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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, 1999
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 17, 2000, 3,990,631 shares (including 32,141 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 $55,800,000.
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 - 1999
TABLE OF CONTENTS
PART ITEM PAGE
NO. NO. DESCRIPTION NO.
- ---- ---- ----------- ----
I 1 Business.................................................... 1
2 Properties.................................................. 12
3 Legal Proceedings........................................... 12
4 Submission of Matters to a Vote of Security-Holders......... 12
II 5 Market for the Registrant's Common Equity and Related
Stockholder Matters ...................................... 13
6 Selected Financial Data..................................... 14
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
7A Quantitative and Qualitative Disclosures about Market Risk.. 20
8 Financial Statements and Supplementary Data................. 21
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 21
III 10 Directors and Executive Officers of the Registrant.......... 21
11 Executive Compensation...................................... 21
12 Security Ownership of Certain Beneficial Owners
and Management ........................................... 21
13 Certain Relationships and Related Transactions.............. 21
IV 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .............................................. 21
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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, switches, connectors, filters and
sockets. These products are sold primarily to original equipment manufacturers
("OEMs") in a diverse and growing range of industries, including manufacturers
of computers and computer-related products; networking, satellite, wireless and
other communications products; Internet infrastructure and appliances; consumer
goods; robotics and industrial equipment; defense and aerospace equipment; and
medical instrumentation. The Company also sells products to contract electronics
manufacturers ("CEMs") who manufacture products for companies in all electronics
industry segments. Through the Aved Memory Products ("AMP") and Aved Display
Technologies ("ADT") divisions of its subsidiary, Aved Industries, Inc., the
Company also designs and has manufactured under the label of its subsidiary's
divisions, certain board level products including memory modules and flat panel
display driver boards. See "Products." These products are also sold to OEMs.
While the Company reincorporated in Delaware in 1987, it and its predecessors
have operated since 1964. The Company was recognized by industry trade
publications as the fifth largest distributor of semiconductors and the 12th
largest electronic components distributor overall 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. Industry associations estimate total U.S. factory sales of
electronic products will continue to grow. The growth of this industry has been
driven by increased demand for new products incorporating sophisticated
electronic components, such as laptop computers, networking, satellite, wireless
and other communications products, infrastructure and appliances for the
Internet, and multimedia products; as well as the increased utilization of
electronic components in a wide range of industrial, consumer and military
products. E-commerce is expected to generate $1.3 trillion of sales in the year
2003 up from just $50 billion in 1998. In order to support this growth, analysts
believe that spending for U.S. e-business infrastructure will grow from
approximately $150 billion in 1999 to $350 billion in the year 2003.
Additionally, analysts project consumption of semiconductor products to grow
from $126 billion worldwide in 1998 to over $233 billion in 2002.
The three product groups included in the electronic components subsegment of the
electronics industry are semiconductors, passive/electromechanical components,
and systems and computer products (such as disk drives, terminals and computer
peripherals). The Company believes that semiconductors and
passive/electromechanical products currently account for approximately 39% and
20%, respectively, of the electronic components distribution marketplace, while
systems and computer products account for the remaining 41%. The Company only
participates in the distribution of semiconductors and passive/electromechanical
products which account for two of the three industry product groups.
Distributors are an integral part of the electronics industry. During 1999,
an estimated $24 billion of electronic components were sold through
distribution in the United States, up from $10 billion in 1992. In
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recent years, there has been a growing trend for distribution to play an
increasing role in the electronics industry. OEMs and CEMs 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, sales and marketing. Large distribution companies not only fill
these procurement and materials management roles, but further serve as a single
supply source for OEMs and CEMs, offering a much broader line of products,
incremental quality control measures and more support services than individual
electronic component manufacturers. Management believes that OEMs and CEMs will
continue to increase their service and quality requirements, and that this trend
will result in OEMs, CEMs and electronic component manufacturers continuing to
be 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 technology and 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 amount 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
will be involved in an increasing portion of the electronics industry.
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; (ii) increasing sales to existing customers by
continuing to expand its product offerings and service capabilities; and (iii)
increasing its participation in e-commerce. The Company believes that investment
in expansion and capabilities is necessary to enable the Company to participate
in the dynamics of its rapidly changing industry and to achieve greater
profitability in the future.
As a result of our strategy, the Company achieved record levels of profitability
in 1997. While the Company was poised to continue to improve its profitability
during 1998, the industry was changing. At the same time, the industry was
marred with continued price erosion and intensely increased competitive market
conditions. In an effort to better position itself to address these changing
conditions and to become a more formidable force in facing the challenges of an
increasingly competitive and consolidating industry, the Company entertained a
merger proposal which resulted in the Company entering into a letter of intent
to merge with the distribution operations of a sizeable competitor. While
efforts to complete the transaction were underway, financial markets were in
turmoil, industry market conditions were worsening and industry dynamics were
undergoing changes. As a result of these and other factors, efforts to complete
the transaction were prolonged for several months and ultimately the transaction
was terminated due to factors beyond the Company's control. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Selling, General and Administrative Expenses" and Note 6 to Notes to
Consolidated Financial Statements. As a result of the attempted merger, the
Company put internal expansion on hold and lost its momentum for internally
generated growth. Additionally, throughout 1998 the Company was negatively
impacted by the distraction resulting from the evaluation of
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and preparations for the integration of operations in connection with the
proposed merger. These merger-related factors, as well as negative market
conditions and price erosion, combined to result in a decline in the Company's
revenues in 1998.
Once the merger efforts were terminated in the fourth quarter of 1998,
management invested a significant amount of time refocusing the Company on
facing the industry challenges and once again achieving internal growth. To do
so, the Company began efforts to enhance its management team in many areas where
change was needed but kept on hold during the merger efforts. The first half of
1999 was marked with continued pressure on profitability throughout the industry
as well as turmoil resulting from accelerated consolidation trends. During the
second half of 1999 market conditions began to change as the excessive supply
environment reversed, product lead times began to stretch and some product
groups went on allocation. As a result, gross profit margins began to increase
slightly. This reversal of market conditions, combined with certain strategic
decisions made by management, has enabled the Company to achieve improved
results and greater market penetration during the second half of 1999. While
management believes that it may be able to increase market share and increase
profitability even further, there can be no assurance that these goals will be
achieved, particularly since their achievement depends to a large extent on
market conditions outside the Company's control.
EXPANSION
The Company had undergone significant expansion prior to 1998, including opening
new offices, relocating and expanding existing offices and acquiring other
companies, all in order to increase its sales volume, expand its geographic
coverage and become recognized as a national distributor. See "Sales and
Marketing-Sales Office Locations."
As a result of the implementation of the Company's business strategy, the
Company has experienced significant growth every year except 1998. In order to
effectively drive and manage its expansion, the Company continues to: (i)
restructure, enhance and expand its sales staff and sales management and
marketing team; (ii) expand its quality control programs, including its total
quality management ("TQM") and continuous process improvement programs that
ensure quality service, enhance productivity and, over time, reduce costs; (iii)
expand its corporate operations department; (iv) enhance its state-of-the-art
distribution technology; and (v) enhance its asset management capabilities
through new computer and telecommunications equipment. To keep up with industry
trends the Company continues to make significant investments in its web site and
Internet capabilities as well as other forms of e-commerce; and during 1999
created its own web development group. The Company also continues to expand its
investment in its Field Application Engineer ("FAE") program and has increased
its investment in its materials management solutions capabilities which is now
referred to as Supply Chain Management ("SCM"). As the Company has now developed
a greater visibility at the industry's top tier customer base, the Company has
also created an Executive Accounts Program. To better service the large customer
base in the western part of the United States and to enhance relationships with
a supplier base that is predominantly based in California, the Company has
dramatically expanded its west coast corporate offices and relocated the
President and Chief Executive Officer of the Company to San Jose to be based
where sales, marketing and FAE functions are headquartered. The Company has also
expanded the operations of its west coast programming and distribution center.
Since 1997, the Company has opened four new sales offices in the United States
including two which were opened during 1999. The Company expanded its
international presence during 1998 with the opening of a sales office in
Guadalajara, Mexico. The Company currently expects to continue to open new
offices and may seek to acquire additional companies in the future. The Company
also plans to continue its focus on improving the financial performance and
market penetration of each existing location.
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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, in the last few years the Company further expanded its
service capabilities and has opened new sales offices (see "Expansion").
During the last three years, the Company added new suppliers and expects to add
additional suppliers in the future. These new suppliers are intended to offer
larger growth opportunities than some of the smaller suppliers that the Company
has done business with in the past. New supplier relationships generally require
up-front investments that could take substantial time to provide a return.
SERVICE CAPABILITIES
During the past several years, customers have been 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 the Company believes 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 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
service capabilities for just-in-time deliveries, bar coding, bonded inventory
programs, kitting and turnkey services, in-plant stores, in-plant terminals,
electronic data interchange ("EDI") programs, automatic inventory replenishment
programs and complete supply chain management ("SCM") solutions.
In order to further enhance its service capabilities, the Company has also
expanded its Field Application Engineer (FAE) program. The Company expects to
hire additional FAEs 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.
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 has a 20,000 square foot facility in Fremont, California (near San Jose)
which incorporates a programming and a distribution center. In order to service
growing customer demand as well as changing technologies, the Company has
continually increased its investments in its programming
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capabilities by purchasing additional programming equipment and increasing its
programming staff. 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.
The Company believes that in the upcoming years an increasing amount of
transactions in its industry will be processed over the Internet. In this
regard, the Company designed and developed its own web site which became
operational during the first quarter of 1997. In order to further expand its
utilization of and functionality on the Internet, the Company created its own
web development team in 1999. Additionally, to further its e-commerce strategies
the Company has engaged with several third party Internet/e-commerce companies
to expand the visibility of the Company and the ways in which customers can
conduct commerce with the Company. These engagements are expected to expand and
improve customer service, increase revenues, reduce transaction costs and afford
the Company an opportunity to do business in a new and still developing
marketplace. While these engagements have increased operating costs and may
increase costs further in the future, many benefits are expected to be realized
from these investments, however, no assurances can be made that the Company will
realize such benefits.
