing trend for distribution to play an increasing role in the electronics
industry. OEMs which utilize electronic components are increasingly looking to
outsource their procurement, inventory and materials management processes to
third parties in order to concentrate their resources, including management
talent, personnel costs and capital investment, on their core competencies,
which include product development and marketing. Large distribution companies
not only fill these roles, but further serve as a single supply source for OEMs,
offering a much broader line of products, incremental quality control measures
and more support services than individual electronic component manufacturers.
Management believes that OEMs will continue to increase their service and
quality requirements, and that this trend will result in OEMs becoming more
dependent on distributors in the future.
Electronic component manufacturers are under similar pressure to allocate a
larger share of their resources to research, product development and
manufacturing capacity as technological advances continue to shorten product
lifecycles. Electronic component manufacturers sell directly to only a small
number of their potential customers. This small segment of their customer base
accounts for a large portion of the total available revenues. It is not
economical for component manufacturers to provide a broad range of sales support
services to handle the large amount of customers that account for the balance of
available revenues. With their expanded service capabilities, large distributors
have now become a reliable means for component manufacturers to outsource their
sales, marketing, customer service and distribution functions. This trend
particularly benefits larger distributors with nationwide distribution
capabilities such as the Company, as manufacturers continue to allocate a larger
percentage of their business to a more limited number of full service
distribution companies. Management believes that this trend should also provide
consolidation opportunities within the electronic components distribution
industry.
As a result of the trends discussed above, management believes that distribution
represents a growing share of the electronics industry.
2
BUSINESS STRATEGY
The Company's strategy is to continue its managed growth and to gain market
share by: (i) increasing the number of customers it sells to through a
combination of expanding existing sales offices, opening new sales offices and
making selective acquisitions, and (ii) increasing sales to existing customers.
As part of its growth strategies, the Company has and continues to expand its
product offerings and service capabilities. While the Company's aggressive
growth plans caused an adverse effect on profitability in 1994 and continued to
lessen earnings in 1995, the Company believes that the investment in future
expansion was necessary to position the Company to participate in the dynamics
of its rapidly growing and changing industry and to achieve greater
profitability in the future.
EXPANSION
The Company has undergone significant expansion over the last few years. Over
the past three years, the Company has opened 15 new sales offices (including its
first foreign sales office based in Toronto, Canada in January 1996), relocated
and expanded all existing offices and acquired five electronic component
distributors in order to increase its presence as a national distributor. See
"Sales and Marketing-Sales Office Locations" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Acquisitions." The Company is seeking to further expand and enhance
its geographic coverage by opening or acquiring additional sales offices as well
as by expanding its businesses through further synergistic acquisitions.
Although no agreement has been reached as of the date of this filing, the
Company is currently in discussions with acquisition candidates.
As a result of the implementation of the Company's business strategy, the
Company has experienced significant growth. In order to effectively drive and
manage its expansion, the Company has over the last two fiscal years: (i)
restructured, enhanced and expanded its sales staff and sales management team;
(ii) expanded its quality control programs, including the implementation of its
total quality management ("TQM") and continuous process improvement programs
that ensure quality service, enhance productivity and, over time, reduce costs;
(iii) created and staffed a corporate operations department; (iv) increased
staffing in almost all corporate departments; (v) developed state-of-the-art
distribution technology, and (vi) enhanced its asset management capabilities
through new computer and telecommunications equipment. Additionally, the Company
expanded its marketing department. To better service the large customer base in
the western part of the United States, the Company opened a west coast corporate
office during 1994 which houses a regional credit department, as well as sales
and marketing executives for the Company. In addition, during 1995 the Company
opened an additional west coast regional credit department and an east coast
regional credit department.
To create additional opportunities for growth, the Company established a
computer products division. This division presently only carries a limited
product offering, however,
3
the Company expects to expand its product offering in this division. See
"Products-Computer Products."
In order to process rapid growth in sales, the Company has increased its
capacity. In addition to the 110,800 square feet of corporate offices and
state-of-the-art distribution center in Miami, Florida, the Company leased
20,000 square feet of space in Fremont, California (near San Jose) which was
opened in January 1996 to expand its semiconductor programming and distribution
capabilities and improve quality control and service capabilities for its west
coast customers. Additionally, as a result of the Company purchasing through two
separate mergers with and into the Company's wholly-owned subsidiaries (the
"Added Value Acquisitions") all of the capital stock of Added Value Electronics
Distribution, Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky
Mountain," and together with Added Value, collectively the "Added Value
Companies") in December 1995, the Company currently has distribution facilities
in Tustin, California and Denver, Colorado. See "Facilities and Systems." The
Company's capacity, combined with future growth in sales, should enable the
Company to realize the benefits of improved operating efficiencies and
increasing economies of scale in future periods.
INCREASING PRODUCT OFFERINGS
The Company intends to continue its effort to increase the number and breadth of
its product offerings, thereby allowing it to attract new customers and to
represent a larger percentage of the purchases being made by its existing
customers. As part of its efforts to attract new suppliers and expand its
product offerings, the Company has opened new sales offices (see
"Business-Business Strategy-Expansion") in order to achieve the geographic
coverage necessary to be recognized as a national distributor. Over the past 10
years the Company has increased the number of suppliers it represents to over
100 in order to expand its product offering and better serve its customers.
Acquisitions also provide the Company the opportunity to increase its product
offerings. The Company has already received national franchises from suppliers
of one of the companies acquired in the Added Value Acquisitions.
SERVICE CAPABILITIES
As stated above, customers are reducing their approved vendor base in an effort
to place a greater percentage of their purchases with fewer, more capable
distributors. As part of its overall strategy to increase market penetration,
the Company has endeavored to develop state-of-the-art service capabilities. The
Company refers to these service capabilities as "distribution technology." The
Company believes that it has developed service capabilities comparable to some
of the largest distributors in the industry, which service capabilities are not
yet readily available at many distributors of comparable size to the Company.
The Company further believes that these capabilities are not generally made
available by the largest distributors to middle market customers, which
represent the vast majority of the Company's customer base. See "Competition."
Management believes that smaller distributors generally do not have the ability
to offer as broad an array of services
4
as the Company. The Company differentiates itself from its competition by making
state-of-the-art distribution technology available to both large and middle
market customers. Although the Company believes that this differentiation will
assist the Company's growth, there can be no assurance that such differentiation
exists to the extent that the Company currently believes or that it will
continue in the future.
The Company's distribution technology incorporates nationwide access to
real-time inventory and pricing information, electronic order entry and rapid
order processing. During the past few years, the Company has expanded its
services capabilities to include just-in-time deliveries, bar coding, bonded
inventory programs, in-plant stores, in-plant terminals and automatic inventory
replenishment programs. The Company has also implemented electronic data
interchange ("EDI") programs. EDI programs permit the electronic exchange of
information between the Company and its customers and suppliers, thus
facilitating transactions between them by reducing labor costs and paperwork.
The Company has also expanded its technical capabilities by creating a technical
sales program. As part of this program, the Company has hired electrical
engineers at various sales offices across the country and expects to continue to
hire additional engineers in the future. The program is intended to generate
sales by providing customers with engineering support and increased service at
the design and development stages. The program is also intended to enhance the
technical capabilities of the Company's entire sales force through regular
training sessions. Management believes that this capability is also of great
importance in attracting new suppliers.
In an effort to reduce the number of distributors they deal with, and ultimately
reduce their procurement costs, many customers have been selecting distributors
that, in addition to providing their standard components, are also able to
provide products that are not part of the distributors' regular product
offerings. This service is referred to as "kitting." In order to expand its
service offerings to address this growing customer requirement, the Company
created a kitting department toward the end of 1994. One of the strategic
purposes of the Added Value Acquisitions is to enhance the Company's ability to
provide kitting services, as one of the acquired companies has extensive kitting
capabilities. The Company intends to expand nationwide the kitting capabilities
obtained as a result of such acquisitions. In addition to kitting capabilities,
as a result of the recent acquisitions, the Company now has expertise in turnkey
manufacturing which enables customers to outsource their entire procurement and
manufacturing process. Turnkey services are especially attractive to smaller
OEMs which do not have the capital resources necessary to invest in
state-of-the-art manufacturing equipment nor the capacity requirement necessary
to justify such an investment. In performing turnkey services, the Company
subcontracts out all of the manufacturing work to third party assemblers. In
order to properly focus on and market the kitting and turnkey services
capabilities, the Company has created a new division, Apex Solutions. The
Company offers warranties against defects in workmanship with respect to its
turnkey services, which is a pass-through from the assembler.
5
In order to further drive the sales of value-added services, the Company created
its American Assemblies & Design division in Chicago during the fourth quarter
of 1994. American Assemblies & Design has expanded the Company's value-added
capabilities with respect to electromechanical products.
Another rapidly growing segment of electronics distribution is the sale of
programmable semiconductor products. Programmable semiconductors enable
customers to reduce the number of components they use by highly customizing one
semiconductor to perform a function that otherwise would require several
components to accomplish. This saves space and enables customers to reduce the
size and cost of their products. In order to effectively sell programmable
products, most major distributors have established their own semiconductor
programming centers. To participate in this growing segment of the industry, the
Company opened a semiconductor programming center during the third quarter of
1995 and in January 1996 moved such programming center into the Company's new
20,000 square foot facility in Fremont, California (near San Jose). In addition
to enabling the Company to address a rapidly growing market for programmable
products, this capability will allow the Company to attract new product lines
that require programming capabilities.
In order to participate in the rapidly expanding utilization of Internet
services, in 1995 the Company acquired the hardware and developed its own
website. The Company believes that in the upcoming years a substantial amount of
transactions in its industry will be processed over the Internet. In this
regard, the Company has begun to design and develop its own home page which will
have extensive functionality for potential users. The Company expects this new
capability to be operational during the second quarter of 1996.
QUALITY CONTROLS AND ISO CERTIFICATION
During 1994 the Company created an operations department and embarked upon a TQM
program in order to properly manage its rapid growth and achieve compliance with
the increasingly stringent quality standards of its customer base. The TQM
program created continuous process improvement teams empowered to design and
direct the ongoing re-engineering of the Company. The intention of the TQM
program is to improve service, increase efficiency and productivity and, over
time, reduce costs. The expansion in capacity and service capabilities discussed
above were done within the confines of increasing strictness in quality control
programs and traceability procedures. As a result, the Company's Miami
distribution center successfully completed a procedure and quality audit that
resulted in its certification under the international quality standard of ISO
9002. This quality standard was established by the International Standards
Organization (the "ISO") created by the European Economic Community ("EEC"). The
ISO created uniform standards of measuring a company's processes, traceability
procedures and quality control in order to assist and facilitate business among
the EEC. The Company believes that this certification is becoming a requirement
of an increasing portion of the customer base and has currently been obtained by
only a small percentage of distributors in the United States.
6
PRODUCTS
ACTIVE AND PASSIVE COMPONENTS
The Company markets both semiconductors and passive products. Semiconductors,
which are active products, respond to or activate upon receipt of electronic
current. Active products include transistors, diodes, memory devices and other
integrated circuits. Passive components, on the other hand, are designed to
facilitate completion of electronic functions. Passive products include
capacitors, resistors, inductors and electromechanical products such as cable,
connectors, filters and sockets. Virtually all of the Company's customers
purchase both active and passive products.
While the Company offers many of the latest technology semiconductor and passive
products, its focus has historically been on mature products that have a more
predictable demand, more stable pricing and more constant sourcing. The Company
believes that the greater predictability in the demand for these products and
the fact that component manufacturers are not likely to invest capital in order
to increase production of older technologies combine to reduce the risks
inherent in large volume purchases of mature products. By making large volume
purchases of semiconductor and passive products, the Company decreases its
per-unit cost, thus increasing its potential for higher profit margins upon
resale of these mature products. Although the Company continues to position
itself as a leader in the more mature product lines, as part of its growth
strategy, sales of the newer technology products are now playing a greater role
in the overall sales mix of the Company and may play an even greater role in the
overall sales mix as the Company expands its product offerings. Many of the
newer technology products, as well as memory and microprocessor products, have
lower profit margins than the more mature semiconductor and passive product
lines.
The Company does not offer express warranties with respect to any of its active,
passive or computer products, instead passing on only those warranties, if any,
granted by its suppliers.
COMPUTER PRODUCTS
While the Company currently estimates that 30% of electronics distributors'
revenues relate to computer products and microprocessor sales, the Company has
not in the past derived significant revenues from the sale of these products. In
June 1995, the Company entered into a non-exclusive agreement with NexGen to
distribute its line of fifth-generation high-performance Microsoft
WINDOWS(TM)-compatible processor products for the personal computer industry,
which include Nx586 microprocessors and complete motherboards. In January 1996,
AMD, the fourth largest U.S. merchant manufacturer of integrated circuits,
acquired NexGen. There can be no assurance that AMD will maintain NexGen's
present distribution network. As a result of AMD's acquisition of NexGen, AMD
may discontinue the manufacture of Nx586 products, however, the NexGen
7
opportunity has provided the Company with an entrance into the very large and
rapidly growing computer products business. In this regard, the Company, in June
1995, established a computer products division. This division presently carries
only NexGen's motherboard products and computer upgrade kits, however, the
Company expects to expand its product offering in this division which operates
under the name "Access Micro Products." This new division addresses a different
customer base than the traditional OEMs to which the Company markets its
products. This new customer base includes value-added resellers ("VARs"),
systems integrators, computer products distributors, catalog companies and
computer superstores. Sales from this new division will generate substantially
lower profit margins than are generated by the Company's other products,
however, the Company expects to compensate for the lower margins by having a
lower cost structure for these operations and generating higher sales dollars on
a per-unit basis. Management currently remains optimistic about the business
prospects of its computer products division, despite minimal 1995 operating
profit attributable to Nx586 products. No assurance can be given as to the
future success of this new division.
ELECTROMECHANICAL VALUE-ADDED SERVICES
In an effort to reduce overhead, a growing number of customers have been
outsourcing certain processes and relying more upon distributors to handle
certain assemblies and modification work. These include connector and cable
assemblies, cable harnessing, terminal block modifications and other services.
These electromechanical value-added services offer distributors an opportunity
to sell their components at higher margins when these components become
integrated into an assembly.
