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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, 2002
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 28, 2002, the last business day of the Registrant's most recently
completed second fiscal quarter, the aggregate market value of the common stock
of ALL AMERICAN SEMICONDUCTOR, INC. held by non-affiliates was $9,700,000.
As of March 14, 2003, 3,817,434 shares of the common stock of ALL AMERICAN
SEMICONDUCTOR, INC. were outstanding.
Documents Incorporated by Reference:
Pursuant to Instruction G(3) of Form 10-K, 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 Items 10, 11, 12 and 13 of Part III.
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ALL AMERICAN SEMICONDUCTOR, INC.
FORM 10-K - 2002
Table of Contents
Part Item Page
No. No. Description No.
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I 1 Business....................................................................... 1
2 Properties..................................................................... 12
3 Legal Proceedings.............................................................. 12
4 Submission of Matters to a Vote of Security-Holders............................ 13
II 5 Market for the Registrant's Common Equity and Related Stockholder Matters...... 13
6 Selected Financial Data........................................................ 15
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 16
7A Quantitative and Qualitative Disclosures about Market Risk..................... 29
8 Financial Statements and Supplementary Data.................................... 29
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................... 29
III 10 Directors and Executive Officers of the Registrant............................. 29
11 Executive Compensation......................................................... 29
12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................. 29
13 Certain Relationships and Related Transactions................................. 29
14 Controls and Procedures........................................................ 30
IV 15 Exhibits, Financial Statement Schedule, and Reports on Form 8-K................ 30
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PART I
ITEM 1. Business
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General
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All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a distributor of
electronic components manufactured by others. The Company distributes a full
range of semiconductors (active components), including transistors, diodes,
memory devices, microprocessors, microcontrollers 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
in a diverse and growing range of industries, including manufacturers of
computers and computer-related products; home office and portable equipment;
networking, satellite, wireless and other communications products; Internet
infrastructure equipment and appliances; automobiles; consumer goods; voting and
gaming machines; point-of-sale equipment; robotics and industrial equipment;
defense and aerospace equipment; and medical instrumentation. The Company also
sells products to contract electronics manufacturers, or electronics
manufacturing services, or EMS, providers who manufacture products for companies
in all electronics industry segments. Through the Aved Memory Products division
of its subsidiary, Aved Industries, Inc., the Company also designs and has
manufactured under the label of its subsidiary's division, certain memory
modules which are sold to original equipment manufacturers.
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 5th largest distributor of semiconductors and the 10th
largest electronic components distributor overall in North America, 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. Our headquarters for sales and marketing functions and the
office of our President and Chief Executive Officer are located at 230 Devcon
Drive, San Jose, California 95112. Our telephone number in Florida is (305)
621-8282.
THIS REPORT (PARTICULARLY "ITEM 1. BUSINESS" AND "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS")
CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SEE "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING
STATEMENTS; BUSINESS RISKS AND UNCERTAINTIES."
The Electronics and Electronics Distribution Industries
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The electronics industry is one of the largest industries in the United States.
Prior to 2001, it was also one of the fastest growing industries. During 2001,
the electronics and the electronics distribution industries suffered one of the
most severe downturns in the industries' history with global sales of
semiconductors declining by over 30%. While global sales of semiconductors
remained relatively constant in 2002 as compared to 2001, consumption in North
America declined as an increasing amount of manufacturing moved offshore. The
Company believes that electronic component revenue and total U.S. factory sales
of electronic products will resume growth in the future. Historically, the
growth of these industries has been driven by increased demand for new products
incorporating sophisticated electronic components, such as laptop computers,
home office and portable equipment, networking, satellite, wireless and other
communications products, infrastructure equipment and appliances for the
Internet, voting and gaming machines, point-of-sale equipment and multimedia
products; as well as the increased utilization of electronic components in a
wide range of industrial, automotive, consumer and military products. Worldwide
consumption of semiconductor products grew from $126 billion in 1998 to over
$200 billion in 2000. Industry associations estimated that worldwide consumption
of semiconductors declined to $139
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billion in 2001 and grew slightly to $141 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
two-thirds of the electronic components distribution marketplace, while systems
and computer products account for the remainder. 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 2002, an
estimated $21 billion of electronic components were sold through distribution in
North America. While this is up from the approximate level of $10 billion in
1992, it is down from a high of an estimated $37 billion in 2000. Original
equipment manufacturers and most of the smaller contract electronics
manufacturers which utilize electronic components continue 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 original equipment manufacturers and contract electronics
manufacturers, offering a much broader line of products, incremental quality
control measures and more support services than individual electronic component
manufacturers. Management believes that original equipment manufacturers and
most of the smaller contract electronics manufacturers will continue to demand
greater service and to increase quality requirements, and that original
equipment manufacturers, contract electronics manufacturers and electronic
component manufacturers will continue 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 customer base to a more limited number of full
service distribution companies.
A prevalent trend in the electronics distribution industry has been the
consolidation of distribution companies. The Company believes that this
consolidation has to date created, and will continue in the future to create,
growth opportunities for the Company. Consolidation among distributors causes
customers to experience an increased concentration in their approved vendor
base. As a result, the Company believes that some customers will either replace
a consolidated distributor with a different distributor or redistribute a
portion of their purchasing across their distribution network. Accordingly,
through consolidation the Company has increasing opportunities to add customers
and/or do more business with existing customers. Similarly, as a result of
consolidation, many suppliers have either lost a distributor or become a much
less significant supplier to the consolidated distribution company. As a result
of this impact from consolidation, the Company believes that suppliers have
recently added, and will continue in the future to add, new distributors to
their distribution networks. Management believes that the Company has benefited
from, and will continue to benefit in the future from, the consolidation trend.
Business Strategy
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While the Company's long-term strategy is to achieve growth by expanding its
markets, increasing its customer base and selling more to its existing
customers, during the past two years, the Company was
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forced to put its growth plans on hold as a result of the severe downturn in our
industry. During this time period, the Company reduced its workforce and
eliminated certain unprofitable operations. As a result of the severe industry
conditions, the Company's focus, instead of on absolute growth, has been on
market share gain. The Company's strategy is to continue to gain market share
and when market conditions improve, resume growth by: (i) taking advantage of
consolidation trends, (ii) increasing the number of customers it sells to and,
(iii) increasing sales to existing customers by continuing to add new suppliers
and expand its product offerings and service capabilities. While management
believes that it may be able to increase market share and profitability in the
future, 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
Prior to 2001 the Company drove significant expansion 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 experienced significant growth in 1999
and 2000. In order to effectively drive and manage its expansion, in 1999 and
2000 the Company: (i) restructured, enhanced and expanded its sales staff and
sales management and marketing teams; (ii) expanded its quality control
programs; (iii) expanded its corporate operations department; (iv) enhanced its
state-of-the-art distribution technology; and (v) enhanced its asset management
capabilities through new computer and telecommunications equipment and, during
2000, through the opening of a west coast asset management group. To keep up
with industry trends the Company made significant investments in its web site
and Internet capabilities as well as other forms of e-commerce; and in that
regard during 1999 created its own web development group. The Company also
expanded its investment in its Field Application Engineer Program. In addition
to adding field application engineers to the program, in 2000 the Company opened
the All American Technical Center. Additionally, the Company continued to
increase its investment in its materials management solutions capabilities which
is now referred to as Supply Chain Management. As the Company developed a
greater visibility at the industry's top tier customer base, the Company 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 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 and
marketing functions are headquartered. The Company also expanded the operations
of its west coast programming and distribution center.
As a result of a severe industry downturn that began with a dramatic slowdown
during the fourth quarter of 2000, the Company progressively reduced its
workforce and discontinued certain of its non-core operations. See "Employees"
and "Products-Flat Panel Display Products" and Note 6 to Notes to Consolidated
Financial Statements. During 2002 the Company did not close any offices, reduce
its workforce or open any new offices. In the first quarter of 2003 the Company
established a stocking location near London, England as part of its plan to
expand its markets and provide enhanced services beyond the boundaries of North
America.
Increasing Product Offerings
The Company intends to continue its efforts 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, prior to 2001 the Company had expanded its service
capabilities and opened new sales offices (see "Expansion").
During recent years, the Company added many new suppliers and expects to add
additional suppliers in the future as a result of its marketing strategies and
consolidation trends. As a result of the consolidation trend previously
discussed, many suppliers have either lost a distributor or become a much less
significant
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supplier to the consolidated distribution company. Due to the impact from
consolidation, the Company believes that suppliers have recently added, and will
continue in the future to add, new distributors to their distribution networks.
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 as and when market conditions improve, 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. Over the years, the Company 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 programs, automatic inventory replenishment programs and complete
supply chain management solutions.
In order to further enhance its service capabilities, the Company also expanded
its Field Application Engineer Program. Additionally, the Company opened the All
American Technical Center, which is staffed with design specialists that can
assist our sales force and our field application engineers when a higher level
of expertise is needed. The All American Technical Center staff also works on
creating reference designs and design tools to assist customers and suppliers.
These programs are intended to generate sales by providing customers with
engineering support and increased service at the design and development stages.
These programs are also intended to enhance the technical capabilities of the
Company's entire sales force through regular training sessions. Management
believes that this capability is helpful in attracting new suppliers.
Another important 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 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 addition to enabling
the Company to address the market for programmable products, the Company expects
that 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. In order to further
expand its utilization of and functionality on the Internet, the Company has its
own web development team. Additionally, to further its e-commerce strategies the
Company is engaged with multiple 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.
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The Company also provides value-added services relating to its
passive/electromechanical business.
Quality Controls and ISO Certification
The Company has a total quality management program. Our operations are performed
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, or ISO, created by the
European Economic Community, or 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.
Products
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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,
microprocessors, microcontrollers 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.
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. However, there may be instances where a customer might be able to
enforce an express or implied warranty claim against the Company with respect to
component products manufactured by the Company's suppliers, in addition to or in
lieu of the warranties of the suppliers of such components.
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. 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, televisions,
automated teller machines, gaming machines and video monitors. In addition to
replacing cathode ray tubes in traditional applications, as a result of the
lower power requirements and reduced space needs of flat panel displays, the
advent of flat panels is enabling the implementation of display applications
that were not achievable with cathode ray tubes, such as laptop and palmtop
computers, handheld and portable products, voting machines, point-of-sale
equipment and advertising displays.
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, flat panel
displays require a back-light inverter to run the back-light, and cable
assemblies to connect the display, inverter and the driver board to each other
and to the equipment of which it is a part.
The Company has addressed the flat panel display market in several ways. First,
the Company has assembled a comprehensive offering of flat panel display
products, including products from manufacturers of flat panel displays, as well
as manufacturers of the necessary support products such as back-light inverters,
driver boards, cabling and touch-screen filaments. The second aspect in
addressing the flat panel display market is to develop the technical support
necessary to assist customers with integrating flat panel display applications.
In this regard the Company's Field Application Engineer Program and
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marketing department have been developing expertise in flat panel display
applications and integration. Additionally, the Company has added flat panel
display specialists to its sales and marketing groups. In response to the
growing need for support of flat panel display business the Company has a
Display Solutions Group which is a separate group within the Company dedicated
entirely to the support of flat panel display opportunities. Through its Display
Solutions Group, the Company has expanded its 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.
Memory Modules
The Company also designs, has manufactured and sells memory modules under the
Aved Memory Products label. Memory products, which include the memory module
subsegment, represent one of the largest product sectors 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 products manufactured or assembled for Aved Memory Products, the
Company offers a warranty for a period of one year against defects in
workmanship and materials under normal use and service. The warranty applies to
products in their original unmodified condition and is subject to the Company's
terms and conditions.
Customers
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The Company markets its products primarily to original equipment manufacturers
in a diverse and growing range of industries. The Company's customer base
includes manufacturers of computers and computer-related products; home office
and portable equipment; networking, satellite, wireless and other communications
products; Internet infrastructure equipment and appliances; automobiles;
consumer goods; voting and gaming machines; point-of-sale equipment; robotics
and industrial equipment; defense and aerospace equipment; and medical
instrumentation. The Company also sells products to contract electronics
manufacturers, or electronics manufacturing services providers, who manufacture
products for companies in all electronics industry segments. The Company's
customer list includes approximately 12,000 accounts. During 2002, no customer
accounted for more than 7% 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. However, the loss of, or significant disruption in
relationships with, more than one of the Company's larger customers or a
significant number of other customers in a short period of time could have a
material adverse impact on the Company's financial condition or results of
operations.
Sales and Marketing
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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 80 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
and global distributors, while still providing the personalized service levels
usually associated only with regional or local distributors. As a result of its
size and capabilities, the Company brings to the middle market customers a level
of service capabilities that the smaller distributor cannot provide.
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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 its e-commerce capabilities
through its web site functionality and its portal capabilities to enable its
customers to utilize the services available from the Company's strategically
selected 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) 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 portals on the Internet. The Company also uses
its expanded service capabilities, its Field Application Engineer Program,
Display Solutions Group, Supply Chain Management capabilities and its status as
an authorized distributor as marketing tools. See "Business Strategy-Service
Capabilities" and "Suppliers."
Sales Personnel
As a result of the severe industry downturn, the Company went through a
significant reduction in its workforce during 2001. During 2002 the workforce
remained fairly constant. As of March 1, 2003, the Company employed 310 people
in sales on a full-time basis, of which 127 are field salespeople, 117 are
inside salespeople, 35 are in management, 18 are in administration and 13 are
engineers in the Field Application Engineer Program. The Company also had 9
sales representatives covering various territories where the Company does not
have sales offices. Salespeople are generally compensated by a combination of
salary and commissions based upon the gross profits obtained on their sales.
Each branch is run by a general manager who reports to a regional manager, who
in turn reports to an area manager. All area managers report to the Company's
Senior Vice President of Sales. Area, regional and general managers are
compensated by a combination of salary and incentives based on achieving gross
profit goals.
Sales Office Locations
The Company currently operates 33 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, Sacramento, 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.