The Company also provides value-added services relating to its
passive/electromechanical business including connector and cable assemblies.
QUALITY CONTROLS AND ISO CERTIFICATION
The Company has a TQM program in order 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 and Fremont distribution centers and its Fremont programming
center have all successfully completed a procedure and quality audit that
resulted in their 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.
PRODUCTS
ACTIVE AND PASSIVE COMPONENTS
The Company markets both semiconductors and passive products. Semiconductors,
which are active components, 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,
switches, 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 historically had been on mature products that have a more
predictable demand, more stable pricing and more constant sourcing. Although the
Company continues to position itself as a leader in the more mature product
lines, as part of its growth strategy, the Company has expanded its focus to
include offering newer technology products as well as on selling high volumes of
commodity products. These newer technologies and commodity products are playing
a greater role in the overall sales mix of the Company and are expected to play
an even greater role in the overall sales mix to the extent the Company's sales
grow. Most of the commodity products, and many of the newer technology products,
have lower profit margins than the more mature product lines.
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The Company does not offer express warranties with respect to any of its
component products, instead passing on only those warranties, if any, granted by
its suppliers.
FLAT PANEL DISPLAY PRODUCTS
The Company believes that one of the faster growing segments of the electronics
industry will result from the expanded utilization of flat panel displays
("FPD"). Flat panel displays are commonly used in laptop computers and are
currently replacing standard cathode ray tubes in a variety of applications,
including medical, industrial and commercial equipment, as well as personal
computers and video monitors. FPDs are also being utilized in high definition
television ("HDTV").
In order to properly function in any application, flat panel displays need
certain electronic impulses. One solution for generating these electronic
impulses is the use of board level products that control and regulate the
electronic input that drives the flat panel display. These products are commonly
referred to as driver boards. In addition to the driver board, FPDs 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 Company has addressed the FPD market in three ways. First, the Company has
assembled a comprehensive offering of FPD products, including products from
manufacturers of FPDs, as well as manufacturers of the necessary support
products such as back-light inverters and driver boards. The second aspect in
addressing the FPD market is to develop the technical support necessary to
assist customers with integrating FPD applications. In this regard the Company's
FAE program and marketing department have been developing expertise in FPD
applications and integration. Additionally, the Company has added FPD
specialists to its sales and marketing groups. In response to the growing need
for support of FPD business, during 1999 the Company formed its Display
Solutions Group ("DSG") to be a separate group within the Company dedicated
entirely to the support of FPD opportunities. Through our DSG, we have expanded
our internal staff as well as developed relationships with independent
subcontractors, referred to as integrators, in many different geographic
locations. This strategy enables the Company to offer a broad selection of
products, services and solutions needed to service the varying levels of support
required by the customer base.
The third aspect to the Company's approach to the FPD marketplace was
accomplished with the creation of Aved Display Technologies ("ADT"). ADT, which
is run as a separate division, designs, develops and has manufactured under its
own label several proprietary driver board products for FPD applications. In
addition to ADT, the Company also has other suppliers of FPD driver board
products.
MEMORY MODULES
The Company also designs, has manufactured and sells memory modules under the
Aved Memory Products, or AMP label. Memory products, which include the memory
module subsegment, represent the largest product sector of semiconductor
revenues. Memory modules facilitate the incorporation of expanded memory in
limited space. In addition to Aved Memory Products, the Company has other
suppliers of memory module products.
With respect to all products manufactured or assembled for ADT and AMP, 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; networking, satellite, wireless and
other communications products; Internet infrastructure and appliances;
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consumer goods; robotics and industrial equipment; defense and aerospace
equipment; and medical instrumentation. The Company also sells products to CEMs
who manufacture products for companies in all electronics industry segments. The
Company's customer list includes approximately 12,000 accounts. During 1999, no
customer accounted for more than 4% 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 approximately 75 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 be a preferred and expanding source of
supply for all middle market customers. The Company is achieving this by
providing a broader range of products and services than is available from
smaller and comparably sized distributors, and a higher level of attention than
these customers receive from the larger distributors. In addition, the Company
continues its efforts to become a more significant supplier for the top tier
customers by focusing on a niche of products not emphasized by the larger
distributors while providing the high level of quality, service and technical
capabilities required to do business with these accounts.
The Company's marketing strategy also includes the expansion of its e-commerce
capabilities through enhancing its web site functionality and developing its
portal capabilities to enable its customers to utilize the services available
from the Company's growing number of e-commerce partners.
MARKETING TECHNIQUES
As part of the Company's marketing strategy, the marketing department is based
in Silicon Valley near the headquarters of the vast majority of the supplier
base. 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; (iv) the Company's
telemarketing efforts; and (v) a web site and portal on the Internet. The
Company also uses its expanded service capabilities, FAE program, SCM
capabilities and status as an authorized distributor as marketing tools. See
"Business Strategy-Service Capabilities" and "Suppliers."
SALES PERSONNEL
As of March 1, 2000, the Company employed 334 people in sales on a full-time
basis, of which 132 are field salespeople, 126 are inside salespeople, 35 are in
management, 25 are in administration and 16 are engineers in the FAE program.
The Company also had 22 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
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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 on achieving gross
profit goals.
SALES OFFICE LOCATIONS
The Company currently operates 32 sales offices in 21 states, Canada and Mexico.
The locations of the sales offices are in each of the following geographic
markets: Huntsville, Alabama; Phoenix, Arizona; Orange County, San Diego, San
Fernando Valley, San Jose and Tustin, California; Toronto, Canada; Denver,
Colorado; Fort Lauderdale, Miami, Orlando and Tampa, Florida; Atlanta, Georgia;
Chicago, Illinois; Kansas City, Kansas; Baltimore, Maryland; Boston,
Massachusetts; Guadalajara, Mexico; Detroit, Michigan; Minneapolis, Minnesota;
Long Island and Rochester, New York; Raleigh, North Carolina; Cleveland, Ohio;
Portland, Oregon; Philadelphia, Pennsylvania; Austin and Dallas, Texas; Salt
Lake City, Utah; Seattle, Washington and Milwaukee, Wisconsin. The Company also
retains field sales representatives to market other territories throughout the
United States, Canada, Puerto Rico and Mexico. The Company may consider opening
branches in these other territories if the representatives located there achieve
certain 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.
FOREIGN SALES
Sales to foreign countries aggregated approximately $24.1 million, $9.4 million
and $5.4 million for 1999, 1998 and 1997, respectively.
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
an indicator of future sales. At December 31, 1999, the Company had a backlog in
excess of $80 million, compared to a backlog in excess of $43 million at
December 31, 1998 and $50 million at December 31, 1997. During 1997, 1998 and
the first half of 1999 there was an excess availability of product throughout
the industry. As a result, customers kept much lower levels of product on order
as delivery times were short and prices were often declining. During the second
half of 1999 these conditions changed, lead times began to stretch and certain
product groups went on allocation. As a result, customers began increasing the
amount of their scheduled orders. By February 29, 2000, the Company's backlog
had risen to approximately $99 million. While the tight supply market often
results in customers placing scheduled orders for more product than they
actually need (referred to in the industry as double booking), the Company
believes that a substantial portion of its backlog represents products due to be
delivered within the next three months. Approximately 30% 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. In addition,
the Company has increased its practices of EDI transactions where the Company
purchases inventory based on electronically transmitted customer forecasts that
do not become an order until the date of shipment and, therefore, are not
reflected in the Company's backlog.
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SUPPLIERS
The Company generally purchases products from component 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. Suppliers also limit the number of distributors in order to
reduce the costs associated with managing multiple distributors. 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 component 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 that distributor's geographic coverage. 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 suppliers' products at the
customer base. To address this requirement, the Company has an FAE program which
is currently staffed with 16 engineers. During the last three years, the Company
has been successful in adding new suppliers.
All distribution agreements are cancelable by either party, typically upon 30 to
90 days notice. For the year ended December 31, 1999, the Company's three
largest suppliers accounted for 22%, 9% and 4% of consolidated purchases,
respectively. Most of the products that the Company sells are available from
other sources. While the Company believes that the loss of a key supplier could
have an adverse impact on its business in the short term, the Company would
attempt to replace the products offered by that supplier with the products of
other suppliers. If the Company were to lose its rights to distribute the
products of any 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 loss of the Company's largest supplier or a significant number of
suppliers in a short period of time could have a material adverse effect on the
Company. 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 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. The Company believes its inventory risk due to
technological obsolescence is significantly reduced by certain provisions
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.
The vast majority 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.
9
FACILITIES AND SYSTEMS
FACILITIES
The Company's corporate headquarters and main distribution center are located in
a 110,800 square foot facility in Miami, Florida. The Company occupies this
facility through a lease which expires in 2014, subject to the Company's right
to terminate at any time after May 1999 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. Although continued growth is not assured, the Company
estimates that this facility has capacity to handle over $400 million in annual
revenues.
The Company also leases a 13,900 square foot facility in Tustin, California and
a 7,600 square foot facility in Denver, Colorado. The Tustin facility presently
contains all operations for the separate divisions of Aved Display Technologies
and Aved Memory Products. See "Products." The Denver facility is dedicated to
certain value-added services and a regional distribution center.
The Company also leases approximately 20,000 square feet of space for its west
coast distribution and semiconductor programming center located in Fremont,
California (near San Jose).
During 1998, the Company entered into a new lease for approximately 20,000
square feet of space in San Jose, California to house its expanded west coast
corporate offices as well as its northern California sales operation. This lease
incorporates the previously leased space of approximately 11,000 square feet and
adds a new adjoining space of approximately 9,000 square feet. Approximately
8,000 square feet of the space is being used for corporate offices including the
office of the President and Chief Executive Officer of the Company and 8,000
square feet of the space is being utilized for the sales operation. The
remaining area of approximately 4,000 square feet is presently being sublet. In
addition, the Company leases space for its other sales offices, which offices
range in size from approximately 1,000 square feet to 8,000 square feet. See
"Sales and Marketing-Sales Office Locations."