The Company began offering electromechanical value-added services in 1989 as a
result of its acquisition of a regional passive component distributor which
offered such services. To date, the Company has derived only nominal revenues
from these value-added services. Part of the strategy for the acquisition in
January 1994 of a Chicago, Illinois-based distributor (see Note 4 to Notes to
Consolidated Financial Statements) was to expand the Company's electromechanical
value-added capabilities as the acquired company derived a substantially higher
percentage of its revenues from these value-added services. In order to further
drive the sales of these value-added services, the Company created its American
Assemblies & Design division in Chicago during the fourth quarter of 1994,
thereby expanding the Company's value-added capabilities with respect to
electromechanical products. No assurance can be given as to the success of this
division.
FLAT PANEL DISPLAYS
The Company believes that one of the fastest growing segments of the electronics
industry will be utilization of flat panel displays. As a result of the Added
Value Acquisitions in late December 1995, the Company now has significant
expertise in flat panel display products and has on staff the technical
capabilities required to support flat panel display applications. Flat panel
displays are commonly used in laptop computers and are currently replacing
standard cathode ray tubes in a variety of applications, including
8
personal computers and video monitors, as well as in the development of high
definition television ("HDTV"). The acquired companies have developed and
currently sell flat panel display kits which facilitate installation of flat
panel displays. Industry sources estimate that the U.S. flat panel display
market will grow 23% per year from approximately $2 billion in 1995 to over $5.7
billion by the year 2000, and the Company expects to capitalize on this growth
through the sale of its flat panel display kits as well as flat panel displays.
In order to properly function in any application, flat panel displays need
controlled inputs of electronic impulses. In this regard, the recently acquired
companies have developed board level products to control and regulate the
electronic input that drives the flat panel display. These products are commonly
referred to as driver boards. Each display requires specific software to allow
the driver board to "talk" to the display. The recently acquired companies have
developed software for various types of display products. In addition to the
driver board, flat panel displays require a back-light inverter to run the
back-light and cable assemblies to connect the display, inverter and the driver
board to each other and to the equipment of which it is a part. The recently
acquired companies have developed the expertise to assemble the entire kit of
parts needed so that the OEM customer can eliminate this design function and use
one part number to order all of the components needed. This greatly simplifies
the customer's design-in and purchasing process, and allows the customer to
optimize the performance of the flat panel displays.
To date, the recently acquired companies have had only nominal revenues from the
sale of flat panel displays, driver boards and display kits, however, the
Company currently believes that the potential market for these products should
be substantial and, by having these comprehensive capabilities available, the
Company will have a greater opportunity to participate in this new market. The
Company presently represents multiple suppliers of flat panel displays,
back-light inverters and, in its American Assemblies & Design division, has the
ability to manufacture the cable assemblies required to make the complete flat
panel display kits. To date, the Company has had limited revenues from these
products because the Company has not previously had the technical expertise to
design the kits. The technical expertise acquired as a result of the Added Value
Acquisitions will facilitate the Company's ability to sell its existing
components to its OEM customer base as well as to sell driver board and display
kit products to other distributors.
MEMORY MODULES
As a result of the Added Value Acquisitions, the Company now also designs, has
manufactured and sells memory modules. Memory products, which include the memory
module subsegment, represent the largest product sector of semiconductor
revenues, estimated by industry sources at $48 billion worldwide. Memory modules
facilitate the incorporation of expanded memory in limited space. The Company
believes the memory module industry will grow from approximately $14 billion in
1996 to $23 billion
9
worldwide by 2000. Growth in memory products is being driven by a variety of
factors, including new software applications such as Microsoft's WINDOWS 95(TM).
With respect to all products manufactured or assembled by the Company, the
Company offers a warranty for a period of one year against defects in
workmanship and materials under normal use and service and in their original,
unmodified condition.
CUSTOMERS
The Company markets its products primarily to OEMs in a diverse and growing
range of industries. The Company's customer base includes manufacturers of
computers and computer-related products, consumer goods, satellite and
telecommunications equipment, defense and aerospace equipment, robotics and
industrial equipment and medical instrumentation. In addition, as a result of
creating its Access Micro Products division, the Company has begun expanding its
customer base to include VARs, systems integrators, computer products
distributors, catalog companies and computer superstores. The Company's customer
list includes approximately 10,000 accounts. During 1995, no customer accounted
for more than 3% of the Company's sales and the Company does not believe that
the loss of any one customer would have a material adverse impact on its
business.
SALES AND MARKETING
OVERALL STRATEGY
The Company differentiates itself from its competitors in the marketplace by the
combination of products and services that it can provide to its customers. The
Company is a broad-line distributor offering over 60,000 different products
representing more than 100 different component manufacturers. In addition, the
Company employs a decentralized management philosophy whereby branch managers
are given latitude to run their operations based on their experience within
their particular regions and the needs of their particular customer base. This
decentralization results in greater flexibility and a higher level of customer
service. Thus, the Company believes it can provide the broad product offering
and competitive pricing normally associated with the largest national
distributors, while still providing the personalized service levels usually
associated only with regional or local distributors. Additionally, because of
its size and capabilities, the Company brings to the middle market customers a
level of service capabilities that the smaller distributor cannot provide.
The Company's marketing strategy is to have the broad product offerings, service
capabilities and flexibility, and the quality assurance necessary to enable it
to be an expanded and preferred source of supply for all middle market
customers. The Company plans on achieving this by providing a broad range of
products and services to these customers. In addition, the Company now plans to
become a more significant supplier for the
10
top tier customers by providing a niche of products supported by the high level
of quality, service and technical capabilities required to do business with
these accounts.
MARKETING TECHNIQUES
The Company uses various techniques in marketing its products which include: (i)
direct marketing through personal visits to customers by management, field
salespeople and sales representatives, supported by a staff of inside sales
personnel who handle the quoting, accepting, processing and administration of
sales orders; (ii) ongoing advertising in various national industry publications
and trade journals; (iii) general advertising, sales referrals and marketing
support from component manufacturers; and (iv) the Company's telemarketing
efforts. The Company also uses its expanded service capabilities, new technical
sales program and its status as an authorized distributor as marketing tools.
See "Business Strategy-Service Capabilities" and "Suppliers."
SALES PERSONNEL
As of March 1, 1996, the Company employed 314 people in sales on a full-time
basis, of which 121 are field salespeople, 102 are inside salespeople, 37 are in
management, 42 are in administration and 12 are electrical engineers in the
technical sales program. The Company also had 6 sales representatives covering
various territories where the Company does not have sales offices. Salespeople
are generally compensated by a combination of salary and commissions based upon
the gross profits obtained on their sales. Each branch is run by a general
manager who reports to a regional manager, who in turn reports to an area
manager. All area managers report to the Company's Senior Vice President of
Sales. Area, regional and general managers are compensated by a combination of
salary and incentives based upon achieving various goals including gross profits
from the sales offices in their respective areas or regions.
SALES OFFICE LOCATIONS
As a result of the Added Value Acquisitions in December 1995, the Company
acquired sales offices in Tustin, San Diego, Westlake Village and Visalia,
California; Scottsdale, Arizona; Denver, Colorado; and Salt Lake City (Midvale),
Utah. The Company merged its existing Salt Lake City sales office with the
acquired sales office in Midvale, Utah. Additionally, the Company merged the San
Diego, California office with its existing San Diego office, the Westlake
Village, California office with its existing Calabasas office and the Tustin,
California office with its existing Cypress office.
During the second quarter of 1995, the Company relocated its San Fernando Valley
and Orange County, California offices into two much larger facilities in
Calabasas and Cypress, California. As part of such relocations, the Company
closed its office in Torrance, California which was originally opened in 1981.
During 1995, the Company opened three new offices in Tampa, Florida, Rochester,
New York, and Atlanta, Georgia. In addition, the Company opened two more offices
during the first quarter of 1996, including the Company's first office outside
of the United States in Toronto, Canada.
11
As a result of the Added Value Acquisitions and the consolidations, relocations
and new openings since January 1995, the Company currently operates 27 sales
offices in 17 states and Canada. The locations of the sales offices are as
follows: Huntsville, Alabama; Phoenix (Scottsdale), Arizona; Orange County
(Cypress), San Diego, San Fernando Valley (Calabasas), San Jose and Visalia,
California; Toronto, Canada; Denver, Colorado; Danbury, Connecticut; Fort
Lauderdale, Miami and Tampa (Clearwater), Florida; Atlanta, Georgia; Chicago
(Schaumburg), Illinois; Rockville, Maryland; Boston, Massachusetts; Detroit,
Michigan; Minneapolis, Minnesota; Hauppauge and Rochester, New York; Portland,
Oregon; Philadelphia, Pennsylvania; Austin, Dallas and Houston, Texas; and Salt
Lake City (Midvale), Utah.
The Company also retains field sales representatives to market other territories
throughout the United States, Puerto Rico and Mexico. The Company may consider
opening branches in these other territories if the representatives located there
achieve certain specified sales levels.
TRANSPORTATION
All of the Company's products are shipped through third party carriers. Incoming
freight charges are generally paid by the Company, while outgoing freight
charges are typically paid by the customer.
SEASONALITY
The Company's sales have not historically been materially greater in any
particular season or part of the year.
BACKLOG
As is typical of distributors, the Company has a backlog of customer orders.
While these customer orders are cancelable, the Company believes its backlog is
a reliable indicator of future sales. At December 31, 1995, the Company had a
backlog in excess of $74 million (including the backlog from the Added Value
Acquisitions), 139% higher than the backlog of $31 million at December 31, 1994.
By February 29, 1996, the Company's backlog had risen to approximately $76
million. The Company believes that a substantial portion of its backlog
represents products due to be delivered within the next three months.
Approximately 50% of the backlog relates to purchase orders which call for
scheduled shipments of inventory over a period of time, with the balance
representing products that are on back-order with suppliers. The scheduled
shipments enable the Company to plan purchases of inventory over extended time
periods to satisfy such requirements.
12
SUPPLIERS
The Company generally purchases products from components manufacturers pursuant
to non-exclusive distribution agreements. Such suppliers generally limit the
number of distributors they will authorize in a given territory in order to
heighten the distributor's focus on their products as well as to prevent
over-distribution. As a "factory authorized distributor," the Company obtains
sales referrals, as well as sales, marketing and engineering support, from
component manufacturers. This support assists the Company in closing sales and
obtaining new customers. The company's status as an authorized distributor is a
valuable marketing tool as customers recognize that when dealing with an
authorized distributor, they receive greater support from the components
manufacturers.
The Company believes that an important factor which suppliers consider in
determining whether to grant or to continue to provide distribution rights to a
certain distributor is such distributor's geographic representation. In meeting
its goal of being recognized as a national distributor, the Company has opened
and acquired sales offices in a number of markets throughout the United States
and has advertised in national industry publications to demonstrate its
distribution capabilities to current and potential customers and suppliers.
Another important factor that suppliers consider is whether the distributor has
in place an engineering staff capable of designing-in the supplier's products at
the customer base. To address this requirement, the Company established an
engineering program in 1994 which is currently staffed with 12 engineers. As a
result of the Company's strategy, the Company has expanded the number of
suppliers it represents to over 100 in order to expand its product offerings and
better serve its customers.
All distribution agreements are cancelable by either party, typically upon 30 to
90 days' notice. The Company does not regard any one supplier as essential to
its operations since most of the products that the Company sells are available
from other sources at competitive prices. For the year ended December 31, 1995,
the Company's three largest suppliers accounted for 16%, 9% and 8% of
consolidated purchases, respectively. While the Company does not believe that
the loss of any one supplier would have a material adverse impact on its
business, the loss of a significant number of suppliers in a short period of
time could have such an impact. If the Company were to lose its rights to
distribute the products of any one particular supplier, there can be no
assurance that the Company would be able to replace the products which were
available from that particular supplier. The Company, from time to time, alters
its list of authorized suppliers in an attempt to provide its customers with a
better product mix. As a result of its rapid growth, the Company has recently
begun developing a strategy to disengage with several smaller suppliers that do
not fit into the Company's long-term growth strategy.
As a distributor of electronic components, the Company believes that it benefits
from technological change within the electronics industry as new product
introductions accelerate industry growth and provide the Company with additional
sales opportunities. While technological changes may create sales opportunities,
the Company believes its inventory risk to technological obsolescence is
significantly reduced by certain provisions
13
typically found in its distribution agreements including price protection, stock
rotation privileges, obsolescence credits and return privileges. Price
protection is typically in the form of a credit to the Company for any inventory
the Company has of products for which the manufacturer reduces its prices. Stock
rotation privileges typically allow the Company to exchange inventory in an
amount up to 5% of a prior period's purchases. Obsolescence credits allow the
Company to return any products which the manufacturer discontinues. Upon
termination of a distribution agreement, the return privileges typically require
the manufacturer to repurchase the Company's inventory at the Company's average
purchase price, however, if the Company terminates the distribution agreement,
there is typically a 10% to 15% restocking charge.
Substantially all of the Company's inventory is purchased pursuant to its
distribution agreements. The Company does not generally purchase product for
inventory unless it is a commonly sold product, there is an outstanding customer
order to be filled, a special purchase is available or unless it is an initial
stocking package in connection with a new line of products.
FACILITIES AND SYSTEMS
FACILITIES
As a result of its continued growth, the Company has relocated its corporate
headquarters and distribution facility twice since 1990. In order to support
substantial future growth without another relocation, in May 1994 the Company
moved into a 110,800 square foot facility in Miami, Florida to contain new
corporate offices and a state-of-the-art distribution center designed by the
Company. The Company occupies this facility through a lease which expires in
2014 (subject to the Company's right to terminate at any time after the fifth
year of the term upon twenty-four months prior written notice and the payment of
all outstanding debt owed to the landlord). The lease for this facility contains
three six-year options to renew at the then fair market value rental rates. The
lease provides for annual fixed rental payments totaling approximately $264,000
in the first year, $267,000 in the second year, $279,000 in each of the third,
fourth and fifth years, $300,600 in the sixth year, $307,800 in the seventh
year, and in each year thereafter during the term the rent shall increase once
per year in an amount equal to the annual percentage increase in the consumer
price index not to exceed 4% in any one year. The Company presently occupies
approximately 75% of the facility. In June 1994, the Company entered into a
sublease with an unrelated third party for approximately 25% of this facility
for a term of three years ending on July 14, 1997, with no renewal options and
the Company having the right to recapture a portion of the sublet space from and
after the eighteenth month of the three-year term. In February 1996, the Company
notified its subtenant that it plans to reclaim 11,300 square feet pursuant to
the sublease agreement, which will bring the total amount of the building
occupied by the Company to 84%. Although continued growth is not assured, the
Company estimates that this facility (including the space currently sublet) has
capacity to handle over $400 million in annual revenues.
