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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
--or--
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2003
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 Northwest 52nd Avenue, Miami, Florida 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
As of November 7, 2003, 3,760,001 shares of the common stock of All American
Semiconductor, Inc. were outstanding.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
FORM 10-Q - INDEX
Part Item Page
No. No. Description No.
- ------------------------------------------------------------------------------------------------------
I FINANCIAL INFORMATION:
1. Financial Statements
Consolidated Condensed Balance Sheets at September 30, 2003
(Unaudited) and December 31, 2002.............................................. 1
Consolidated Condensed Statements of Income for the Quarters
and Nine Months Ended September 30, 2003 and 2002 (Unaudited).................. 2
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 (Unaudited)...................... 3
Notes to Consolidated Condensed Financial Statements (Unaudited)................ 4
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 7
3. Quantitative and Qualitative Disclosures about Market Risk...................... 12
4. Controls and Procedures......................................................... 12
II OTHER INFORMATION:
2. Changes in Securities and Use of Proceeds....................................... 13
6. Exhibits and Reports on Form 8-K................................................ 13
SIGNATURES...................................................................... 13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30 December 31
ASSETS 2003 2002
- --------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash ................................................................ $ 540,000 $ 644,000
Accounts receivable, less allowances for doubtful
accounts of $2,261,000 and $1,718,000 ............................. 54,252,000 41,234,000
Inventories ......................................................... 50,514,000 52,762,000
Other current assets, including income taxes receivable ............. 4,834,000 4,641,000
------------- -------------
Total current assets .............................................. 110,140,000 99,281,000
Property, plant and equipment - net ................................... 2,700,000 2,796,000
Deposits and other assets ............................................. 3,382,000 2,501,000
------------- -------------
$ 116,222,000 $ 104,578,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt ................................... $ 5,193,000 $ 78,000
Accounts payable and accrued expenses ............................... 43,752,000 44,336,000
Other current liabilities ........................................... 213,000 197,000
------------- -------------
Total current liabilities ......................................... 49,158,000 44,611,000
Long-term debt:
Notes payable ....................................................... 46,158,000 34,013,000
Subordinated debt ................................................... 794,000 5,958,000
Other long-term debt ................................................ 1,177,000 1,171,000
------------- -------------
97,287,000 85,753,000
------------- -------------
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,
3,760,001 and 3,820,954 shares issued and outstanding ............. 38,000 38,000
Capital in excess of par value ...................................... 25,121,000 25,312,000
Accumulated deficit ................................................. (6,224,000) (6,525,000)
------------- -------------
18,935,000 18,825,000
------------- -------------
$ 116,222,000 $ 104,578,000
============= =============
See notes to consolidated condensed financial statements
1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Quarters Nine Months
PERIODS ENDED SEPTEMBER 30 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
NET SALES .......................... $ 82,805,000 $ 85,523,000 $ 224,606,000 $ 255,062,000
Cost of sales ...................... (68,096,000) (70,192,000) (182,050,000) (208,560,000)
------------- ------------- ------------- -------------
Gross profit ....................... 14,709,000 15,331,000 42,556,000 46,502,000
Selling, general and
administrative expenses .......... (13,705,000) (14,234,000) (40,090,000) (43,115,000)
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS ............. 1,004,000 1,097,000 2,466,000 3,387,000
Interest expense ................... (694,000) (720,000) (1,938,000) (2,497,000)
Other income - net ................. - 2,220,000 - 2,220,000
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES ......... 310,000 2,597,000 528,000 3,110,000
Income tax provision ............... (133,000) (1,038,000) (227,000) (1,234,000)
------------- ------------- ------------- -------------
NET INCOME ......................... $ 177,000 $ 1,559,000 $ 301,000 $ 1,876,000
============= ============= ============= =============
EARNINGS PER SHARE:
Basic .............................. $.05 $.40 $.08 $.49
==== ==== ==== ====
Diluted ............................ $.04 $.40 $.08 $.49
==== ==== ==== ====
See notes to consolidated condensed financial statements
2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30 2003 2002
- -----------------------------------------------------------------------------------------------------
Cash Flows Provided By (Used For) Operating Activities ............. $ (10,554,000) $ 34,089,000
------------- -------------
Cash Flows From Investing Activities:
Acquisition of property and equipment .............................. (521,000) (158,000)