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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 and Cyclicality
The Company's sales have not historically been materially greater in any
particular season or part of the year, however, there is some seasonality to our
industry. The electronic components and the electronics distribution industries
have historically been cyclical with significant volatility in the cycles.
Management believes that this cyclicality and volatility will continue in the
future. During the second half of 1999, the industry began entering an up-cycle
which continued throughout most of 2000 and was one of the industry's most
rapidly growing and strongest up-cycles. In the fourth quarter of 2000 the
up-cycle ended and the industry entered another down-cycle which accelerated and
continued throughout 2001 and showed little sign of improvement in 2002. The
Company believes that the industry is still in a down-cycle that has proven to
be one of the most severe and long-lasting in the industry's history. It is not
clear when this current down-cycle will end. While the Company believes that
there will be another up-cycle in the future, there can be no assurance that
there will be an up-cycle nor can there be an assurance that business will not
decline further in the future.
Foreign Sales
Sales to customers in foreign countries aggregated approximately $37.2 million,
$19.8 million and $31.6 million for 2002, 2001 and 2000, respectively. Due to
the Company's recent global expansion initiatives, sales to customers in foreign
countries may increase in the future. See "Business Strategy-Expansion."
Backlog
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As is typical of distributors, the Company has a backlog of customer orders.
These orders are generally cancelable by the customer. At December 31, 2002, the
Company had a backlog of $44 million, compared to a backlog of $55 million at
December 31, 2001 and $158 million at December 31, 2000. During periods of
excess product availability, customers keep much lower levels of product on
order as delivery times are short and prices are often declining. As lead times
begin to stretch and certain product groups start becoming allocated by
suppliers, customers begin increasing the amount of their scheduled orders.
Conditions of tight supply often result in customers placing scheduled orders
for more product than they actually need (referred to in the industry as double
booking). When product availability improves, customers begin to have more
inventory than they require and the industry typically experiences backlog
cancellations and inventory corrections. While lead times and product
availability began to improve toward the end of 2000, the severe product
shortages earlier in the year, combined with expectations that the market would
continue to expand in 2001, resulted in inflated customer backlogs at the end of
2000. The combination of improved product availability, a slowing economy and
other factors resulted in customers beginning to cancel their backlog in the
first quarter of 2001. As market conditions worsened, customer backlog
deteriorated even further. As we are still in a period of ample product
availability and relatively weak demand, our customer backlog is at low levels.
The Company believes that a substantial portion of its backlog represents
products due to be delivered within the next three months. Historically,
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. At this point in time, the correlation of
backlog to future sales is less of an indicator than historically for the
reasons discussed above. In addition, the Company has increased its practices of
electronic data interchange transactions where the Company purchases inventory
based on electronically transmitted customer forecasts that may not become an
order until the date of shipment and, therefore, may not be reflected in the
Company's backlog. The Company's backlog was $44 million at December 31, 2002
and increased to $48 million at February 28, 2003. The Company's backlog was $60
million at February 28, 2002.
8
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. The Company is
recognized as a national distributor with offices across North America. To
further strengthen its geographic coverage, the Company recently began to expand
internationally. Another important factor that suppliers consider is whether the
distributor has in place an engineering staff capable of assisting customers in
designing-in the suppliers' products at the customer base. To address this
requirement, the Company has a Field Application Engineer Program which is
currently staffed with 13 engineers.
Almost all distribution agreements are cancelable by either party, typically
upon 30 to 90 days notice. For the year ended December 31, 2002, the Company's
three largest suppliers accounted for 22%, 8% and 7% of consolidated purchases,
respectively. See Note 14 to Notes to Consolidated Financial Statements. While
most of the products that the Company sells are available from other sources,
the Company's future success will depend in large part on maintaining
relationships with existing suppliers and developing relationships with new
ones. While the Company believes that the loss of a key supplier, particularly
its largest supplier, could have a material 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. However, 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, or significant
disruption in relationships with, any of the Company's larger suppliers,
particularly its largest supplier, or a significant number of other suppliers in
a short period of time could have a material adverse impact on the Company's
financial condition or results of operations. The Company, from time to time,
alters its list of authorized suppliers in an attempt to provide its customers
with a better product mix.
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 addressing
price protection, stock rotation privileges, obsolescence credits and return
privileges. Price protection is typically provided 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 products which a
manufacturer discontinues. Upon termination of a distribution agreement, the
return privileges generally require the manufacturer to repurchase the Company's
inventory at the Company's purchase price, however, if the Company terminates
the distribution agreement, there is generally 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. As a result of the
Company's strategy in how it has positioned itself in a rapidly consolidating
industry, the Company has been successful in attracting new suppliers. In
connection with adding new suppliers, the Company acquires new stocking
packages.
9
These new stocking packages typically take time to become productive. While
management believes that these new product lines and the resulting stocking
packages should provide growth opportunities in the future as and when market
conditions improve, there can be no assurance that this strategy will be
successful.
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 upon twenty-four months prior written notice and the
payment of all outstanding debt owed to the landlord. The lease for this
facility contains three six-year options to renew at the then fair market value
rental rates.
The 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). In Denver, Colorado the Company leases a 7,100
square foot facility which is dedicated to certain value-added services and a
regional distribution center.
In Tustin, California the Company leases a 13,900 square foot facility for its
Aved Memory Products division. See "Products." In December 2000, the Company
leased 26,700 square feet of space in Irvine, California which housed the
operations of the Company's newly created Integrated Display Technologies
division. As a result of operations of this division being discontinued during
2001, the Company subsequently negotiated a buyout of the lease in March 2002
for approximately $158,000.
The Company also leases approximately 20,000 square feet of space in San Jose,
California to house its west coast corporate offices and the headquarters of the
Company's sales and marketing functions, as well as its northern California
sales operation. 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,
which had been sublet, is presently vacant.
In addition, the Company leases space for its other sales offices, which offices
range in size from approximately 1,000 square feet to 10,000 square feet. See
"Sales and Marketing-Sales Office Locations."
Due to the severe industry downturn, the Company currently has excess space in
its sales offices and excess capacity in its distribution centers. To the extent
that the Company increases sales in future periods, management expects to
realize improved operating efficiencies and economies of scale as a result of
its present excess capacity. There can be no assurance, however, that any sales
growth will be achieved.
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 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 complete supply
chain management solutions.
10
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 expand, its systems capabilities, including hardware and
software upgrades to meet its computer and communications needs. As and when
market conditions improve, the Company believes that these systems enhancements
should assist the Company in increasing sales, improving efficiencies and
providing the potential for 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 by
foreign companies. Until recently all of these components were purchased by the
Company from United States subsidiaries or affiliates of those foreign
manufacturers. The Company has recently begun purchasing a limited amount of
product offshore and this offshore purchasing activity may increase in the
future. 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
policy changes related to, among other things, anti-dumping and other
international anti-trust 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 effect on the Company in the future. Since
substantially all of the Company's purchases from foreign companies are still
transacted with United States subsidiaries or affiliates of these foreign
manufacturers, substantially all of the Company's purchases are paid for in U.S.
dollars.
Employees
- ---------
As a result of the severe industry downturn, the Company went through a
significant reduction in its workforce during 2001. During 2002 the workforce
remained fairly constant. As of March 1, 2003, the Company employed 560 persons,
of which 310 are involved in sales and sales management; 86 are involved in
marketing; 59 are involved in the distribution centers; 34 are involved in
operations; 13 are involved in management; 36 are involved in bookkeeping and
clerical; and 22 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 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 name recognition and assets and
possess greater financial, personnel and other resources than does the Company.
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 that have in the past
exceeded $13 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 with
offices in multiple cities within the United States and local distributors with
just one location. With sales offices in 31 cities in 21 states, the Company
generally competes as a national distributor. Additionally, the Company is one
of the few national distributors which have offices in Canada and Mexico, and
has recently established a stocking facility in the United Kingdom. The Company,
which was recognized by industry sources as the 5th largest distributor of
semiconductors and the 10th largest electronic components distributor overall in
the United States, believes its primary competition comes from the top 50
distributors in the industry. The
11
competition in the electronics distribution industry can be segregated by target
customers: major (or top tier) accounts; middle market accounts; small accounts;
and emerging growth accounts. Competition to be the primary supplier for the
major customers is dominated by the top tier distributors as a result of the
product offerings, global support structure, pricing and distribution technology
offered by these distributors. The Company competes for a portion of the
available business of 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 tier distributors, or are fill-in or niche products. With
its expanded product offering and service capabilities and its 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 tier distributors for the middle and emerging market
customer base is not as strong since the largest distributors focus their
efforts and resources on the major account base. For this reason, the Company
has focused strong efforts on servicing this middle and emerging 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 a broader product base
and more sophisticated distribution technology than comparably-sized
distributors and by seeking to offer to middle and emerging market companies a
greater level of service than is offered to them by the major national and
global distributors. The Company believes that today the top tier distributors
continue their efforts to penetrate the middle market customer base more than
they have in the past.
There has also been an increase in competition from brokers, lately being
referred to as independent distributors. Additionally, there has been an
emergence of competition from the advent of third party logistics and
fulfillment companies. There has also been an emergence of businesses commonly
referred to as e-brokers and e-exchanges and several other forms of e-commerce
companies which have grown with the expanded use of the Internet. In addition to
the increased competition from these other groups, some of the total available
distribution market share is being reduced as more and more original equipment
manufacturers transition their procurement into EMS companies and original
design manufacturers. The EMS companies and original design manufacturers
utilize their abilities to aggregate demand to develop direct purchasing
channels with component manufacturers. Furthermore, as more and more
manufacturing moves outside the boundaries of North America the Company believes
that the total available distribution market share is being reduced as
procurement channels increase in Asia and Europe. There can be no assurance that
the Company will be able to defend its market share against existing competition
or that new competition will not emerge or that the total available distribution
market share will not be reduced further.
ITEM 2. Properties
- ------- ----------
See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales
Office Locations" and Note 12 to Notes to Consolidated Financial Statements.
ITEM 3. Legal Proceedings
- ------- -----------------
The Company is from time to time involved in litigation primarily relating to
claims arising out of its operations in the ordinary course of business. Some of
these 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 to the extent
provided for under its agreement with the manufacturer, as well as defend such
claims on the Company's behalf, although no assurance can be given that any
manufacturer would do so. There has been a recent trend throughout the United
States of increased litigation over various employee and intellectual property
matters. While the Company is presently involved in certain litigation relating
to such matters, the Company believes that none of these claims should have a
material adverse impact on its financial condition or results of operations. The
Company believes, however, that the costs associated with such matters may
increase in the future. There can be no assurance that a particular litigation
will not have a material adverse impact on the Company's financial condition or
results of operations in the future.
12
ITEM 4. Submission of Matters to a Vote of Security-Holders
- ------- ---------------------------------------------------
On October 2, 2002, the Company held its 2002 annual meeting of shareholders
(the "Annual Meeting"). The information required to be reported in this Item 4
has been previously reported and reference is made to Item 4 of Part II of the
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------
Sales Prices of Common Stock
- ----------------------------
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
- ---------------------- ------ ------
2001
- ----
First Quarter $14.50 $ 6.94
Second Quarter 9.30 5.10
Third Quarter 7.40 2.04
Fourth Quarter 4.61 2.00
2002
- ----
First Quarter 4.89 3.15
Second Quarter 4.25 2.37
Third Quarter 3.08 1.45
Fourth Quarter 2.89 1.60
2003
- ----
First Quarter (through March 14, 2003) 2.39 1.94
As of March 14, 2003, there were approximately 340 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, based upon
information provided by its transfer agent, it has over 4,000 beneficial holders
of its common stock.
Common Stock Purchase Rights Plan
- ---------------------------------
In June 2000, the Board of Directors of the Company adopted a Common Stock
Purchase Rights Plan (the "Rights Plan") and authorized and approved a dividend
distribution of one right (each a "Right" and collectively the "Rights") for
each outstanding share of common stock of the Company to shareholders of record
at the close of business on June 23, 2000. Each share of common stock of the
Company that is issued after June 23, 2000 will also include one Right.
Each Right initially entitles the registered holder to purchase from the
Company, but only when exercisable under the Rights Plan, one share of common
stock at a price of $95.00 per share, subject to certain future adjustments. The
Rights will be exercisable only if a person or group acquires 15% or more of the
Company's common stock (or 10% of such stock under certain circumstances) or
announces a tender offer the consummation of which would result in ownership by
a person or group of 15% or more of the common stock (or 10% of such stock under
certain circumstances). Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company the number of shares of the Company's common stock having a market value
equal to twice the exercise price of the Right.
13
If the Company is acquired in a merger or other business combination
transaction, or sells more than 50% of its assets or earning power, after a
person or group has acquired 15% or more of the Company's outstanding common
stock (or 10% of such stock under certain circumstances), each Right (other than
Rights owned by such person or group) will entitle its holder to purchase, at
the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price.
Following the acquisition by a person or group of 15% or more of the Company's
common stock (or 10% of such stock under certain circumstances) and prior to an
acquisition of 50% or more of the common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group) at an
exchange ratio of one share of common stock per Right.
Prior to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's common stock (or 10% of such stock under certain
circumstances), the Rights are redeemable for $.001 per Right at the option of
the Board of Directors. The rights will expire on June 8, 2010.
Dividend Policy
- ---------------
The Company has never declared or paid cash dividends. 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 Company's operations and
future growth of its business. In addition, the Company's revolving line of
credit agreement prohibits the payment of any dividends. See Note 9 to Notes to
Consolidated Financial Statements.
Sales of Unregistered Securities
- --------------------------------
The Company has not issued or sold any unregistered securities during the
quarter ended December 31, 2002.