14
As a result of the Added Value Acquisitions, the Company leases a 13,900 square
foot facility in Tustin, California and a 7,600 square foot facility in Denver,
Colorado. The Tustin facility contains a distribution center as well as the
staff supporting the Company's kitting and turnkey operations and the separate
divisions created for flat panel displays and memory module operations. See
"Business-Products." The Denver facility contains a regional distribution center
and sales office.
In October 1995, the Company entered into a lease for a new west coast
distribution and semiconductor programming center located in Fremont, California
(near San Jose). This facility contains approximately 20,000 square feet of
space. The Company moved into such facility in January 1996. The Company will
use this space to expand its semiconductor programming and distribution
capabilities and improve quality control and service capabilities for its west
coast customers.
As a result of a January 1994 acquisition, the Company leases a 9,700 square
foot facility located near Chicago, Illinois, which contains a regional
distribution center and the value-added operations of the Company's American
Assemblies division. The Chicago sales operations have been relocated from this
facility to a separate office in the Chicago area. Furthermore, the Company
occupies approximately 11,000 square feet of space in San Jose, California,
approximately 7,500 square feet of which is presently used for sales and 3,500
square feet of which is used for corporate offices. In addition, the Company
leases space for its other sales offices, which range in size from approximately
1,000 square feet to 8,000 square feet. See "Sales and Marketing -- Sales Office
Locations."
The Company has significant excess capacity as a result of its distribution
centers in Miami, Florida, Fremont and Tustin, California and Denver, Colorado.
The Company expects to realize improved operating efficiencies and economies of
scale subject to achieving its projected sales growth.
SYSTEMS
In 1990, the Company created a management information systems department ("MIS")
and, in 1991, new computer and communications systems were placed into service.
As a result of its rapid growth and in order to provide state-of-the-art
distribution technology, the Company expanded these systems during 1994 and
expects to continue to develop and expand its systems capabilities further. The
Company believes that these systems will assist in increasing sales and in
improving efficiencies and the potential for greater profitability through
increased employee productivity, enhanced asset management, improved quality
control capabilities and expanded customer service capabilities. See "Business
Strategy-Service Capabilities."
The Company's systems and operations are designed to facilitate centralized
warehousing which allows salespeople across the country to have real-time access
to inventory and pricing information and allows a salesperson in any office to
enter orders electronically, which instantaneously print in the Company's
distribution facility for shipping and
15
invoicing. The combination of the
centralized distribution center and the electronic order entry enable the
Company to provide rapid order processing at low costs. The system also provides
for automatic credit checks, which prohibit any product from being shipped until
the customer's credit has been approved. Additionally, the Company's systems
provide more timely and reliable information and analytical tools that will
allow the Company to continue to enhance its asset management capabilities.
Further, the systems allow the Company to participate with customers and
suppliers in electronic data interchange and to expand customer services,
including just-in-time deliveries, kitting programs, bar-coding, automatic
inventory replenishment programs, bonded and consigned inventory programs,
in-plant stores and in-plant terminals.
FOREIGN MANUFACTURING AND TRADE REGULATION
A significant number of the components sold by the Company are manufactured
outside the United States and purchased by the Company from United States
subsidiaries or affiliates of those foreign manufacturers. As a result, the
Company and its ability to sell at competitive prices could be adversely
affected by increases in tariffs or duties, changes in trade treaties, currency
fluctuations, strikes or delays in air or sea transportation, and possible
future United States legislation with respect to pricing and import quotas on
products from foreign countries. The Company's ability to be competitive in or
with the sales of imported components could also be affected by other
governmental actions and changes in policies related to, among other things,
anti-dumping legislation and currency fluctuations. Since the Company purchases
from United States subsidiaries or affiliates of foreign manufacturers, the
Company's purchases are paid for in U.S. dollars which reduces the potential
adverse effect of currency fluctuations. While the Company does not believe that
these factors adversely impact its business at present, there can be no
assurance that such factors will not have a material adverse affect on the
Company in the future.
EMPLOYEES
As of March 1, 1996, the Company employed 571 persons, of which 314 are involved
in sales; 68 are involved in marketing; 58 are involved in the distribution
centers; 54 are involved in operations; 40 are involved in management; 26 are
involved in bookkeeping and clerical; and 11 are involved in MIS. None of the
Company's employees are covered by collective bargaining agreements. The Company
believes that management's relations with its employees are good.
COMPETITION
The Company believes that there are over 1,000 electronic components
distributors throughout the United States, ranging in size from less than $1
million in revenues to companies with annual sales exceeding $5 billion
worldwide. These distributors can be divided into global distributors who have
operations around the world, national distributors who have offices throughout
the United States, regional distributors and local
16
distributors. With 27 sales offices in 17 states and Canada, the Company
competes as a national distributor. The Company, which was recently recognized
by industry sources as the ninth largest distributor of semiconductors and the
18th largest distributor of electronic components in the United States, believes
its primary competition comes from the top 50 distributors in the industry.
The Company competes with many companies that distribute electronic components
and, to a lesser extent, companies that manufacture such products and sell them
directly. Some of these companies have greater assets and possess greater
financial and personnel resources than does the Company. The competition in the
electronics distribution industry can be segregated by target customers: major
(or top tier) accounts; middle market accounts; and emerging growth accounts.
Competition to be the primary supplier for the major customers is dominated by
the top 10 distributors as a result of the product offerings, pricing and
distribution technology offered by these distributors. The Company competes for
these major industry customers by seeking to provide the very best service and
quality and focusing on fill-in or niche products. With its expanded service
capabilities and quality assurance procedures in place, the Company believes
that it can now compete for a bigger portion of the business at the top tier
customer base, although there can be no assurance it will be successful in doing
so. The Company believes competition from the top 10 distributors for the middle
market customer base is not as strong since the largest distributors focus their
efforts on the major account base. For this reason, the Company has focused its
efforts on servicing this middle market customer base. The Company competes for
this business by seeking to offer a broader product base, better pricing and
more sophisticated distribution technology than the regional or local
distributors by seeking to offer more sophisticated distribution technology than
comparably-sized distributors and by seeking to offer to such middle market
companies a higher service level than is offered to them by the major national
distributors.
ITEM 2. PROPERTIES
See "ITEM 1. Business-Facilities and Systems" and "-Sales and Marketing-Sales
Office Locations" and Note 9 to Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation relating to claims
arising out of its operations in the ordinary course of business. Such claims
are generally covered by insurance or, if they relate to products manufactured
by others which it distributes, the Company would expect that the manufacturers
of such products would indemnify the Company, as well as defend such claims on
the Company's behalf, although no assurance can be given that any manufacturer
would do so. The Company believes that none of these claims should have a
material adverse impact on its financial condition or results of operations.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) On December 28, 1995, the Registrant held a special meeting of its
stockholders (the "Special Meeting"), which Special Meeting was
reconvened on December 29, 1995 after its adjournment on December 28,
1995.
(b) Not applicable.
(c) The only matter voted on at the Special Meeting was the approval of the
Added Value Acquisitions pursuant to which the Company through two
newly-formed, wholly-owned subsidiaries proposed to acquire by merger
two affiliated, privately-held companies, Added Value Electronics
Distribution, Inc. and A.V.E.D.-Rocky Mountain, Inc. See "ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations-Acquisitions."
This matter received the votes of the holders of the number of shares
of common stock voted in person or by proxy at the Special Meeting and
the percentage of total votes cast, as indicated below:
For 8,804,712 95.1%
Against 145,905 1.6%
Abstain 303,658 3.3%
(d) Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the symbol
"SEMI." The following table sets forth the range of high and low sale prices for
the Company's common stock as reported on The Nasdaq Stock Market during each of
the quarters presented:
18
QUARTER OF FISCAL YEAR HIGH LOW
1994
First Quarter $ 3 7/8 $ 2 7/16
Second Quarter 3 13/16 2 1/2
Third Quarter 3 1/4 2 1/8
Fourth Quarter 2 3/8 1 1/2
1995
First Quarter 2 1/8 1 15/32
Second Quarter 2 7/16 1 5/8
Third Quarter 3 11/16 2 1/8
Fourth Quarter 3 5/16 2 3/16
1996
First Quarter (through March 27, 1996) 2 5/16 2
As of March 27, 1996, there were approximately 525 holders of record of the
Company's common stock, based on the stockholders list maintained by the
Company's transfer agent. Many of these record holders hold these securities for
the benefit of their customers. The Company believes that it has over 4,700
beneficial holders of its common stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends. In 1989, the Company's
Board of Directors declared a 25% stock split effected in the form of a stock
dividend. Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other relevant factors. It is not
anticipated, however, that the Company will pay cash dividends on its common
stock in the foreseeable future, inasmuch as it expects to employ all available
cash in the continued growth of its business. In addition, the Company's
revolving line of credit agreement and recently completed $15,000,000 senior
subordinated promissory note financing prohibit the payment of any dividends
without the prior written consent of the Company's senior lender and holder of
such senior subordinated promissory note, respectively. See Note 6 to Notes to
Consolidated Financial Statements.
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the Company for and as of
the years 1991 through 1995 has been derived from the audited Consolidated
Financial Statements of the Company. Such information should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this report and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Income Statement Data
YEARS ENDED DECEMBER 31 1995 (1) 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
Net Sales......................... $ 180,794,000 $ 101,085,000 $ 67,510,000 $ 49,015,000 $ 45,332,000
Cost of Sales..................... (140,928,000) (74,632,000) (49,010,000) (35,083,000) (32,001,000)
------------- -------------- ------------- ------------ --------------
Gross Profit...................... 39,866,000 26,453,000 18,500,000 13,932,000 13,331,000
Selling, General and
Administrative Expenses......... (32,806,000) (23,335,000) (14,821,000) (11,366,000) (11,577,000)
Nonrecurring Expenses (2)......... (1,098,000) (548,000) (61,000) (114,000) (124,000)
------------- -------------- ------------- ------------- --------------
Income from Operations............ 5,962,000 2,570,000 3,618,000 2,452,000 1,630,000
Interest Expense.................. (2,739,000) (1,772,000) (1,103,000) (1,153,000) (1,407,000)
Other Income (Expense)-Net (3).... - (39,000) 281,000 (18,000) 47,000
------------- -------------- ------------- ------------- --------------
Income Before Income Taxes........ 3,223,000 759,000 2,796,000 1,281,000 270,000
Provision for Income Taxes........ (1,337,000) (407,000) (1,094,000) (525,000) (153,000)
------------- -------------- ------------- ------------- --------------
Net Income........................ $ 1,886,000 $ 352,000 $ 1,702,000 $ 756,000 $ 117,000
============= ============== ============= ============= ==============
Earnings Per Share (4):
Primary......................... $.12 $.03 $.19 $.12 $.03
==== ==== ==== ==== ====
Fully Diluted................... $.12 $.03 $.18 $.12 $.03
==== ==== ==== ==== ====
Balance Sheet Data
DECEMBER 31 1995 (1) 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
Working Capital................... $ 59,352,000 $ 39,800,000 $ 27,534,000 $ 19,427,000 $ 15,112,000
Total Assets...................... 114,474,000 57,858,000 37,968,000 28,595,000 24,977,000
Long-Term Debt, including
current portion................. 37,604,000 27,775,000 14,928,000 13,850,000 13,405,000
Shareholders' Equity.............. 32,267,000 16,950,000 15,612,000 8,517,000 4,633,000
Book Value Per Common Share....... $1.62 $1.37 $1.30 $1.10 $1.24
- -------------------------
(1) On December 29, 1995, the Company completed the Added Value Acquisitions.
The income statement data reflects only the nonrecurring expenses
associated with such acquisitions while the balance sheet data reflects
the assets and liabilities of the acquired companies as of December 29,
1995.
(2) 1995 includes a charge for front-end incentive employment compensation of
$1,098,000 associated with the Added Value Acquisitions. 1994 includes a
charge for relocation of plant facilities in the amount of $185,000 and a
write-off of the Company's product development investment of $363,000.
(3) 1993 includes approximately $237,000 of income from the settlement of a
business interruption claim.
(4) Weighted average shares (including common share equivalents) outstanding
for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 were
15,945,696, 13,029,714, 9,166,908, 6,514,481 and 3,806,856, respectively,
on a primary basis and were 15,945,696, 13,029,714, 9,511,500, 6,514,481
and 3,962,038, respectively, on a fully diluted basis.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth for the years ended December 31, 1995, 1994 and
1993 (i) certain items in the Company's consolidated statements of income
expressed as a percentage of net sales and (ii) the percentage change in dollar
amounts of such items as compared to the indicated prior fiscal year.
PERIOD TO PERIOD
ITEMS AS A PERCENTAGE PERCENTAGE INCREASE
OF NET SALES /(DECREASE)
YEARS ENDED YEARS ENDED
DECEMBER 31 DECEMBER 31
1995 1994 1993 1995-94 1994-93
---- ---- ---- ------- -------
Net Sales............................. 100.0% 100.0% 100.0% 78.9% 49.7%
Gross Profit.......................... 22.1 26.2 27.4 50.7 43.0
Selling, General and
Administrative Expenses............. 18.1 23.1 22.0 40.6 57.4
Nonrecurring Expenses................. .6 .5 .1 100.4 798.4
Income from Operations................ 3.3 2.5 5.4 132.0 (29.0)
Interest Expense...................... 1.5 1.8 1.6 54.6 60.7
Income Before Income
Taxes............................... 1.8 .8 4.1 324.6 (72.9)
Net Income............................ 1.0 .3 2.5 435.8 (79.3)
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
SALES
For the year ended December 31, 1995, the Company achieved record-breaking sales
by reaching net sales of $180.8 million, a 78.9% increase over net sales of
$101.1 million in 1994. This dramatic increase in sales reflects the success of
the Company's aggressive sales strategy and the general increase in demand for
electronic products. The increase in sales was comprised of revenues generated
from existing territories which had revenue increases of approximately $62.3
million, revenues generated by new sales offices of approximately $10.8 million
and revenues generated by a company acquired in September 1994 of approximately
$6.6 million. Substantially all of the increase in net sales is attributable to
volume increases and the introduction of new products as opposed to price
increases. See "ITEM 1 - Business-Business Strategy."