Due to the dramatic price erosion during the past few years as well as the
continued growth in revenues, the Company believes its unit volume shipped has
increased. As a result, the Company has utilized some of its excess capacity. As
a result of our capacity utilization as well as the need to increase
productivity in our distribution center, the Company is presently evaluating
potential investments to add further automation to its distribution centers.
SYSTEMS
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 appropriate
distribution facility for shipping and invoicing. The combination of the
centralized distribution centers 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 systems allow the
Company to participate with customers and suppliers in electronic data
interchange, or EDI, and to expand customer services, including just-in-time
deliveries, kitting programs, bar coding, automatic inventory replenishment
programs, bonded inventory programs, in-plant stores and in-plant terminals and
supply chain management.
As a result of rapidly increasing advances in technology, the Company has
recognized that its computer and communications systems will be subject to
continual enhancements. In order to meet the increasing demands of customers and
suppliers, to maintain state-of-the-art capabilities, and to participate in
e-commerce, the Company has continually been expanding, and in the future will
continue to develop and
10
expand, its systems capabilities, including hardware and software upgrades to
meet its computer and communications needs. The Company believes that these
systems enhancements should assist in increasing sales and in improving
efficiencies and the potential for greater profitability in future periods
through increased employee productivity, enhanced asset management, improved
quality control capabilities and expanded customer service capabilities. See
"Business Strategy-Service Capabilities." There can be no assurance, however,
that these benefits will be achieved.
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, economic or financial turbulence abroad, 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. The Company believes that these factors may have had an adverse
impact on its business during past years, and there can be no assurance that
such factors will not have a more significant adverse affect on the Company in
the future. Since the Company purchases from United States subsidiaries or
affiliates of foreign manufacturers, the Company's purchases are paid for in
U.S. dollars.
EMPLOYEES
As of March 1, 2000, the Company employed 622 persons, of which 334 are involved
in sales and sales management; 96 are involved in marketing; 64 are involved in
the distribution centers; 51 are involved in operations; 11 are involved in
management; 42 are involved in bookkeeping and clerical; and 24 are involved in
information technology. 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 $9 billion
worldwide. These distributors can generally be divided into global distributors
who have operations around the world, national distributors who have offices
throughout the United States, regional distributors and local distributors. With
sales offices in 21 states, the Company competes as a national distributor.
Additionally, the Company is one of the few national distributors which has
offices in Canada and Mexico. The Company, which was recently recognized by
industry sources as the fifth largest distributor of semiconductors and the 12th
largest electronic components distributor overall in the United States, believes
its primary competition comes from the top 50 distributors in the industry.
Recently, there has been an emergence of additional competition from the advent
of third party logistics companies, businesses commonly referred to as e-brokers
and several other forms of e-commerce companies which have grown as a result of
the expanded use of the Internet. While the Company is aggressively working on
implementing its e-commerce strategies, including its web site and portal
development, to deal with these new forms of competition, there can be no
assurance that the Company will be able to defend its market share against the
emergence of these new business models.
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
11
tier) accounts; middle market accounts; and emerging growth accounts.
Competition to be the primary supplier for the major customers is dominated by
the top five distributors as a result of the product offerings, pricing and
distribution technology offered by these distributors. The Company competes for
a portion of the available business at these major industry customers by seeking
to provide the very best service and quality and by focusing on products that
are not emphasized by the top five distributors, or are fill-in or niche
products. With its expanded service capabilities and quality assurance
procedures in place, the Company believes that it can compete for a bigger
portion of the business at the top tier customer base, although there can be no
assurance that the Company will be successful in doing so. The Company believes
competition from the top five 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 strong 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
and global distributors. The Company believes that today the top five
distributors are seeking to penetrate the middle market customer base more than
they have in the past.
ITEM 2. PROPERTIES
See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales
Office Locations" and Note 10 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. Many of such
claims are covered by insurance or, if they relate to products manufactured by
others for 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.
There has been a recent trend throughout the United States of increased
grievances over various employee matters. While the Company is presently not
involved in any material litigation relating to such matters, the Company
believes that costs associated with such matters may increase in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1999.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on The Nasdaq Stock Market (Nasdaq National
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:
Quarter of Fiscal Year High Low
- ---------------------- ---- ---
1998
- ----
First Quarter 10 6 7/8
Second Quarter 12 11/32 7 3/16
Third Quarter 10 15/16 4 7/32
Fourth Quarter 7 3/16 3 3/4
1999
- ----
First Quarter 5 5/16 3 7/16
Second Quarter 4 17/32 2 1/2
Third Quarter 5 2 13/16
Fourth Quarter 4 1/2 2 11/16
2000
- ----
First Quarter (through March 17, 2000) 19 3 1/16
On June 1, 1999, the Company's shareholders approved a one-for-five reverse
stock split (the "Reverse Stock Split") of the Company's outstanding shares of
common stock. The Reverse Stock Split became effective for trading in the
Company's new common stock as of June 2, 1999. Immediately following the Reverse
Stock Split, there were 3,973,431 shares of common stock outstanding. The $.01
par value of the common stock remained the same after the Reverse Stock Split.
All references to shares of common stock, stock options, warrants, exercise
prices per share and per share amounts have been restated to reflect the effect
of the Reverse Stock Split.
As of March 17, 2000, there were approximately 450 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 6,300
beneficial holders of its common stock.
On June 24, 1999, the Company was advised by the Nasdaq Listing Qualifications
department of The Nasdaq Stock Market (the "Nasdaq Listing Department") that the
Company maintained a bid price in excess of the $1.00 minimum bid requirement
under The Nasdaq Stock Market rules for a minimum of ten consecutive business
days. Accordingly, the matter of maintaining a minimum bid price detailed in a
previous notification from the Nasdaq Listing Department was closed.
DIVIDEND POLICY
The Company has never 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 prohibits the payment of any dividends. See
Note 7 to Notes to Consolidated Financial Statements.
13
SALES OF UNREGISTERED SECURITIES
The Company has not issued or sold any unregistered securities during the
quarter ended December 31, 1999 except as follows:
Pursuant to the Company's Employees', Officers', Directors' Stock Option Plan,
as previously amended and restated, the Company granted during the quarter ended
December 31, 1999 stock options to purchase 165,400 shares of the Company's
common stock to 94 individuals at exercise prices ranging from $3.27 to $3.60
per share. The stock options are exercisable over a five or six-year period. See
Note 9 to Notes to Consolidated Financial Statements. All of the stock options
were granted by the Company in reliance upon the exemption from registration
available under Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the Company for and as of
the years 1995 through 1999 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." All references to
shares of common stock and per share amounts have been restated to reflect the
effect of the Reverse Stock Split.
Statement of Operations Data
Years Ended December 31 1999 1998 1997 1996 1995(1)
- -------------------------------------------------------------------------------------------------------------------------
Net Sales (2) ........................ $ 329,563,000 $ 250,044,000 $ 265,640,000 $ 237,846,000 $ 177,335,000
Cost of Sales (3) .................... (265,064,000) (194,599,000) (207,173,000) (185,367,000) (138,089,000)
------------- ------------- ------------- ------------- -------------
Gross Profit ......................... 64,499,000 55,445,000 58,467,000 52,479,000 39,246,000
Selling, General and
Administrative Expenses ........... (56,357,000) (46,880,000) (48,257,000) (51,675,000) (32,321,000)
Restructuring and Other Nonrecurring
Expenses (4) ...................... -- (2,860,000) -- (4,942,000) (1,098,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations ........................ 8,142,000 5,705,000 10,210,000 (4,138,000) 5,827,000
Interest Expense (5) ................. (4,985,000) (4,313,000) (4,797,000) (7,025,000) (2,739,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Income Taxes .... 3,157,000 1,392,000 5,413,000 (11,163,000) 3,088,000
Income Tax (Provision) Benefit ....... (1,358,000) (561,000) (2,163,000) 2,942,000 (1,281,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Discontinued
Operations and Extraordinary Items. 1,799,000 831,000 3,250,000 (8,221,000) 1,807,000
Discontinued Operations (6) .......... -- -- -- (1,757,000) 79,000
Extraordinary Items (7) .............. -- -- -- 58,000 --
------------- ------------- ------------- ------------- -------------
Net Income (Loss) .................... $ 1,799,000 $ 831,000 $ 3,250,000 $ (9,920,000) $ 1,886,000
============= ============= ============= ============= =============
Earnings (Loss) Per Share (8):
Basic ............................. $.46 $.21 $.83 $(2.51) $.62
Diluted ........................... $.46 $.21 $.82 $(2.47) $.59
Balance Sheet Data
December 31 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Working Capital ...................... $ 91,217,000 $ 68,192,000 $ 63,308,000 $ 69,823,000 $ 59,352,000
Total Assets ......................... 151,501,000 118,957,000 112,286,000 112,921,000 114,474,000
Long-Term Debt, Including
Current Portion ................... 71,867,000 50,978,000 46,900,000 58,221,000 37,604,000
Shareholders' Equity ................. 27,852,000 26,509,000 25,674,000 22,396,000 32,267,000
Book Value Per Common Share .......... $7.01 $6.67 $6.46 $5.65 $ 8.12
- ----------------------
14
(1)The statement of operations data for 1995 reflects nonrecurring expenses
associated with certain acquisitions, which occurred on December 29, 1995,
while the balance sheet data reflects the assets and liabilities of the
acquired companies at December 31, 1995.
(2)Net sales, including sales generated by the Company's computer products
division which was discontinued in the third quarter of 1996, were
$244,668,000 for 1996 and $180,794,000 for 1995.
(3)1996 includes non-cash inventory write-offs of $2,000,000 associated with
the Company's restructuring of its kitting and turnkey operations.
