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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, 1997
COMMISSION FILE NUMBER: 0-16207
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16115 N.W. 52ND AVENUE
MIAMI, FLORIDA 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 20, 1998, 19,863,895 shares (including 160,703 held by a
wholly-owned subsidiary of the Registrant) of the common stock of ALL AMERICAN
SEMICONDUCTOR, INC. were outstanding, and the aggregate market value of the
common stock held by non-affiliates was $30,800,000.
Documents Incorporated by Reference:
Portions of the definitive proxy statement to be filed within 120 days after the
end of the Registrant's fiscal year are incorporated by reference into Part III.
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ALL AMERICAN SEMICONDUCTOR, INC.
FORM 10-K - 1997
TABLE OF CONTENTS
PART ITEM PAGE
NO. NO. DESCRIPTION NO.
- ---- ---- ----------- ----
I 1 Business................................................................................ 1
2 Properties.............................................................................. 12
3 Legal Proceedings ...................................................................... 12
4 Submission of Matters to a Vote of Security-Holders..................................... 13
II 5 Market for the Registrant's Common Equity and Related Stockholder Matters............... 13
6 Selected Financial Data................................................................. 14
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 15
8 Financial Statements and Supplementary Data............................................. 23
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................... 23
III 10 Directors and Executive Officers of the Registrant...................................... 23
11 Executive Compensation.................................................................. 23
12 Security Ownership of Certain Beneficial Owners and Management.......................... 23
13 Certain Relationships and Related Transactions.......................................... 23
IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 23
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PART I
ITEM 1. BUSINESS
General
- -------
All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a national
distributor of electronic components manufactured by others. The Company
distributes a full range of semiconductors (active components), including
transistors, diodes, memory devices and other integrated circuits, as well as
passive components, such as capacitors, resistors, inductors and
electromechanical products, including cable, switches, connectors, filters and
sockets. These products are sold primarily to original equipment manufacturers
("OEMs") in a diverse and growing range of industries, including manufacturers
of computers and computer-related products, satellite and communications
products, consumer goods, robotics and industrial equipment, defense and
aerospace equipment and medical instrumentation. The Company also sells products
to contract electronics manufacturers ("CEMs") who manufacture products for
companies in all electronics industry segments. Through the Aved Memory Products
("AMP") and Aved Display Technologies ("ADT") divisions of its subsidiary, Aved
Industries, Inc., the Company also designs and has manufactured under the label
of its subsidiary's divisions, certain board level products including memory
modules and flat panel display driver boards. See "Business Strategy-Expansion"
and "Products." These products are also sold to OEMs. In 1995 and 1996 the
Company also distributed a limited offering of computer products including
motherboards, computer upgrade kits, keyboards and disk drives. During the third
quarter of 1996, the Company discontinued its computer products division
("CPD"). See "Products."
Approximately 82% of the Company's 1997 sales were derived from the sale of
active products and 18% from passive products. The Company expects that this
sales mix may change due to the faster growth rate of its semiconductor
business.
While the Company reincorporated in Delaware in 1987, it and its predecessors
have operated since 1964. The Company is one of the faster growing distributors
in the industry and, as a result of its growth, the Company was recognized by
industry trade publications as the 8th largest distributor of active products
and the 15th largest distributor of electronic components in the United States,
out of an industry group that numbers more than 1,000 distributors.
The Company's principal executive office is located at 16115 N.W. 52nd Avenue,
Miami, Florida 33014.
The Electronics Distribution Industry
- -------------------------------------
The electronics industry is one of the largest and fastest growing industries in
the United States. Industry associations estimate total U.S. factory sales of
electronic products at approximately $450 billion for 1997 compared to $276
billion in 1991. The growth of this industry has been driven by increased demand
for new products incorporating sophisticated electronic components, such as
laptop computers, multimedia and Internet related products and satellite and
telecommunications equipment; as well as the increased utilization of electronic
components in a wide range of industrial, consumer and military products.