14
ITEM 6. Selected Financial Data
- ------- -----------------------
The following selected consolidated financial data for the Company for and as of
the years 1998 through 2002 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 a one-for-five reverse stock split which became effective on June 2,
1999. For the Company's unaudited quarterly results of operations for the eight
quarters ended December 31, 2002, see "Quarterly Results of Operations" in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Statement of Operations Data
Years Ended December 31 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Net Sales (1)....................... $ 332,047,000 $ 381,111,000 $ 516,155,000 $ 326,627,000 $ 247,557,000
Cost of Sales (2)................... (271,304,000) (318,363,000) (409,934,000) (263,330,000) (193,354,000)
------------- ------------- ------------- ------------- -------------
Gross Profit........................ 60,743,000 62,748,000 106,221,000 63,297,000 54,203,000
Selling, General and
Administrative Expenses (3)....... (56,655,000) (74,213,000) (78,368,000) (55,229,000) (45,936,000)
Impairment of Goodwill.............. - (895,000) - - -
Restructuring and Other
Nonrecurring Expenses (4)......... - - - - (2,860,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations........................ 4,088,000 (12,360,000) 27,853,000 8,068,000 5,407,000
Interest Expense (5)................ (3,138,000) (8,657,000) (8,642,000) (4,985,000) (4,313,000)
Other Income - Net (6).............. 2,220,000 - - - -
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Income Taxes.... 3,170,000 (21,017,000) 19,211,000 3,083,000 1,094,000
Income Tax (Provision) Benefit...... (1,287,000) 7,424,000 (8,096,000) (1,326,000) (437,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before
Discontinued Operations........... 1,883,000 (13,593,000) 11,115,000 1,757,000 657,000
Discontinued Operations:
Income from Operations (7)........ - 362,000 84,000 42,000 174,000
Loss on Disposal (8).............. - (9,344,000) - - -
------------- ------------- ------------- ------------- -------------
Net Income (Loss)................... $ 1,883,000 $ (22,575,000) $ 11,199,000 $ 1,799,000 $ 831,000
============= ============= ============= ============= =============
Basic Earnings Per Share (9):
Income (Loss) from
Continuing Operations........... $ .49 $(3.52) $ 2.90 $ .45 $ .17
Discontinued Operations........... - (2.33) .02 .01 .04
------ ------ ------ ------ ------
Net Income (Loss)................. $ .49 $(5.85) $ 2.92 $ .46 $ .21
====== ====== ====== ====== ======
Diluted Earnings Per Share (9):
Income (Loss) from
Continuing Operations........... $ .49 $(3.52) $ 2.68 $ .45 $ .17
Discontinued Operations........... - (2.33) .02 .01 .04
------ ------ ------ ------ ------
Net Income (Loss)................. $ .49 $(5.85) $ 2.70 $ .46 $ .21
====== ====== ====== ====== ======
Balance Sheet Data
December 31 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Working Capital..................... $ 54,670,000 $ 86,569,000 $ 159,644,000 $ 91,217,000 $ 68,192,000
Total Assets........................ 104,578,000 144,122,000 250,219,000 151,501,000 118,957,000
Long-Term Debt, Including
Current Portion................... 41,220,000 76,075,000 128,124,000 71,867,000 50,978,000
Shareholders' Equity................ 18,825,000 17,025,000 39,598,000 27,852,000 26,509,000
Book Value Per Common Share......... $4.93 $4.21 $9.80 $7.01 $6.67
- -------------------------
(1) Net sales including sales generated by the Company's Aved Display
Technologies ("ADT") and Integrated Display Technologies ("IDT") divisions
and the related turnkey support business which were discontinued in 2001
were $388,109,000 for 2001, $522,183,000 for 2000, $329,563,000 for 1999 and
$250,044,000 for 1998.
15
(2) 2001 includes non-cash inventory write-offs of $13,375,000. See Note 7 to
Notes to Consolidated Financial Statements.
(3) 2001 includes non-cash write-offs of accounts receivable of $5,220,000. See
Note 7 to Notes to Consolidated Financial Statements.
(4) 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.
(5) Interest expense for 2001 includes write-downs of deferred financing fees of
approximately $448,000. See Note 9 to Notes to Consolidated Financial
Statements.
(6) Other income reflects the combined value of cash and stock received by the
Company in consideration for releasing the then-existing indebtedness of a
customer, together with lease payments that the Company collected from
certain leases that were pledged to the Company as collateral, all of which
aggregated $2,220,000 after deducting related legal expenses associated with
the transaction. See Note 8 to Notes to Consolidated Financial Statements.
(7) Reflects income from discontinued operations of $362,000 (net of $208,000
income tax provision) for 2001, $84,000 (net of $61,000 income tax
provision) for 2000, $42,000 (net of $32,000 income tax provision) for 1999
and $174,000 (net of $124,000 income tax provision) for 1998 relating to
management's decision to discontinue the ADT and IDT divisions as well as
the related turnkey support business. See Note 6 to Notes to Consolidated
Financial Statements.
(8) Reflects a loss on disposal of $(9,344,000) (net of $5,367,000 income tax
benefit) for 2001 primarily made up of the write-offs of $4,488,000 of
inventory and $7,442,000 of accounts receivable. See Note 6 to Notes to
Consolidated Financial Statements.
(9) Weighted average common shares outstanding for the years ended December 31,
2002, 2001, 2000, 1999 and 1998 after reflecting a one-for-five reverse
stock split which became effective on June 2, 1999 were 3,849,553,
3,856,813, 3,828,978, 3,921,138 and 3,937,021, respectively, for basic
earnings per share and were 3,850,002, 3,856,813, 4,140,579, 3,924,166 and
3,998,802, respectively, for diluted earnings per share.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
This discussion should be read in conjunction with "Item 6. Selected Financial
Data" and Notes to Consolidated Financial Statements contained in this report.
Critical Accounting Policies and Estimates
- ------------------------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
inventories, income taxes, a postretirement benefit obligation and loss
contingencies. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies, among others,
may be impacted significantly by judgement, assumptions and estimates used in
the preparation of the Consolidated Financial Statements:
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). Under SAB 101, revenue is recognized at the point of
passage to the customer of title and risk of loss, and when there is persuasive
evidence of an arrangement, the sales price is determinable, and collection of
the resulting receivable is reasonably assured. The Company generally recognizes
revenue at the time of shipment. Sales are reflected net of discounts and
returns.
The allowance for doubtful accounts is maintained to provide for losses arising
from customers' inability to make required payments. If there is a deterioration
of our customers' credit worthiness and/or there is an increase in the length of
time that the receivables are past due greater than the historical assumptions
used, additional allowances may be required.
16
Inventories are stated at the lower of cost (determined on an average cost
basis) or market. Based on our assumptions about future demand and market
conditions as well as the Company's distribution agreements with its suppliers,
which generally provide for price protection and obsolescence credits,
inventories are written-down to market value. If our assumptions about future
demand change, and/or actual market conditions are less favorable than those
projected, additional write-downs of inventories may be required.
Deferred tax assets are recorded based on the Company's projected future taxable
income and the resulting utilization of the deferred tax assets. To the extent
that the Company would not be able to realize all or part of its deferred tax
assets in the future, an adjustment to the deferred tax assets would be
necessary and charged to income.
The Company calculates a postretirement benefit obligation using actuarial life
expectancy tables and an assumed discount rate. If the assumptions used in this
calculation change, an adjustment to the postretirement benefit obligation may
be required.
Loss contingencies arise in the ordinary course of business. In determining loss
contingencies, we evaluate the likelihood of the loss or impairment of an asset
or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of such loss. We accrue for an estimated loss contingency when it is
probable that a liability has been incurred or an asset has been impaired and
the amount of the loss can be reasonably estimated.
Results of Operations
- ---------------------
Overview
The following table sets forth for the years ended December 31, 2002, 2001 and
2000, certain items in the Company's Consolidated Statements of Operations
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
----------------------------
2002 2001 2000
----- ----- -----
Net Sales................................................................. 100.0% 100.0% 100.0%
Gross Profit.............................................................. 18.3 16.5 20.6
Selling, General and Administrative Expenses.............................. (17.1) (19.5) (15.2)
Impairment of Goodwill.................................................... - (0.2) -
Income (Loss) from Continuing Operations.................................. 1.2 (3.2) 5.4
Interest Expense.......................................................... (0.9) (2.3) (1.7)
Other Income - Net........................................................ 0.7 - -
Income (Loss) from Continuing Operations Before Income Taxes.............. 1.0 (5.5) 3.7
Income Tax (Provision) Benefit............................................ (0.4) 1.9 (1.5)
Income (Loss) from Continuing Operations Before Discontinued Operations... 0.6 (3.6) 2.2
Discontinued Operations................................................... - (2.3) *
Net Income (Loss)......................................................... 0.6 (5.9) 2.2
- -------------------
* not meaningful
Comparison of Years Ended December 31, 2002 and 2001
- ----------------------------------------------------
Sales
Net sales for the year ended December 31, 2002 were $332.0 million, a 12.9%
decrease from net sales of $381.1 million for 2001. The decrease was primarily
attributable to a continuation of the industry downturn that began during the
fourth quarter of 2000 and progressively and significantly worsened throughout
2001. Net sales were also negatively impacted by a weakness in demand for
electronic components, a trend of electronics manufacturing to move offshore as
well as the general weakness in the overall
17
economy. Management expects that the weakness in market conditions may continue
through much of 2003. Additionally, management expects that the trend for
electronics manufacturing to move offshore, where the Company currently has very
limited sales presence, will continue.
Gross Profit
Gross profit was $60.7 million for 2002, a 20.2% decrease from gross profit of
$76.1 million for 2001, without giving effect to non-cash inventory write-offs
during 2001 aggregating $13.4 million resulting from adverse industry conditions
(see Note 7 to Notes to Consolidated Financial Statements). The decrease in
gross profit was primarily due to decreases in net sales and gross profit
margins. Gross profit margins as a percentage of net sales were 18.3% for 2002
compared to 20.0% for 2001, excluding from the 2001 period the inventory
write-offs described above. The decline in gross profit margins reflects the
continued weakness in demand for electronic components, excess product
availability as well as a change in our product mix, including an increase in
sales of flat panel displays which generally sell at lower gross margins. In
addition, we continue to develop long-term strategic relationships with accounts
that have required aggressive pricing programs and we expect a greater number of
low margin, large volume transactions. Management therefore expects that the
downward pressure on gross profit margins may continue. After giving effect to
the inventory write-offs during 2001 described above, gross profit was $62.7
million and the gross profit margin was 16.5% for 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased to $56.7 million
for 2002 from $69.0 million for 2001 without giving effect to $5.2 million of
write-offs during 2001 of accounts receivable resulting from the adverse
economic and industry conditions. The improvement in SG&A reflects the benefit
from the implementation of certain expense reduction programs, including
workforce and salary reductions, all of which began during the second quarter of
2001. The decrease in SG&A also reflects a reduction in variable expenses
associated with the decline in sales and gross profit dollars. After giving
effect to the write-offs during 2001 of certain accounts receivable, SG&A was
$74.2 million for 2001.
SG&A as a percentage of net sales was 17.1% for the year ended December 31, 2002
compared to 18.1% for the 2001 period without giving effect to the write-offs of
accounts receivable during 2001. The decrease in SG&A as a percentage of net
sales was due to the improvement in SG&A in absolute dollars discussed above
which more than offset the impact from the decline in net sales. After taking
into account the write-offs during 2001 of accounts receivable, SG&A as a
percentage of net sales was 19.5% for 2001.
Income (Loss) from Continuing Operations
Income from continuing operations was $4.1 million for 2002 compared to $7.1
million for 2001 excluding the non-cash charges during 2001 for inventory and
accounts receivable write-offs discussed above and also excluding an $895,000
non-cash write-off of goodwill in 2001. See Note 5 to Notes to Consolidated
Financial Statements. The decrease in income from continuing operations was due
to the significant decline in sales and gross profit dollars for the reasons
discussed previously, which decreases were partially offset by the improvement
in SG&A described above. After giving effect to the non-cash charges in 2001,
the Company had a loss from continuing operations of $12.4 million for 2001.
Other Income
In September 2002, the Company entered into an agreement with a customer (the
"Agreement") to whom the Company had previously supplied display integration and
turnkey support. The Agreement provided, among other things, that the Company
release the then-existing indebtedness of the customer, which indebtedness had
been previously written off by the Company during 2001, and certain related
security interests. In consideration of these releases, the Company received
approximately $2.0 million in cash and 11,000,000 shares, $.01 par value per
share, of common stock of this customer. These shares are not registered under
the Securities Act of 1933 and are not publicly traded. The shares are subject
to a voting arrangement outside the control of the Company. As a result of the
voting arrangement, the Company has given up
18
substantially all of its voting rights. The Company has reflected the value of
these shares in Deposits and Other Assets on the Consolidated Balance Sheet at
December 31, 2002. The value of these shares was based on an independent
appraisal at $19,000 as of the date these shares were received by the Company.
The combined value of the cash and stock, together with lease payments that the
Company previously collected from leases that were pledged to the Company as
collateral for the then existing indebtedness of the customer, aggregated
approximately $2.2 million, after deducting related legal expenses associated
with the transaction. This amount is reflected as Other Income on the
Consolidated Statement of Operations for 2002.
Interest Expense
Interest expense decreased significantly to $3.1 million for 2002 compared to
$8.2 million for 2001, without giving effect in 2001 to $448,000 of a non-cash
write-off of deferred financing fees in connection with changes in the Company's
credit facility during 2001. After giving effect to the non-cash write-off,
interest expense was $8.7 million for 2001. The substantial decrease in interest
expense resulted from significant decreases in our average borrowings and
decreases in overall interest rates. Our average borrowings decreased by
approximately $57 million when comparing 2002 and 2001. The decrease in average
borrowings was due to decreases in our inventory and income taxes receivable as
well as from the positive effects of our expense reduction programs.
Net Income (Loss)
Net income was $1.9 million, or $.49 per share (diluted), for the year ended
December 31, 2002, compared to a net loss of $(22.6) million, or $(5.85) per
share (diluted), for the year ended December 31, 2001 after giving effect to the
non-cash charges as discussed above. In addition, 2001 also includes the loss on
disposal of $14.7 million on a pre-tax basis including a write-off of $4.5
million of inventory and $7.4 million of accounts receivable, or $9.3 million
after-tax, associated with the discontinuance of our Aved Display Technologies
and Integrated Display Technologies divisions in June of 2001. See "Comparison
of Years Ended December 31, 2001 and 2000-Discontinued Operations" below.