Decrease (increase) in other assets ................................ (929,000) 185,000
------------- -------------
Cash flows provided by (used for) investing activities .......... (1,450,000) 27,000
------------- -------------
Cash Flows From Financing Activities:
Net borrowings (repayments) under line of credit agreement ......... 12,145,000 (34,052,000)
Repayments of notes payable ........................................ (54,000) (211,000)
Purchase of treasury shares ........................................ (191,000) (44,000)
------------- -------------
Cash flows provided by (used for) financing activities .......... 11,900,000 (34,307,000)
------------- -------------
Decrease in cash ................................................... (104,000) (191,000)
Cash, beginning of period .......................................... 644,000 636,000
------------- -------------
Cash, end of period ................................................ $ 540,000 $ 445,000
============= =============
Supplemental Cash Flow Information:
Interest paid ...................................................... $ 1,675,000 $ 2,497,000
============= =============
Income taxes paid (refunded) - net ................................. $ 153,000 $ (9,272,000)
============= =============
See notes to consolidated condensed financial statements
3
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
In the opinion of management, the accompanying unaudited Consolidated Condensed
Financial Statements include all adjustments (consisting of normal recurring
accruals or adjustments only) necessary to present fairly the financial position
at September 30, 2003, and the results of operations and the cash flows for all
periods presented. The results of operations for the interim periods are not
necessarily indicative of the results to be obtained in any future interim
period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 2002) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, including the
consolidated financial statements and notes thereto which should be read in
conjunction with these financial statements.
The accompanying unaudited interim financial statements have been prepared in
accordance with instructions to Form 10-Q and, therefore, do not include all
information and footnotes required to be in conformity with accounting
principles generally accepted in the United States of America.
Stock-Based Compensation
- ------------------------
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
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.
Quarters Nine Months
Periods Ended September 30 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------
Net earnings:
As reported $177,000 $1,559,000 $301,000 $1,876,000
Pro forma 177,000 1,559,000 260,000 1,853,000
Basic earnings per share:
As reported $.05 $.40 $.08 $.49
Pro forma .05 .40 .07 .48
Diluted earnings per share:
As reported $.04 $.40 $.08 $.49
Pro forma .04 .40 .07 .48
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: expected volatility of 109% for the quarter and nine months ended
September 30, 2003, compared to 108% for the same periods of 2002;
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
risk-free interest rate of 4.1% for the quarter and nine months ended September
30, 2003, compared to 4.0% for the same periods of 2002; and expected lives of 2
to 5 years for all periods presented.
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
- ------------------
The following average shares were used for the computation of basic and diluted
earnings per share:
Quarters Nine Months
Periods Ended September 30 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Basic............................... 3,785,175 3,851,185 3,804,462 3,854,998
Diluted............................. 3,939,446 3,851,345 3,860,611 3,855,125
2. LONG-TERM DEBT
On May 14, 2003, the Company entered into a $65 million credit facility (the
"Credit Facility") which expires May 14, 2006. Borrowings under the Credit
Facility bear interest at one of three pricing levels dependent on the Company's
debt service coverage ratio at the quarterly pricing date (as defined), and are
secured by all of the Company's assets including accounts receivable,
inventories and equipment. At the first pricing level, at the Company's option,
the rate will be either (a) .5% over the greater of the Federal funds rate plus
..5% and prime or (b) 2.75% over LIBOR. At the second level, at the Company's
option, the rate will be either (a) 1% over the greater of the Federal funds
rate plus .5% and prime or (b) 3.25% over LIBOR. At the third level, at the
Company's option, the rate will be either (a) 1.5% over the greater of the
Federal funds rate plus .5% and prime or (b) 3.75% over LIBOR. In accordance
with the Credit Facility, pricing was at the third level until the Company's
June 30, 2003 financial statements were received by the Administrative Agent
(the first pricing date). Based upon the debt service coverage ratio as
calculated using the Company's June 30, 2003 financial statements, the Company
improved from the third pricing level to the first pricing level effective in
the middle of August 2003. In connection with the Credit Facility, the Company
recorded deferred financing fees aggregating $999,000. These fees are being
amortized over the term of the Credit Facility in interest expense. As with our
previous facility, the amounts that the Company may borrow under the Credit
Facility are based upon specified percentages of the Company's eligible accounts
receivable and inventories (as defined) and the Company is required to comply
with certain affirmative and negative covenants and certain financial ratios.