The three product groups included in the electronic components 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 account for approximately 35% and 29%,
respectively, of the electronic components distribution marketplace, while
systems and computer products account for the remaining 36%. Prior to June 1995,
the Company was a distributor of only semiconductors and
passive/electromechanical products. In mid 1995, the Company created a computer
products division ("CPD"). The operations of this division, which had carried a
very limited product offering, were discontinued in the third quarter of 1996.
See "Products."
Distributors are an integral part of the electronics industry. During 1997, an
estimated $22 billion of electronic components were sold through distribution in
the United States, up from $10 billion in 1992. In recent years, there has been
a growing trend for distribution to play an increasing role in the electronics
industry. OEMs which utilize electronic components are increasingly looking to
outsource their procurement, inventory and materials management processes to
third parties in order to concentrate their resources (including management
talent, personnel costs and capital investment) on their core competencies,
which include product development, sales and marketing. Large distribution
companies not only fill these procurement and materials management roles, but
further serve as a single supply source for OEMs, offering a much broader line
of products, incremental quality control measures and more support services than
individual electronic component manufacturers. Management believes that OEMs
will continue to increase their service and quality requirements, and that this
trend will result in both OEMs and electronic component manufacturers continuing
to be dependent on distributors in the future.
Electronic component manufacturers are under similar pressure to allocate a
larger share of their resources to research, product development and
manufacturing capacity as technological advances continue to shorten product
lifecycles. Electronic component manufacturers sell directly to only a small
number of their potential customers. This small segment of their customer base
accounts for a large portion of the total available revenues. It is not
economical for component manufacturers to provide a broad range of sales support
services to handle the large amount of customers that account for the balance of
available revenues. With their expanded technology and service capabilities,
large distributors have now become a reliable means for component manufacturers
to outsource their sales, marketing, customer service and distribution
functions. This trend particularly benefits larger distributors with nationwide
distribution capabilities such as the Company, as manufacturers continue to
allocate a larger amount of their business to a more limited number of full
service distribution companies. Management believes that this trend should also
provide consolidation opportunities within the electronic components
distribution industry.
As a result of the trends discussed above, management believes that distribution
will be involved in an increasing portion of the electronics industry.
Business Strategy
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The Company's strategy is to continue its managed growth and to gain market
share by: (i) increasing the number of customers it sells to through a
combination of expanding existing sales offices, opening new sales offices and
making selective acquisitions, and (ii) increasing sales to existing customers
by continuing to expand its product offerings and service capabilities. While
the Company's aggressive growth plans caused an adverse effect on profitability
in 1996 and prior years, the Company believes that the investment in expansion
was necessary to position the Company to participate in the dynamics of its
rapidly growing and changing industry and to achieve greater profitability in
the future. Now that the Company has achieved a critical mass, has obtained the
necessary geographic coverage and has expanded its distribution capacity to
facilitate additional growth, the Company has begun to shift its focus from
increasing market share to a combination of continued market share growth with a
greater focus on increasing profitability. In this regard, during 1996 the
Company eliminated or reduced certain aspects of its operations and services
that were not economically feasible to continue or expand and, in 1997, achieved
record levels of profitability. While management believes that it can continue
to increase market share and that it can increase profitability over its record
levels of 1997, there can be no assurance that these goals will be achieved.
EXPANSION
The Company has undergone significant expansion over the last several years
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
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"Sales and Marketing-Sales Office Locations" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Acquisitions."
As a result of the implementation of the Company's business strategy, the
Company has experienced significant growth. In order to effectively drive and
manage its expansion, the Company has over the last three years: (i)
restructured, enhanced and expanded its sales staff and sales management team;
(ii) expanded its quality control programs, including the implementation of its
total quality management ("TQM") and continuous process improvement programs
that ensure quality service, enhance productivity and, over time, reduce costs;
(iii) created and staffed a corporate operations department; (iv) developed
state-of-the-art distribution technology, and (v) enhanced its asset management
capabilities through new computer and telecommunications equipment. To better
service the large customer base in the western part of the United States, the
Company opened during 1994 a west coast corporate office which houses sales and
marketing executives for the Company. In addition, during 1995 the Company
opened an additional west coast regional credit department and an east coast
regional credit department. In 1995 the Company began expanding its marketing
department and in 1996 made significant personnel additions.