Comparison of Years Ended December 31, 2001 and 2000
- ----------------------------------------------------
Sales
Net sales for the year ended December 31, 2001 were $381.1 million, representing
a 26.2% decrease over record sales of $516.2 million for 2000. The decrease was
primarily attributable to a severe broad-based industry downturn, weakness in
demand for electronic components as well as the general weakness in the overall
economy.
Gross Profit
Without giving effect to non-cash inventory write-offs during 2001 aggregating
$13.4 million resulting from adverse industry conditions (see Note 7 to Notes to
Consolidated Financial Statements), gross profit was $76.1 million for 2001,
representing a 28.3% decrease from gross profit of $106.2 million for 2000. The
decrease was due to the significant decline in sales as well as the decrease in
gross profit margins as a percentage of net sales. Gross profit margins as a
percentage of net sales, without giving effect to the inventory write-offs, were
20.0% for 2001 compared to 20.6% for 2000. The decline in gross profit margins
reflected the severe industry downturn, weakness in demand for electronic
components and excess product availability. In addition, we continued to develop
long-term strategic relationships with accounts that required aggressive pricing
programs. After giving effect to the inventory write-offs, gross profit dollars
were $62.7 million and the gross profit margin was 16.5% for 2001.
19
Selling, General and Administrative Expenses
SG&A, without giving effect to $5.2 million of write-offs of accounts receivable
resulting from the adverse economic and industry conditions, was $69.0 million
for 2001 compared to $78.4 million for 2000. The improvement in SG&A reflected
the implementation of certain expense reduction programs, including workforce
and salary reductions which began during the first half of 2001. The improvement
also reflected a reduction in variable expenses associated with the decline in
sales and gross profit dollars. After giving effect to the accounts receivable
write-offs, SG&A was $74.2 million for 2001.
Without giving effect to the write-offs of accounts receivable, SG&A as a
percentage of net sales was 18.1% for the year ended December 31, 2001 compared
to 15.2% for the 2000 period. The increase in SG&A as a percentage of net sales
reflected the significant decline in sales, slightly offset by the improvement
in SG&A discussed above. After taking into account the write-offs of accounts
receivable during 2001, SG&A as a percentage of net sales was 19.5% for 2001.
See Note 7 to Notes to Consolidated Financial Statements.
Income (Loss) from Continuing Operations
Excluding the non-cash charges during 2001 for inventory and accounts receivable
write-offs discussed above and also excluding an $895,000 non-cash write-off of
goodwill (see Note 5 to Notes to Consolidated Financial Statements), income from
continuing operations was $7.1 million for 2001, compared to income from
continuing operations of $27.9 million for 2000. The decrease in income from
continuing operations (excluding the non-cash charges) was primarily
attributable to decreases in sales and gross profit dollars resulting from the
severe industry downturn, which decreases were partially offset by the
improvement in SG&A described above. See Note 7 to Notes to Consolidated
Financial Statements. After giving effect to the previously mentioned non-cash
charges the Company had a loss from continuing operations of $12.4 million for
2001.
Interest Expense
Interest expense, without giving effect to $448,000 of a non-cash write-off of
deferred financing fees in connection with changes in the Company's credit
facility during 2001, was $8.2 million for 2001 compared to $8.6 million for
2000. After giving effect to such non-cash write-off, interest expense was $8.7
million for 2001. The decrease in interest expense before the non-cash write-off
resulted from a decrease in overall interest rates as well as from a significant
decline in our average borrowings during 2001. The significant decline in our
borrowings during 2001 was primarily attributable to the decreases in inventory
and accounts receivable during the second half of the year. These factors more
than offset the impact from an increase in our interest rate margins during 2001
under the Company's line of credit agreement. See "Liquidity and Capital
Resources" and Note 9 to Notes to Consolidated Financial Statements.
Discontinued Operations
Due to the overall weakness in the economy, the negative impact of the severe
broad-based industry downturn and other factors, Aved Display Technologies and
Integrated Display Technologies did not generate the cash flows anticipated. As
a result, during 2001, management decided to discontinue these divisions.
Accordingly, these divisions are accounted for as discontinued operations in the
accompanying Consolidated Financial Statements. The loss on disposal of $14.7
million on a pretax basis ($9.3 million after tax) included the estimated costs
and expenses associated with the disposal of $14.6 million primarily made up of
the write-off of $4.5 million of inventory and $7.4 million of accounts
receivable. In addition, the loss on disposal included a provision of $112,000
on a pretax basis for operating losses during the phase-out period which
continued for approximately two months. See Note 6 to Notes to Consolidated
Financial Statements.
20
Net Income (Loss)
After giving effect to the non-cash charges and the loss from discontinued
operations, all as discussed above, the Company had a net loss of $(22.6)
million, or $(5.85) per share (diluted), for the year ended December 31, 2001,
compared to a record net income of $11.2 million, or $2.70 per share (diluted),
for 2000.
Quarterly Results of Operations
- -------------------------------
The following table presents unaudited quarterly results of operations for the
eight quarters ended December 31, 2002. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly such quarterly information.
(In thousands, except per share data)
2002 2001
------------------------------------------- --------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
Net Sales................ $ 82,142 $ 87,397 $ 85,523 $ 76,985 $ 125,917 $ 100,062 $ 88,767 $ 66,365
Gross Profit............. 15,641 15,530 15,331 14,241 25,012 13,140 17,857 6,739
Income (Loss) from
Continuing Operations... 1,151 1,139 1,097 701 3,765 (6,862) 1,189 (10,452)
Other Income - Net....... - - 2,220 - - - - -
Net Income (Loss)........ 119 198 1,559 7 671 (13,982) (381) (8,883)
Diluted Earnings (Loss)
Per Share............... $.03 $.05 $.40 $.00 $.17 $(3.63) $(.10) $(2.30)
Liquidity and Capital Resources
- -------------------------------
Working capital at December 31, 2002 decreased to $54.7 million from working
capital of $86.6 million at December 31, 2001. The current ratio was 2.23:1 at
December 31, 2002 compared to 2.69:1 at December 31, 2001. The decrease in
working capital was primarily due to decreases in inventory and income taxes
receivable which were partially offset by a decrease in accounts payable.
Accounts receivable was $41.2 million at December 31, 2002 and 2001. The average
number of days that accounts receivables were outstanding improved to 47 days as
of December 31, 2002 as compared to 64 days as of December 31, 2001. This
improvement reflects a greater amount of time devoted to collection efforts as a
result of a decline in sales activity as well as the write-off of certain
accounts in 2001 due to the weakened economic environment and adverse industry
conditions. The improvement also reflects certain large customers paying early
in order to take advantage of discount terms. Inventory levels were $52.8
million at December 31, 2002, down from $81.0 million at December 31, 2001. The
substantial decrease in inventory reflects our sustained efforts to bring
inventory positions in line with the reduced level of sales. Accounts payable
and accrued expenses decreased to $44.3 million at December 31, 2002 from $50.8
million at December 31, 2001 as a result of reduced purchases in connection with
the reduced level of sales.
In August 2002, the Company's Board of Directors authorized the continuance of
the stock repurchase program, originally approved by the Board and announced in
1999, which provided for the repurchase of up to $2.0 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 its common
stock and other factors. The Company currently intends to make stock repurchases
using available cash flow from operations and/or available borrowings under its
line of credit. 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. For the year ended December 31, 2002, the Company
repurchased 35,950 shares of its common stock at an average price of $2.34 per
share, or an aggregate price of approximately $84,000, which, together with
previous purchases since 1999, represents 183,136 shares at an aggregate price
of approximately $567,000 purchased under the program. There were no
21
repurchases for the year ended December 31, 2001. The aggregate cost of the
repurchased shares was reflected as treasury stock prior to December 31, 2002
and, as of December 31, 2002, all treasury stock was retired.
Outstanding borrowings under the Company's line of credit facility aggregated
$34.0 million at December 31, 2002 compared to $68.7 million at December 31,
2001. The dramatic decline in outstanding borrowings reflects the decrease in
working capital discussed previously. During 2002 the credit facility was
amended to reduce the line of credit from $85 million to $60 million to better
match the Company's present borrowing requirements. The credit facility was
previously amended in 2002 to reduce the line of credit from $100 million to $85
million and in 2001 to reduce the line of credit from $150 million to $100
million. The reductions in the credit facility benefit the Company by decreasing
the amount of the fee charged on the unused portion of the credit facility. In
addition, during 2001 the interest rate margins on the Company's credit facility
were increased. During 2002 the interest rate margins were, at the Company's
option, 1.0% for the prime rate portion, or 3.25% through March 30, 2002 and
4.25% effective March 31, 2002 for the LIBOR portion. Accordingly, at December
31, 2002, the interest rate margins were 1.0% for the prime rate portion and
4.25% for the LIBOR portion. Under the credit facility, the Company is required
to comply with certain affirmative and negative covenants, certain of which were
modified in 2002 in connection with the foregoing amendments, 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 unless
consented to by the lenders, which consent has been obtained in connection with
the Company's stock repurchase program. 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. Borrowings under the credit facility, which are based on
eligible accounts receivable and inventories as defined in the agreement, are
secured by all of the Company's assets including accounts receivable,
inventories and equipment. See Note 9 to Notes to Consolidated Financial
Statements.
In September 2002, the Company entered into an agreement with a customer which
provided, among other things, that the Company release the then-existing
indebtedness of the customer, which indebtedness had been previously written off
by the Company primarily in the nine-month period ended September 30, 2001, and
certain related security interests. In consideration of these releases, the
Company received approximately $2.0 million in cash in addition to certain stock
and other consideration. The net cash proceeds received were used to reduce the
outstanding borrowings under the Company's credit facility. The Company
continues to guarantee the future payment to a third party of certain leases
which were previously pledged to the Company as collateral for the payment of
outstanding receivables which were owed by this customer. This guaranty was made
when the leases were sold to this third party who paid to the Company the net
present value of the future payments of the leases. The maximum exposure under
this guaranty was approximately $877,000 with a net present value of $694,000 at
December 31, 2002.
The Company also has $5.1 million of subordinated debentures which mature in
June 2004, as well as other subordinated debt with various maturities through
2015 aggregating approximately $896,000 and an unfunded postretirement benefit
obligation of approximately $1,171,000. See Note 9 to Notes to Consolidated
Financial Statements.
In addition to its borrowings under its line of credit facility and other
long-term debt obligations reflected in the Consolidated Financial Statements,
the Company has operating leases for office space, distribution facilities and
equipment that have initial or remaining noncancelable lease terms in excess of
one year as of December 31, 2002. The amounts of the Company's obligations with
respect to operating leases are approximately $3.7 million, $3.4 million, $2.9
million, $2.0 million and $1.2 million for each of the years ending December 31,
2003, 2004, 2005, 2006 and 2007, respectively. See Note 12 to Notes to
Consolidated Financial Statements.
The Company currently expects that its cash flows from operations and additional
borrowings available under its credit facility will be sufficient to meet the
Company's current financial requirements over the next twelve months.
22
Inflation and Currency Fluctuations
- -----------------------------------
The Company does not believe that inflation significantly impacted its business
during 2002; however, inflation has had significant effects on the economy in
the past and could adversely impact the Company's results in the future
especially as the Company expands internationally. The Company believes that
currency fluctuations could have adverse effects on its business if they make
components manufactured abroad too expensive, cause limitations in customer
productions due to unfavorable export conditions or cause 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.
New Accounting Pronouncements
- -----------------------------
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), effective for fiscal years beginning
after December 31, 2002. SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under the new rule a liability for
an exit cost can no longer be recognized at the date of an entity's commitment
to an exit plan as defined in Issue 94-3. SFAS 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 also establishes that fair value is the
objective for initial measurement of the liability. The Company adopted SFAS 146
as of January 1, 2003. The effect of the adoption of this statement was not
material.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS
148"), effective for fiscal years beginning after December 15, 2002. SFAS 148
amends Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted SFAS 148 as of January 1, 2003. The effect of the
adoption of this statement was not material as the Company continues to use the
intrinsic value method allowed under SFAS 123.
Forward-Looking Statements; Business Risks and Uncertainties
- ------------------------------------------------------------
This report contains statements that are forward-looking within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this report, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," "contemplates," "may," "will,"
"shall," "assuming," "prospect," "should," "could," "looking forward" and
similar expressions, to the extent used, are intended to identify the
forward-looking statements. All forward-looking statements are based on current
expectations and beliefs concerning future events that are subject to risks and
uncertainties. Actual results may differ materially from the results suggested
in this report. In many cases, we cannot predict the risks or uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements. Factors that may cause or contribute to such
differences, and our business risks generally, include, but are not limited to,
the items described below, as well as in other sections of this report and in
other of our public filings and in our press releases. The Company undertakes no
obligation to update publicly or revise any forward-looking statements, business
risks and/or uncertainties.
Our industry is cyclical, which causes our operating results to fluctuate
significantly.
In the fall of 1999, our industry emerged from a four-year period of excess
supply. As a result of limited supply from the fourth quarter of 1999 to the
fourth quarter of 2000, prices and profit margins went up and
23
our operating results improved. During the fourth quarter of 2000, a combination
of improved product availability, a slowing economy and other factors caused a
sudden adverse change in market conditions in our industry, which continued to
deteriorate during 2001 resulting in a broad-based industry slowdown, excess
customer inventory and a severe decline in demand for electronic components
which continued during 2002 and into 2003. We cannot predict the timing or the
severity of the cycles within our industry. In particular and as of this time,
it is difficult to predict how long and to what levels any industry slowdown or
downturn and/or general economic weakness will last or be exacerbated by
terrorism or war. The electronic components distribution industry has
historically been affected by general economic downturns, which have often had
an adverse economic effect upon manufacturers, end-users of electronic
components and electronic components distributors, which occurred in 2001 and
2002 and continues in 2003. In addition, our industry directly depends on the
continued growth of the electronic components industry and indirectly on the
level of end-user demand for our customers' products. Due to changing conditions
(such as in late 2000 and all of 2001), our customer base has experienced in
2001 and 2002 and may in the future continue to experience periods of inventory
corrections which could materially adversely impact our results. Furthermore,
the timing of new product developments, the life-cycle of existing electronic
products, and the level of acceptance and growth of new products can affect
demand for electronic components. In that regard, the Company has supported in
the past and expects in the future to support new technologies and emerging
markets, the failure of which to be accepted or grow (as was the situation
during 2001 and 2002) could have a material adverse effect on our operating
results. These market changes and factors have caused in the past (including in
2002), and will likely cause in the future, our operating results to
significantly fluctuate.