The covenants, among other things, place limitations and restrictions on the
Company's borrowings, investments, capital expenditures and transactions with
affiliates, prohibit dividends and acquisitions and prohibit stock redemptions
in excess of an aggregate cost of $2.0 million during the term of the Credit
Facility. The Credit Facility requires the Company to maintain certain minimum
levels of tangible net worth throughout the term of the agreement as well as a
minimum debt service coverage ratio and a minimum inventory turnover level, each
tested on a quarterly basis.
In connection with the Credit Facility, the Company repaid in May 2003 all
outstanding borrowings under the Company's previous $60 million facility.
At September 30, 2003, outstanding borrowings under the Company's Credit
Facility aggregated $46,158,000.
Included in long-term debt on the December 31, 2002 Consolidated Condensed
Balance Sheet is $5,150,000 of subordinated debentures. This debt matures on
June 13, 2004 and accordingly is reflected in the current portion of long-term
debt on the September 30, 2003 unaudited Consolidated Condensed
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
Balance Sheet. The Company expects that its cash flows from operations and
additional borrowings available under its Credit Facility will be sufficient to
repay this obligation.
3. OPTIONS
Option Plan
- -----------
During the quarter ended September 30, 2003, no stock options were granted by
the Company pursuant to the Employees', Officers', Directors' Stock Option Plan,
as previously amended and restated (the "Option Plan"). During the quarter ended
September 30, 2003, a total of 99,654 stock options previously granted pursuant
to the Option Plan expired or were canceled at exercise prices ranging from
$1.92 to $6.75 per share.
During the quarter ended June 30, 2003, the Company granted an aggregate of
325,010 stock options to 135 individuals pursuant to the Option Plan. These
options have exercise prices ranging from $1.92 to $2.11 per share (fair market
value at date of grant), vest over a three-year period and are exercisable over
a four-year period. During the quarter ended June 30, 2003, a total of 11,810
stock options previously granted pursuant to the Option Plan expired or were
canceled at exercise prices ranging from $1.92 to $9.55 per share.
During the quarter ended March 31, 2003, no stock options were granted by the
Company pursuant to the Option Plan. During the quarter ended March 31, 2003, a
total of 29,710 stock options previously granted pursuant to the Option Plan
expired or were canceled at exercise prices ranging from $3.27 to $5.34 per
share.
Director Option Plan
- --------------------
During the quarter ended September 30, 2003, the Company granted 3,000 stock
options to three individuals pursuant to the 2000 Nonemployee Director Stock
Option Plan, as amended (the "Director Option Plan"). These options have an
exercise price of $3.41 per share (fair market value at date of grant), vest
over a two-year period and are exercisable over a ten-year period.
During the quarter and six months ended June 30, 2003, the Company granted 1,500
stock options to one individual pursuant to the Director Option Plan. These
options have an exercise price of $2.19 per share (fair market value at date of
grant), vest over a two-year period and are exercisable over a ten-year period.
4. STOCK REPURCHASE PROGRAM
In connection with the Company's stock repurchase program, which provides for
the repurchase of up to $2.0 million in purchase price of the Company's common
stock, the Company repurchased 34,893 shares of its common stock at an average
price of $3.80 per share, or an aggregate price of $133,000, during the quarter
ended September 30, 2003. Including previous purchases, the Company has
repurchased 244,089 shares at an aggregate price of $759,000 under this program.
Shares purchased under this program are immediately retired.
6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
All American Semiconductor, Inc. and its subsidiaries (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. 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.
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 unaudited Consolidated Condensed 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 unaudited Consolidated Condensed 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.
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
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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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
- ---------------------
Net sales for the quarter and nine months ended September 30, 2003 were $82.8
million and $224.6 million, respectively, representing a 3.2% and 11.9% decrease
from net sales of $85.5 million and $255.1 million for the same periods of 2002.