In December 1995 the Company purchased through two separate mergers with and
into the Company's wholly-owned subsidiaries (the "Added Value Acquisitions";
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Acquisitions") all of the capital stock of Added Value
Electronics Distribution, Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc.
("Rocky Mountain;" Rocky Mountain together with Added Value, collectively the
"Added Value Companies"). As a result of these acquisitions, the Company added
new sales locations, new operations facilities and several new product
offerings. See "Sales and Marketing-Sales Office Locations" and "Products."
While the Company does not have any present plans to open new offices or to
acquire any additional companies, it may do so in the future. The Company also
plans to continue its focus on improving the financial performance and market
penetration of each existing location.
INCREASING PRODUCT OFFERINGS
The Company intends to continue its effort to increase the number and breadth of
its product offerings, thereby allowing it to attract new customers and to
represent a larger percentage of the purchases being made by its existing
customers. As part of its efforts to attract new suppliers and expand its
product offerings, the Company expanded its service capabilities and has opened
new sales offices (see "Expansion") in order to achieve the geographic coverage
necessary to be recognized as a national distributor.
During 1997, the Company added new suppliers and expects to add additional
suppliers in the future. These new suppliers are intended to offer larger growth
opportunities than some of the smaller suppliers that the Company has done
business with in the past. New supplier relationships generally require up-front
investments that take 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 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
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ability to offer as broad an array of services as the Company. The Company
differentiates itself from its competition by making state-of-the-art
distribution technology available to both large and middle market customers.
Although the Company believes that this differentiation will assist the
Company's growth, there can be no assurance that such differentiation exists to
the extent that the Company currently believes or that it will continue in the
future.
The Company's distribution technology incorporates nationwide access to
real-time inventory and pricing information, electronic order entry and rapid
order processing. During the past few years, the Company has expanded its
services capabilities to include just-in-time deliveries, bar coding, bonded
inventory programs, in-plant stores, in-plant terminals and automatic inventory
replenishment programs. The Company has also implemented electronic data
interchange ("EDI") programs. EDI programs permit the electronic exchange of
information between the Company and its customers and suppliers, thus
facilitating transactions between them by reducing labor costs, errors and
paperwork.
In an effort to reduce the number of distributors they deal with, and ultimately
reduce their procurement costs, many customers have been selecting distributors
that, in addition to providing their standard components, are also able to
provide products that are not part of the distributors' regular product
offerings. This service is referred to as "kitting." In order to expand its
service offerings to address this growing customer requirement, the Company
created a kitting department toward the end of 1994. One of the strategic
purposes of the Added Value Acquisitions was to enhance the Company's ability to
provide kitting services, as one of the acquired companies had kitting
capabilities. In addition to kitting capabilities, as a result of the Added
Value Acquisitions the Company began developing the expertise in turnkey
manufacturing which enables customers to outsource their entire procurement and
manufacturing process. Turnkey services are especially attractive to smaller
OEMs which do not have the capital resources necessary to invest in
state-of-the-art manufacturing equipment nor the capacity requirement necessary
to justify such an investment. In performing turnkey services, the Company
subcontracts out all of the manufacturing work to third party assemblers. The
Company offers warranties against defects in workmanship with respect to its
turnkey services, which is a pass-through from the assembler.
In order to better support its customer base and improve the utilization of its
distribution technology and kitting and turnkey services, the Company has
focused on consulting with customers to jointly develop complete materials
management solutions or "MMS". In the fourth quarter of 1996, the Company
created an MMS Group to facilitate the consultation as well as the development
and implementation of materials management solutions. The MMS Group is staffed
with personnel experienced in the manufacturing environment who can better
understand the customers' processes and needs.
In order to further enhance its service capabilities, the Company also expanded
its technical support by creating an engineering or technical sales program in
1994. As part of this program, the Company has hired electrical engineers, or
Field Application Engineers (FAEs), at various sales offices across the country.
The Company expects to hire additional FAEs in the future. The program is
intended to generate sales by providing customers with engineering support and
increased service at the design and development stages. The program is also
intended to enhance the technical capabilities of the Company's entire sales
force through regular training sessions. Management believes that this
capability is also of great importance in attracting new suppliers.