(4)1998 reflects a nonrecurring charge relating to a failed proposed merger. The
nonrecurring charge includes expansion costs incurred in anticipation of
supporting the proposed combined entity, employee-related expenses,
professional fees and other merger-related out of pocket costs. 1996 includes
non-recurring expenses consisting of: $1,092,000 relating to restructuring
the Company's kitting and turnkey operations, $587,000 relating to the
termination of certain employment agreements, $445,000 relating to relocating
the Company's cable assembly division, $625,000 relating to the accrual of a
postretirement benefit cost associated with an amendment to an employment
agreement with one of the Company's executive officers, and $2,193,000
relating to an impairment of goodwill primarily related to certain
acquisitions. 1995 reflects a charge for front-end incentive employment
compensation associated with certain acquisitions.
(5)Interest expense for 1996 includes amortization and a write-down of deferred
financing fees relating to obtaining the Company's $100 million credit
facility of approximately $2,148,000.
(6)Includes income (losses) from discontinued operations of $(166,000) (net of
$125,000 income tax benefit) and $79,000 (net of $56,000 income tax
provision) for 1996 and 1995, respectively, and a loss on disposal of
$(1,591,000) (net of $1,200,000 income tax benefit) in 1996 relating to
management's decision to discontinue its computer products division.
(7)Reflects an after-tax gain of $272,000 (net of $205,000 income tax
provision) associated with the Company's settlement of a civil litigation and
an after-tax non-cash expense of $214,000 (net of $161,000 income tax
benefit) resulting from the early extinguishment of the Company's $15 million
senior subordinated promissory note.
(8)Weighted average common shares outstanding after reflecting the Reverse
Stock Split for the years ended December 31, 1999, 1998, 1997, 1996 and 1995
were 3,921,138, 3,937,021, 3,934,512, 3,948,570 and 3,048,292, respectively,
for basic earnings per share and were 3,924,166, 3,998,802, 3,956,967,
4,021,152 and 3,173,373, respectively, for diluted earnings per share.
15
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, 1999, 1998 and
1997, certain items in the Company's Consolidated Statements of Income expressed
as a percentage of net sales. All percentages are based on net sales.
Items as a Percentage
of Net Sales
-----------------------
Years Ended
December 31
-----------------------
1999 1998 1997
------ ------ ------
Net Sales.......................................... 100.0% 100.0% 100.0%
Gross Profit....................................... 19.6 22.2 22.0
Selling, General and Administrative Expenses....... (17.1) (18.7) (18.2)
Restructuring and Other Nonrecurring Expenses...... -- (1.1) --
Income from Operations............................. 2.5 2.3 3.8
Interest Expense................................... (1.5) (1.7) (1.8)
Income Before Income Taxes......................... 1.0 0.6 2.0
Net Income......................................... 0.5 0.3 1.2
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
SALES
For the year ended December 31, 1999, the Company achieved a record sales level
at $329.6 million, a $79.6 million or 31.8% increase over net sales of $250.0
million for 1998. The increase resulted from improved conditions in the industry
as well as from increased sales in most territories and contributions from two
new sales offices which were opened during the second quarter of 1999.
GROSS PROFIT
Gross profit was $64.5 million in 1999 compared to $55.4 million for 1998,
representing a 16.3% increase. The increase in gross profit was due to the
increase in sales which more than offset a decline in gross profit margins as a
percentage of net sales. Gross profit margins as a percentage of net sales were
19.6% for 1999, compared to 22.2% for 1998. The decline in gross profit margins
reflects the competitive market and excess supply conditions during the first
half of 1999, a greater number of low margin, large volume transactions than in
the previous year, as well as continued changes in the Company's product mix. In
addition, the Company continues to experience lower margins relating to the
development of long-term strategic relationships with accounts which have
required aggressive pricing programs. Although gross profit margins started to
improve slightly during the second half of 1999, management is unsure whether
this positive trend will continue or possibly reverse.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") was $56.4 million for
1999, compared to $46.9 million for 1998. The increase in SG&A was primarily a
result of an increase in the Company's infrastructure to support the changing
needs and additional requirements of its customers and increased variable
expenses associated with the increases in sales and gross profit. Furthermore,
in an effort to drive expansion and internal growth, the Company opened
additional sales offices and increased and
16
enhanced its management personnel during 1999. Due to these factors, the Company
expects that SG&A will increase in future periods.
SG&A as a percentage of net sales improved to 17.1% for the year ended December
31, 1999, from 18.7% for the 1998 period. The decrease in SG&A as a percentage
of sales reflects the significant increase in sales which more than offset the
increase in SG&A in absolute dollars.
INCOME FROM OPERATIONS
Income from operations was $8.1 million for 1999, a 42.7% increase over income
from operations of $5.7 million for 1998. The increase in income from operations
was due to the increase in net sales, which more than offset the impact of the
decline in gross profit margins and the increase in SG&A. In addition, 1998
included a nonrecurring charge of $2.9 million relating to a failed proposed
merger.
INTEREST EXPENSE
Interest expense was $5.0 million for the year ended December 31, 1999, compared
to $4.3 million for 1998. The increase in interest expense resulted from an
increase in average borrowings during 1999 to support the growth in sales and
the expanded infrastructure. Interest expense for 1999 also reflects a decrease
in the Company's borrowing rate.
NET INCOME
Net income increased dramatically to $1.8 million, or $.46 per share (diluted),
for the year ended December 31, 1999, a 116.5% increase over net income of
$831,000, or $.21 per share (diluted), for 1998. The increase in net income
reflects the increase in gross profit which was partially offset by the
increases in SG&A and interest expense. In addition, 1998 included a
nonrecurring charge of $1.7 million on an after-tax basis relating to a failed
proposed merger.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
SALES
Net sales for the year ended December 31, 1998 were $250.0 million, compared to
net sales of $265.6 million for 1997. The decrease in net sales was partially
attributable to price erosion and adverse market conditions within our industry.
Sales for 1998 were also negatively impacted by the distractions resulting from
a failed proposed merger. See "Selling, General and Administrative Expenses"
below and Note 6 to Notes to Consolidated Financial Statements.
GROSS PROFIT
Gross profit was $55.4 million in 1998, compared to $58.5 million in 1997. The
decrease in gross profit was due to the decrease in net sales. Gross profit
margins as a percentage of net sales were 22.2% for 1998, compared to 22.0% for
1997. While the gross profit margin for the year was slightly higher than for
the prior year, the gross profit margin began declining toward the end of 1998,
reflecting increased competition and a greater number of low margin, large
volume transactions. In addition, the Company experienced lower margins relating
to the development of long-term strategic relationships with accounts which have
required aggressive pricing programs. The Company also experienced margin
pressures resulting from price increases from certain suppliers that the Company
was not able to pass on to its customers at the same rate.
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") was $46.9 million for
1998, down from $48.3 million for 1997. The decrease in SG&A reflected a
reduction in variable expenses associated with the decrease in gross profit as
well as the continued benefits of the Company's cost control programs. SG&A as a
percentage of net sales was 18.7% for 1998, compared to 18.2% for 1997. The
increase in SG&A as a percentage of net sales reflected the impact of the
reduction in net sales discussed above. As a result of the industry-wide price
erosion experienced during 1996 through 1998, the Company had to ship more units
for each dollar of revenue. As a result, the Company's excess capacity was
diminished. Additionally, customer requirements have increased significantly,
resulting in the Company increasing its infrastructure to support the additional
customer needs.
During 1998, the Company was involved in merger discussions which led to a
letter of intent being signed in June 1998. Throughout 1998 the Company was
actively involved in the evaluation of and preparations for the integration of
operations in connection with the proposed merger. In October 1998, the merger
negotiations were terminated. As a result, the Company recorded a nonrecurring
charge in 1998, which included expansion costs incurred in anticipation of
supporting the proposed combined entity, certain employee-related expenses,
professional fees and other merger-related out of pocket costs, all of which
aggregated $2.9 million. See Note 6 to Notes to Consolidated Financial
Statements.
INCOME FROM OPERATIONS
Income from operations was $5.7 million for 1998 including the $2.9 million
nonrecurring charge, compared to income from operations of $10.2 million for
1997. The decrease in income from operations was attributable to the decrease in
net sales which more than offset the decrease in SG&A.
INTEREST EXPENSE
Interest expense decreased to $4.3 million for the year ended December 31, 1998
compared to $4.8 million for 1997. The decrease in interest expense resulted
from lower average borrowings during 1998 as well as a decrease in the Company's
borrowing rate.
NET INCOME
Net income was $831,000, or $.21 per share (diluted), for the year ended
December 31, 1998, compared to net income of $3.3 million, or $.82 per share
(diluted), for 1997. The decrease in net income reflected the decrease in sales
and the nonrecurring expenses (approximately $1.7 million on an after-tax basis)
which more than offset the decreases in SG&A and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1999 improved significantly to $91.2 million,
compared to working capital of $68.2 million at December 31, 1998. The current
ratio improved to 2.75:1 at December 31, 1999, compared to 2.63:1 at December
31, 1998. The increases in working capital and in the current ratio were due
primarily to increases in accounts receivable and inventory. These changes more
than offset an increase in accounts payable. Accounts receivable levels at
December 31, 1999 were $53.2 million, compared to $37.8 million at December 31,
1998. The increase in accounts receivable reflects the record level of sales
achieved during the end of 1999 compared to the end of 1998. Additionally, the
average number of days that accounts receivables were outstanding improved from
53 days as of December 31, 1998 to 52 days as of December 31, 1999. Inventory
levels were $85.3 million at December 31, 1999 compared to $69.1 million at
December 31, 1998. The increase primarily reflects higher inventory levels
needed to support increased sales. Accounts payable and accrued expenses
increased to $51.6 million at December 31, 1999 from $41.2 million at December
31, 1998, primarily as a result of the increase in purchases of inventory.