21
GROSS PROFIT
Gross profit was $39.9 million in 1995 compared to $26.5 million for 1994,
representing a 50.7% increase. The increase was due to the significant growth in
sales. Gross profit margins as a percentage of net sales were 22.1% for 1995
compared to 26.2% for 1994. The decline in gross margins has been attributable
to several factors, including the development of long-term strategic
relationships with accounts who have required aggressive pricing, the
competitive environment in the electronic distribution marketplace, as well as
the addition of memory products, microprocessors and motherboards to the
Company's product mix, all of which carry lower gross margins but either
substantially higher unit prices or volume and consequently generate higher
gross profit dollars. The decline in gross profit margins has been more than
offset by increases in sales and improved operating efficiencies. While gross
profit margins are expected to continue to decline slightly, the Company
believes that any future decline should continue to be offset by increases in
sales and improved operating efficiencies. See "ITEM 1. - Business-Business
Strategy."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for 1995 was $32.8 million
compared to $23.3 million for 1994. The increase was primarily the result of the
Company's rapid growth and aggressive expansion. As sales grew dramatically,
selling expenses, including sales commissions and telephone expenses, also
increased. In addition, as a result of the relocation of the Company's corporate
headquarters and distribution facility in May 1994, the expansion of the
computer and communications systems, the opening of new sales offices and the
relocating of existing sales offices into larger facilities, rent (both for
realty and personalty), occupancy expenses and depreciation and amortization
costs increased. Furthermore, the Company expanded its sales personnel, created
and staffed a northeast credit department and increased staffing in almost all
corporate departments. Additionally, during 1995 the Company created a computer
products division ("CPD," and also referred to as Access Micro Products) to
distribute microprocessors, motherboards and other computer products, opened its
new programming center and created a cable assembly division (known as American
Assemblies). As a result, SG&A for 1995 reflects start-up costs including
additional salaries, payroll taxes and employee benefit costs, increased
advertising and promotion expenses and increased training costs.
SG&A as a percentage of net sales improved to 18.1% for 1995 from 23.1% for
1994. The significant improvement in SG&A as a percentage of sales reflects the
anticipated improvement in operating efficiencies and benefits from economies of
scale.
The Company expects to further expand its service capabilities and increase
staffing to support its recently opened programming center and its newly created
CPD, as well as its cable assembly division. Additionally, during the latter
part of 1995 and early 1996 the Company opened three new sales offices,
relocated its west coast programming and
22
distribution center into a significantly larger facility and completed the Added
Value Acquisitions. (See "Acquisitions" below). In connection with these
acquisitions, the Company created two new divisions. The first division, Aved
Industries, is intended to concentrate on the design, manufacture, sales and
marketing of flat panel display products and technical support for these
products. Additionally, Aved Industries will be involved in the design,
manufacture, sales and marketing of memory module products. The other division,
Apex Solutions, was created to expand the Company's ability to support kitting
and turnkey services on a national basis. In connection with these two new
divisions, the Company will be increasing staff and incurring additional
operating expenses. As a result of the foregoing, SG&A, in absolute dollars and
as a percentage of sales, may increase in the near term. While these expansions
and increases will have a negative impact on profitability in the short term,
the Company believes that these investments will enable the Company to obtain a
greater competitive advantage which will improve its performance in the future.
As a result of its distribution centers in Miami, Florida; Fremont, California;
and from the Added Value Acquisitions in Tustin, California and Denver,
Colorado, the Company now has significant excess capacity. With its present
systems and staff, the Company believes that it can facilitate substantial
increases in revenues without significant additional fixed costs. Accordingly,
SG&A as a percentage of sales should decrease in the future as the Company
realizes the benefits from improved operating efficiencies and economies of
scale.
INCOME FROM OPERATIONS
Income from operations was $6.0 million in 1995, notwithstanding nonrecurring
expenses of $1.1 million relating to front-end incentive employment compensation
paid in connection with the Added Value Acquisitions. This represents an
increase of 132.0% over income from operations of $2.6 million, including
nonrecurring expenses aggregating $548,000, in 1994. The increase in income from
operations was attributable to the significant increase in sales and improved
operating efficiencies which more than offset the decline in gross profit
margins and the additional expenses associated with the Company's expansion.
INTEREST EXPENSE
Interest expense increased to $2.7 million in 1995 as compared to $1.8 million
in 1994. The increase reflects an increase in both the prime rate as well as the
average borrowings outstanding under the Company's line of credit required to
fund the Company's continued growth. Additionally, interest expense also
increased as a result of the subordinated debt issued during June 1994, debt
issued in connection with tenant improvements relating to the relocation of the
Company's corporate headquarters and distribution center in May 1994 and debt
associated with capital leases.
23
NET INCOME
Net income for 1995 reached an all-time high of $1.9 million, a more than
five-fold increase over net income of $352,000 for 1994. Earnings per share
increased 300% to $.12 in 1995 from $.03 in 1994, even with a 22% increase in
the average number of shares outstanding. The increase in earnings for 1995
resulted primarily from the significant increase in sales resulting in increased
operating efficiencies and benefits from economies of scale as discussed above.
In addition, this increase in earnings was achieved notwithstanding the negative
impact on earnings associated with start-up costs in connection with the
creation of the CPD and cable assembly division, the opening of the Company's
programming center and the nonrecurring expenses associated with the Added Value
Acquisitions.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
SALES
Net sales for 1994 increased $33.6 million to $101.1 million, a 49.7% increase
over net sales of $67.5 million for 1993. The sales increase was attributable to
a general increase in demand for electronic products, an increase in sales in
substantially all territories, revenues generated by new sales offices and
revenues generated by acquired companies which represented approximately $10
million of sales in 1994. In addition, the Company continued to benefit from
consolidations within the industry as customers continued to seek additional
sources of supply in order to minimize supplier dependency and to achieve a
higher level of service. Substantially all of the increase in net sales is
attributable to volume increases and the introduction of new products as opposed
to price increases.
GROSS PROFIT
Gross profit was $26.5 million in 1994, an $8.0 million or 43.0% increase over
gross profit of $18.5 million in 1993. The increase was due predominantly to the
growth in sales discussed above. Gross profit margins as a percentage of net
sales were 26.2% in 1994 compared to 27.4% in 1993. The downward trend reflects
a decline associated with a greater number of large volume transactions at
reduced margins, the competitive environment in the electronic distribution
marketplace, as well as a change in the Company's overall sales mix. The overall
sales mix changed as sales of newer technology products began playing a greater
role in the sales of the Company than in prior years. Many of the newer
technology products result in lower profit margins than sales of more mature
product lines on which the Company had historically focused. By making large
volume purchases, the Company decreases its per-unit cost, thus increasing its
potential for higher profit margins upon resale of these mature products. This
downward trend is expected to continue, and has accelerated, in 1995.
24
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased $8.5 million to $23.3 million in 1994 compared to $14.8 million
in 1993. The increase was primarily the result of the Company's rapid growth and
aggressive expansion. As sales grew by $33.6 million, selling expenses increased
substantially including sales commissions, telephone expenses and the cost of
supplies. SG&A as a percentage of sales increased to 23.1% in 1994 as compared
to 22.0% in 1993 due to the increase in expenses discussed below.
In May 1994, the Company relocated its corporate headquarters and distribution
facility for the second time since 1990 into a Company designed state-of-the art
facility. The 1994 move into a Company-designed state-of-the-art facility was
intended to accommodate significant future growth and enable the Company to
expand its service capabilities, enhance its quality control programs and
improve its productivity. Additionally, the Company expanded its computer and
communications systems and equipment. During 1994, the Company also opened seven
new sales offices, relocated four existing offices into larger facilities,
opened a west coast corporate office and acquired two electronic components
distributors. This resulted in increased SG&A including increased rent (both for
realty and personalty) and related occupancy expenses, depreciation expense and
amortization costs and the incurrence of moving and start-up costs and design,
consulting and integration expenses.
In order to effectively drive and manage its aggressive expansion, the Company
expanded its sales staff and sales management team, created and staffed a
corporate operations department and a west coast credit department and increased
staffing in almost all corporate departments. The Company also expanded its
service capabilities by staffing its technical sales program, creating a kitting
department and establishing its American Assemblies division to improve its
value-added services. The Company's quality control programs and traceability
procedures were enhanced resulting in the Company's Miami distribution center
obtaining the international quality standard of ISO 9002. As a result, the
Company incurred consulting expenses and start-up costs and had increased
salaries, payroll taxes and employee benefit costs.
INCOME FROM OPERATIONS
As a result of the additional SG&A as detailed above and the recording of
nonrecurring expenses consisting of a charge for relocation of plant facilities
in the amount of $185,000 and a write-off of a product development investment in
the amount of $363,000, compared to nonrecurring expenses of $61,000 incurred in
1993, income from operations was impacted and decreased to $2.6 million in 1994
compared to $3.6 million in 1993. See Notes 5 and 9 to Notes to Consolidated
Financial Statements.
25
INTEREST EXPENSE
Interest expense increased to $1.8 million in 1994 compared to $1.1 million in
1993. The increase was due primarily to an increase in borrowings required to
fund the Company's continued growth, including the issuance of subordinated
debentures in the amount of $5,150,000 in a private placement completed in the
second quarter of 1994, additional debt incurred in connection with the
Company's acquisitions in the approximate amount of $3.4 million and
subordinated debt aggregating approximately $2 million relating to purchase
money financing of acquisitions and the financing of tenant improvements and
personal property in connection with the Company's new corporate headquarters
and distribution center. Additionally, an increase in interest rates more than
offset savings associated with the decrease in the rate charged the Company by
its senior lender.
NET INCOME
For the year ended December 31, 1994, net income was $352,000 ($.03 per share),
as compared to net income of $1.7 million ($.19 per share, $.18 fully diluted)
in 1993. This decrease was primarily attributable to the increase in SG&A, the
increased interest expense and the recording of nonrecurring expenses discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1995 increased to approximately $59.4 million
from working capital of approximately $39.8 million at December 31, 1994. The
current ratio was 2.31:1 at December 31, 1995 as compared to 3.94:1 at December
31, 1994. The decrease in the current ratio was due to an increase in accounts
payable related to increases in inventory as well as additional liabilities
associated with the Added Value Acquisitions. Accounts receivable levels at
December 31, 1995 were $35.1 million, up from accounts receivable levels of
$16.6 million at December 31, 1994. The increase in accounts receivable reflects
the record level of sales for 1995 and the receivables acquired in the Added
Value Acquisitions on December 29, 1995. The average number of days that
accounts receivable were outstanding as of December 31, 1995, was 58 days
compared to 56 days as of December 31, 1994. Inventory increased to $67.5
million at December 31, 1995 from inventory of $35.0 million at December 31,
1994. The increase in inventory was primarily to support the increases in sales
in 1995, budgeted growth for 1996 and an initial stocking package relating to
the addition of microprocessor and motherboard products. The increase in
inventory also reflects inventory associated with the Added Value Acquisitions.
Inventory turns, on the other hand, improved to 2.7 times in 1995 compared to
2.6 times in 1994. The increase in accounts payable and accrued expenses by
$30.4 million to $43.5 million at December 31, 1995 as compared to $13.0 million
at December 31, 1994, was primarily as a result of the increase in inventory in
1995 over 1994, as well as additional liabilities associated with the Added
Value Acquisitions. The Company's assets and liabilities increased overall as a
result of the Added Value Acquisitions. See "Acquisitions" and Note 4 to Notes
to Consolidated Financial Statements.
26
Certain additional improvements to the Company's Miami corporate facility
aggregating approximately $90,300 were financed as of May 1, 1995 by the
landlord. This $90,300 is evidenced by a promissory note payable in 240
consecutive, equal self-amortizing monthly installments of principal and
interest. This note, which is subordinate to the Company's line of credit,
accrues interest at a fixed rate of 8% per annum. See "Item 1.
Business--Facilities and Systems" and Note 6 to Notes to Consolidated Financial
Statements.
During 1995, the Company's shareholders' equity nearly doubled to $32.3 million
from $17.0 million at the end of 1994. This increase resulted from the net
income during such period; the Company's completion of a public offering in June
and July 1995 (the "1995 Public Offering") of 5,232,500 shares of common stock
which generated aggregate net proceeds (after deducting all associated costs) of
approximately $8.5 million; and 2,013,401 shares of common stock issued in the
Added Value Acquisitions. The aggregate net proceeds from the 1995 Public
Offering initially were used to reduce the amount outstanding under the
Company's line of credit, pending the use of the line of credit for continued
growth and expansion, including opening new sales offices, acquisitions,
inventory diversification and general working capital purposes. See
"Acquisitions" and Notes 2 and 8 to Notes to Consolidated Financial Statements.
The Company's main source of financing is its line of credit facility with its
senior lender. In March 1995, the line of credit facility was increased from $25
million to $30 million and in December 1995, the Company's line of credit was
again amended to increase the facility from $30 million to $45 million. Of the
last $15 million increase, $10 million matures on June 30, 1996, with the
balance (together with the original $30 million) maturing on May 31, 1997. In
1994, the interest rate on the facility was reduced to, at the Company's option,
either one-quarter of one percent (1/4%) below prime or two percent (2%) above
certain LIBOR rates. Under the terms of the 1994 amendment, the Company pays a
nonusage fee of one-tenth of one percent (1/10%) calculated on the unused
portion of the facility, payable quarterly in arrears, and the termination date
of the facility was extended to May 31, 1997. See Note 6 to Notes to
Consolidated Financial Statements. The line of credit agreement requires the
Company to be in compliance with certain financial ratios including a minimum
amount of a tangible net worth and a current asset support ratio based upon
specified percentages of eligible accounts receivable and inventories. The
Company also is required to comply with certain affirmative and negative
covenants. These covenants place limitations on the Company's future borrowings,
dividend payments, redemption of certain securities, transactions with
affiliates on less than an arm's-length basis, investments, acquisitions,
mergers, capital expenditures and changes in control and management. As of
December 31, 1995, the Company was in compliance with the required financial
ratios and other covenants. Outstanding borrowings under this facility, which
are secured by accounts receivable, inventories and equipment and a pledge of
the capital stock of the Company's subsidiaries, amounted to $25,900,000 at
December 31, 1995 as compared to $19,991,000 at December 31, 1994.
27
This increase in outstanding borrowings reflects the increase in borrowings to
support the significant growth of the Company and in connection with the Added
Value Acquisitions.
In June 1994, the Company completed a private placement (the "1994 Private
Placement") of 51.5 units, with each unit consisting of a 9% non-convertible
subordinated debenture due 2004 in the principal amount of $100,000 issuable at
par, together with 7,500 common stock purchase warrants exercisable at $3.15 per
share. The 51.5 units issued represent debentures aggregating $5,150,000
together with an aggregate of 386,250 warrants. The debentures are payable in
semi-annual installments of interest only commencing December 1, 1994, with the
principal amount maturing in full on June 13, 2004. The Company is not required
to make any mandatory redemptions or sinking fund payments. The debentures are
subordinated to the Company's senior indebtedness including the line of credit
facility, the recently completed senior subordinated promissory note financing
discussed below and notes issued to the Company's landlord. Each warrant issued
can be exercised to purchase one share of the Company's Common Stock at any time
between December 14, 1994 and June 13, 1999 at an exercise price equal to $3.15
per share. See Notes 6 and 8 to Notes to Consolidated Financial Statements.