We are dependent on a limited number of suppliers. If one or more of our largest
suppliers chooses not to sell products to us, our operating results could
suffer.
We rely on a limited number of suppliers for products which generate a
significant portion of our sales. Substantially all of our inventory has and
will be purchased from suppliers with which we have entered into non-exclusive
distributor agreements which are typically cancelable on short notice (generally
30 to 90 days). Products purchased from our three largest suppliers accounted
for approximately 37% of our consolidated purchases during the calendar year
ended December 31, 2002, of which 22% were purchased from one supplier. No other
supplier accounted for more than six percent of our consolidated purchases
during this period. While most of the products that we sell are available from
other sources, our future success will depend in large part on maintaining
relationships with existing suppliers and developing relationships with new
ones. We believe that the loss of a key supplier (particularly our largest
supplier) could have a material adverse impact on our business in the short term
as we attempt to replace the products offered by that supplier with the products
of other suppliers. However, if we were to lose our right to distribute the
products of any particular supplier, there can be no assurance that we would be
able to replace the products which were available from that particular supplier.
The loss of, or significant disruptions in relationships with, any of our
largest suppliers (particularly our largest supplier) or a significant number of
other suppliers in a short period of time, could have a material adverse effect
on our operating results.
We do not have long-term contracts with our customers and, as a result, our
customers may be able to cancel, reduce or delay their orders without penalty.
We typically do not obtain long-term purchase orders or commitments but instead
work with our customers to develop nonbinding forecasts of future orders. Based
on such nonbinding forecasts, we make commitments regarding the level of
business that we will seek and accept, and the levels and utilization of
personnel and other resources. A variety of conditions, both specific to each
individual customer and generally affecting each customer's industry, may cause
our customers to cancel, reduce or delay orders that were either previously made
or anticipated or attempt to return inventory. Generally, our customers may
cancel, reduce or delay purchase orders and commitments without penalty or other
charges associated with such cancellation, reduction or delay. Significant or
numerous cancellations, reductions or delays in orders by customers have in 2001
and to a lesser extent in 2002 had, and could in the future have, a material
adverse effect on our operating results.
24
We may not be able to sustain or manage growth or achieve satisfactory levels of
profitability.
As and when market conditions improve and if and as we commence our growth, we
will need to manage our expanding operations effectively and successfully
integrate into our operations any new businesses or divisions which we may
acquire or open. If we are unable to do so, particularly in instances in which
we have made or make significant investments, our failure could have a material
adverse effect on our operating results. We may be unsuccessful in growing and
achieving satisfactory levels of profitability if we are unable to:
- secure adequate supplies of competitive products on a timely basis and
on commercially reasonable terms, especially in times of product
allocations;
- expand sales to existing customers and increase our customer base;
- turn our inventories and collect our accounts receivable fully (and
consistent with historical bad debt levels prior to 2002) and in a
timely manner, especially with respect to customers in new technologies
or in emerging markets and generally as a result of the weakened or
further weakening financial condition of certain customers (including
several customer bankruptcies);
- avoid obsolescence of inventory or devaluation of inventory as a result
of continuing adverse market conditions;
- maintain our existing key supplier relationships as well as develop new
relationships with leading suppliers of electronic components;
- hire and retain additional qualified management, marketing and other
personnel to successfully manage our growth, including personnel to
monitor our operations, control costs and maintain effective inventory
and credit controls;
- effectively and fully utilize our level of personnel and facility and
infrastructure overcapacity; and
- invest to maintain and enhance our infrastructure, including
telecommunications and information systems, logistics services and our
service capabilities, including "distribution technology".
A decline in gross profit margins arising from a change in market conditions or
aggressive pricing programs could adversely affect our operating results.
During certain prior periods, we have experienced an increase in gross profit
margins as a result of favorable market conditions in the electronic components
distribution industry, including limited supply of certain products. However,
there is no assurance that negative changes in the economic environment
generally and/or in the electronic components industry in particular will not
occur. In fact, such negative changes in both the economic environment generally
and in the electronic components industry began to occur in the fourth quarter
of 2000, progressively worsened throughout 2001 and remained weak during 2002.
Furthermore, we continue to develop long-term strategic relationships with
accounts which have required aggressive pricing programs. These factors could
result in a decline in our gross profit margins, materially adversely affecting
our operating results.
We may not be able to satisfy our funding requirements.
We may need to spend significant amounts of cash to: fund operating losses
and/or increases in expenses; meet our working capital requirements; invest in
capital equipment and infrastructure; upgrade our information and communication
systems; acquire businesses or open divisions; or respond to unanticipated
developments, increasing customer demands or competitive pressures. If we do not
have enough cash on hand, cash generated from our operations or cash available
under our credit facility to meet these cash requirements, we will need to seek
alternative sources of financing to carry out our growth and operating
strategies. We may not be able to raise needed cash on terms acceptable to us,
or at all. Financing may be on terms that are dilutive or potentially dilutive.
If alternative sources of financing are required but are insufficient or
unavailable, we will be required to modify our operating plans to the extent of
available funding, if and assuming such modifications can be made at all.
25
We are dependent on foreign manufacturers and subject to trade regulations which
expose us to political and economic risk.
A significant number of components sold by us are manufactured by foreign
companies. As a result, our ability to sell certain products at competitive
prices could be adversely affected by any of the following:
- increases in tariffs or duties;
- changes in trade treaties;
- strikes or delays in air or sea transportation;
- future United States legislation with respect to pricing and/or import
quotas on products imported from foreign countries; and
- turbulence in offshore economies or financial markets.
Our ability to be competitive with respect to sales of imported components could
also be affected by other governmental actions and policy changes, including
anti-dumping and other international antitrust legislation. In addition, adverse
currency fluctuations could have the effect of making components manufactured
abroad more expensive, cause limitations in customer productions due to
unfavorable export conditions or cause our offshore suppliers to limit exports
to the United States. Because we purchase substantially all of our products from
United States subsidiaries and affiliates of foreign manufacturers, almost all
of our purchases are paid for in U.S. dollars, which usually reduces or
eliminates the potential adverse effects of currency fluctuations. However, in
late 2002 we began purchasing a limited amount of our product offshore and this
offshore purchasing activity may increase in the future. Accordingly, there can
be no assurance that such factors could not have a material adverse effect on
our operating results in the future.
Our industry is subject to supply shortages. Any delay or inability to obtain
components may have an adverse effect on our operating results.
At various times prior to 2001 there have been shortages of components in the
electronics industry and the availability of certain components have been
limited by some of our suppliers. Although such shortages and allocations have
not had a material adverse effect on our operating results, there can be no
assurance that any future shortages or allocations would not have such an effect
on us.
The prices of our components are subject to volatility.
A significant portion of the memory products we sell have historically
experienced volatile pricing. If market pricing for these products decreases
significantly, we may experience periods when our investment in inventory
exceeds the market price of such products. In addition, at times there are price
increases from our suppliers that we are unable to pass on to our customers.
These market conditions could have a negative impact on our sales and gross
profit margins unless and until our suppliers reduce the cost of these products
to us. Further, in the future aggressive pricing programs that may be required,
an increased number of low-margin, large volume transactions and/or increased
availability of the supply of certain products can further impact gross profit
margins.
Our industry is highly competitive and competition could harm our ability to
sell our products and services and thereby reduce our market share.
The electronic components distribution industry is highly competitive. We
generally compete with local, regional and national distributors. Some of our
competitors have greater name recognition and financial, personnel and other
resources than we do. There can be no assurance that we will continue to compete
successfully with existing or new competitors and failure to do so could have a
material adverse effect on our operating results.
Emergence of new competitive business models could have adverse effects on our
business.
In the last couple of years, additional competition has emerged in the
electronic components distribution industry. This increased competition resulted
in part from the advent of third party logistics and fulfillment
26
companies, businesses commonly referred to as e-exchanges and e-brokers and
several other forms of e-commerce companies which have grown with the expanded
use of the Internet. In addition to the increased competition from these other
groups, some of the total available distribution market share is being reduced
as more and more original equipment manufacturers transition their procurement
into EMS companies and original design manufacturers. The EMS companies and
original design manufacturers utilize their abilities to aggregate demand to
develop direct purchasing channels with component manufacturers. Furthermore, as
more and more manufacturing moves outside the boundaries of North America, the
Company believes that the total available distribution market share is also
being reduced as procurement channels increase in Asia and Europe. While we have
implemented our e-commerce strategies, including our website and multiple
portals, to confront certain of these new competitive business models, there can
be no assurance that we will be able to defend our market share against the
emergence of these or other new business models.
A reversal of the trend for distribution to play an increasing role in the
electronic components industry could affect our business.
In recent years, there has been a growing trend for original equipment
manufacturers and contract electronics manufacturers to outsource their
procurement, inventory and materials management processes to third parties,
particularly electronic component distributors. Although we do not currently
foresee this trend reversing, if it did, our business would be materially
adversely affected.
We are exposed to interest rate changes which could adversely affect our
operating results.
We are exposed to interest rate changes with respect to our credit facility,
which currently is based upon, at our option, the prime rate or LIBOR. In fact,
interest rates are currently at a very low level and no assurance can be given
that interest rates will not begin to rise as the general economy commences its
recovery. Any material increase in the level of interest rates could materially
adversely affect our operating results.
Our operations would be adversely affected if third party carriers were unable
to transport or were materially hindered in transporting our products.
All of our products are shipped through third party carriers, principally one
carrier. If a strike or other event prevented or materially hindered or
disrupted that carrier from transporting our products, there is no assurance
that other carriers would be available or have the capacity to deliver our
products to our customers. If adequate third party sources to ship our products
were not available at any time, our operating results would be materially and
adversely affected.
We depend on the continued services of our executive officers, and their loss
could affect our ability to successfully grow our business.
We are highly dependent upon the services of our President and Chief Executive
Officer. The permanent loss for any reason of our President and Chief Executive
Officer, or any one or more of our other key executives, could have a material
adverse effect upon our operating results. While we believe that we would be
able to locate suitable replacements for our executives if their services were
lost, there can be no assurance that we would, in fact, be able to do so.
We must attract and retain personnel to help support our future growth, and
competition for personnel in our industry has previously been intense.
We require the services of a substantial number of qualified personnel. Our
future success depends to a significant degree upon the continued contributions
of our management, engineering, sales, marketing, information technology,
distribution and finance personnel. Prior to late 2000, the market for such
skilled and experienced personnel was characterized by intense competition and
aggressive recruiting, as well as a high degree of employee mobility. Such a
market, if it was to return, would make it particularly difficult to attract and
retain the qualified personnel we require. The loss of or our inability to
continue to attract and retain these key personnel could harm our business.
27
Any acquisitions could be difficult to integrate, disrupt our business and
adversely affect our operations.
Our growth in the future may depend, in part, on our ability to acquire
compatible electronic components distributors or other businesses and to
integrate the acquired operations. There can be no assurance that we will be
able to locate additional appropriate acquisition candidates, or that we will be
successful in acquiring any identified candidates. In addition and as we have
experienced in the past, we cannot be certain that the operations of any
acquired companies will be effectively integrated or prove profitable. The
completion of future acquisitions may require the expenditure of sizable amounts
of capital and management effort. Moreover, unexpected problems encountered in
connection with our acquisitions could have a material adverse effect on our
operating results.
We may be exposed to product liability claims.
We are likely to be named as a defendant in any products liability action
brought by an end-user as a result of our value-added services or as a
participant in the distribution chain between the manufacturer and end-user.
Although as of this date there are no material claims asserted against us for
products liability, there can be no assurance that such claims will not arise in
the future. In the event that any products liability claim is not covered by
insurance or we are not indemnified by or cannot recover damages from our
supplier of the product or another third party in the chain of distribution, we
may be required to fund some or all of a product liability claim, which could
have a material adverse effect on us.
We may be exposed to warranty claims.
The Company may be exposed to warranty claims by its customers both with respect
to products manufactured by others which the Company distributes and with
respect to products on which the Company has performed value added work. With
respect to claims relating to products manufactured by others, the Company would
expect that the manufacturers of such products would indemnify the Company to
the extent provided for under its agreement with the manufacturer, as well as
defend such claims on the Company's behalf, although no assurance can be given
that any manufacturer would so do. In addition, there may be instances where a
customer might be able to enforce an express or implied warranty claim against
the Company with respect to component products manufactured by the Company's
suppliers, in addition to or in lieu of the warranties of the suppliers of such
components. Accordingly, a significant number of such warranty claims could have
a material adverse effect on us.
Our global expansion initiatives may not be successful.
The Company recently commenced global expansion initiatives in an attempt to
increase its sales to customers in foreign countries. Given the Company's
limited experience in the international market and that the Company only
recently, and on a limited basis so far, commenced operations outside of North
America, no assurance can be given that the Company's global expansion
initiatives will be successful.
Our officers and directors have and will continue to have significant control
over us.
If the Company's Chairman and President and Chief Executive Officer exercised
all of their outstanding stock options, they and their respective spouses and
children and related trusts would own an aggregate of approximately 624,000
shares, representing approximately 15% of the outstanding shares of common
stock. As a result of such stock ownership and their positions as executive
officers, as the members of the executive committee of our Board of Directors
and as two of the seven directors of All American, they are and will continue to
be in a position to control the day-to-day affairs of All American.