18
On May 3, 1996 the Company entered into a $100 million line of credit facility
with a group of banks (the "Credit Facility") which expires May 3, 2001. During
1999, borrowings under the Credit Facility bore interest, at the Company's
option, at either prime plus one-quarter of one percent (.25%) or LIBOR plus two
and one-quarter percent (2.25%). Borrowings under the Credit Facility are
secured by all of the Company's assets including accounts receivable,
inventories and equipment. The amounts that the Company may borrow under the
Credit Facility are based upon specified percentages of the Company's eligible
accounts receivable and inventories, as defined. Under the Credit Facility, the
Company is required to comply with certain affirmative and negative covenants as
well as to comply with certain financial ratios. These covenants, among other
things, place limitations and restrictions on the Company's borrowings,
investments and transactions with affiliates and prohibit dividends and stock
redemptions. Furthermore, the Credit Facility requires the Company to maintain
certain minimum levels of tangible net worth throughout the term of the
agreement and a minimum debt service coverage ratio which is tested on a
quarterly basis. At December 31, 1999, outstanding borrowings under the Credit
Facility aggregated $64.0 million compared to $43.3 million at December 31,
1998. The increase in outstanding borrowings reflects the significant growth in
sales and the related increases in inventory and accounts receivable. See Note 7
to Notes to Consolidated Financial Statements.
During 1999, the Company's Board of Directors authorized the repurchase of up to
$2 million in purchase price of the Company's common stock and the lenders under
the Credit Facility waived the restriction on stock redemptions with respect to
such repurchase program. The stock repurchases may, at the discretion of the
Company's management, be made from time to time at prevailing prices in the open
market or through privately negotiated transactions. The Company's management
will base its decision on market conditions, the price of the common stock and
other factors. The Company intends to make such stock repurchases using
available cash flow from operations and/or available borrowings under the Credit
Facility. Any shares of common stock repurchased will be available for
reissuance in connection with the Company's Employees', Officers', Directors'
Stock Option Plan or for other corporate purposes. As of December 31, 1999, the
Company repurchased 138,586 shares of its common stock at an average price of
$3.30 per share.
The Company expects that its cash flows from operations and additional
borrowings available under the Credit Facility will be sufficient to meet its
current financial requirements over the next twelve months.
INFLATION AND CURRENCY FLUCTUATIONS
The Company does not believe that inflation significantly impacted its business
during 1999; however, inflation has had significant effects on the economy in
the past and could adversely impact the Company's results in the future. The
Company believes that currency fluctuations could have adverse effects on its
business if it causes limitations in customer productions due to unfavorable
export conditions or if it causes the Company's offshore suppliers to limit
exports to the United States. In certain prior years, the Company believes that
currency fluctuations have had such adverse effects.
YEAR 2000 ISSUE
The Company has evaluated its business information technology (IT) systems as
well as its non-IT systems and has surveyed its major vendors. The Company
currently believes that its internal systems are in compliance with Year 2000
requirements. To date, none of our systems have experienced material
difficulties from the transition to Year 2000. Based upon the survey of the
Company's major suppliers and the lack of material issues to date, the Company
currently believes that Year 2000 issues of its suppliers should not have a
material adverse effect on the Company's business, operations or financial
condition. Nevertheless, to the extent the Company's vendors (particularly its
major vendors) experience Year 2000 difficulties in the future, the Company may
face delays in obtaining or even be unable to obtain certain products and
services and therefore may be unable to make shipments to customers resulting in
a material adverse effect on the Company's business, operations and financial
condition. The Company did not survey its customers and on a limited basis
surveyed certain other third parties with which it has a business relationship.
As there have been no material issues to date, no assessment has been made of
any future
19
potential impact by customers' non-compliance (such as the ability of customers
to electronically interface with the Company), although no assurance can be
given that such non-compliance will not surface in the future resulting in a
material adverse effect on the Company's business, operations and financial
condition. The Company did not undertake an analysis of (nor, given the lack of
material issues to date, does it intend to analyze) the effect of a
worst-case Year 2000 scenario on the Company's business, operations or financial
condition and, accordingly, the materiality of such effect (if any) is uncertain
and the Company does not have a contingency plan and, given the lack of material
issues to date, does not intend to create one.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs relating to the Company's future
performance and operating results, its bookings, products, services, markets and
industry, and/or future events relating to or effecting the Company and its
business and operations (including, without limitation, general technology
growth). If and when used in this Form 10-K, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," "could," "may" and similar
expressions as they relate to the Company or its management are intended to
identify forward-looking statements. The actual performance, results or
achievements of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties. Factors
that could adversely affect the Company's future results, performance or
achievements include, without limitation, the amount and timing of shipments of
previously booked customer orders, the effectiveness of the Company's business
and marketing strategies, timing of delivery of products from suppliers, price
increases from suppliers that cannot be passed on to the Company's customers at
the same rate, the product mix sold by the Company, the Company's development of
new customers, existing customer demand as well as the level of demand for
products of its customers, the ability of the Company to open new sales offices
in a timely and cost-effective manner and to expand its product offerings and
continue to enhance its service capabilities and the timing and cost thereof,
utilization by the Company of any excess capacity, availability of products from
and the establishment and maintenance of relationships with suppliers, price
erosion in and price competition for products sold by the Company, management of
growth and expenses, the ability of the Company to generate the expected return
from its addition of people, addition of sales offices and the increase of its
infrastructure, the Company's ability to collect accounts receivable, price
decreases on inventory that is not price protected, gross profit margins,
including decreasing margins relating to the Company being required to have
aggressive pricing programs, increased competition from third party logistics
companies, e-brokers and other forms of e-commerce companies through the use of
the Internet as well as from its traditional competitors, availability and terms
of financing to fund capital needs, the continued enhancement of
telecommunication, computer and information systems, the achievement by the
Company and its vendors and customers and other third parties with which the
Company has a business relationship of Year 2000 compliance, the continued and
anticipated growth of the electronics industry and electronic components
distribution industry, as well as general technology growth, the impact on
certain of the Company's suppliers and customers of economic or financial
turbulence in off-shore economies and/or financial markets, change in government
tariffs or duties, currency fluctuations, a change in interest rates, the state
of the general economy, and the other risks and factors detailed in this Form
10-K and in the Company's other filings with the Securities and Exchange
Commission and in its press releases. These risks and uncertainties are beyond
the ability of the Company to control. In many cases, the Company cannot predict
the risks and uncertainties that could cause actual results to differ materially
from those indicated by the forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Credit Facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have
20
a material adverse effect on the Company's financial results. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
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
Management's Responsibility for Financial Reporting.......... F-1
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 (i) Certificate of Amendment of
Certificate of Incorporation dated August 21, 1995 of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-K for the year ended December 31, 1995) and
(ii) Certificate of Amendment of Certificate of Incorporation
dated June 1, 1999 of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarter ended
June 30, 1999).
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 Form 10-Q for the quarter ended
June 30, 1999).
4.2 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).
21
4.3 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).
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 Lease Agreement for west coast corporate office and northern
California sales office in San Jose, California dated October
1, 1998 between San Jose Technology Properties, LLC and the
Company (incorporated by reference to Exhibit 10.3 to the
Company's Form 10-K for the year ended December 31, 1998).
10.4 Promissory Notes, all dated May 1, 1994 payable to Drake, 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).
10.5 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).
10.6 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).
10.7 Amended and Restated All American Semiconductor, Inc.
Employees', Officers', Directors' Stock Option Plan, as amended
through June 1, 1999 (incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended June 30,
1999).**
10.8 Deferred Compensation Plan (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form
S-2, File No. 33-47512).**
10.9 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).
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), as amended by First
Amendment to Employment Agreement dated as of December 31,
1996, between the Company and Paul Goldberg (incorporated by
reference to Exhibit 10.9 to the Company's Form 10-K for the
year ended December 31, 1996), as amended by Second Amendment
to Employment Agreement dated as of August 21, 1998, between
the Company and Paul Goldberg (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
September 30, 1998).**
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), as amended by First
Amendment to Employment Agreement dated as of August 21, 1998,
between the Company and Bruce M. Goldberg (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1998).**
10.12 Merger 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).
22
10.13 Loan and Security Agreement (without exhibits or schedules)
among Harris Trust and Savings Bank, as a lender and
administrative agent, American National Bank and Trust Company
of Chicago, as a lender and collateral agent, and the Other
Lenders Party thereto and the Company, as borrower, together
with six (6) Revolving Credit Notes, all dated May 10, 1996,
aggregating $100,000,000 (incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q for the quarter ended March 31,
1996).
10.14 Amendment No. 1 to Loan and Security Agreement dated August 2,
1996 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1996).
10.15 Amendment No. 2 to Loan and Security Agreement dated November
14, 1996 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1996).
10.16 Amendment No. 3 to Loan and Security Agreement dated July 31,
1998 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1998).
10.17 Amendment No. 4 to Loan and Security Agreement dated March 23,
1999 (incorporated by reference to Exhibit 10.18 to the
Company's Form 10-K for the year ended December 30, 1998).
10.18 Consulting Contract dated July 1, 1995 by and between the
Company and The Equity Group, Inc. (incorporated by reference
to Exhibit 10.23 to the Company's Form 10-K for the year ended
December 31, 1995).
10.19 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).**
10.20 Settlement Agreement dated December 17, 1996, by and among the
Company, certain of its subsidiaries and certain selling
stockholders of the Added Value Companies (incorporated by
reference to Exhibit 10.35 to the Company's Form 10-K for the
year ended December 31, 1996).
10.21 Settlement Agreement dated January 22, 1997, by and among the
Company, certain of its subsidiaries and Thomas Broesamle
(incorporated by reference to Exhibit 10.36 to the Company's
Form 10-K for the year ended December 31, 1996).
10.22 Form of Salary Continuation Plan (incorporated by reference to
Exhibit 10.37 to the Company's Form 10-K for the year ended
December 31, 1996).**
10.23 Promissory Note, dated October 1, 1996, payable to Sam Berman,
d/b/a Drake Enterprises, in the amount of $161,500
(incorporated by reference to Exhibit 10.38 to the Company's
Form 10-K for the year ended December 31, 1996).