On March 18, 1996, subsequent to the balance sheet date, the Company executed a
senior subordinated promissory note in the amount of $15,000,000 to be repaid on
July 31, 1997. Interest is payable quarterly in arrears at a fluctuating rate
equal to the greater of (a) the prime rate or (b) the federal funds rate plus
one-half of one percent (1/2%); plus the applicable margin. The applicable
margin will be 4% for the first three months and will increase by one-half of
one percent (1/2%) in each subsequent three-month period until maturity. In
addition, beginning with the second three-month interest period, the Company is
obligated to pay a fee each three-month interest period equal to one and
one-half percent (1-1/2%) of the principal amount then outstanding. This note,
which is subordinated to the Company's line of credit facility, is unsecured and
requires that the Company comply with certain affirmative and negative
covenants. The proceeds were used to reduce the amount outstanding under the
Company's line of credit.
The Company expects that its cash flows from operations and additional
borrowings available under the line of credit agreement will be sufficient to
meet its current financial requirements over the next twelve months. However,
the Company continues to explore available financing alternatives to fund the
Company's long-term growth.
INFLATION AND CURRENCY FLUCTUATIONS
The Company does not believe that inflation or currency fluctuations
significantly impacted its business during 1995; however, inflation, changing
interest rates and currency fluctuations have had significant effects on the
economy in the past and could adversely impact the Company's results in the
future.
28
ACQUISITIONS
On December 29, 1995, the Company purchased through two separate mergers with
and into the Company's wholly-owned subsidiaries (the "Added Value
Acquisitions") all of the capital stock of Added Value Electronics Distribution,
Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain," and
together with Added Value, collectively the "Added Value Companies"), two
affiliated, privately-held electronic component distributors. The purchase price
for the Added Value Companies included approximately $2,936,000 in cash and
2,013,401 shares of common stock of the Company valued at approximately
$4,893,000 (exclusive of the 160,703 shares of common stock issued in the
transaction to a wholly-owned subsidiary of the Company). In addition, the
Company paid an aggregate of $1,200,000 in cash to the selling stockholders in
exchange for covenants not to compete, and an aggregate of $1,098,000 in cash as
front-end incentive employment compensation paid to certain key employees of the
Added Value Companies. The Company also assumed substantially all of the
seller's disclosed liabilities of approximately $8,017,000, including
approximately $3,809,000 in bank notes which have since been repaid. The Company
may be obligated to pay to the selling stockholders of the Added Value Companies
up to $1,900,000 of additional consideration ("Additional Consideration") if the
aggregate value of the shares of the Company's common stock issued to the
selling stockholders has not, by June 30, 1998, appreciated in the aggregate by
at least $1,900,000. The Additional Consideration is payable, subject to certain
limitations, at the election of the Company, in cash or the Company's common
stock, or a combination of cash and the Company's common stock. The acquisitions
were accounted for by the purchase method of accounting which resulted in the
recognition of approximately $2,937,000 of excess cost over fair value of net
assets acquired. The assets, liabilities and operating results of the acquired
companies are included in the consolidated financial statements of the Company
from the date of the acquisitions, December 29, 1995.
Also see Notes 4, 6 and 8 to Notes to Consolidated Financial Statements for a
discussion of acquisitions by the Company of All American Transistor Corporation
of D.C. based in Rockville, Maryland on June 14, 1993, Components Incorporated,
a regional distributor of electronic components and related products based in
Chicago, Illinois, on January 24, 1994 and GCI Corp., a Philadelphia-area
distributor of electronic components based in southern New Jersey, on September
9, 1994.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries and
supplementary data required by this item are included in Item 14(a)(1) and (2)
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to these items will be included in a definitive proxy statement
filed within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT PAGE
1. FINANCIAL STATEMENTS
Independent Auditors' Report......................... F-1
Consolidated Balance Sheets.......................... F-2
Consolidated Statements of Income.................... F-3
Consolidated Statements of Changes in
Shareholders' Equity.............................. F-4
Consolidated Statements of Cash Flows................ F-5
Notes to Consolidated Financial Statements........... F-6
2. FINANCIAL STATEMENT SCHEDULES
None
3. EXHIBITS
3.1 Certificate of Incorporation, as amended
(incorporated by reference to Exhibits 3.1 to the
Company's Registration Statement on Form S-1, File
No. 33-15345-A, and to the Company's Form 10-K for
the fiscal year ended December 31, 1991), as further
amended by Certificate of Amendment of Certificate of
Incorporation dated August 21, 1995 of the Company.*
30
3.2 By-Laws, as amended July 29, 1994 (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q
for the quarter ended June 30, 1994).
4.1 Specimen Certificate of Common Stock (incorporated
by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-2, File No.
33-47512).
4.2 Specimen A Warrant Certificate (incorporated by
reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-2, File No.
33-47512).
4.3 Specimen B Warrant Certificate (incorporated
by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-2, File No.
33-47512).
4.4 Form of Warrant Agreement (incorporated by
reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-2, File No.
33-47512).
4.5 Form of Underwriters' Warrant Agreement
(incorporated by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-2, File
No. 33-47512).
4.6 Fiscal Agency Agreement, dated as of June 8, 1994,
between the Company and American Stock Transfer &
Trust Co. ("American Stock Transfer"), as fiscal
agent, paying agent and securities registrar
(incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K dated June 14, 1994 and filed with
the Securities and Exchange Commission on June 15,
1994).
4.7 Warrant Agreement, dated as of June 8, 1994, between
the Company and American Stock Transfer, as warrant
agent (incorporated by reference to Exhibit 4.2 to
the Company's Form 8-K dated June 14, 1994 and filed
with the Securities and Exchange Commission on June
15, 1994).
4.8 Placement Agent's Warrant Agreement, dated as of June
8, 1994, between the Company and RAS Securities Corp.
(incorporated by reference to Exhibit 4.3 to the
Company's Form 8-K dated June 14, 1994 and filed with
the Securities and Exchange Commission on June 15,
1994).
4.9 Underwriter's Warrant Agreement between the
Company and Lew Lieberbaum & Co., Inc. (incorporated
by reference to Exhibit 4.2 to Amendment No. 1 to the
Company's Registration Statement on Form S-1, File
No. 33-58661).
31
9.1 Form of Voting Trust Agreement attached as Exhibit
"E" to Purchase Agreement (incorporated by reference
to Exhibit 9.1 to the Company's Registration
Statement on Form S-4, File No. 033-64019).
10.1 Form of Indemnification Contracts with Directors
and Executive Officers (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement
on Form S-2, File No. 33-47512).
10.2 Lease Agreement for Headquarters dated May 1, 1994
between Sam Berman d/b/a Drake Enterprises ("Drake")
and the Company (incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ended
March 31, 1994).
10.3 Promissory Notes, all dated May 1, 1994 payable to
the Company's landlord in the amounts of $865,000,
$150,000 and $32,718 (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended March 31, 1994).
10.4 Promissory Note, dated May 1, 1995, payable to
Drake, the Company's landlord, in the amount of
$90,300 (incorporated by reference to Exhibit 10.35
to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661).
10.5 Agreement between Drake and the Company dated May 1,
1994 (incorporated by reference to Exhibit 10.5 to
the Company's Form 10-K for the year ended December
31, 1994).
10.6 Amended and Restated All American Semiconductor,
Inc. Employees', Officers', Directors' Stock Option
Plan (incorporated by reference to Exhibit 10.36 to
Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661).**
10.7 Deferred Compensation Plan (incorporated by
reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-2, File No.
33-47512).**
10.8 Master Lease Agreement dated March 21, 1994, together
with lease schedules for computer and other equipment
(incorporated by reference to Exhibit 10.9 to the
Company's Form 10-K for the year ended December 31,
1994).
32
10.9 Revolving Credit Agreement, Master Promissory Note,
Security Agreement and Stock Pledge Agreement, all
dated December 29, 1992 with the Company's lender
(incorporated by reference from the Company's Current
Report on Form 8-K dated December 29, 1992).
10.10 Employment Agreement dated as of May 24, 1995,
between the Company and Paul Goldberg (incorporated
by reference to Exhibit 10.22 to Amendment No. 1 to
the Company's Registration Statement on Form S-1,
File No. 33-58661).**
10.11 Employment Agreement dated as of May 24, 1995,
between the Company and Bruce M. Goldberg
(incorporated by reference to Exhibit 10.24 to
Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661).**
10.12 Form of Warrant Extension Agreement relating
to the Warrant issued to The Equity Group, Inc.
(assigned to Robert D. Goldstein) (incorporated by
reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-2, File No.
33-47512).
10.13 Asset Purchase Agreement dated March 30,
1993 by and between All American Semiconductor of
Rockville, Inc. and All American Transistor
Corporation of D.C. (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-K for the
fiscal year ended December 31, 1992).
10.14 Asset Purchase Agreement dated January 5, 1994 by and
between All American Semiconductor of Chicago, Inc.
and Components Incorporated; and as an exhibit
thereto the employment agreement with Robert Ryan
(incorporated by reference to exhibits to the
Company's current report on Form 8-K dated January
19, 1994).
10.15 Asset Purchase Agreement dated as of July 1, 1994 by
and between the Company and GCI Corp.; Letter
Agreement dated July 1, 1994 among the Company, GCI
Corp., Robert Andreini, Joseph Cardarelli and Joseph
Nelson; Guaranty dated July 1, 1994 and Amendment
Letter to Asset Purchase Agreement and Letter
Agreement dated July 15, 1994 (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended June 30, 1994).
10.16 Merger Purchase Agreement (the "Purchase Agreement")
dated as of October 31, 1995, among the Company, All
American Added Value, Inc., All American A.V.E.D.,
Inc. and the Added Value Companies (incorporated by
reference to Appendix A to the Proxy
Statement/Prospectus included in and to Exhibit 2.1
to the Company's Registration Statement on Form S-4,
File No. 033-64019).
33
10.17 First Amendment to Revolving Credit Agreement (Letter
Agreement), Master Promissory Note and Guaranty
Agreement, all dated May 27, 1993, with the Company's
lender (incorporated by reference as Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended June
30, 1993).
10.18 Second Amendment to Revolving Credit Agreement and
First Amendment to Stock Pledge Agreement and Master
Promissory Note, all dated July 19, 1993, with the
Company's lender (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended June 30, 1993).
10.19 Third Amendment to Revolving Credit Agreement and
Master Promissory Note, both dated as of August 4,
1994; and Second Amendment to Stock Pledge Agreement,
Security Agreement and Guaranty Agreement, all dated
as of August 10, 1994, with the Company's lender
(incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30,
1994).
10.20 Fourth Amendment to Revolving Credit Agreement and
Master Promissory Note, both dated as of March 28,
1995, with the Company's lender (incorporated by
reference to Exhibit 10.22 to the Company's Form 10-K
for the year ended December 31, 1994).
10.21 Fifth Amendment to Revolving Credit Agreement and
Master Promissory Note, both dated as of December 15,
1995, with the Company's lender.*
10.22 Sixth Amendment to Revolving Credit Agreement
dated as of March 14, 1996, with the Company's
lender.*
10.23 Consulting Contract dated July 1, 1995 by and
between All American Semiconductor, Inc. and The
Equity Group, Inc.*
10.24 Form of Consulting Agreement between the
Company and Lew Lieberbaum & Co., Inc. (incorporated
by reference to Exhibit 10.19 to Amendment No. 1 to
the Company's Registration Statement on Form S-1,
File No. 33-58661).
10.25 Warrant Certificates Nos. 93-1 and 93-2 dated as
of May 13, 1993, issued to The Equity Group, Inc.
(incorporated by reference to Exhibit 10.24 to the
Company's Form 10-K for the year ended December 31,
1994).
34
10.26 All American Semiconductor, Inc. 401(k) Profit
Sharing Plan (incorporated by reference to Exhibit
10.25 to the Company's Form 10-K for the year ended
December 31, 1994).**
10.27 Employment Agreement dated as of May 24, 1995,
between the Company and Howard L. Flanders
(incorporated by reference to Exhibit 10.25 to
Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661).**
10.28 Employment Agreement dated as of May 24, 1995,
between the Company and Rick Gordon (incorporated by
reference to Exhibit 10.26 to Amendment No. 1 to the
Company's Registration Statement on Form S-1, File
No. 33-58661).**
10.29 Senior Subordinated Promissory Note dated
March 18, 1996 from the Company to and accepted by
CIBC Inc. in the principal amount of $15,000,000.*
10.30 Senior Subordinated Subsidiaries Guarantee
dated March 18, 1996 from all of the Company's
wholly-owned subsidiaries in favor of CIBC Inc.*
11.1 Earnings per share; see Note 1 to Notes to
Consolidated Financial Statements regarding
computation of per share earnings.
21.1 List of subsidiaries of the Registrant.*
23.1 Consent of Lazar, Levine & Company LLP, independent
certified public accountants.*
27.1 Financial Data Schedule.*
- ------------------
* Filed herewith
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
Although no reports were filed during the fourth quarter of 1995, on
January 12, 1996, the Company filed a Form 8-K dated December 29, 1995,
reporting in items 2 and 7 thereof the completion of the Added Value
Acquisitions and the financial statements "previously filed" in
connection therewith.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ALL AMERICAN SEMICONDUCTOR, INC.
(Registrant)
By: /S/ PAUL GOLDBERG
Paul Goldberg, Chairman of the Board and
Chief Executive Officer
Dated: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 29, 1996.