Our shareholder rights plan, preferred stock and governing documents may
discourage potential acquisitions of our business.
We have a shareholders rights plan and have authorized preferred stock which is
available to be issued with such rights, preferences, privileges and limitations
as are determined by the Board of Directors. In addition, our Certificate of
Incorporation includes provisions designed to discourage attempts by others to
28
acquire control of us without negotiation with our Board of Directors, and to
attempt to ensure that such transactions are on terms favorable to all of our
shareholders. These provisions provide, among other things:
- that meetings of our shareholders may only be called by the Board of
Directors;
- that an affirmative vote of two-thirds of our outstanding shares of
common stock is required to approve certain business combinations
unless 65% of our Board approves such transaction;
- for three classes of directors with each class elected for a three year
staggered term;
- that our Board in evaluating a tender offer or certain business
combinations is authorized to give due consideration to all relevant
factors; and
- that actions of shareholders may not be taken by written consent of
shareholders in lieu of a meeting.
For various reasons, however, these provisions may not always be in the best
interest of our shareholders. These reasons include the fact that the provisions
of our Certificate of Incorporation (i) make it difficult to remove directors
even if removal would be in the best interest of our shareholders; (ii) make it
difficult for our shareholders to approve certain transactions that are not
approved by at least 65% of our Board, even if the transactions would be
beneficial to our shareholders; and (iii) eliminate the ability of our
shareholders to act without a meeting. Our shareholder rights plan, our
blank-check preferred stock and our governing documents may have the effect of
delaying, deterring or preventing a change in control of All American, could
discourage potential investors from bidding for our common stock at a premium
over the market price of the common stock and could adversely affect the market
price and the voting rights of the holders of the common stock.
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 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 15(a)(1) and (2)
of this report.
In addition, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Quarterly Results of Operations" for
presentation of unaudited quarterly results of operations for the eight quarters
ended December 31, 2002.
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 Related Stockholder Matters; 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
definitive proxy statement is incorporated herein by this reference.
29
ITEM 14. Controls and Procedures
- -------- -----------------------
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
Within 90 days of the filing date of this Annual Report on Form 10-K, we carried
out an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and the chief financial
officer, of the effectiveness of the design and operation of our "disclosure
controls and procedures" (as defined in the Securities Exchange Act of 1934,
Rules 13a - 14(c) and 15d - 14(c)). Based on this evaluation, our chief
executive officer and chief financial officer have concluded that as of the date
of the evaluation our disclosure controls and procedures are effective to ensure
that all material information required to be filed in this report has been made
known to them.
Changes In Internal Controls
- ----------------------------
As of the date of this report there have been no significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. Exhibits, Financial Statement Schedule, 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 Operations........................... 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 Schedule
----------------------------
Schedule II - Valuation and Qualifying Accounts................. S-1
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., as fiscal agent,
paying agent and securities registrar (incorporated by reference
to Exhibit 4.1 to the Company's Form 8-K dated June 14, 1994 and
filed with the Securities and Exchange Commission on June 15,
1994).
4.3 2000 Common Stock Purchase Rights Agreement, dated as of June 9,
2000, between the Company and American Stock Transfer & Trust
Company (incorporated by reference to
30
Exhibit number 4.1 to the Company's Registration Statement on
Form 8-A, filed with the Securities and Exchange Commission on
June 13, 2000).
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 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
August 22, 2001 (incorporated by reference to Exhibit 10.7 to the
Company's Form 10-K for the year ended December 31, 2001).**
10.8 All American Semiconductor, Inc. Amended and Restated 2000
Nonemployee Director Stock Option Plan, as amended and restated
through August 22, 2001 (incorporated by reference to Exhibit
10.8 to the Company's Form 10-K for the year ended December 31,
2001).**
10.9 Deferred Compensation Plan (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-2, File
No. 33-47512).**
10.10 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).
10.11 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), as
amended by Third Amendment to Employment Agreement effective as
of January 1, 2000 and dated as of April 27, 2000, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ended March 31,
2000).**
10.12 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), as amended by Second Amendment
to Employment Agreement effective as of January 1, 2000 and dated
as of April 27, 2000, 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 March 31, 2000).**
31
10.13 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).
10.14 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 (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
March 31, 1996).
10.15 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).
10.16 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).
10.17 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).
10.18 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 31, 1998).
10.19 Amendment No. 5 to Loan and Security Agreement dated August 8,
2000 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 2000).
10.20 Amendment No. 6 to Loan and Security Agreement dated September
29, 2000 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 2000).
10.21 Amendment No. 7 to Loan and Security Agreement dated May 14, 2001
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended March 31, 2001).
10.22 Amendment No. 8 to Loan and Security Agreement dated May 14, 2001
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 2001).
10.23 Amendment No. 9 to Loan and Security Agreement dated August 14,
2001 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 2001).
10.24 Amendment No. 10 to Loan and Security Agreement dated November
14, 2001 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 2001).
10.25 Amendment No. 11 to Loan and Security Agreement dated March 29,
2002 (incorporated by reference to Exhibit 10.25 to the Company's
Form 10-K for the year ended December 31, 2001).
10.26 Amendment No. 12 to Loan and Security Agreement dated October 31,
2002 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 2002).
10.27 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).**
10.28 Amendment A to the All American Semiconductor, Inc. 401(k) Profit
Sharing Plan (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 2002).**
10.29 Amendment B to the All American Semiconductor, Inc. 401(k) Profit
Sharing Plan (incorporated by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended September 30, 2002).**
10.30 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).**
10.31 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).
32
10.32 Employment Agreement effective as of January 1, 2000 and dated as
of April 27, 2000, between the Company and Howard L. Flanders
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
10.33 Employment Agreement effective as of January 1, 2000 and dated as
of April 27, 2000, between the Company and Rick Gordon
(incorporated by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
10.34 Composition Agreement dated September 18, 2002 among ParView,
Inc., AmeriCapital, LLC and the Company (without exhibits)
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarter ended September 30, 2002).
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.*
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350.*
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350.*
- ------------------
* 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 2002.
33
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/ BRUCE M. GOLDBERG
--------------------------------------------------------
Bruce M. Goldberg, President and Chief Executive Officer
Dated: March 26, 2003
By: /s/ HOWARD L. FLANDERS
--------------------------------------------------------
Howard L. Flanders, Executive Vice President and
Chief Financial Officer
Dated: March 26, 2003
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 26, 2003.
/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/ HOWARD M. PINSLEY Director
- ---------------------------------
Howard M. Pinsley
/s/ RICHARD E. SIEGEL Director
- ---------------------------------
Richard E. Siegel
34
CERTIFICATIONS
I, Bruce M. Goldberg, President and Chief Executive Officer of All American
Semiconductor, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of All American
Semiconductor, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003 /s/ BRUCE M. GOLDBERG
---------------------------
Bruce M. Goldberg
President and Chief Executive Officer
I, Howard L. Flanders, Executive Vice President and Chief Financial Officer of
All American Semiconductor, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of All American
Semiconductor, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
35
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 26, 2003 /s/ HOWARD L. FLANDERS
-------------------------------
Howard L. Flanders
Executive Vice President and
Chief Financial Officer
36
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 quarterly 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, 2002 and 2001 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule listed in Part IV, Item
15(a) of this Form 10-K. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. 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, 2002 and 2001 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ LAZAR LEVINE & FELIX LLP
- ---------------------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
February 21, 2003
F-1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS December 31 2002 2001
- -----------------------------------------------------------------------------------------------
Current assets:
Cash ....................................................... $ 644,000 $ 636,000
Accounts receivable, less allowances for doubtful
accounts of $1,718,000 and $1,845,000 .................... 41,234,000 41,217,000
Inventories ................................................ 52,762,000 81,032,000
Other current assets, including income taxes receivable .... 4,641,000 14,904,000
Net assets of discontinued operations ...................... - 36,000
------------- -------------
Total current assets ..................................... 99,281,000 137,825,000
Property, plant and equipment - net .......................... 2,796,000 3,476,000
Deposits and other assets .................................... 2,501,000 2,821,000
------------- -------------
$ 104,578,000 $ 144,122,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt .......................... $ 78,000 $ 234,000
Accounts payable and accrued expenses ...................... 44,336,000 50,848,000
Other current liabilities .................................. 197,000 174,000
------------- -------------
Total current liabilities ................................ 44,611,000 51,256,000
Long-term debt:
Notes payable .............................................. 34,013,000 68,662,000
Subordinated debt .......................................... 5,958,000 5,999,000
Other long-term debt ....................................... 1,171,000 1,180,000
------------- -------------
85,753,000 127,097,000
------------- -------------
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, 3,820,954 and 4,040,150 shares issued
and outstanding .......................................... 38,000 40,000
Capital in excess of par value ............................. 25,312,000 26,328,000
Accumulated deficit ........................................ (6,525,000) (8,408,000)
Treasury stock, at cost, none and 183,246 shares ........... - (935,000)
------------- -------------
18,825,000 17,025,000
------------- -------------
$ 104,578,000 $ 144,122,000
============= =============
See notes to consolidated financial statements
F-2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2002 2001 2000
- -----------------------------------------------------------------------------------------------
NET SALES ................................... $ 332,047,000 $ 381,111,000 $ 516,155,000
Cost of sales ............................... (271,304,000) (318,363,000) (409,934,000)
------------- ------------- -------------
Gross profit ................................ 60,743,000 62,748,000 106,221,000
Selling, general and
administrative expenses ................... (56,655,000) (74,213,000) (78,368,000)
Impairment of goodwill ...................... - (895,000) -
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ................................ 4,088,000 (12,360,000) 27,853,000
Interest expense ............................ (3,138,000) (8,657,000) (8,642,000)
Other income - net .......................... 2,220,000 - -
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ............ 3,170,000 (21,017,000) 19,211,000
Income tax (provision) benefit .............. (1,287,000) 7,424,000 (8,096,000)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE
DISCONTINUED OPERATIONS ................... 1,883,000 (13,593,000) 11,115,000
Discontinued operations:
Income from operations (net of $(208,000)
and $(61,000) income tax provision) ....... - 362,000 84,000
Loss on disposal (net of $5,367,000
income tax benefit) ....................... - (9,344,000) -
------------- ------------- -------------
NET INCOME (LOSS) ........................... $ 1,883,000 $ (22,575,000) $ 11,199,000
============= ============= =============
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations..... $ .49 $(3.52) $2.90
Discontinued operations...................... - (2.33) .02
----- ------ -----
Net income (loss)............................ $ .49 $(5.85) $2.92
===== ====== =====
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations..... $ .49 $(3.52) $2.68
Discontinued operations...................... - (2.33) .02
----- ------ -----
Net income (loss)............................ $ .49 $(5.85) $2.70
===== ====== =====
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, 1999 ....... 3,973,431 $ 40,000 $ 25,751,000 $ 2,968,000 $ (907,000) $ 27,852,000
Exercise of stock options ........ 66,189 - 394,000 - - 394,000
Income tax benefit from
stock options exercised .......... - - 181,000 - - 181,000
Purchase of treasury shares ...... - - - - (28,000) (28,000)
Net income ....................... - - - 11,199,000 - 11,199,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 ....... 4,039,620 40,000 26,326,000 14,167,000 (935,000) 39,598,000
Exercise of stock options ........ 530 - 2,000 - - 2,000
Net loss ......................... - - - (22,575,000) - (22,575,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 ....... 4,040,150 40,000 26,328,000 (8,408,000) (935,000) 17,025,000
Purchase of treasury shares ...... - - - - (83,000) (83,000)
Retirement of treasury shares .... (219,196) (2,000) (1,016,000) - 1,018,000 -
Net income ....................... - - - 1,883,000 - 1,883,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 ....... 3,820,954 $ 38,000 $ 25,312,000 $ (6,525,000) $ - $ 18,825,000
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements
F-4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 1,883,000 $(22,575,000) $ 11,199,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................. 932,000 1,129,000 1,354,000
Loss on disposal of assets ................................ 5,000 40,000 78,000
Non-cash interest expense ................................. 19,000 657,000 381,000
Inventory write-offs ...................................... - 13,375,000 -
Accounts receivable write-offs ............................ - 5,220,000 -
Impairment of goodwill .................................... - 895,000 -
Changes in assets and liabilities of
continuing operations:
Decrease (increase) in accounts receivable ................ (17,000) 40,279,000 (33,915,000)
Decrease (increase) in inventories ........................ 28,270,000 50,116,000 (60,796,000)
Decrease (increase) in other current assets ............... 10,263,000 (11,165,000) 892,000
Increase (decrease) in accounts payable and
accrued expenses ........................................ (6,512,000) (30,386,000) 29,690,000
Increase (decrease) in other current liabilities .......... 23,000 (1,089,000) 1,069,000
Decrease (increase) in net assets
of discontinued operations .............................. 36,000 7,032,000 (5,078,000)
------------ ------------ ------------
Net cash provided by (used for) operating activities .. 34,902,000 53,528,000 (55,126,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ....................... (256,000) (367,000) (1,058,000)
Decrease (increase) in other assets ......................... 320,000 (795,000) (442,000)
------------ ------------ ------------
Net cash provided by (used for) investing activities .. 64,000 (1,162,000) (1,500,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of
credit agreement .......................................... (34,649,000) (51,827,000) 56,515,000
Repayments of notes payable ................................. (226,000) (240,000) (274,000)
Purchase of treasury shares ................................. (83,000) - (28,000)
Net proceeds from issuance of equity securities ............. - 2,000 575,000
------------ ------------ ------------
Net cash provided by (used for) financing activities .. (34,958,000) (52,065,000) 56,788,000
------------ ------------ ------------
Increase in cash ............................................ 8,000 301,000 162,000
Cash, beginning of year ..................................... 636,000 335,000 173,000
------------ ------------ ------------
Cash, end of year ........................................... $ 644,000 $ 636,000 $ 335,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................... $ 3,274,000 $ 8,542,000 $ 7,810,000
============ ============ ============
Income taxes paid (refunded) - net .......................... $ (9,482,000) $ 456,000 $ 7,369,000
============ ============ ============
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 distributor of electronic components manufactured by others.