The decrease in sales for the third quarter of 2003 compared to the same period
of last year was attributable to the continuation of the industry downturn and
the negative impact from weak demand in electronic components both of which
began during the fourth quarter of 2000. These negative industry conditions
continued through the beginning of the third quarter of 2003, however,
conditions began improving in the latter part of this quarter. Another factor
that contributed to the decrease in sales is the continuing trend for
electronics manufacturing to move offshore where the Company currently has very
limited sales presence. The decrease in sales for the nine months ended
September 30, 2003 compared to the same period of 2002 was primarily
attributable to the negative conditions discussed above. While market conditions
remain difficult and the trend continues for electronics manufacturing to move
offshore, management is slightly more optimistic about the possibility that an
industry recovery may be underway. Sales for the third quarter of 2003 were
15.1% ahead of sales for the second quarter of 2003 and represented the second
sequential quarterly increase. Furthermore, the decrease in sales for the third
quarter of 2003 was significantly less than the previous quarterly decreases in
2003 compared to the quarterly periods of 2002. In an effort to increase its
offshore presence, the Company has recently established operations in the United
Kingdom to support the European market and in South Korea to support the Asian
market. Management is currently exploring further expansion into the Asian
market.
Gross profit was $14.7 million and $42.6 million for the third quarter and first
nine months of 2003, down 4.1% and 8.5% from $15.3 million and $46.5 million for
the same periods of 2002. The decreases in gross profit were primarily due to
the decreases in net sales. Gross profit margins as a percentage of net sales
were 17.8% and 18.9% for the third quarter and first nine months of 2003
compared to 17.9% and 18.2% for the third quarter and first nine months of 2002.
The improvement in gross profit margins for the first nine months of 2003
compared to the first nine months of 2002 reflects a fewer number of low margin,
large volume transactions during the first nine months of 2003 versus the same
period of 2002. Notwithstanding this slight improvement, there is continued
pressure on gross profit margins reflecting the continued development of
long-term strategic relationships with accounts that require aggressive pricing
programs, as well as excess product availability and the continuing change in
our product mix. Additionally, management anticipates a greater number of low
margin, large volume transactions. Management therefore expects that downward
pressure on gross profit margins may continue and may result in a decrease in
our gross profit margins as a percentage of net sales.
Selling, general and administrative expenses ("SG&A") decreased to $13.7 million
for the third quarter of 2003 from $14.2 million for the third quarter of 2002.
SG&A decreased to $40.1 million for the first nine months of 2003 from $43.1
million for the same period of 2002. The improvements in SG&A reflect in
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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large part a reduction in variable expenses associated with the decline in sales
and gross profit dollars. In addition, the improvements reflect reductions in
operating lease expenses as well as reductions in payroll costs and
discretionary expenditures.
SG&A as a percentage of net sales was 16.6% and 17.8% for the quarter and nine
months ended September 30, 2003, compared to 16.6% and 16.9% for the same
periods of 2002. The increase in SG&A as a percentage of net sales for the first
nine months of 2003 reflects the decline in sales which more than offset the
reductions in SG&A.
Income from operations was $1.0 million and $2.5 million for the third quarter
and first nine months of 2003 compared to $1.1 million and $3.4 million for the
third quarter and first nine months of 2002. The decreases in income from
operations were due to the decline in sales and gross profit dollars as
discussed previously, which decreases were partially offset by the improvements
in SG&A described above.
Interest expense decreased to $694,000 and $1.9 million for the third quarter
and first nine months of 2003, from $720,000 and $2.5 million for the same
periods of 2002. The slight decrease in interest expense for the third quarter
of 2003 compared to the third quarter of 2002 resulted primarily from a decrease
in overall interest rates which was partially offset by an increase in our
average borrowings. The substantial decrease in interest expense for the first
nine months of 2003 compared to the same period of 2002 was due to significant
decreases in our average borrowings and decreases in overall interest rates.
During the third quarter of 2003, and to a lesser extent for the first nine
months of 2003, the Company benefited from an improvement in its interest
pricing levels under its $65 million credit facility (the "Credit Facility").