Another rapidly growing segment of electronics distribution is the sale of
programmable semiconductor products. Programmable semiconductors enable
customers to reduce the number of components they use by highly customizing one
semiconductor to perform a function that otherwise would require several
components to accomplish. This saves space and enables customers to reduce the
size and cost of their products. In order to effectively sell programmable
products, most major distributors have established their own semiconductor
programming centers. To participate in this growing segment of the industry, the
Company opened a semiconductor programming center during the third quarter of
1995 and in January 1996 moved its programming center into the Company's 20,000
square foot facility in Fremont, California (near San Jose). In addition to
enabling the Company to address a rapidly growing market for
4
programmable products, this capability will allow the Company to attract new
product lines that require programming capabilities.
The Company believes that in the upcoming years an increasing amount of
transactions in its industry will be processed over the Internet. In this
regard, the Company designed and developed its own web site which became
operational during the first quarter of 1997. In order to further expand its
visibility and functionality on the Internet, the Company has engaged with third
party Internet service companies. These engagements are expected to increase
revenues, reduce transaction costs and afford the Company an opportunity to do
business in a new and still developing marketplace. While these engagements have
increased operating costs in 1997 and will increase costs further in 1998, many
benefits are expected to be realized in future periods.
In an attempt to further drive the sales of value-added services, the Company
created its American Assemblies & Design division in Chicago during the fourth
quarter of 1994. American Assemblies & Design was intended to expand the
Company's value-added capabilities with respect to electromechanical products.
As a result of continued losses as well as a shift in the Company's focus, the
operations of American Assemblies were relocated and consolidated into the
Company's Miami distribution center in the first quarter of 1996. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Selling, General and Administrative Expenses."
QUALITY CONTROLS AND ISO CERTIFICATION
The Company has a TQM program in order to improve service, increase efficiency
and productivity and, over time, reduce costs. The expansion in capacity and
service capabilities discussed above were done within the confines of increasing
strictness in quality control programs and traceability procedures. As a result,
the Company's Miami and Fremont distribution centers and its Fremont programming
center have all successfully completed a procedure and quality audit that
resulted in their certification under the international quality standard of ISO
9002. This quality standard was established by the International Standards
Organization (the "ISO") created by the European Economic Community ("EEC"). The
ISO created uniform standards of measuring a company's processes, traceability
procedures and quality control in order to assist and facilitate business among
the EEC. The Company believes that this certification is becoming a requirement
of an increasing portion of the customer base.
Products
- --------
ACTIVE AND PASSIVE COMPONENTS
The Company markets both semiconductors and passive products. Semiconductors,
which are active components, respond to or activate upon receipt of electronic
current. Active products include transistors, diodes, memory devices and other
integrated circuits. Passive components, on the other hand, are designed to
facilitate completion of electronic functions. Passive products include
capacitors, resistors, inductors and electromechanical products such as cable,
switches, connectors, filters and sockets. Virtually all of the Company's
customers purchase both active and passive products.
While the Company offers many of the latest technology semiconductor and passive
products, its focus historically had been on mature products that have a more
predictable demand, more stable pricing and more constant sourcing. The Company
believes that the greater predictability in the demand for these products and
the fact that component manufacturers are not likely to invest capital in order
to increase production of older technologies combine to reduce the risks
inherent in large volume purchases of mature products. By making large volume
purchases, the Company decreases its per-unit cost, thus increasing its
potential for higher profit margins upon resale of these mature products.
Although the Company continues to position itself as a leader in the more mature
product lines, as part of its growth strategy, the Company has expanded its
focus to include offering newer technology products as well as on selling high
volumes of commodity products. These newer technologies and commodity products
are playing a greater role in the
5
overall sales mix of the Company and are expected to play an even greater role
in the overall sales mix to the extent the Company's sales continue to grow.
Most of the commodity products, and many of the newer technology products, have
lower profit margins than the more mature product lines.
The Company does not offer express warranties with respect to any of its
component products, instead passing on only those warranties, if any, granted by
its suppliers.