/S/ PAUL GOLDBERG Chairman of the Board and Chief Executive
Paul Goldberg Officer, Director
(Principal Executive Officer)
/S/ BRUCE M. GOLDBERG President and Chief Operating Officer, Director
Bruce M. Goldberg
/S/ HOWARD L. FLANDERS Vice President and Chief Financial Officer,
Howard L. Flanders Director
(Principal Financial and Accounting Officer)
/S/ RICK GORDON Senior Vice President of Sales, Director
Rick Gordon
/S/ SHELDON LIEBERBAUM Director
Sheldon Lieberbaum
/S/ S. CYE MANDEL Director
S. Cye Mandel
36
Independent Auditors' Report
To The Board of Directors
All American Semiconductor, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of All American
Semiconductor, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the three years in the period ended December 31, 1995. 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of All
American Semiconductor, Inc. and subsidiaries at December 31, 1995 and 1994 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/S/ LAZAR, LEVINE & COMPANY LLP
LAZAR, LEVINE & COMPANY LLP
New York, New York March 9, 1996, except as to Note 6, the date of which is
March 18, 1996
F-1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Current assets:
Cash ............................................................ $ 276,000 $ 200,000
Accounts receivable, less allowances for doubtful
accounts of $921,000 and $425,000................................ 35,101,000 16,615,000
Inventories........................................................ 67,463,000 34,971,000
Other current assets............................................... 1,959,000 1,543,000
------------------ ----------------
Total current assets........................................... 104,799,000 53,329,000
Property, plant and equipment - net.................................... 3,882,000 2,832,000
Deposits and other assets.............................................. 2,316,000 1,178,000
Excess of cost over fair value of net assets
acquired - net....................................................... 3,477,000 519,000
------------------ ----------------
$ 114,474,000 $ 57,858,000
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................. $ 844,000 $ 396,000
Accounts payable and accrued expenses.............................. 43,451,000 13,007,000
Income taxes payable............................................... 199,000 -
Other current liabilities.......................................... 953,000 126,000
------------------ ----------------
Total current liabilities...................................... 45,447,000 13,529,000
Long-term debt:
Notes payable...................................................... 29,900,000 20,507,000
Subordinated debt.................................................. 6,515,000 6,872,000
Other long-term debt............................................... 345,000 -
------------------ ----------------
82,207,000 40,908,000
------------------ ----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued.......................................... - -
Common stock, $.01 par value, 40,000,000 and 20,000,000 shares
authorized, 19,863,895 and 12,416,791 shares
issued and outstanding........................................... 199,000 124,000
Capital in excess of par value..................................... 25,511,000 11,764,000
Retained earnings.................................................. 7,008,000 5,122,000
Treasury stock, at cost, 180,295 and
19,592 shares.................................................. (451,000) (60,000)
------------------ ----------------
32,267,000 16,950,000
------------------ ----------------
$ 114,474,000 $ 57,858,000
================== ================
See notes to consolidated financial statements
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
NET SALES......................................... $ 180,794,000 $ 101,085,000 $ 67,510,000
Cost of sales..................................... (140,928,000) (74,632,000) (49,010,000)
-------------------- -------------------- -------------------
Gross profit...................................... 39,866,000 26,453,000 18,500,000
Selling, general and administrative
expenses........................................ (32,806,000) (23,335,000) (14,821,000)
Nonrecurring expenses:
Acquisition costs.............................. (1,098,000) - -
Relocation of plant facilities................. - (185,000) (61,000)
Write-off of product development
investment.............................. - (363,000) -
-------------------- -------------------- ------------------
INCOME FROM OPERATIONS............................ 5,962,000 2,570,000 3,618,000
Interest expense.................................. (2,739,000) (1,772,000) (1,103,000)
Other income (expense) - net...................... - (39,000) 281,000
-------------------- -------------------- ------------------
Income before income taxes........................ 3,223,000 759,000 2,796,000
Provision for income taxes........................ (1,337,000) (407,000) (1,094,000)
-------------------- -------------------- ------------------
NET INCOME........................................ $ 1,886,000 $ 352,000 $ 1,702,000
==================== ==================== ==================
Earnings Per Share:
Primary....................................... $.12 $.03 $.19
==== ==== ====
Fully diluted................................. $.12 $.03 $.18
==== ==== ====
See notes to consolidated financial statements
F-3
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED TREASURY SHAREHOLDERS'
SHARES STOCK PAR VALUE EARNINGS STOCK EQUITY
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992...... 7,746,791 $ 77,000 $ 5,432,000 $ 3,068,000 $ (60,000) $ 8,517,000
Sale of equity securities....... 4,270,959 43,000 5,350,000 - - 5,393,000
Net income...................... - - - 1,702,000 - 1,702,000
---------- ----------- ------------ ----------- ------------ --------------
Balance, December 31, 1993...... 12,017,750 120,000 10,782,000 4,770,000 (60,000) 15,612,000
Exercise of stock options and
warrants..................... 399,041 4,000 545,000 - - 549,000
Issuance of options and
warrants..................... - - 437,000 - - 437,000
Net income...................... - - - 352,000 - 352,000
---------- ----------- ------------ ----------- ----------- --------------
Balance, December 31, 1994...... 12,416,791 124,000 11,764,000 5,122,000 (60,000) 16,950,000
SALE OF EQUITY SECURITIES....... 5,232,500 53,000 8,447,000 - - 8,500,000
ISSUANCE OF EQUITY SECURITIES... 2,174,104 22,000 5,262,000 - (391,000) 4,893,000
EXERCISE OF STOCK OPTIONS AND
WARRANTS..................... 40,500 - 38,000 - - 38,000
NET INCOME...................... - - - 1,886,000 - 1,886,000
---------- ----------- ------------ ----------- ----------- --------------
BALANCE, DECEMBER 31, 1995...... 19,863,895 $ 199,000 $25,511,000 $ 7,008,000 $ (451,000) $ 32,267,000
========== =========== =========== =========== =========== ==============
See notes to consolidated financial statements
F-4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 1,886,000 $ 352,000 $ 1,702,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 1,038,000 677,000 384,000
Non-cash interest expense............................. 148,000 47,000 -
Nonrecurring expenses................................. - 363,000 -
Other expense, net.................................... - - 31,000
Changes in assets and liabilities
Increase in accounts receivable.................... (14,002,000) (3,019,000) (2,835,000)
Increase in inventories............................ (24,495,000) (9,508,000) (5,228,000)
Increase in other current assets................... (251,000) (904,000) (411,000)
Increase in accounts payable and
accrued expenses.................................. 26,523,000 4,702,000 708,000
Increase (decrease) in other current liabilities... 867,000 (63,000) 85,000
-------------- ------------- --------------
Net cash used for operating activities........... (8,286,000) (7,353,000) (5,564,000)
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (1,435,000) (1,618,000) (250,000)
Increase in other assets.................................. (1,540,000) (712,000) (134,000)
Purchases of net assets of acquired companies (net
of cash acquired)..................................... (2,860,000) (1,084,000) -
-------------- ------------- --------------
Net cash used for investing activities........... (5,835,000) (3,414,000) (384,000)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of equity securities........... 8,538,000 742,000 5,393,000
Increase in notes payable................................. 134,000 6,088,000 -
Repayments of notes payable............................... (385,000) (2,119,000) (964,000)
Net borrowings under line of credit agreements............ 5,910,000 6,076,000 1,536,000
-------------- ------------- --------------
Net cash provided by financing activities........ 14,197,000 10,787,000 5,965,000
-------------- ------------- --------------
Increase in cash.......................................... 76,000 20,000 17,000
Cash, beginning of year................................... 200,000 180,000 163,000
--------------- ------------- --------------
Cash, end of year......................................... $ 276,000 $ 200,000 $ 180,000
============== ============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 2,581,000 $ 1,604,000 $ 1,102,000
============== ============= ==============
Income taxes paid......................................... $ 898,000 $ 1,021,000 $ 1,163,000
============== ============= ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital
leases aggregating $634,000 for computer equipment became effective during 1994.
During 1995, the Company purchased all the capital stock of Added Value
Electronics Distribution, Inc. and A.V.E.D.-Rocky Mountain, Inc. The Company
paid approximately $2,936,000 in cash and 2,013,401 shares of common stock of
the Company valued at approximately $4,893,000. The Company also assumed
substantially all of the seller's disclosed liabilities. During 1994, the
Company acquired substantially all of the assets of GCI Corporation. The Company
paid $485,000 in cash, with the balance by a combination of a promissory note
and stock options. The Company also assumed substantially all of the seller's
disclosed liabilities. In addition, during 1994, the Company acquired
substantially all of the assets of Components Incorporated. The Company paid
$599,000 in cash, with the balance in a promissory note. The Company also
assumed substantially all of the seller's disclosed liabilities. During 1993,
the Company acquired substantially all of the assets of an affiliated company.
The purchase price payable for such assets was the assumption of liabilities.
See notes to consolidated financial statements
F-5
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a national distributor of electronic components manufactured by
others. The Company primarily distributes a full range of semiconductors (active
components), including transistors, diodes, memory devices and other integrated
circuits, as well as passive components, such as capacitors, resistors,
inductors and electromechanical products, including cable, connectors, filters
and sockets. The Company's products are sold primarily to original equipment
manufacturers ("OEMs") in a diverse and growing range of industries, including
manufacturers of consumer goods, satellite and communications products,
computers and computer-related products, robotics and industrial equipment,
defense and aerospace equipment and medical instrumentation.
The Company's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP"). Those principles considered
particularly significant are detailed below. GAAP requires management to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expenses. While actual results could differ from these estimates,
management does not expect the variances, if any, to have a material effect on
the consolidated financial statements.
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of all
subsidiaries, all of which are wholly-owned. All material intercompany balances
and transactions have been eliminated in consolidation.
Prior years' financial statements have been reclassified to conform with the
current year's presentation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company,
from time to time, maintains cash balances which exceed the federal depository
insurance coverage limit. The Company performs periodic reviews of the relative
credit rating of its bank to lower its risk. The Company believes that
concentration with regards to accounts receivable is limited due to its large
customer base.
INVENTORIES
Inventories, which consist solely of electronic components held for resale, are
stated at the lower of cost (determined on an average cost basis) or market.
F-6
DEPRECIATION AND AMORTIZATION
Fixed assets are reflected at cost. Depreciation of office furniture and
equipment, computer equipment and motor vehicles is provided on straight-line
and accelerated methods over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided using the
straight-line method over the term of the related lease or the life of the
respective asset, whichever is shorter. Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are capitalized.
The excess of cost over the fair value of net assets acquired is being amortized
over periods ranging from 15 years to 40 years using the straight-line method.
INCOME TAXES
The Company has elected to file a consolidated federal income tax return with
its subsidiaries. Deferred income taxes are provided on transactions which are
reported in the financial statements in different periods than for income tax
purposes. The Company adopted Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes" ("SFAS 109"), for the year ended December 31,
1993. SFAS 109 requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the difference is expected to reverse. Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. The
effect of the adoption of SFAS 109 was not material. See Note 7 to Notes to
Consolidated Financial Statements.
EARNINGS PER SHARE
Primary earnings per share has been computed based upon the weighted average
number of common and common equivalent shares outstanding during each period
presented. Fully diluted earnings per share has been computed assuming
conversion of all dilutive stock options and warrants.
The following average shares were used for the computation of primary and fully
diluted earnings per share:
YEARS ENDED DECEMBER 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Primary........................................... 15,945,696 13,029,714 9,166,908
Fully diluted..................................... 15,945,696 13,029,714 9,511,500
F-7
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
investments purchased with an original maturity of three months or less to be
cash.
POSTRETIREMENT BENEFITS
In 1993, the Company adopted Financial Accounting Standards Board Statement No.
106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions."
The effect of the adoption of this Statement was not material.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This Statement is
required to be implemented no later than for fiscal years beginning after
December 15, 1995. The Company has not yet adopted SFAS 123, but believes that
the effect in the year of implementation will not be material.
NOTE 2 - PUBLIC OFFERING
On June 15, 1995, the Company completed a public offering of 4,550,000 shares
(exclusive of the over-allotment option) of its common stock at $1.875 per
share. On July 13, 1995, the Company issued an additional 682,500 shares of its
common stock as a result of the exercise of an over-allotment option. The
aggregate net proceeds from this offering, after deducting all associated costs,
aggregated approximately $8,500,000. As a result, the Company's common stock and
capital in excess of par value increased by $53,000 and $8,447,000,
respectively. The net proceeds initially were used to reduce the amount
outstanding under the Company's line of credit, pending the use of the line of
credit for continued growth and expansion, including opening new sales offices,
acquisitions, inventory diversification and general working capital purposes.
F-8
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Office furniture and equipment..................................... $ 3,283,000 $ 2,210,000
Computer equipment................................................. 2,162,000 1,321,000
Leasehold improvements............................................. 1,271,000 1,058,000
Motor vehicles..................................................... 25,000 25,000
--------------- -----------------
6,741,000 4,614,000
Accumulated depreciation and amortization.......................... (2,859,000) (1,782,000)
--------------- -----------------
$ 3,882,000 $ 2,832,000
=============== =================
NOTE 4 - ACQUISITIONS
On December 29, 1995, the Company purchased through two separate mergers with
and into the Company's wholly-owned subsidiaries (the "Added Value
Acquisitions") all of the capital stock of Added Value Electronics Distribution,
Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain," and
together with Added Value, collectively the "Added Value Companies"). The
purchase price for the Added Value Companies included approximately $2,936,000
in cash and 2,013,401 shares of common stock of the Company valued at
approximately $4,893,000 (exclusive of the 160,703 shares of common stock issued
in the transaction to a wholly-owned subsidiary of the Company). In addition,
the Company paid an aggregate of $1,200,000 in cash to the selling stockholders
in exchange for covenants not to compete, and an aggregate of $1,098,000 in cash
as front-end incentive employment compensation paid to certain key employees of
the Added Value Companies. The Company also assumed substantially all of the
seller's disclosed liabilities of approximately $8,017,000, including
approximately $3,809,000 in bank notes which have since been repaid. The Company
may be obligated to pay to the selling stockholders of the Added Value Companies
up to $1,900,000 of additional consideration ("Additional Consideration") if the
aggregate value of the shares of the Company's common stock issued to the
selling stockholders has not, by June 30, 1998, appreciated in the aggregate by
at least $1,900,000. The Additional Consideration is payable, subject to certain
limitations, at the election of the Company in cash or the Company's common
stock, or a combination of cash and the Company's common stock. The acquisitions
were accounted for by the purchase method of accounting which resulted in the
recognition of approximately $2,937,000 of excess cost over fair value of net
assets acquired. The assets, liabilities and operating results of the acquired
companies are included in the consolidated financial statements of the Company
from the date of the acquisitions, December 29, 1995.