With respect to the interest rate charged to the Company under its Credit
Facility, based upon the debt service coverage ratio as calculated using the
June 30, 2003 financial statements, the Company improved from the third pricing
level to the first pricing level effective in the middle of August 2003. This
improvement resulted in a reduction of 100 basis points on the interest rates
charged on the Company's borrowings under its Credit Facility. Our average
borrowings decreased by $10 million when comparing the year-to-date periods of
2003 and 2002. The decrease in average borrowings was due to decreases in our
inventory as well as a refund of income taxes receivable. In connection with the
Credit Facility, interest expense for the third quarter and first nine months of
2003 included noncash amortization of deferred financing fees of $84,000 and
$125,000, respectively, and will reflect an aggregate of $999,000 of deferred
financing fees over the term of the Credit Facility. See "Liquidity and Capital
Resources" below and Note 2 to Notes to Consolidated Condensed Financial
Statements (Unaudited).
Net income was $177,000 or $.04 per share (diluted) and $301,000 or $.08 per
share (diluted) for the quarter and nine months ended September 30, 2003,
compared to $1.6 million or $.40 per share (diluted) and $1.9 million or $.49
per share (diluted) for the same periods of 2002. Net income from the 2002
periods reflect other income of $1.3 million on an after-tax basis associated
with a settlement with a customer of an accounts receivable that had been
previously written-off by the Company in 2001.
Liquidity and Capital Resources
- -------------------------------
Working capital at September 30, 2003 increased to $61.0 million from working
capital of $54.7 million at December 31, 2002. The current ratio was 2.24:1 at
September 30, 2003 compared to 2.23:1 at December 31, 2002. The increase in
working capital was primarily due to an increase in accounts receivable which
was partially offset by an increase in the current portion of long-term debt and
a decrease in inventory. Accounts receivable levels at September 30, 2003 were
$54.3 million compared to $41.2 million at December 31, 2002. The increase in
accounts receivable reflects an increase in the level of sales towards the
latter part of the third quarter of 2003 compared to the latter part of 2002.
Inventory levels were $50.5 million at September 30, 2003, down from $52.8
million at December 31, 2002. Accounts payable and accrued expenses decreased
slightly to $43.8 million at September 30, 2003 from $44.3 million at December
31, 2002. The slight decrease in inventory was due to the increase in sales
towards the end of the third quarter which outpaced our inventory purchases for
the quarter. Management
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
expects that if sales levels continue their sequential increases our inventory
purchases and possibly our inventory balance will increase in subsequent
quarters. The current portion of long-term debt was $5.2 million at September
30, 2003 compared to $78,000 at December 31, 2002. The change in the current
portion of long-term debt was due to a reclassification from long-term debt of
$5.1 million of subordinated debentures which matures on June 13, 2004. The
Company expects that its cash flows from operations and additional borrowings
available under its Credit Facility will be sufficient to repay this obligation.
Included in Other Current Assets on each of the Consolidated Condensed Balance
Sheets presented is an income tax receivable of $1.2 million in connection with
a carry back of a net operating loss. The income tax receivable was collected
subsequent to the balance sheet date.
In connection with the Company's stock repurchase program, which provides for
the repurchase of up to $2.0 million in purchase price of the Company's common
stock, the Company repurchased 34,893 shares of its common stock at an average
price of $3.80 per share, or an aggregate price of $133,000, during the quarter
ended September 30, 2003. Including previous purchases, the Company has
repurchased 244,089 shares at an aggregate price of $759,000 under this program.
On May 14, 2003, the Company entered into a $65 million credit facility (the
"Credit Facility") which expires May 14, 2006. Borrowings under the Credit
Facility bear interest at one of three pricing levels dependent on the Company's
debt service coverage ratio at the quarterly pricing date (as defined), and are
secured by all of the Company's assets including accounts receivable,
inventories and equipment. At the first pricing level, at the Company's option,
the rate will be either (a) .5% over the greater of the Federal funds rate plus
..5% and prime or (b) 2.75% over LIBOR. At the second level, at the Company's
option, the rate will be either (a) 1% over the greater of the Federal funds
rate plus .5% and prime or (b) 3.25% over LIBOR. At the third level, at the
Company's option, the rate will be either (a) 1.5% over the greater of the
Federal funds rate plus .5% and prime or (b) 3.75% over LIBOR. In accordance
with the Credit Facility, pricing was at the third level until the Company's
June 30, 2003 financial statements were received by the Administrative Agent
(the first pricing date). Based upon the debt service coverage ratio as
calculated using the Company's June 30, 2003 financial statements, the Company
improved from the third pricing level to the first pricing level effective in
the middle of August 2003. In connection with the Credit Facility, the Company
recorded deferred financing fees aggregating $999,000. These fees are being
amortized over the term of the Credit Facility in interest expense. As with our
previous facility, the amounts that the Company may borrow under the Credit
Facility are based upon specified percentages of the Company's eligible accounts
receivable and inventories (as defined) and the Company is required to comply
with certain affirmative and negative covenants and certain financial ratios.