FLAT PANEL DISPLAY PRODUCTS
The Company believes that one of the faster growing segments of the electronics
industry will result from the expanded utilization of flat panel displays or
FPDs. Flat panel displays are commonly used in laptop computers and are
currently replacing standard cathode ray tubes in a variety of applications,
including medical, industrial and commercial equipment, as well as personal
computers and video monitors. FPDs are also being utilized in high definition
television ("HDTV").
In order to properly function in any application, flat panel displays need
certain electronic impulses. One solution for generating these electronic
impulses is the use of board level products that control and regulate the
electronic input that drives the flat panel display. These products are commonly
referred to as driver boards. In addition to the driver board, FPDs require a
back-light inverter to run the back-light, and cable assemblies to connect the
display, inverter and the driver board to each other and to the equipment of
which it is a part.
The Company has addressed the FPD market in three ways. First, the Company has
assembled a comprehensive offering of FPD products, including products from
manufacturers of FPDs, as well as manufacturers of the necessary support
products such as back-light inverters and driver boards. The second aspect in
addressing the FPD market is to develop the technical support necessary to
assist customers with integrating FPD applications. In this regard the Company's
FAE program and marketing department have been developing expertise in FPD
applications and integration.
The third aspect to the Company's approach to the FPD marketplace was
accomplished with the creation of Aved Display Technologies ("ADT"). ADT, which
is run as a separate division, was established in 1996 with certain of the
personnel and assets acquired in the Added Value Acquisitions. ADT designs,
develops and has manufactured under its own label, several proprietary driver
board products for FPD applications. In addition to ADT, the Company also has
other suppliers of FPD driver board products.
MEMORY MODULES
As a result of the Added Value Acquisitions, the Company also designs, has
manufactured and sells memory modules under the Aved Memory Products, or AMP
label. Memory products, which include the memory module subsegment, represent
the largest product sector of semiconductor revenues. Memory modules facilitate
the incorporation of expanded memory in limited space. In addition to Aved
Memory Products the Company has other suppliers of memory module products.
With respect to all products manufactured or assembled for ADT and AMP, the
Company offers a warranty for a period of one year against defects in
workmanship and materials under normal use and service and in their original,
unmodified condition.
COMPUTER PRODUCTS
While the Company currently believes that 36% of electronics distributors'
revenues relate to computer products, the Company has not in the past derived
significant revenues from the sale of these products. In June 1995, the Company
began to distribute motherboards, and in connection therewith, established a
computer products division or CPD. This division expanded its offering to
include computer upgrade kits, disk drives and keyboards. Sales from this
division generated substantially lower profit margins than were
6
generated by the Company's other products. As a result of supply problems and
related losses, as well as a decision by the Company to focus its resources on
its active and passive components business, the operations of CPD were
discontinued in the third quarter of 1996.
With respect to all products manufactured or assembled for CPD, the Company
offered a warranty for a period of one year against defects in workmanship and
materials under normal use and service and in their original, unmodified
condition.
Customers
- ---------
The Company markets its products primarily to OEMs in a diverse and growing
range of industries. The Company's customer base includes manufacturers of
computers and computer-related products, satellite and communications products,
consumer goods, robotics and industrial equipment, defense and aerospace
equipment and medical instrumentation. The Company also sells products to
contract electronics manufacturers ("CEMs") who manufacture products for
companies in all electronics industry segments. In addition, as a result of its
computer products division, in 1995 the Company began expanding its customer
base to include VARs, systems integrators, computer products distributors,
catalog companies and computer superstores. Sales to this new customer base have
been terminated with the Company's decision to discontinue the operations of
CPD. The Company's customer list includes approximately 12,000 accounts. During
1997, no customer accounted for more than 4% of the Company's sales and the
Company does not believe that the loss of any one customer would have a material
adverse impact on its business.
Sales And Marketing
- -------------------
OVERALL STRATEGY
The Company differentiates itself from its competitors in the marketplace by the
combination of products and services that it can provide to its customers. The
Company is a broad-line distributor offering over 60,000 different products
representing approximately 85 different component manufacturers. In addition,
the Company employs a decentralized management philosophy whereby branch
managers are given latitude to run their operations based on their experience
within their particular regions and the needs of their particular customer base.