F-9
On September 9, 1994, the Company completed the acquisition of substantially all
of the assets of GCI Corp., a Philadelphia-area distributor of electronic
components. As consideration for this acquisition, the Company paid $485,000 in
cash, issued a promissory note of approximately $306,000 payable interest only
for two years and in quarterly installments over the next three years, and
issued stock options valued at $144,000 at September 9, 1994. The Company also
assumed substantially all of the seller's disclosed liabilities of approximately
$1,930,000, including a $1,400,000 bank note payable which has been repaid. See
Notes 6 and 8 to Notes to Consolidated Financial Statements. The promissory note
is required to be paid down by one-half of the then outstanding principal
balance if certain Net Earnings (as defined) are attained for 1995 or 1996. For
1995, the level of Net Earnings (as defined) was not met and therefore no
principal payments were made on such promissory note. The seller may earn up to
an additional $760,000 of contingent purchase price over the three-year period
ending December 31, 1997 if certain gross profit targets are met. For 1995, the
gross profit targets were not met and, therefore, no additional purchase price
was earned. The acquisition was accounted for by the purchase method of
accounting which resulted in the recognition of approximately $394,000 of excess
cost over fair value of net assets acquired. The operating results of the
acquired company are included in the consolidated statement of income from the
date of acquisition.
The three principal stockholders and key employees of GCI Corp. (the "GCI
Principals") each received an employment agreement expiring on December 31, 1997
providing for base salary of $122,000, $113,000 and $110,000 per annum,
respectively. In addition to base salary, each of the GCI Principals may earn a
bonus based upon the percentage of the Net Earnings generated in the sales
Territory, as defined. In addition to the net earnings bonus, two of the GCI
Principals may earn an annual bonus based upon the gross profit of the Company
with respect to all sales made in Maryland, Virginia and Delaware, but only if
certain minimum gross profit levels are obtained. The Company has also agreed to
grant to each of the GCI Principals employee incentive stock options at fair
market value on the date of grant (10,000 to each by January 30, 1996; 10,000 to
each by January 30, 1997; and 10,000 to each by January 30, 1998), but each such
grant is conditional upon sales in the sales Territory, as defined, attaining a
minimum gross profit for the year most recently ended. One other key employee of
GCI Corp. accepted employment with the Company and was granted 10,000 employee
incentive stock options at an exercise price of $2.63 per share, the ability to
receive up to 15,000 additional employee incentive stock options (5,000 per year
in respect of 1995, 1996 and 1997) if certain minimum gross profit for sales in
the sales Territory, as defined, are attained during each such year, and shall
be issued 1,000 shares of Common Stock upon completing his 18th month of
service.
On January 24, 1994, the Company completed the acquisition of substantially all
of the assets of Components Incorporated, a Chicago-based distributor of
electronic components
F-10
("Components"). As consideration for this acquisition, the Company paid $599,000
in cash and issued a promissory note of approximately $399,000 due two years
from closing, which has since been repaid. The Company also assumed
substantially all of the seller's disclosed liabilities of approximately
$700,000, including a $400,000 bank note payable which has been repaid. See Note
6 to Notes to Consolidated Financial Statements. The Components principal
received $350,000 of consideration for a covenant not to compete that restricts
any competition with the Company for a period equal to the later of the third
anniversary of the Components principal's termination as an employee or January
24, 1999. The $350,000 consideration was in the form of a grant of stock options
valued at $100,000 as of January 24, 1994 and the delivery to the Components
principal of a promissory note in the principal amount of $250,000. See Notes 6
and 8 to Notes to Consolidated Financial Statements. The Company has also agreed
to grant to the Components principal employee incentive stock options at fair
market value on the date of grant (5,000 on January 24, 1995; 10,000 on January
24, 1996; and 15,000 on January 24, 1997), each of such three sets of options to
be for a period of five years, subject to earlier termination in the event of
termination of employment, death or disability. The acquisition was accounted
for by the purchase method of accounting. The operating results of the acquired
company are included in the consolidated statement of income from the date of
acquisition.
On June 14, 1993, the Company completed the acquisition of substantially all of
the assets of All American Transistor Corporation of D.C. ("D.C."), formerly a
45% owned affiliate. The consideration for the acquisition was the assumption of
all of D.C.'s disclosed liabilities. As a result, the Company's assets and
liabilities each increased by approximately $1,000,000, including principal and
interest on a bank note payable of approximately $503,000 which has since been
repaid. The acquisition of D.C. has been accounted for by the purchase method of
accounting and the purchase price approximates the fair value of the net assets
acquired. The operating results of this acquisition are included in the
Company's consolidated statement of income from the date of acquisition.
The following unaudited pro forma consolidated income statement data presents
the consolidated results of operations of the Company as if the acquisitions of
the Added Value Companies, GCI Corp., Components and D.C. had occurred at the
beginning of the years presented:
YEARS ENDED DECEMBER 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Net sales......................................... $ 219,558,000 $145,402,000 $111,922,000
Net income........................................ 2,851,000 1,779,000 3,275,000
Primary earnings per share........................ $.16 $.12 $.29
Fully diluted earnings per share.................. $.16 $.12 $.28
F-11
The above pro forma information does not purport to be indicative of what would
have occurred had the acquisitions been made as of such date or of the results
which may occur in the future.
NOTE 5 - PRODUCT DEVELOPMENT INVESTMENT WRITE-OFF
As a result of the rapid growth of the Company's electronic components
distribution business, in 1994 the Company decided to no longer pursue the
design and development of certain licensed technology intended to protect
various electronic equipment and machines from surges and sags in power.
Accordingly, the Company expensed its total investment of $363,000 in 1994.
NOTE 6 - LONG-TERM DEBT
LINE OF CREDIT
In March 1995, the Company's line of credit facility was increased from $25
million to $30 million, and in December 1995, the Company's line of credit was
again amended to increase the facility from $30 million to $45 million. Of the
last $15 million increase, $10 million matures on June 30, 1996, with the
balance (together with the original $30 million) maturing on May 31, 1997.
Outstanding borrowings under this facility, which are secured by accounts
receivable, inventories and equipment and a pledge of the capital stock of the
Company's subsidiaries, amounted to $25,900,000 at December 31, 1995.
In 1994, the Company's line of credit agreement was amended to reduce the
Company's interest rate from one-quarter of one percent (1/4%) above prime to,
at the Company's option, either one-quarter of one percent (1/4%) below prime or
two percent (2%) above certain LIBOR rates. The Company pays a nonusage fee of
one-tenth of one percent (1/10%) calculated on the unused portion of the
facility, payable quarterly in arrears.
Under the line of credit agreement, the Company is required to comply with
certain affirmative and negative covenants. These covenants place limitations on
the Company's future borrowings, dividend payments, redemption of certain
securities and transactions with affiliates on less than an arm's-length basis,
investments, acquisitions, mergers, capital expenditures and changes in control
and management. Furthermore, the agreement requires the Company to be in
compliance with certain financial ratios including a minimum amount of tangible
net worth and a current asset support ratio based upon specified percentages of
eligible accounts receivable and inventories. As of December 31, 1995, the
Company was in compliance with the required financial ratios and other
covenants.
F-12
At December 31, 1994, outstanding borrowings under the Company's then $25
million facility were $19,991,000.
NOTES PAYABLE - BANKS
In connection with the acquisitions of the Added Value Companies, the Company
assumed two notes payable to banks of approximately $3,809,000 which were
subsequently repaid in January 1996. These notes are included in long-term debt
as of December 31, 1995.
SUBORDINATED DEBT
On March 18, 1996, subsequent to the balance sheet date, the Company executed a
senior subordinated promissory note in the amount of $15,000,000 to be repaid on
July 31, 1997. Interest is payable quarterly in arrears at a fluctuating rate
equal to the greater of (a) the prime rate or (b) the federal funds rate plus
one-half of one percent (1/2%); plus an applicable margin. The applicable margin
will be 4% for the first three months and will increase by one-half of one
percent (1/2%) in each subsequent three-month period until maturity. In
addition, beginning with the second three-month interest period, the Company is
obligated to pay a fee each three-month interest period equal to one and
one-half percent (1-1/2%) of the principal amount then outstanding. This note,
which is subordinated to the Company's line of credit facility, is unsecured and
requires that the Company comply with certain affirmative and negative
covenants. The proceeds were used to reduce the amount outstanding under the
Company's line of credit.
In September 1994, in connection with the acquisition of GCI Corp., the Company
issued a promissory note to the seller bearing interest at 7% per annum in the
approximate amount of $306,000 due in 1999. The promissory note, which is
subordinate to the Company's line of credit and recently completed senior
subordinated promissory note financing, is payable interest only on a quarterly
basis for the first two years with the principal amount, together with accrued
interest thereon, payable in equal quarterly installments over the next three
years. One-half of the then outstanding principal balance of the promissory note
is required to be paid if certain Net Earnings (as defined) are attained for
1995 or 1996. For 1995, the level of Net Earnings (as defined) was not met.
In June 1994, the Company completed a private placement (the "1994 Private
Placement") of 51.5 units, with each unit consisting of a 9% non-convertible
subordinated debenture due 2004 in the principal amount of $100,000 issuable at
par, together with 7,500
F-13
common stock purchase warrants exercisable at $3.15 per share. The 51.5 units
issued represent debentures aggregating $5,150,000 together with an aggregate of
386,250 warrants. See Note 8 to Notes to Consolidated Financial Statements. The
debentures are payable in semi-annual installments of interest only commencing
December 1, 1994, with the principal amount maturing in full on June 13, 2004.
The Company is not required to make any mandatory redemptions or sinking fund
payments. The debentures are subordinated to the Company's senior indebtedness
including the line of credit facility, the recently completed senior
subordinated promissory note financing and notes issued to the Company's
landlord. The 386,250 warrants were valued at $.50 per warrant as of the date of
the 1994 Private Placement and, accordingly, the Company has recorded the
discount in the aggregate amount of $193,125 as additional paid-in capital. This
discount is being amortized over the ten-year term of the debentures and in 1995
approximately $19,000 was expensed.
In May 1994, the Company executed a promissory note in the amount of $865,000 in
favor of the Company's landlord to finance substantially all of the tenant
improvements necessary for the Company's Miami facility. This $865,000 note
requires no payments in the first year (interest accrues and is added to the
principal balance), is payable interest only in the second year and has a
repayment schedule with varying monthly payments over the remaining 18 years. At
the same time, the Company entered into another promissory note with the
Company's landlord for up to $150,000 to finance certain personal property for
the facility. This $150,000 note is payable interest only for six months and
thereafter in 60 equal self-amortizing monthly payments of principal and
interest. These notes, which are subordinate to the Company's line of credit,
bear interest at 8% per annum and are payable monthly. In May 1994, the Company
executed another promissory note in the approximate amount of $33,000 with the
Company's landlord. This note is payable monthly with interest at 9.5% per annum
and matures in April 1997. Certain additional improvements to the Company's
Miami corporate facility aggregating approximately $90,300 were financed as of
May 1, 1995 by the landlord. This $90,300 is evidenced by a promissory note
payable in 240 consecutive, equal self-amortizing monthly installments of
principal and interest. This note, which is subordinate to the Company's line of
credit, accrues interest at a fixed rate of 8% per annum.
In January 1994, in connection with the acquisition of Components, the Company
issued a promissory note to the seller bearing interest at 8% per annum in the
approximate amount of $399,000, payable in quarterly installments of interest
only, for a term of two years. The entire principal amount was repaid in January
1996. In addition, as part of the consideration for a covenant not to compete,
the Company issued a promissory note to the principal of the seller in the
amount of $250,000 (the "Non-Compete Note"). The Non-Compete Note bears interest
at 8% per annum, payable quarterly, with $100,000 of principal due March 10,
1995, $50,000 of principal due April 24, 1996, and the remaining $100,000
payable in eight quarterly principal installments each in the amount of $12,500
F-14
payable over the fourth and fifth years of such note. One-half of the then
outstanding principal balance of the Non-Compete Note is required to be paid if
certain Net Earnings (as defined) are attained in any fiscal year, with the
entire then outstanding principal balance of the Non-Compete Note required to be
paid if at least the same level of Net Earnings (as defined) are attained in a
subsequent fiscal year. For 1995, the level of Net Earnings (as defined) was not
attained. These notes are subordinate to the Company's line of credit.
Long-term debt of the Company as of December 31, 1995, other than the line of
credit, matures as follows:
1996............................................... $ 579,000
1997............................................... 204,000
1998............................................... 277,000
1999............................................... 192,000
2000............................................... 44,000
Thereafter......................................... 6,158,000
----------------
$ 7,454,000
================
OBLIGATIONS UNDER CAPITAL LEASES
The Company is the lessee of computer and office equipment under capital leases
expiring in various years through 1997. The assets, aggregating $773,000, and
liabilities under capital leases are recorded at the lower of the present value
of the minimum lease payments or the fair value of the assets. The assets are
depreciated over their estimated productive lives. As of December 31, 1995,
accumulated depreciation of these assets aggregated approximately $257,000.
Depreciation of assets under capital leases is included in depreciation expense.
Minimum future lease payments under capital leases as of December 31, 1995 and
for each of the next five years and in the aggregate are approximately as
follows:
1996......................................... $ 331,000
1997......................................... 190,000
1998......................................... -
1999......................................... -
2000......................................... -
---------------
Total minimum lease payments................. 521,000
Less amount representing interest............ (82,000)
---------------
Total obligations under capital leases....... 439,000
Current portion.............................. (265,000)
---------------
$ 174,000
===============
F-15
Interest rates on capital leases vary from 11.7% to 13.9% per annum and are
imputed based on the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.
Various capital leases provide for purchase options.
NOTE 7 - INCOME TAXES
The tax effects of the temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 1995 and 1994 are as follows:
Deferred tax assets: 1995 1994
------------- --------------
Accounts receivable............ $ 336,000 $ 168,000
Inventory...................... 354,000 222,000
Other assets................... 145,000 51,000
------------- --------------
835,000 441,000
Deferred tax liabilities:
Fixed assets................... 270,000 326,000
------------- --------------
Net deferred tax asset........... $ 565,000 $ 115,000
============= ==============
The components of income tax expense for the years ended December 31, 1995, 1994
and 1993 are as follows:
CURRENT DEFERRED TOTAL
1995
FEDERAL.... $ 1,450,000 $ (292,000) $ 1,158,000
STATE...... 225,000 (46,000) 179,000
---------------- -------------- ----------------
$ 1,675,000 $ (338,000) $ 1,337,000
================ ============== ================
1994
Federal.... $ 385,000 $ (3,000) $ 382,000
State...... 26,000 (1,000) 25,000
---------------- -------------- ----------------
$ 411,000 $ (4,000) $ 407,000
================ ============== ================
1993
Federal.... $ 962,000 $ (11,000) $ 951,000
State...... 145,000 ( 2,000) 143,000
---------------- ------------- ----------------
$ 1,107,000 $ (13,000) $ 1,094,000
================ ============= ================
A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective tax rate is as
follows:
F-16
YEARS ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
U.S. Federal income tax statutory rate............................ 34.0% 34.0% 34.0%
State income tax, net of federal
income tax benefit............................................. 3.7 4.6 3.4
Other - including non-deductible items............................ 3.8 15.0 1.7
---- ---- ----
Effective tax rate................................................ 41.5% 53.6% 39.1%
==== ==== ====
The high effective tax rate for 1994 was primarily due to non-deductible
entertainment expenses.