10.24 Note dated August 21, 1998, by Bruce Mitchell Goldberg and
Jayne Ellen Goldberg in favor of the Company in the principal
amount of $125,000 (incorporated by reference to Exhibit 10.5
to the Company's Form 10-Q for the quarter ended September 30,
1998).
11.1 Statement Re: Computation of Per Share Earnings.*
21.1 List of subsidiaries of the Registrant.*
23.1 Consent of Lazar Levine & Felix 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
No reports were filed during the fourth quarter of 1999.
23
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
Dated: March 29, 2000
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, 2000.
/s/ PAUL GOLDBERG Chairman of the Board, Director
- ------------------------
Paul Goldberg
/s/ BRUCE M. GOLDBERG President and Chief Executive Officer, Director
- ------------------------ (Principal Executive Officer)
Bruce M. Goldberg
/s/ HOWARD L. FLANDERS Executive Vice President and Chief Financial Officer,
- ------------------------ Director
Howard L. Flanders (Principal Financial and Accounting Officer)
/s/ RICK GORDON Senior Vice President of Sales, Director
- ------------------------
Rick Gordon
/s/ ROBIN L. CRANDELL Director
- ------------------------
Robin L. Crandell
/s/ S. CYE MANDEL Director
- ------------------------
S. Cye Mandel
/s/ DANIEL M. ROBBIN Director
- ------------------------
Daniel M. Robbin
/s/ RICHARD E. SIEGEL Director
- ------------------------
Richard E. Siegel
24
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Company's management is responsible for the preparation of the Consolidated
Financial Statements in accordance with generally accepted accounting principles
and for the integrity of all the financial data included in this Form 10-K. In
preparing the Consolidated Financial Statements, management makes informed
judgements and estimates of the expected effects of events and transactions that
are currently being reported.
Management maintains a system of internal controls that is designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed and recorded in accordance with management's policies for conducting
its business. This system includes policies which require adherence to ethical
business standards and compliance with all laws to which the Company is subject.
The internal controls process is continuously monitored by direct management
review.
The Board of Directors, through its Audit Committee, is responsible for
determining that management fulfils its responsibility with respect to the
Company's Consolidated Financial Statements and the system of internal controls.
The Audit Committee, comprised solely of directors who are not officers or
employees of the Company, meets annually with representatives of management and
the Company's independent accountants to review and monitor the financial,
accounting, and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The Company's independent accountants have full and
free access to the Audit Committee.
/s/ BRUCE M. GOLDBERG /s/ HOWARD L. FLANDERS
- ------------------------------------ ----------------------
Bruce M. Goldberg Howard L. Flanders
President, Executive Vice President,
Chief Executive Officer Chief Financial Officer
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, 1999 and 1998 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the three years in the period ended December 31, 1999. 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, 1999 and 1998 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/S/ LAZAR LEVINE & FELIX LLP
LAZAR LEVINE & FELIX LLP
New York, New York
March 3, 2000
F-1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31 1999 1998
- --------------------------------------------------------------------------------------------
Current assets:
Cash ...................................................... $ 173,000 $ 473,000
Accounts receivable, less allowances for doubtful
accounts of $1,987,000 and $1,412,000 ................... 53,202,000 37,821,000
Inventories ............................................... 85,260,000 69,063,000
Other current assets ...................................... 4,637,000 2,574,000
------------- -------------
Total current assets .................................... 143,272,000 109,931,000
Property, plant and equipment - net ......................... 4,482,000 4,506,000
Deposits and other assets ................................... 2,741,000 3,458,000
Excess of cost over fair value of net assets acquired - net.. 1,006,000 1,062,000
------------- -------------
$ 151,501,000 $ 118,957,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt ......................... $ 273,000 $ 269,000
Accounts payable and accrued expenses ..................... 51,584,000 41,229,000
Income taxes payable ...................................... -- 56,000
Other current liabilities ................................. 198,000 185,000
------------- -------------
Total current liabilities ............................... 52,055,000 41,739,000
Long-term debt:
Notes payable ............................................. 64,298,000 43,306,000
Subordinated debt ......................................... 6,089,000 6,187,000
Other long-term debt ...................................... 1,207,000 1,216,000
------------- -------------
123,649,000 92,448,000
------------- -------------
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 shares
authorized, 3,973,431 shares issued and outstanding ..... 40,000 40,000
Capital in excess of par value ............................ 25,751,000 25,751,000
Retained earnings ......................................... 2,968,000 1,169,000
Treasury stock, at cost, 174,646 and 36,060 shares ........ (907,000) (451,000)
------------- -------------
27,852,000 26,509,000
------------- -------------
$ 151,501,000 $ 118,957,000
============= =============
See notes to consolidated financial statements
F-2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------
NET SALES .......................... $ 329,563,000 $ 250,044,000 $ 265,640,000
Cost of sales ...................... (265,064,000) (194,599,000) (207,173,000)
------------- ------------- -------------
Gross profit ....................... 64,499,000 55,445,000 58,467,000
Selling, general and
administrative expenses .......... (56,357,000) (46,880,000) (48,257,000)
Restructuring and other
nonrecurring expenses ............ -- (2,860,000) --
------------- ------------- -------------
INCOME FROM OPERATIONS ............. 8,142,000 5,705,000 10,210,000
Interest expense ................... (4,985,000) (4,313,000) (4,797,000)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES ......... 3,157,000 1,392,000 5,413,000
Income tax provision ............... (1,358,000) (561,000) (2,163,000)
------------- ------------- -------------
NET INCOME ......................... $ 1,799,000 $ 831,000 $ 3,250,000
============= ============= =============
EARNINGS PER SHARE:
Basic ............................ $.46 $.21 $.83
==== ==== ====
Diluted .......................... $.46 $.21 $.82
==== ==== ====
See notes to consolidated financial statements
F-3
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Capital in Retained Total
Common Excess of Earnings Treasury Shareholders'
Shares Stock Par Value (Deficit) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996
as previously reported ....... 19,833,895 $ 198,000 $ 25,561,000 $ (2,912,000) $ (451,000) $ 22,396,000
One-for-five reverse stock split
effective June 2, 1999 ....... (15,867,067) (158,000) 158,000 -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 ..... 3,966,828 40,000 25,719,000 (2,912,000) (451,000) 22,396,000
Exercise of stock options ...... 6,000 -- 28,000 -- -- 28,000
Net income ..................... -- -- -- 3,250,000 -- 3,250,000
----------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 ..... 3,972,828 40,000 25,747,000 338,000 (451,000) 25,674,000
Exercise of stock options ...... 603 -- 4,000 -- -- 4,000
Net income ..................... -- -- -- 831,000 -- 831,000
----------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 ..... 3,973,431 40,000 25,751,000 1,169,000 (451,000) 26,509,000
PURCHASE OF TREASURY SHARES .... -- -- -- -- (456,000) (456,000)
NET INCOME ..................... -- -- -- 1,799,000 -- 1,799,000
----------- ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 ..... 3,973,431 $ 40,000 $ 25,751,000 $ 2,968,000 $ (907,000) $ 27,852,000
=========== ============ ============ ============ ============ ============
See notes to consolidated financial statements
F-4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 1,799,000 $ 831,000 $ 3,250,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 1,230,000 1,236,000 1,440,000
Non-cash interest expense ................................. 294,000 352,000 254,000
Changes in assets and liabilities of continuing operations:
Increase in accounts receivable ......................... (15,381,000) (4,924,000) (972,000)
Increase in inventories ................................. (16,197,000) (1,154,000) (3,697,000)
Decrease (increase) in other current assets ............. (2,063,000) (500,000) 3,039,000
Increase in accounts payable and accrued expenses ....... 10,383,000 2,075,000 7,356,000
Increase (decrease) in other current liabilities ........ (43,000) (317,000) 62,000
Decrease in net assets of discontinued operations ......... -- -- 830,000
------------ ------------ ------------
Net cash provided by (used for) operating activities .. (19,978,000) (2,401,000) 11,562,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ....................... (582,000) (564,000) (298,000)
Decrease (increase) in other assets ......................... 299,000 (944,000) (83,000)
------------ ------------ ------------
Net cash used for investing activities ................ (283,000) (1,508,000) (381,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit agreement .. 20,711,000 4,263,000 (11,000,000)
Increase in notes payable ................................... -- 10,000 --
Repayments of notes payable ................................. (294,000) (339,000) (290,000)
Purchase of treasury shares ................................. (456,000) -- --
Net proceeds from issuance of equity securities ............. -- 4,000 28,000
------------ ------------ ------------
Net cash provided by (used for) financing activities .. 19,961,000 3,938,000 (11,262,000)
------------ ------------ ------------
Increase (decrease) in cash ................................. (300,000) 29,000 (81,000)
Cash, beginning of year ..................................... 473,000 444,000 525,000
------------ ------------ ------------
Cash, end of year ........................................... $ 173,000 $ 473,000 $ 444,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................... $ 4,410,000 $ 4,223,000 $ 4,906,000
============ ============ ============
Income taxes paid (refunded) - net .......................... $ 1,399,000 $ 1,756,000 $ (989,000)
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1999 the Company entered into a capital lease in the amount of $495,000
for certain programming and telecommunications equipment. During 1997 a capital
lease in the amount of $634,000 for computer equipment, which first took effect
in 1994, was renewed for an additional three years.
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 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, switches, 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 computers and computer-related products; networking;
satellite, wireless and other communications products; Internet infrastructure
and appliances; consumer goods; robotics and industrial equipment; defense and
aerospace equipment; and medical instrumentation. The Company also sells
products to contract electronics manufacturers who manufacture products for
companies in all electronics industry segments. The Company also designs and has
manufactured certain board level products including memory modules and flat
panel display driver boards, both of which are sold to OEMs.
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 may 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. The Company has a
Canadian subsidiary which conducts substantially all of its business in U.S.
dollars.
All references to shares of common stock, $.01 par value, stock options,
warrants, exercise prices per share and per share amounts have been restated to
reflect the effect of the Reverse Stock Split (as hereinafter defined). See Note
4 to Notes to Consolidated Financial Statements.