This decentralization results in greater flexibility and a higher level of
customer service. Thus, the Company believes it can provide the broad product
offering and competitive pricing normally associated with the largest national
distributors, while still providing the personalized service levels usually
associated only with regional or local distributors. Additionally, because of
its size and capabilities, the Company brings to the middle market customers a
level of service capabilities that the smaller distributor cannot provide.
The Company's marketing strategy is to be a preferred and expanding source of
supply for all middle market customers. The Company is achieving this by
providing a broader range of products and services than is available from
smaller and comparably sized distributors, and a higher level of attention than
these customers receive from the larger distributors. In addition, the Company
continues its efforts to become a more significant supplier for the top tier
customers by providing a niche of products supported by the high level of
quality, service and technical capabilities required to do business with these
accounts.
MARKETING TECHNIQUES
The Company has expanded its marketing group by adding a west coast marketing
department strategically situated in Silicon Valley during 1996. The Company
uses various techniques in marketing its products which include: (i) direct
marketing through personal visits to customers by management, field salespeople
and sales representatives, supported by a staff of inside sales personnel who
handle the quoting, accepting, processing and administration of sales orders;
(ii) ongoing advertising in various national industry publications and trade
journals; (iii) general advertising, sales referrals and marketing support from
component manufacturers; (iv) the Company's telemarketing efforts; and (v) a web
site on the Internet. The
7
Company also uses its expanded service capabilities, technical sales or FAE
Program, its MMS Group and its status as an authorized distributor, as marketing
tools. See "Business Strategy-Service Capabilities" and "Suppliers."
SALES PERSONNEL
As of March 1, 1998, the Company employed 287 people in sales on a full-time
basis, of which 113 are field salespeople, 113 are inside salespeople, 25 are in
management, 20 are in administration and 16 are electrical engineers in the
technical sales or FAE Program. The Company also had 8 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 operating income goals.
SALES OFFICE LOCATIONS
The Company currently operates 29 sales offices in 19 states and Canada. The
locations of the sales offices are in each of the following geographic markets:
Huntsville, Alabama; Phoenix, Arizona; Orange County, San Diego, San Fernando
Valley, San Jose and Tustin, California; Toronto, Canada; Denver, Colorado; Fort
Lauderdale, Orlando, Miami and Tampa, Florida; Atlanta, Georgia; Chicago,
Illinois; Baltimore, Maryland; Boston, Massachusetts; Detroit, Michigan;
Minneapolis, Minnesota; Long Island and Rochester, New York; 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, Puerto Rico and Mexico. The Company may consider opening branches
in these other territories if the representatives located there achieve certain
sales levels.
TRANSPORTATION
All of the Company's products are shipped through third party carriers. Incoming
freight charges are generally paid by the Company, while outgoing freight
charges are typically paid by the customer.
SEASONALITY
The Company's sales have not historically been materially greater in any
particular season or part of the year.
Backlog
- -------
As is typical of distributors, the Company has a backlog of customer orders.
While these customer orders are cancelable, the Company believes its backlog is
an indicator of future sales. At December 31, 1997, the Company had a backlog in
excess of $50 million, compared to a backlog in excess of $49 million at
December 31, 1996 and $74 million at December 31, 1995. In 1993, 1994 and 1995,
the Company operated in a highly allocated market where the demand for products
was much greater than the supply. As a result of these product shortages,
customers had a practice of placing longer term product needs on order with
distributors to increase their probabilities of receiving their products on time
and to protect against rising prices. At the end of 1995 and during 1996,
product availability increased and there was a dramatic shift to an oversupply
market. In response to this dramatic shift customers began canceling order
backlogs to lower their inventories and to take advantage of the better pricing
which became available. Today the customer practice is to keep much lower levels
of product on order as delivery times are much shorter than they were in 1993,
1994 and 1995. Additionally, the Company has increased its practices of EDI
transactions where the Company purchases inventory based on electronically
transmitted customer forecasts that do not
8
become an order until the date of shipment and, therefore, are not reflected in
the Company's backlog. As a result of the dramatic shift in the supply-demand
balance and the increase in EDI transactions, the Company's backlog is lower
than it was two years ago and the Company believes that the backlog figures have
a different indication of future sales levels than the backlog figures of the
1993 through 1995 period.