The Company distributes a full range of semiconductors (active components),
including transistors, diodes, memory devices, microprocessors, microcontrollers
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 in a diverse and growing
range of industries, including manufacturers of computers and computer-related
products; home office and portable equipment; networking; satellite, wireless
and other communications products; Internet infrastructure equipment and
appliances; automobiles; consumer goods; voting and gaming machines;
point-of-sale equipment; robotics and industrial equipment; defense and
aerospace equipment; and medical instrumentation. The Company also sells
products to contract electronics manufacturers or electronics manufacturing
services providers who manufacture products for companies in all electronics
industry segments. The Company also designs and has manufactured certain memory
modules which are sold to original equipment manufacturers.
The Company's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States of America. 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 Canadian
and Mexican subsidiaries which conduct substantially all of their business in
U.S. dollars. In addition, in early 2003 the Company established a U.K.
subsidiary which will conduct its business in U.K. pounds sterling.
Prior years' financial statements have been reclassified to conform with the
current year's presentation.
Concentration of Credit Risk/Fair Values
- ----------------------------------------
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, 2002 and 2001 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.
Inventories
- -----------
Inventories are stated at the lower of cost (determined on an average cost
basis) or market.
F-6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
Revenue Recognition
- -------------------
The Company recognizes revenues at the point of passage of title, which is
generally at the time of shipment.
Shipping and Handling Costs
- ---------------------------
Shipping and handling costs associated with inbound freight are included in cost
of sales. Shipping and handling costs associated with outbound freight are
included in selling, general and administrative expenses.
Advertising
- -----------
The Company advertises in various national industry publications and trade
journals. Advertising expense is included in selling, general and administrative
expenses.
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. 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. 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 10 to Notes to Consolidated Financial
Statements.
Stock-Based Compensation
- ------------------------
The Company has two stock option plans, which are described in Note 11 to Notes
to Consolidated Financial Statements. The Company applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations to account for the option plans using the intrinsic value
method. Accordingly, no compensation cost has been recognized for the option
plans. Had compensation cost for the option plans been determined using the fair
value based method, as defined in Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's
net earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below. The Company adopted Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB
F-7
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Statement No. 123" as of January 1, 2003, which amended SFAS 123. The effect of
the adoption of this statement was not material as the Company continues to use
the intrinsic value method allowed under SFAS 123.
Years Ended December 31 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Net earnings (loss):
As reported $1,883,000 $(22,575,000) $11,199,000
Pro forma 1,789,000 (22,606,000) 10,853,000
Basic earnings (loss) per share:
As reported $.49 $(5.85) $2.92
Pro forma .46 (5.86) 2.83
Diluted earnings (loss) per share:
As reported $.49 $(5.85) $2.70
Pro forma .46 (5.86) 2.62
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 2002, 2001 and 2000, respectively: expected volatility of 108%,
105% and 47%; risk-free interest rate of 4.0%, 4.4% and 6.3%; and expected lives
of 2 to 8 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as future amounts are likely to be affected by the
number of grants awarded and since additional awards are generally expected to
be made at varying prices.
Earnings Per Share
- ------------------
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.
The following average shares were used for the computation of basic and diluted
earnings per share:
Years Ended December 31 2002 2001 2000
- --------------------------------------------------------------------------------
Basic............................. 3,849,553 3,856,813 3,828,978
Diluted........................... 3,850,002 3,856,813 4,140,579
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.
Excess of Cost Over Fair Value of Net Assets Acquired (Goodwill)
- ----------------------------------------------------------------
The Company periodically reviewed the value of its goodwill to determine if an
impairment had occurred. As part of this review, the Company measured the
estimated future operating cash flows of acquired businesses and compared that
with the carrying value of its goodwill. As a result of its review, the
Company's goodwill was fully written-off as of December 31, 2001. See Note 5 to
Notes to Consolidated Financial Statements. Prior to the write-off, goodwill was
amortized over periods ranging from 15 years to 40 years using the straight-line
method.
F-8
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
New Accounting Pronouncements
- -----------------------------
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), effective for fiscal years beginning
after December 31, 2002. SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Under the new rule a liability for
an exit cost can no longer be recognized at the date of an entity's commitment
to an exit plan as defined in Issue 94-3. SFAS 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS 146 also establishes that fair value is the
objective for initial measurement of the liability. The Company adopted SFAS 146
as of January 1, 2003. The effect of the adoption of this statement was not
material.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS
148"), effective for fiscal years beginning after December 15, 2002. SFAS 148
amends Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted SFAS 148 as of January 1, 2003. The effect of the
adoption of this statement was not material as the Company continues to use the
intrinsic value method allowed under SFAS 123.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
December 31 2002 2001
- -------------------------------------------------------------------------------
Office furniture and equipment.................... $ 2,454,000 $ 3,497,000
Computer equipment................................ 3,434,000 4,334,000
Leasehold improvements............................ 1,790,000 2,344,000
----------- -----------
7,678,000 10,175,000
Accumulated depreciation and amortization......... (4,882,000) (6,699,000)
----------- -----------
$ 2,796,000 $ 3,476,000
=========== ===========
NOTE 3 - STOCK REPURCHASE PROGRAM
- ---------------------------------
In August 2002, the Company's Board of Directors authorized the continuance of
the stock repurchase program, originally approved by the Board and announced in
1999, which provided for the repurchase of up to $2.0 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 its common
stock and other factors. The Company currently intends to make stock repurchases
using available cash flow from operations and/or available borrowings under its
line of credit. 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. For the year ended December 31, 2002, the Company
repurchased 35,950 shares of its common stock at an average price of $2.34 per
share, or an aggregate price of approximately $84,000, which, together with
previous purchases since 1999, represents 183,136 shares at an aggregate price
of approximately $567,000 purchased under the program. There were no repurchases
for the year ended December 31, 2001. The aggregate cost of the repurchased
shares was reflected as treasury stock prior to December 31, 2002 and, as of
December 31, 2002, all treasury stock was retired. See Note 11 to Notes to
Consolidated Financial Statements.
F-9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4 - STOCK PURCHASE RIGHTS
- ------------------------------
In June 2000, the Board of Directors of the Company adopted a Common Stock
Purchase Rights Plan (the "Rights Plan") and authorized and approved a dividend
distribution of one right (each a "Right" and collectively the "Rights") for
each outstanding share of common stock of the Company to shareholders of record
at the close of business on June 23, 2000. Each share of common stock of the
Company that is issued after June 23, 2000 will also include one Right.
Each Right initially entitles the registered holder to purchase from the
Company, but only when exercisable under the Rights Plan, one share of common
stock at a price of $95.00 per share, subject to certain future adjustments. The
Rights will be exercisable only if a person or group acquires 15% or more of the
Company's common stock (or 10% of such stock under certain circumstances) or
announces a tender offer the consummation of which would result in ownership by
a person or group of 15% or more of the common stock (or 10% or such stock under
certain circumstances). Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company the number of shares of the Company's common stock having a market value
equal to twice the exercise price of the Right.
If the Company is acquired in a merger or other business combination
transaction, or sells more than 50% of its assets or earning power, after a
person or group has acquired 15% or more of the Company's outstanding common
stock (or 10% of such stock under certain circumstances), each Right (other than
Rights owned by such person or group) will entitle its holder to purchase, at
the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price.
Following the acquisition by a person or group of 15% or more of the Company's
common stock (or 10% of such stock under certain circumstances) and prior to an
acquisition of 50% or more of the common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group) at an
exchange ratio of one share of common stock per Right.
Prior to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's common stock (or 10% of such stock under certain
circumstances), the Rights are redeemable for $.001 per Right at the option of
the Board of Directors. The Rights will expire on June 8, 2010.
NOTE 5 - IMPAIRMENT OF GOODWILL
- -------------------------------
As of January 1, 2002, the Company adopted Financial Accounting Standards Board
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") which no
longer allows for the amortization of goodwill but requires that goodwill be
subject to annual impairment tests in accordance with the Statement. Prior to
the adoption of SFAS 142 the Company applied Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), and portions of
Accounting Principles Board Opinion 30, "Reporting the Results of Operations".
Under those rules the Company periodically reviewed the value of its goodwill to
determine if an impairment had occurred. As part of this review, the Company
measured the estimated future operating cash flows of acquired businesses and
compared that with the carrying value of its goodwill. As a result of its
review, the Company determined that impairments had occurred, and, accordingly,
write-downs aggregating $895,000 were recorded during 2001. As a result of these
write-downs, goodwill was fully written-off as of December 31, 2001.
NOTE 6 - DISCONTINUED OPERATIONS
- --------------------------------
As a result of an acquisition in 1995, the Company created Aved Display
Technologies ("ADT"), a separate division engaged in the design, development and
manufacture of several proprietary driver board products for flat panel display
applications. In the fourth quarter of 2000, the Company created a division
F-10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
which operated under the name Integrated Display Technologies ("IDT"). This
division was intended to address customer needs for design, integration and
turnkey support for display solutions and specialized display applications. Due
to the overall weakness in the economy, the negative impact of the severe
broad-based industry downturn and other factors, ADT and IDT did not generate
cash flows as anticipated. As a result, management decided to discontinue these
divisions. The Company finalized its plan of disposal during the second quarter
of 2001. Accordingly, these divisions were accounted for as discontinued
operations and the results of operations for 2001 and 2000 are segregated in the
accompanying Consolidated Statements of Operations. The loss on disposal of
$14,711,000 on a pretax basis included the estimated costs and expenses
associated with the disposal of $14,599,000 primarily made up of the write-off
of $4,488,000 of inventory and $7,442,000 of accounts receivable. The inventory
that was written off has been scrapped and removed from stock. In addition, the
loss on disposal included a provision of $112,000 on a pretax basis for
operating losses during the phase-out period, which continued for approximately
two months.
Sales from these divisions, including the related turnkey support business, were
$6,998,000 and $6,028,000 for 2001 and 2000, respectively. The net assets of
discontinued operations, after reflecting certain non-cash write-offs included
in the accompanying Consolidated Balance Sheet at December 31, 2001, are
summarized as follows:
December 31 2001
- -------------------------------------------------------------------------------
Other current assets.......................................... $ 26,000
Property, plant and equipment - net........................... 18,000
Current liabilities........................................... (8,000)
-----------
Net assets.................................................... $ 36,000
===========
NOTE 7 - SPECIAL CHARGES
- ------------------------
As a result of a slowing economy and a severe widespread industry downturn, the
Company was forced to write off certain accounts receivable during 2001
aggregating $5,220,000 which is reflected in Selling, general and
administrative expenses in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2001.
During 2000, the Company's inventory levels increased substantially to support
higher levels of sales based on customer orders and forecasts. Inventory also
increased during 2000 as a result of the addition of major new suppliers and the
anticipated sales growth related thereto. During the fourth quarter of 2000, a
combination of excess product availability, a slowing economy and other factors
caused the industry to begin slowing down. As a result of this change, the
customer base had a significant amount of excess inventory. In an effort to
correct their inventory positions, customers began rescheduling and canceling
their orders and returned significant amounts of inventory. This accelerated
during the first half of 2001. Accordingly, the Company attempted to delay or
cancel purchase orders with its supplier base and to utilize its inventory
return privileges wherever possible. These efforts were made in an attempt to
achieve inventory levels which more closely supported the Company's reduced
backlog from its customers as well as to improve the Company's product mix. Even
after taking these measures, as adverse industry conditions accelerated and got
progressively worse, the prospect of customers taking inventory that was
returned to the Company or subject to rescheduled orders became more and more
remote. As a result of this and the severe industry downturn, the Company wrote
off unusable inventory during 2001 aggregating $13,375,000. The inventory that
was written off was subsequently scrapped and removed from stock. There can be
no assurance that adverse market conditions will not continue or worsen and that
further corrections may not be necessary in the future.
F-11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 8 - OTHER INCOME
- ---------------------
In September 2002, the Company entered into an agreement with a customer (the
"Agreement") to whom the Company had previously supplied display integration and
turnkey support. The Agreement provided, among other things, that the Company
release the then-existing indebtedness of the customer, which indebtedness had
been previously written off by the Company primarily in the nine-month period
ended September 30, 2001, and certain related security interests. In
consideration of these releases, the Company received $2,031,000 in cash and
11,000,000 shares, $.01 par value per share, of common stock of this customer.
These shares are not registered under the Securities Act of 1933 and are not
publicly traded. The shares are subject to a voting arrangement outside the
control of the Company. As a result of the voting arrangement, the Company has
given up substantially all of its voting rights. The Company has reflected the
value of these shares in Deposits and Other Assets in the accompanying
Consolidated Balance Sheet at December 31, 2002, based on an independent
appraisal of these shares at $19,000 as of the date these shares were received
by the Company. The combined value of the cash and stock, together with lease
payments that the Company previously collected from leases that were pledged to
the Company as collateral for the then existing indebtedness, aggregated
$2,220,000, after deducting related legal expenses associated with the
transaction. This amount is reflected as Other Income in the accompanying
Consolidated Statements of Operations.
NOTE 9 - LONG-TERM DEBT
- -----------------------
Line of Credit
- --------------
During the fourth quarter of 2002, the credit facility was amended to reduce the
line of credit from $85 million to $60 million to better match the Company's
present borrowing requirements. The credit facility was previously amended in
2002 to reduce the line of credit from $100 million to $85 million and in 2001
to reduce the line of credit from $150 million to $100 million. The reductions
in the credit facility benefit the Company by decreasing the amount of the fee
charged on the unused portion of the credit facility. In addition, during 2001
the interest rate margins on the Company's credit facility were increased. In
connection with the changes to the credit facility, $448,000 of deferred
financing fees were written off to interest expense during 2001. During 2002 the
interest rate margins were, at the Company's option, 1.0% for the prime rate
portion, or 3.25% through March 30, 2002 and 4.25% effective March 31, 2002 for
the LIBOR portion. Accordingly, at December 31, 2002, the interest rate margins
were 1.0% for the prime rate portion and 4.25% for the LIBOR portion. Borrowings
under the credit facility, which are based on eligible accounts receivable and
inventories as defined in the agreement, are secured by all of the Company's
assets including accounts receivable, inventories and equipment. Outstanding
borrowings under the Company's credit facility aggregated $34,013,000 at
December 31, 2002 compared to $68,662,000 at December 31, 2001. Under the credit
facility, the Company is required to comply with certain affirmative and
negative covenants, certain of which were modified in 2002 in connection with
the foregoing amendments, 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 unless consented to by the lenders, which
consent has been obtained in connection with the Company's stock repurchase
program. 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.