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. Fair values of cash, accounts receivable, accounts payable and
long-term debt reflected in the December 31, 1999 and 1998 Consolidated Balance
Sheets approximate carrying value at these dates.
MARKET RISK
The Company's Credit Facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results.
F-6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
INVENTORIES
Inventories are stated at the lower of cost (determined on an average cost
basis) or market.
FIXED ASSETS
Fixed assets are reflected at cost. Depreciation of office furniture and
equipment and computer equipment 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.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
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.
The Company periodically reviews the value of its excess of cost over the fair
value of net assets acquired to determine if an impairment has occurred. As part
of this review the Company measures the estimated future operating cash flows of
acquired businesses and compares that with the carrying value of excess of cost
over the fair value of net assets.
REVENUE RECOGNITION
The Company recognizes revenues at the point of passage of title, which is
generally at the time of shipment.
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 utilizes Financial Accounting Standards Board Statement
No. 109, "Accounting for Income Taxes" ("SFAS 109"). 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. See Note 8 to Notes to
Consolidated Financial Statements.
EARNINGS PER SHARE
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" ("SFAS 128"), which changed the method for calculating
earnings per share. SFAS 128 requires the presentation of "basic" and "diluted"
earnings per share on the face of the statement of income. Earnings per common
share is computed by dividing net income by the weighted average, during each
period, of the number of common shares outstanding and for diluted earnings per
share also common equivalent shares outstanding.
F-7
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following average shares were used for the computation of basic and diluted
earnings per share:
Years Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Basic........................................ 3,921,138 3,937,021 3,934,512
Diluted...................................... 3,924,166 3,998,802 3,956,967
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.
COMPREHENSIVE INCOME
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
130, "Reporting Comprehensive Income", which prescribes standards for reporting
comprehensive income and its components. The Company had no items of other
comprehensive income in any period presented and accordingly is not required to
report comprehensive income.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes standards for reporting about operating segments. The Company
has determined that no operating segment outside of its core business met the
quantitative thresholds for separate reporting. Accordingly, no separate
information has been reported.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."
The effect of the adoption of this statement was not material.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
December 31 1999 1998
- ----------------------------------------------------------------------------
Office furniture and equipment .............. $ 4,758,000 $ 4,179,000
Computer equipment .......................... 4,374,000 3,924,000
Leasehold improvements ...................... 2,104,000 2,017,000
------------ ------------
11,236,000 10,120,000
Accumulated depreciation and amortization.... (6,754,000) (5,614,000)
------------ ------------
$ 4,482,000 $ 4,506,000
============ ============
NOTE 3 - STOCK REPURCHASE PROGRAM
On May 24, 1999, the Company announced that the Company's Board of Directors
authorized the repurchase of up to $2 million in purchase price of the Company's
common stock. The stock repurchases may, at the discretion of the Company's
management, be made from time to time at prevailing prices in the open market or
through privately negotiated transactions. The Company's management will base
its decision on market conditions, the price of the common stock and other
factors. The Company intends to make such stock repurchases using available cash
flow from operations and/or available borrowings
F-8
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
under its credit facility. Any shares of common stock repurchased will be
available for reissuance in connection with the Employees', Officers',
Directors' Stock Option Plan, as previously amended and restated (the "Option
Plan"), or for other corporate purposes. As of December 31, 1999, the Company
repurchased 138,586 shares of its common stock at an average price of $3.30 per
share. The aggregate cost of the repurchased shares is reflected as treasury
stock on the Consolidated Balance Sheet.
NOTE 4 - REVERSE STOCK SPLIT
On June 1, 1999, the Company's shareholders approved a one-for-five reverse
stock split (the "Reverse Stock Split") of the Company's outstanding shares of
common stock. The Reverse Stock Split became effective for trading in the
Company's new common stock as of June 2, 1999. Immediately following the Reverse
Stock Split, there were 3,973,431 shares of common stock outstanding. The $.01
par value of the common stock remained the same after the Reverse Stock Split.
All references to shares of common stock, stock options, warrants, exercise
prices per share and per share amounts have been restated to reflect the effect
of the Reverse Stock Split.
NOTE 5 - NASDAQ LISTING
On June 24, 1999, the Company was advised by the Nasdaq Listing Qualifications
department of The Nasdaq Stock Market (the "Nasdaq Listing Department") that the
Company maintained a bid price in excess of the $1.00 minimum bid requirement
under The Nasdaq Stock Market rules for a minimum of ten consecutive business
days. Accordingly, the matter of maintaining a minimum bid price detailed in a
previous notification from the Nasdaq Listing Department was closed.
NOTE 6 - RESTRUCTURING AND OTHER NONRECURRING EXPENSES
During 1998, the Company was involved in merger discussions which led to a
letter of intent being signed in June 1998. Throughout 1998 the Company was
actively involved in the evaluation of and preparations for the integration of
operations in connection with the proposed merger. In October 1998, the merger
negotiations were terminated. As a result, the Company recorded a nonrecurring
charge in 1998, which included expansion costs incurred in anticipation of
supporting the proposed combined entity, certain employee-related expenses,
professional fees and other merger-related out of pocket costs, all of which
aggregated $2,860,000.
NOTE 7 - LONG-TERM DEBT
LINE OF CREDIT
The Company has a $100 million line of credit facility with a group of banks
(the "Credit Facility") which expires May 3, 2001. Borrowings under the Credit
Facility bear interest, at the Company's option, at either prime plus
one-quarter of one percent (.25%) or LIBOR plus two and one-quarter percent
(2.25%). Outstanding borrowings under the Credit Facility, which are secured by
all of the Company's assets including accounts receivable, inventories and
equipment, amounted to $63,974,000 at December 31, 1999 compared to $43,263,000
at December 31, 1998. The amounts that the Company may borrow under the Credit
Facility are based upon specified percentages of the Company's eligible accounts
receivable and inventories, as defined. Under the Credit Facility, the Company
is required to comply with certain affirmative and negative covenants as well as
to comply with certain financial ratios. These covenants, among other things,
place limitations and restrictions on the Company's borrowings, investments and
transactions with affiliates and prohibit dividends and stock redemptions.
Furthermore, the Credit Facility requires the Company to maintain certain
minimum levels of tangible net worth throughout the term of the agreement and a
minimum debt service coverage ratio which is tested on a quarterly basis.
F-9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
SUBORDINATED DEBT
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 1,500 common stock purchase warrants exercisable at $15.75
per share. The 51.5 units issued represent debentures aggregating $5,150,000
together with an aggregate of 77,250 warrants. See Note 9 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 Credit Facility
and notes issued to the Company's landlord. The 77,250 warrants were valued at
$2.50 per warrant as of the date of the 1994 Private Placement and, accordingly,
the Company 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 approximately $19,000 was expensed in 1999, 1998 and
1997.
In May 1994, the Company executed a twenty-year 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 has a repayment schedule with varying remaining monthly payments over the
final 18 years. At the same time, the Company entered into another promissory
note with the Company's landlord for $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 Credit Facility, bear
interest at 8% per annum and are payable monthly. 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 obligation
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 Credit Facility, accrues interest at a fixed rate of 8%
per annum. In October 1996, the Company executed a promissory note in the amount
of $161,500 with the Company's landlord to finance certain additional
improvements to the Company's Miami corporate facility. This note, which is
subordinate to the Credit Facility, is payable monthly with interest at 8.5% per
annum and matures in October 2011.
Long-term debt of the Company as of December 31, 1999, other than the Credit
Facility and obligations under capital leases, matures as follows:
2000 ........................................................... $ 83,000
2001 ........................................................... 86,000
2002 ........................................................... 76,000
2003 ........................................................... 68,000
2004 ........................................................... 59,000
Thereafter...................................................... 7,012,000
------------
$ 7,384,000
============
OBLIGATIONS UNDER CAPITAL LEASES
The Company is the lessee of computer, programming and telecommunications
equipment under capital leases expiring in 2000 and 2002. The assets,
aggregating $1,129,000, 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, 1999, accumulated depreciation of these assets aggregated
approximately $534,000. Depreciation of assets under these capital leases is
included in depreciation expense.
F-10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Minimum future lease payments under these capital leases as of December 31, 1999
and for each of the remaining years and in the aggregate are approximately as
follows:
2000 ................................................ $ 224,000
2001 ................................................ 188,000
2002 ................................................ 156,000
-------------
Total minimum lease payments......................... 568,000
Less amount representing interest.................... (59,000)
-------------
Total obligations under capital leases............... 509,000
Current portion...................................... (190,000)
-------------
$ 319,000
=============
Interest rates on capital leases vary from 8.0% to 8.5% 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. These capital
leases provide for purchase options.
NOTE 8 - INCOME TAXES
The tax effects of the temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 1999 and 1998 are as follows:
1999 1998
------------- ------------
Deferred tax assets:
Accounts receivable......................... $ 738,000 $ 524,000
Inventory................................... 387,000 384,000
Accrued expenses............................ 574,000 1,569,000
Postretirement benefits..................... 541,000 481,000
Other....................................... 546,000 649,000
------------- ------------
2,786,000 3,607,000
Deferred tax liabilities:
Fixed assets................................ 368,000 387,000
------------- ------------
Net deferred tax asset......................... $ 2,418,000 $ 3,220,000
============= ============
At December 31, 1999, $1,698,000 of the net deferred tax asset was included in
"Other current assets" and $720,000 was included in "Deposits and other assets"
in the accompanying Consolidated Balance Sheet.