NOTE 8 - CAPITAL STOCK, OPTIONS AND WARRANTS
In December 1995, in connection with the acquisition of the Added Value
Companies, the Company issued an aggregate of 2,174,104 shares of common stock
(see Note 4 to Notes to Consolidated Financial Statements). As a result of Added
Value previously owning approximately 37% of Rocky Mountain, 160,703 shares,
valued at approximately $391,000, issued as part of the Rocky Mountain merger
were acquired by the Company's wholly-owned subsidiary. In addition, in
connection with such acquisitions, certain selling stockholders were granted an
aggregate of 50,000 stock options to acquire the Company's common stock at an
exercise price of $2.313 per share exercisable, subject to a six-year vesting
period, through December 29, 2002.
In July 1995, the Company issued to a consulting firm a warrant to acquire
45,000 shares of the Company's common stock at an exercise price of $2.50 per
share exercisable through July 20, 2000. The warrant was issued in consideration
of such consulting firm entering into a new one-year consulting agreement with
the Company covering financial public relations/investor relations services. At
December 31, 1995, these warrants remained unexercised. The same consulting firm
had previously been issued warrants to acquire an aggregate of 180,000 shares in
September 1987 and May 1993 in connection with prior consulting agreements as
discussed below.
In connection with new employment agreements between the Company and each of its
four executive officers entered into in May 1995, an aggregate of 1,000,000
stock options were granted on June 8, 1995 to such four executive officers
pursuant to the Employees', Officers', Directors' Stock Option Plan, as amended
(the "Option Plan"). These options have an exercise price of $1.875 per share
and are exercisable through June 7, 2005, subject to a vesting schedule.
In connection with the public offering (see Note 2 to Notes to Consolidated
Financial Statements), the Company issued to the underwriter common stock
purchase warrants covering an aggregate of 523,250 shares of common stock
(including warrants issued in
F-17
connection with the underwriter's exercise of the over-allotment option). These
warrants are exercisable at a price of $2.625 per share for a period of four
years commencing one year from June 8, 1995.
In June 1994, the Company issued an aggregate of 386,250 common stock purchase
warrants in connection with a private placement of subordinated debentures (see
Note 6 to Notes to Consolidated Financial Statements). The warrants are
exercisable at any time between December 14, 1994 and June 13, 1999 at an
exercise price of $3.15 per share. In connection with this private placement,
the placement agent received warrants to purchase 38,625 shares of the Company's
common stock. The placement agent's warrants are exercisable for a four-year
period commencing June 14, 1995 at an exercise price of $3.78 per share. At
December 31, 1995, these warrants had not been exercised.
During 1992, the Company sold units, each unit consisting of two shares of
common stock and two warrants. In addition, the underwriters of this offering
were issued warrants to purchase 175,000 units at $3.30 per unit. The
underwriters' warrants are exercisable for a four-year period which commenced in
June 1993. During 1993, the Company redeemed its then outstanding warrants. In
addition, during 1993, 78,750 of the underwriters' warrants were exercised. As a
result of these transactions, the Company received aggregate net proceeds of
approximately $5,393,000 in 1993. During 1994, an additional 78,750 of the
underwriters' warrants were exercised, leaving a balance of 17,500 warrants. The
Company received aggregate net proceeds of approximately $465,000 in 1994. At
December 31, 1995, the 17,500 warrants remained unexercised.
In March 1992, the Company issued a warrant to acquire 30,000 shares of its
common stock at $1.00 per share in connection with a $1.0 million subordinated
loan to the Company which was repaid in June 1992. This warrant was exercised in
March 1995.
In September 1987, the Company issued a warrant to acquire 90,000 shares of its
common stock at $1.60 per share (after the 1989 stock split) relating to a since
expired consulting agreement. In connection with the public offering completed
in June 1992, the Company extended the exercise period of this warrant to June
1994. In May 1993, in connection with a new consulting agreement with the same
party, the Company further extended the exercise period to June 1997 and issued
additional warrants to acquire 90,000 shares of its common stock at $1.35 per
share. At December 31, 1995, none of the warrants relating to these consulting
agreements had been exercised.
In June 1987, the Company reserved 375,000 shares of common stock for issuance
under an employee stock option plan. In 1992, the number of shares of common
stock reserved for issuance under this stock option plan was increased to
750,000 shares, in 1993 the number of shares of common stock reserved for
issuance under this stock option plan was increased to 1,750,000 shares, in 1994
the number of shares of common
F-18
stock reserved was increased to 2,250,000 shares, and in 1995 the number of
shares of common stock reserved was increased to 3,250,000 shares. As of
December 31, 1995 outstanding options under this plan were as follows:
NUMBER OF OPTIONS
DATE OF GRANT OUTSTANDING OPTION PRICE
- ----------------------------------------------------------------
1991..................... 425,000 $.75-$1.03
1993..................... 469,063 $1.375-$2.53
1994..................... 261,000 $2.125-$2.63
1995..................... 1,055,000 $1.84-$2.313
---------
Total outstanding........ 2,210,063
Total exercised.......... 156,627
Total available.......... 883,310
--------
3,250,000
=========
All such options outstanding are exercisable within six years from the date
granted.
In connection with the acquisition of the assets of Components (see Note 4 to
Notes to Consolidated Financial Statements), the Company issued 98,160
unqualified stock options exercisable through January 1999 at an exercise price
of $1.65 per share.
In connection with the acquisition of the assets of GCI Corp. (see Note 4 to
Notes to Consolidated Financial Statements), the Company issued 117,551
unqualified stock options exercisable from September 1995 through September 1999
at an exercise price of $1.65 per share.
In addition, the Company is obligated to issue 1,000 shares of its common stock
and, under certain circumstances, the Company may be obligated to issue 130,000
incentive stock options. See Note 4 to Notes to Consolidated Financial
Statements.
NOTE 9 - COMMITMENTS/RELATED PARTY TRANSACTIONS
Included in the Company's results of operations for 1995 is approximately
$875,000 of sales, at cost, to the Added Value Companies.
In December 1991, the Company relocated its corporate offices and Miami
warehouse to a 37,000 sq. ft. facility. In addition, a warehouse in New York was
consolidated into this new Miami warehouse. In connection with the relocation
and consolidation, the Company entered into a new lease with an unrelated third
party which was to expire in December 1997. Annual rent payments under this
lease totaled $57,000 in 1994.
F-19
In May 1994, the Company terminated its lease covering the 37,000 sq. ft.
facility and entered into a new lease with its then existing landlord to lease a
new 110,800 sq. ft. facility for its corporate headquarters and Miami
distribution center. During 1995, the Company was utilizing approximately 75% of
this new facility, the balance of which the Company was subleasing to an
unrelated third party for a term of three years ending on July 14, 1997. This
sublease has no renewal options and the Company has the right to recapture a
portion of the sublet space from the tenant after the eighteenth month of the
three-year term. In February 1996 the Company notified its subtenant that it
plans to reclaim 11,300 square feet pursuant to the sublease agreement, which
will bring the total amount of the building occupied by the Company to 84% at
such time. The sublease provides for base rent of $5,000 per month increasing 5%
per year and additional rent representing the subtenant's pro rata share of
landlord pass-through expenses and other expenses pertaining to the sublet
premises. The lease has a term expiring in 2014 (subject to the Company's right
to terminate at any time after the fifth year of the term upon twenty-four
months prior written notice and the payment of all outstanding debt owed to the
landlord). The lease gives the Company three six-year options to renew at the
fair market value rental rates. The lease provides for annual fixed rental
payments totaling approximately $264,000 in the first year, $267,000 in the
second year, $279,000 in each of the third, fourth and fifth years, $300,600 in
the sixth year, $307,800 in the seventh year and in each year thereafter during
the term the rent shall increase once per year in an amount equal to the annual
percentage increase in the consumer price index not to exceed 4% in any one
year.
As a result of the Added Value Acquisitions, the Company leases a 13,900 square
foot facility in Tustin, California and a 7,600 square foot facility in Denver,
Colorado. The Tustin facility contains a distribution center as well as the
staff supporting the Company's kitting and turnkey operations and the separate
divisions created for flat panel displays and memory module operations. The
Denver facility contains a regional distribution center and sales office.
In October 1995, the Company entered into a lease for a new west coast
distribution and semiconductor programming center located in Fremont, California
(near San Jose). The Company moved into such facility in January 1996. The
Company will use this space to expand its semiconductor programming and
distribution capabilities and improve quality control and service capabilities
for its west coast customers.
The Company leases space for 27 sales offices, including non-cancelable leases
assumed in connection with the acquisitions of the Added Value Companies, which
expire at various dates and include various escalation clauses and renewal
options.
F-20
Approximate minimum future rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1995, are as follows for the next five years:
YEAR ENDING DECEMBER 31
1996...................... $2,107,000
1997...................... 1,863,000
1998...................... 1,371,000
1999...................... 995,000
2000...................... 660,000
Total rent expense, including real estate taxes and net of sublease income,
amounted to approximately $1,345,000, $753,000 and $526,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
In May 1995, the Company entered into new employment agreements with each of the
four executive officers of the Company (collectively, the "1995 Agreements").
These agreements provide for an aggregate of $845,500 in base salary per annum
effective beginning either March or June 1995 and are subject to an annual
increase commencing as of January 1, 1996 equal to the greater of 4% per annum
as to two agreements and 5% per annum as to the other two agreements or the
increase in the cost of living. The 1995 Agreements provide that the executive
officers as a group are entitled to receive an annual cash bonus, subject to
certain caps, equal to an aggregate of 10% of the Company's pre-tax income,
before nonrecurring and extraordinary charges, in excess of $1,000,000 in any
calendar year. Excluding certain one-time bonuses for 1995 aggregating $55,000,
the total amount of bonuses earned for 1995 was approximately $370,000. The 1995
Agreements also provide for certain additional benefits, including participation
in the Company's benefit plans, disability benefits and various life insurance
policies. The 1995 Agreements also contain change-in-control provisions that may
result in certain lump sum severance payments based on a multiple (two or three
years) of all annual compensation and benefits being payable to them. One
agreement contains a retirement benefits package including $100,000 per annum
from date of retirement (any time on or after January 1, 1999) until the later
of the death of such executive officer or his spouse. A postretirement benefit
cost of $264,000, related to retirement benefits under this agreement, is
included in the consolidated statement of income for the year ended December 31,
1995. Retirement benefits under this agreement are presently unfunded. A
postretirement benefit obligation of $264,000 is included in the consolidated
balance sheet at December 31, 1995.
In connection with the acquisitions of the Added Value Companies, the Company
entered into employment agreements with a total of 17 employees, including five
key employees.
F-21
The two-year employment agreements for the five key employees provide for annual
salaries aggregating $695,000, excluding certain front-end incentive employment
compensation aggregating $765,000. The remaining 12 employment agreements
provide for annual compensation at rates comparable to what was previously paid
to such employees and in certain agreements provide front-end incentive
employment compensation (aggregating $333,000) and additional employment
compensation aggregating $214,500 payable ratably over their two-year employment
periods.
Effective January 1, 1988, the Company established a deferred compensation plan
(the "Deferred Compensation Plan") for executive officers and key employees of
the Company. The employees eligible to participate in the Deferred Compensation
Plan (the "Participants") are chosen at the sole discretion of the Board of
Directors upon a recommendation from the Board of Directors' Compensation
Committee. Pursuant to the Deferred Compensation Plan, commencing on a
Participant's retirement date, he or she will receive an annuity for ten years.
The amount of the annuity shall be computed at 30% of the Participant's Salary,
as defined. Any Participant with less than ten years of service to the Company
as of his or her retirement date will only receive a pro rata portion of the
annuity. Retirement benefits paid under the Deferred Compensation Plan will be
distributed monthly. The Company paid benefits under this plan of approximately
$15,600 and $52,000 during 1995 and 1994, respectively, none of which was paid
to any executive officer. The maximum benefit payable to a Participant
(including each of the executive officers) under the Deferred Compensation Plan
is presently $22,500 per annum. At December 31, 1995 the cash surrender values
of insurance policies owned by the Company under the Plan, which provide for the
accrued deferred compensation benefits, aggregated approximately $78,000.
The Company maintains a 401(k) plan (the "401(k) Plan"), which is intended to
qualify under Section 401(k) of the Internal Revenue Code. All full-time
employees of the Company over the age of 21 are eligible to participate in the
401(k) Plan after completing 90 days of employment. Each eligible employee may
elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of
his or her salary, limited to $9,240 in 1995. The Company makes matching
contributions and in 1995 its contributions were in the amount of 25% on the
first 6% contributed of each participating employee's salary.
NOTE 10 - SETTLEMENT OF INSURANCE CLAIM
In 1993, the Company settled its business interruption claim, which occurred
during the third quarter of 1992, for $237,000. This settlement is reflected as
other income in the consolidated statement of income for the year ended December
31, 1993.
F-22
NOTE 11 - CONTINGENCIES
From time to time the Company may be named as a defendant in suits for product
defects, breach of warranty, breach of implied warranty of merchantability,
patent infringement or other actions relating to products which it distributes
which are manufactured by others. In each case, the Company expects that the
manufacturer of such products will indemnify the Company, as well as defend such
actions on the Company's behalf although there is no guarantee that the
manufacturers will do so. In addition, as a result of the acquisitions of the
Added Value Companies, the Company offers a warranty with respect to its
manufactured products for a period of one year against defects in workmanship
and materials under normal use and service and in the original, unmodified
condition.
NOTE 12 - ECONOMIC DEPENDENCY
For the year ended December 31, 1995, purchases from one supplier were in excess
of 10% of the Company's total purchases and aggregated approximately
$26,528,000. The net outstanding accounts payable to this supplier at December
31, 1995 amounted to approximately $838,000.
For the year ended December 31, 1994, purchases from one supplier were in excess
of 10% of the Company's total purchases and aggregated approximately
$12,200,000. The net outstanding accounts payable to this supplier at December
31, 1994 amounted to approximately $246,000.
For the year ended December 31, 1993, purchases from one supplier were in excess
of 10% of the Company's total purchases and aggregated approximately $9,600,000.
The net outstanding accounts payable to this supplier at December 31, 1993
amounted to approximately $178,000.
F-23