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. 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
F-12
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 Company's 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 2002, 2001 and 2000. All of these warrants expired
during 1999.
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, which is subordinate to the Company's credit facility, has a repayment
schedule with varying monthly payments of principal after the second year and
bears interest at 8% per annum. 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 also subordinate to
the Company's 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 also subordinate
to the credit facility, is payable monthly with interest at 8.5% per annum and
matures in October 2011.
Other Long-Term Debt
- --------------------
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, 2002 and 2001.
Long-term debt of the Company as of December 31, 2002, other than the Company's
credit facility, matures as follows:
2003.......................................................... $ 78,000
2004.......................................................... 5,180,000
2005.......................................................... 64,000
2006.......................................................... 70,000
2007.......................................................... 75,000
Thereafter.................................................... 1,740,000
-----------
$ 7,207,000
===========
NOTE 10 - INCOME TAXES
- ----------------------
The tax effects of the temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 2002 and 2001 are as follows:
Deferred tax assets: 2002 2001
----------- -----------
Accounts receivable.......................... $ 654,000 $ 708,000
Inventory.................................... 477,000 2,924,000
Accrued expenses............................. 776,000 825,000
Postretirement benefits...................... 580,000 572,000
Discontinued operations...................... - 526,000
Net operating loss........................... 232,000 355,000
Other........................................ 327,000 361,000
----------- -----------
3,046,000 6,271,000
Deferred tax liabilities:
Fixed assets................................. 219,000 280,000
----------- -----------
Net deferred tax asset......................... $ 2,827,000 $ 5,991,000
=========== ===========
At December 31, 2002, $2,234,000 of the net deferred tax asset was included in
Other current assets and $593,000 was included in Deposits and other assets
in the accompanying Consolidated Balance Sheet.
F-13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The components of income tax expense (benefit) are as follows:
Years Ended December 31 2002 2001 2000
- ------------------------------------------------------------------------------
Current
- -------
Federal..................... $(1,463,000) $ (9,238,000) $ 7,425,000
State....................... (414,000) (909,000) 1,869,000
----------- ------------ -----------
(1,877,000) (10,147,000) 9,294,000
----------- ------------ -----------
Deferred
- --------
Federal..................... 2,769,000 (1,913,000) (697,000)
State....................... 395,000 (523,000) (440,000)
----------- ------------ -----------
3,164,000 (2,436,000) (1,137,000)
----------- ------------ -----------
$ 1,287,000 $ (12,583,000) $ 8,157,000
=========== ============ ===========
A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective tax rate is as
follows:
Years Ended December 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------
U.S. Federal income tax statutory rate................... 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit...... 3.3 3.3 5.9
Goodwill amortization and other - including
non-deductible items................................... 2.3 (2.5) 1.2
------ ------ ------
Effective tax rate....................................... 40.6% 35.8% 42.1%
====== ====== ======
The tax benefit associated with the disqualifying disposition of stock acquired
with incentive stock options under the Option Plan reduced taxes payable by
$181,000 as of December 31, 2000 and is reflected as a credit to capital in
excess of par value in the accompanying Consolidated Balance Sheet.
NOTE 11 - CAPITAL STOCK, OPTIONS AND WARRANTS
- ---------------------------------------------
In June 2000, the Company established the 2000 Nonemployee Director Stock Option
Plan, (the "Director Option Plan"). The Director Option Plan provides for awards
of options to purchase shares of common stock, $.01 par value per share, of the
Company to nonemployee directors of the Company. An aggregate of 75,000 shares
of the Company's common stock has been reserved for issuance under the Director
Option Plan. Under the Director Option Plan, on or about the day of each
nonemployee director's initial election to the Company's Board of Directors, he
or she is awarded nonqualified stock options to purchase at least 1,500 shares
of the Company's common stock but not more than 15,000 shares, and on the date
of each annual meeting of the shareholders of the Company each nonemployee
director is automatically awarded additional nonqualified stock options to
purchase 1,000 shares. Pursuant to the Director Option Plan, the Company granted
an aggregate of 4,500 stock options to four individuals during 2002, an
aggregate of 4,500 stock options to four individuals during 2001 and an
aggregate of 4,500 stock options to three individuals during 2000. The
outstanding stock options that were granted in 2002 have exercise prices ranging
from $1.96 to $1.98. The outstanding stock options that were granted in 2001
have an exercise price of $5.35. The outstanding stock options that were granted
in 2000 have an exercise price of $10.53 per share. All exercise prices are
based on fair market value at date of grant and the options all vest over a
two-year period and are exercisable over a ten-year period. At December 31,
2002, 12,000 stock options were outstanding.
In 1987, the Company established the Option Plan. The Option Plan provides for
the granting to key employees of both "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and "nonqualified stock options" ("nonqualified stock options" are
options which do not comply with Section 422 of the Code) and for the granting
to nonemployee directors and independent contractors associated with the Company
of nonqualified stock options. Unless earlier terminated, the Option Plan will
continue in effect through April 18, 2009. The expiration of the Option Plan, or
its termination by the Board of Directors, will not affect any options
previously granted and then
F-14
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
outstanding under the Option Plan. Such outstanding options would remain in
effect until they have been exercised, terminated or have expired. A maximum of
1,100,000 shares of the Company's Common Stock has been reserved for issuance
upon the exercise of options granted under the Option Plan, of which 105,646
shares of common stock have been previously issued pursuant to the exercise of
options granted under the Option Plan and 994,354 shares of common stock are
available for issuance as of December 31, 2002 in connection with the exercise
of options outstanding and options to be granted.
In connection with the cancellation in June 2001 of 88,900 stock options
previously granted pursuant to the Option Plan, the Company agreed with each of
the Company's employees electing such cancellation ("electing employees") to
issue no earlier than six months but no later than nine months from the date of
cancellation an equal number of options at the then fair market value of the
Company's common stock. The canceled options had exercise prices ranging from
$13.02 to $16.71 per share. Accordingly, in March 2002, the Company granted
81,000 options at an exercise price of $3.45 per share to the electing employees
who were still employed by the Company. These 81,000 options vest over two years
and are exercisable through March 3, 2005.
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, which became fully vested during 2000, have an
exercise price of $9.375 per share and are exercisable through June 7, 2005. The
number of stock options and exercise price per share reflect a one-for-five
reverse stock split which became effective on June 2, 1999. At December 31, 2002
these options remained unexercised.
A summary of options granted under the option plans and related information for
the years ended December 31, 2000, 2001 and 2002 follows:
Weighted Average
Options Exercise Price
------------ ----------------
Outstanding, December 31, 1999 714,848 $ 6.29
Granted 137,000 13.00
Exercised (66,189) 5.96
Canceled (35,625) 5.77
------------
Outstanding, December 31, 2000 750,034 7.57
Weighted average fair value of options granted during 2000 4.36
Granted 12,250 5.75
Exercised (530) 4.19
Canceled (126,120) 11.47
------------
Outstanding, December 31, 2001 635,634 6.75
Weighted average fair value of options granted during 2001 3.88
Granted 85,500 3.37
Canceled (96,250) 5.68
------------
Outstanding, December 31, 2002 624,884 6.46
============
Weighted average fair value of options granted during 2002 1.93
Options exercisable:
December 31, 2000 386,939 7.51
December 31, 2001 454,958 7.22
December 31, 2002 453,464 7.22
Exercise prices for options outstanding as of December 31, 2002 ranged from
$1.96 to $14.32. The weighted-average remaining contractual life of these
options is approximately 2 years. Outstanding options at December 31, 2002 were
held by 134 individuals.
As of December 31, 2002, the Company retired 219,196 shares of its common stock
which had previously been reflected as Treasury stock on the Consolidated
Balance Sheets. Included in the retirement were
F-15
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
the 32,141 shares held by a wholly-owned subsidiary of the Company in connection
with certain acquisitions by the Company in 1995.
NOTE 12 - 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
ninth year and provides for annual fixed rental payments totaling approximately
$332,900 in year nine; 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 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). In Denver, Colorado the Company leases a 7,100
square foot facility which is dedicated to certain value-added services and a
regional distribution center.
In Tustin, California the Company leases a 13,900 square foot facility for its
Aved Memory Products division. In December 2000, the Company leased 26,700
square feet of space in Irvine, California which housed the operations of the
Company's newly created Integrated Display Technologies division. As a result of
operations of this division being discontinued during 2001, the Company
subsequently negotiated a buyout of the lease in March 2002 for approximately
$158,000.
During 1998, the Company entered into a lease for approximately 20,000 square
feet of space in San Jose, California to house its expanded west coast corporate
offices and the headquarters of the Company's sales and marketing functions, as
well as its northern California sales operation. 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, which had been sublet, is presently vacant.
The Company leases space for its other sales offices, which range in size from
approximately 1,000 square feet to 10,000 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 and distribution facility leases as well as equipment leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 2002, are as follows:
YEAR ENDING DECEMBER 31
- -----------------------
2003.......................................................... $3,700,000
2004.......................................................... 3,400,000
2005.......................................................... 2,900,000
2006.......................................................... 2,000,000
2007.......................................................... 1,200,000
Thereafter.................................................... 3,000,000
Total rent expense for office and distribution facility leases, including real
estate taxes and net of sublease income, amounted to approximately $3,955,000,
$3,600,000 and $2,703,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
F-16
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 2002, 2001 and 2000, 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, 2002, 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 $198,000. The retirement benefit accrual
under this plan was $455,000 at December 31, 2002.
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 2002, 2001, and 2000 the Company committed to contribute
$115,000, $110,000, and $235,000 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. The
retirement benefit accrual under this plan was $556,000 at December 31, 2002.
During 2000, employment agreements with two of the Company's executive officers
were amended whereby the term, among other things, was extended through December
31, 2005. In addition, during 2000 the Company entered into new agreements that
continue until December 31, 2003 with two other executive officers on similar
terms as were contained in their previous employment agreements with the
Company. At December 31, 2002, in addition to incentive compensation, these
agreements provide for aggregate base salary of approximately $4,180,000 over
the remaining term of the agreements.
In connection with an employment agreement with an executive officer, an
unfunded postretirement benefit obligation of $1,171,000 is included in Other
long-term debt in the accompanying Consolidated Balance Sheets at December 31,
2002 and 2001.
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 are eligible to participate in the 401(k) Plan after
completing 90 days of employment. During 2002, each eligible employee could
elect to contribute to the 401(k) Plan, through payroll deductions, up to 100%
of his or her salary, limited to $11,000 in 2002. The Company's 401(k) Plan
provides for discretionary matching contributions by the Company. During 2001
and in prior years, the Company's 401(k) Plan provided for standard matching
contributions by the Company in the amount of 25% on the first 6% contributed of
each participating employee's salary. The Company expensed $0, $443,000 and
$691,000 for matching contributions for the years ended December 31, 2002, 2001
and 2000, respectively.
The Company entered into a lease for residential space in San Jose, California
with a partnership which includes two of the Company's executive officers. The
lease provides for rental payments of $4,800 per month through January 1, 2006.
In consideration of the impact of the severe industry downturn on the
F-17
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Company, the partnership reduced the monthly rent to $3,400 in 2001. Towards the
end of 2002 rental payments were increased to $4,270 per month, still below the
rental amount provided for under the lease. The Company paid a total of $43,400
to this partnership during 2002.
NOTE 13 - 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 to the extent provided
for under its agreement with the manufacturer, as well as defend such actions on
the Company's behalf, although there can be no assurance that the manufacturers
will do so. Recently, there has been a trend throughout the United States of
increased litigation over various employee and intellectual property matters.
With respect to products manufactured or assembled for Aved Memory Products, the
Company offers a warranty for a period of one year against defects in
workmanship and materials under normal use and service. The warranty applies to
products in their original unmodified condition and is subject to the Company's
terms and conditions.
The Company has guaranteed the future payment to a third party of certain leases
which were previously pledged to the Company as collateral for the payment of
outstanding receivables. This guaranty was made when the leases were sold to
this third party who paid to the Company the net present value of the future
payments of the leases. The maximum exposure under this guaranty was
approximately $877,000 with a net present value of $694,000 at December 31,
2002.
NOTE 14 - ECONOMIC DEPENDENCY
- -----------------------------
For each of the years ended December 31, 2002, 2001 and 2000, purchases from one
supplier were in excess of 10% of the Company's total annual purchases and
aggregated approximately $52,830,000, $57,980,000 and $104,420,000,
respectively. The net outstanding accounts payable to this supplier at December
31, 2002, 2001 and 2000 amounted to approximately $632,000, $1,413,000 and
$11,286,000, respectively. For each of the years ended December 31, 2002, 2001
and 2000, no customer accounted for more than 7% of the Company's sales. Sales
to customers in foreign countries totaled $37,249,000, $19,793,000 and
$31,645,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
F-18
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Description Period Expenses Accounts Deductions of Period
- ---------------------- ------------ ----------- ------------ ------------ --------------
Allowance for Doubtful
Accounts
2002 $ 1,845,000 $ 756,000 $ - $ (883,000) $ 1,718,000
2001 $ 3,283,000 $ 1,335,000 $ - $ (2,773,000) $ 1,845,000
2000 $ 1,987,000 $ 1,899,000 $ - $ (603,000) $ 3,283,000
S-1