The covenants, among other things, place limitations and restrictions on the
Company's borrowings, investments, capital expenditures and transactions with
affiliates, prohibit dividends and acquisitions and prohibit stock redemptions
in excess of an aggregate cost of $2.0 million during the term of the Credit
Facility. The Credit Facility requires the Company to maintain certain minimum
levels of tangible net worth throughout the term of the agreement as well as a
minimum debt service coverage ratio and a minimum inventory turnover level, each
tested on a quarterly basis. At September 30, 2003, outstanding borrowings under
the Company's Credit Facility aggregated $46,158,000.
10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Long-term debt, operating leases and other long-term obligations as of September
30, 2003 mature as follows:
Payments Due by Period
------------------------------------------------------
Less than More than
Obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------------------------------------------------------------------------------------------
Long-term debt (1).................. $ 52,145,000 $ 5,193,000 $ 46,363,000 $ 161,000 $ 428,000
Operating leases.................... 13,000,000 3,400,000 6,300,000 1,100,000 2,200,000
Other long-term obligations (2)..... 1,177,000 - 6,000 - 1,171,000
------------ ------------ ------------ ------------ ------------
Total obligations................... $ 66,322,000 $ 8,593,000 $ 52,669,000 $ 1,261,000 $ 3,799,000
============ ============ ============ ============ ============
- ----------
(1) Reflected on the unaudited Consolidated Condensed Balance Sheet as of
September 30, 2003 and includes $46,158,000 under the Company's $65 million
credit facility which matures on May 14, 2006 and $5,150,000 of
subordinated debentures which matures on June 13, 2004.
(2) Reflected on the unaudited Consolidated Condensed Balance Sheet as of
September 30, 2003 and includes a postretirement benefit obligation of
$1,171,000.
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.
Off-Balance Sheet Arrangements
- ------------------------------
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 a customer. This
guaranty was made when the leases were sold to this third party who paid to the
Company in 2001 the net present value of the future payments of the leases. The
maximum exposure under this guaranty, which continues through the latest lease
expiration date of March 31, 2006, was $670,000 with a net present value of
$558,000 at September 30, 2003.
Forward-Looking Statements; Business Risks and Uncertainties
- ------------------------------------------------------------
This Form 10-Q contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs relating to the Company's or
industry's future performance, its future operating results, its available cash
flow, its sales, products, services, markets and industry, market conditions
and/or future events relating to or effecting the Company and its business and
operations, including continuing increasing sales levels in future quarters, All
American's attainment of new customers and success with new business
opportunities and global expansion and All American having sufficient cash flow
to repay the $5.1 million of subordinated debentures maturing June 13, 2004. If
and when used in this Form 10-Q, the words "believes," "estimates," "plans,"
"expects," "attempts," "intends," "anticipates," "could," "may," "explore" and
similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements. The actual performance, results or
achievements of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties. Factors
that could adversely affect the Company's future results, performance or
achievements include, without limitation: the recent improvements in market
conditions and business activity with respect to the broad-based industry
downturn which resulted in the decline in demand for electronic components and
excess customer inventory failing to continue and/or further improve; a failure
of the general economy to continue to improve; the continuance of a trend for
electronics manufacturing to move offshore; the level of effectiveness of the
Company's business and marketing strategies, including those outside North
America and particularly in Asia; an increase in the allowance for doubtful
accounts receivable and bad debts or further write-offs of accounts receivable
as a result of an adverse change in the financial condition of one or more of
the Company's customers or the
11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
estimate made by the Company of the level of allowance for doubtful accounts
based primarily on historical assumptions proving to be inadequate; write-offs
of inventory arising from customers returning inventory or canceling orders or
the devaluation of inventory as a result of adverse market conditions; a
reduction in the Company's development of new customers, existing customer
demand as well as the level of demand for products of its customers;
deterioration in the relationships with existing suppliers, particularly one of
our largest suppliers; price erosion in and price competition for products sold