The components of income tax expense are as follows:
Years Ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------
CURRENT
Federal............................. $ 466,000 $ 1,210,000 $ 1,836,000
State............................... 90,000 210,000 207,000
------------ ------------ ------------
556,000 1,420,000 2,043,000
------------ ------------ ------------
DEFERRED
Federal............................. 698,000 (749,000) 105,000
State............................... 104,000 (110,000) 15,000
------------ ------------ ------------
802,000 (859,000) 120,000
------------ ------------ ------------
$ 1,358,000 $ 561,000 $ 2,163,000
============ ============ ============
F-11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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:
Years Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------
U.S. Federal income tax statutory rate..................... 34.0% 34.0% 34.0%
State income tax, net of federal income tax benefit........ 3.3 4.2 2.7
Goodwill amortization...................................... 5.2 4.2 .9
Other - including non-deductible items..................... .5 (2.1) 2.4
------ ----- -----
Effective tax rate......................................... 43.0% 40.3% 40.0%
====== ===== =====
NOTE 9 - CAPITAL STOCK, OPTIONS AND WARRANTS
In December 1995, in connection with certain acquisitions, the Company issued an
aggregate of 434,821 shares of common stock, including 32,141 shares, valued at
approximately $391,000, which were issued to the Company's wholly-owned
subsidiary. In addition, in connection with such acquisitions, certain selling
stockholders were granted an aggregate of 10,000 stock options (6,000 stock
options of which have since been canceled) to acquire the Company's common stock
at an exercise price of $11.565 per share exercisable, subject to a six-year
vesting period, through December 29, 2002. In connection with the Company
entering into a settlement agreement with certain of the selling stockholders in
December 1996, an aggregate of 19,000 shares of the Company's common stock was
canceled and certain selling stockholders were granted stock options to purchase
an aggregate of 10,000 shares of the Company's common stock at an exercise price
of $7.50 per share exercisable through December 30, 2001. At December 31, 1999,
7,500 of these options remained unexercised and 2,500 were canceled.
In July 1995, the Company issued to a consulting firm a warrant to acquire 9,000
shares of the Company's common stock at an exercise price of $12.50 per share
exercisable through June 30, 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, 1999, this warrant remained unexercised.
In connection with employment agreements between the Company and each of its
four executive officers entered into in May 1995, an aggregate of 200,000 stock
options were granted on June 8, 1995 to such four executive officers pursuant to
the Option Plan. These options have an exercise price of $9.375 per share and
are exercisable through June 7, 2005, subject to a vesting schedule.
In connection with the public offering in 1995, the Company issued to the
underwriter common stock purchase warrants covering an aggregate of 104,650
shares of common stock (including warrants issued in connection with the
underwriter's exercise of the over-allotment option). These warrants are
exercisable at a price of $13.125 per share for a period of four years
commencing June 8, 1996. At December 31, 1999, these warrants remained
unexercised.
In June 1994, the Company issued an aggregate of 84,975 common stock purchase
warrants, including 7,725 warrants issued to the placement agent, in connection
with a private placement of subordinated debentures (see Note 7 to Notes to
Consolidated Financial Statements). All of these warrants expired during 1999.
F-12
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company has reserved 900,000 shares of common stock for issuance under the
Option Plan. A summary of options granted and related information for the years
ended December 31, 1997, 1998 and 1999 under the Option Plan follows:
Weighted Average
Options Exercise Price
---------- ----------------
Outstanding, December 31, 1997 545,664 $ 7.30
Weighted average fair value of options granted during the year 2.10
Granted 39,000 7.20
Exercised (603) 5.60
Canceled (17,750) 6.95
----------
Outstanding, December 31, 1998 566,311 7.30
Weighted average fair value of options granted during the year 1.35
Granted 204,400 3.52
Exercised -- --
Canceled (55,863) 6.61
----------
Outstanding, December 31, 1999 714,848 6.29
==========
Weighted average fair value of options granted during the year 1.15
Options exercisable:
December 31, 1997 93,625 6.35
December 31, 1998 166,416 6.10
December 31, 1999 184,416 5.96
Exercise prices for options outstanding as of December 31, 1999 ranged from
$3.27 to $11.57. The weighted-average remaining contractual life of these
options is approximately 5 years. Outstanding options at December 31, 1999 were
held by 117 individuals.
The Company applies APB 25 and related Interpretations in accounting for the
Option Plan. Accordingly, no compensation cost has been recognized for the
Option Plan. Had compensation cost for the Option Plan been determined using the
fair value based method, as defined in SFAS 123, the Company's net earnings and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
Years Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------
Net earnings:
As reported $ 1,799,000 $ 831,000 $ 3,250,000
Pro forma 1,665,000 800,000 2,859,000
Basic earnings per share:
As reported $.46 $.21 $.83
Pro forma .42 .20 .73
Diluted earnings per share:
As reported $.46 $.21 $.82
Pro forma .42 .20 .72
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: expected volatility of 40%,
60% and 50%; risk-free interest rate of 5.9%, 5.7% and 6.1%; and expected lives
of 5 to 8 years.
F-13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1995. Additionally, future amounts are likely to be affected by
the number of grants awarded since additional awards are generally expected to
be made at varying amounts.
NOTE 10 - COMMITMENTS/RELATED PARTY TRANSACTIONS
In May 1994, the Company entered into a new lease with its then existing
landlord to lease a 110,800 square foot facility for its corporate headquarters
and Miami distribution center. 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 is currently in its
sixth year and provides for annual fixed rental payments totaling approximately
$300,600 in year six; $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 leases a 13,900 square foot facility in Tustin, California and a
7,600 square foot facility in Denver, Colorado. The Tustin facility presently
contains all operations for the separate divisions of Aved Display Technologies
and Aved Memory Products. The Denver facility is dedicated to certain
value-added services and a regional distribution center.
The Company also leases approximately 20,000 square feet of space for its west
coast distribution and semiconductor programming center located in Fremont,
California (near San Jose). The Company utilizes this space to service growing
customer demand and changing technologies as well as to address a rapidly
growing market for programmable products.
During 1998, the Company entered into a new lease for approximately 20,000
square feet of space in San Jose, California to house its expanded west coast
corporate offices as well as its northern California sales operation. This lease
incorporates the previously leased space of approximately 11,000 square feet and
adds a new adjoining space of approximately 9,000 square feet. Approximately
8,000 square feet of the space is being used for corporate offices including the
office of the President and Chief Executive Officer of the Company and 8,000
square feet of the space is being utilized for the sales operation. The
remaining area of approximately 4,000 square feet is presently being sublet.
The Company leases space for its other sales offices, which range in size from
approximately 1,000 square feet to 8,000 square feet. The leases for these
offices expire at various dates and include various escalation clauses and
renewal options.
Approximate minimum future lease payments required under operating leases for
office leases as well as equipment leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1999, are as
follows:
YEAR ENDING DECEMBER 31
2000............................................................ $3,266,000
2001............................................................ 2,207,000
2002............................................................ 1,489,000
2003............................................................ 1,147,000
2004............................................................ 678,000
Thereafter...................................................... 4,313,000
F-14
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Total rent expense for office leases, including real estate taxes and net of
sublease income, amounted to approximately $2,451,000, $2,165,000, and
$1,940,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
In 1998, the Board of Directors approved a loan to the President and Chief
Executive Officer of the Company in the amount of $125,000 in connection with
his relocation to Silicon Valley. This loan is evidenced by a promissory note,
which bears interest at 5% per annum and is payable interest only for the first
five years and four months; principal and interest thereafter until maturity on
a twenty-year self-amortizing annual basis; and any unpaid principal and accrued
interest is payable in full in August 2013. This note receivable is included in
"Deposits and other assets" in the accompanying Consolidated Balance Sheet at
December 31, 1999.
Effective January 1, 1988, the Company established a deferred compensation plan
(the "1988 Deferred Compensation Plan") for executive officers and key employees
of the Company. The employees eligible to participate in the 1988 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 1988 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 1988 Deferred
Compensation Plan will be distributed monthly. The Company paid benefits under
this plan of approximately $15,600 during each of 1999, 1998 and 1997, none of
which was paid to any executive officer. The maximum benefit payable to a
Participant (including each of the executive officers) under the 1988 Deferred
Compensation Plan is presently $30,000 per annum. At December 31, 1999, the cash
surrender values of insurance policies owned by the Company under the 1988
Deferred Compensation Plan, which provide for the accrued deferred compensation
benefits, aggregated approximately $145,000.
During 1996, the Company established a second deferred compensation plan (the
"Salary Continuation Plan") for executives of the Company. The executives
eligible to participate in the Salary Continuation Plan are chosen at the sole
discretion of the Board of Directors upon a recommendation from the Board of
Directors' Compensation Committee. The Company may make contributions each year
in its sole discretion and is under no obligation to make a contribution in any
given year. For 1999, 1998, and 1997 the Company committed to contribute
$115,000, $192,000, and $160,000 respectively, under this plan. Participants in
the plan will vest in their plan benefits over a ten-year period. If the
participant's employment is terminated due to death, disability or due to a
change in control of management, they will vest 100% in all benefits under the
plan. Retirement benefits will be paid, as selected by the participant, based on
the sum of the net contributions made and the net investment activity.
In connection with an employment agreement with an executive officer an unfunded
postretirement benefit obligation of $1,171,000 is included in the Consolidated
Balance Sheets at December 31, 1999 and 1998.
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 $10,000 in 1999. The Company makes matching
contributions and in 1999 its contributions were in the amount of 25% on the
first 6% contributed of each participating employee's salary. The Company
expensed $599,000, $521,000, and $472,000 for such matching contributions for
the years ended December 31, 1999, 1998 and 1997, respectively.
F-15
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 those cases, 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, the Company offers a warranty with
respect to products manufactured or assembled for Aved Display Technologies and
Aved Memory Products for a period of one year against defects in workmanship and
materials under normal use and service and in their original, unmodified
condition.
NOTE 12 - ECONOMIC DEPENDENCY
For each of the years ended December 31, 1999, 1998 and 1997, purchases from one
supplier were in excess of 10% of the Company's total annual purchases and
aggregated approximately $62,950,000, $39,893,000 and $43,435,000, respectively.
The net outstanding accounts payable to this supplier at December 31, 1999, 1998
and 1997 amounted to approximately $7,545,000, $5,832,000 and $2,854,000,
respectively.
F-16