by the Company; difficulty in the management and control of expenses; the
inability of the Company to generate revenue commensurate with the level of
personnel and size of its infrastructure; price decreases on inventory that is
not price protected; decreases in gross profit margins, including decreasing
margins resulting from the Company being required to have aggressive pricing
programs, an increasing number of low-margin, large volume transactions and
increased availability of the supply for certain products; increased competition
from third party logistics and fulfillment companies, e-brokers and other
Internet providers through the use of the Internet as well as from its
traditional competitors; insufficient funds from operations, from the Company's
credit facility, including the borrowing base formula under the Credit Facility
not permitting the Company to borrow the maximum amount under the facility, and
from other sources (debt and/or equity) to support the Company's operations and
to repay the Company's subordinated debentures at maturity; problems with
telecommunication, computer and information systems; the inability of the
Company to expand its product offerings or obtain product during periods of
allocation; the inability of the Company to continue to enhance its service
capabilities and the timing and cost thereof; the failure to achieve acceptance
of or to grow in all or some of the new technologies that have been or are being
supported by the Company; an increase in interest rates; the adverse impact of
any product liability or warranty claims or intellectual property claims; the
impact from changes in accounting rules; the adverse impact of war and terrorism
on the economy; and the other risks and factors detailed in this Form 10-Q and
in the Company's Form 10-K for the fiscal year ended December 31, 2002 and other
filings with the Securities and Exchange Commission and in its press releases.
These risks and uncertainties are beyond the ability of the Company to control.
In many cases, the Company cannot predict the risks and uncertainties that could
cause actual results to differ materially from those indicated by the
forward-looking statements. The Company undertakes no obligation to update
publicly or revise any forward-looking statements, business risks and/or
uncertainties.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
The Company's Credit Facility bears interest based on interest rates tied to the
Federal funds rate, prime or LIBOR, any 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.
Controls and Procedures
- -----------------------
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
As of the end of the period covered by this report, we evaluated, under the
supervision and with the participation of our management, including our chief
executive officer and the chief financial officer, the effectiveness of the
design and operation of our "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)). 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 Over Financial Reporting
- -----------------------------------------------------
There have been no changes in internal controls over financial reporting that
occurred during the most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
PART II. OTHER INFORMATION
ITEM 2. Changes In Securities and Use of Proceeds
- ------- -----------------------------------------
(c) Sales of Unregistered Securities
--------------------------------
During the quarter ended September 30, 2003, the Company did not issue or
sell any unregistered securities, although, pursuant to the Company's 2000
Nonemployee Director Stock Option Plan, as amended, the Company granted
stock options to three individuals to purchase 3,000 shares of the
Company's common stock at an exercise price of $3.41 per share. The stock
options vest over a two-year period and are exercisable over a ten-year
period. The stock options were granted by the Company in reliance upon the
exemption from registration available under Section 4(2) of the Securities
Act of 1933, as amended. See Note 3 to Notes to Consolidated Condensed
Financial Statements (Unaudited).
ITEM 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
10.1 All American Semiconductor, Inc. 401(k) Profit Sharing Plan,
amended and restated.
11.1 Statement Re: Computation of Per Share Earnings (Unaudited).
31.1 Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350.
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K dated August 7, 2003 was filed on August
7, 2003 reporting in Item 9 (Item 12) the issuance of a press release
announcing the Company's second quarter results for the period ended
June 30, 2003.
------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
All American Semiconductor, Inc.
--------------------------------------------
(Registrant)
Date: November 13, 2003 /s/ Bruce M. Goldberg
--------------------------------------------
Bruce M. Goldberg, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 2003 /s/ Howard L. Flanders
--------------------------------------------
Howard L. Flanders, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
13