By February 28, 1998, the Company's backlog had risen to approximately $52
million. The Company believes that a substantial portion of its backlog
represents products due to be delivered within the next three months.
Approximately 40% 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.
Suppliers
- ---------
The Company generally purchases products from components manufacturers pursuant
to non-exclusive distribution agreements. Such suppliers generally limit the
number of distributors they will authorize in a given territory in order to
heighten the distributor's focus on their products as well as to prevent
over-distribution. 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 components manufacturers.
The Company believes that an important factor which suppliers consider in
determining whether to grant or to continue to provide distribution rights to a
certain distributor is that distributor's geographic coverage. In meeting its
goal of being recognized as a national distributor, the Company has opened and
acquired sales offices in a number of markets throughout the United States and
has advertised in national industry publications to demonstrate its distribution
capabilities to current and potential customers and suppliers. Another important
factor that suppliers consider is whether the distributor has in place an
engineering staff capable of designing-in the suppliers' products at the
customer base. To address this requirement, the Company established an
engineering or FAE Program in 1994 which is currently staffed with 16 electrical
engineers.
As a result of the Company's strategy, from 1980 to 1996, the Company increased
the number of suppliers it represented from 20 to over 100 in order to expand
its product offerings and better serve its customers. As a result of its rapid
growth and the acquisitions it has completed over the years, the Company has an
overlap of suppliers in many product areas and, while still maintaining an
expanded offering of products, the Company began to reduce the number of
suppliers with which it does business. While this initially caused the Company
to incur costs and required the Company to increase inventory reserves, this
move is expected to increase the return on investment with, and the productivity
of, the remaining suppliers in future periods. The Company presently represents
85 suppliers.
All distribution agreements are cancelable by either party, typically upon 30 to
90 days notice. For the year ended December 31, 1997, the Company's three
largest suppliers accounted for 21%, 8% and 8% of consolidated purchases,
respectively. Most of the products that the Company sells are available from
other sources. While the Company believes that the loss of a key supplier could
have an adverse impact on its business in the short term, the Company would
attempt to replace the products offered by that supplier with the products of
other suppliers. If the Company were to lose its rights to distribute the
products of any particular supplier, there can be no assurance that the Company
would be able to replace the products which were available from that particular
supplier. The loss of a significant number of suppliers in a short period of
time could have a material adverse effect on the Company. The Company, from time
to time, alters its list of authorized suppliers in an attempt to provide its
customers with a better product mix.
9
As a distributor of electronic components, the Company believes that it benefits
from technological change within the electronics industry as new product
introductions accelerate industry growth and provide the Company with additional
sales opportunities. The Company believes its inventory risk due to
technological obsolescence is significantly reduced by certain provisions
typically found in its distribution agreements including price protection, stock
rotation privileges, obsolescence credits and return privileges. Price
protection is typically in the form of a credit to the Company for any inventory
the Company has of products for which the manufacturer reduces its prices. Stock
rotation privileges typically allow the Company to exchange inventory in an
amount up to 5% of a prior period's purchases. Obsolescence credits allow the
Company to return any products which the manufacturer discontinues. Upon
termination of a distribution agreement, the return privileges typically require
the manufacturer to repurchase the Company's inventory at the Company's average
purchase price, however, if the Company terminates the distribution agreement,
there is typically a 10% to 15% restocking charge.
The vast majority of the Company's inventory is purchased pursuant to its
distribution agreements. The Company does not generally purchase product for
inventory unless it is a commonly sold product, there is an outstanding customer
order to be filled, a special purchase is available or unless it is an initial
stocking package in connection with a new line of products.
Facilities and Systems
- ----------------------
FACILITIES
The Company's corporate headquarters and main distribution center are located in
a 110,800 square foot facility in Miami, Florida. The Company occupies this
facility through a lease which expires in 2014, subject to the Company's right
to terminate at any time after May 1999 upon twenty-four months prior written
notice and the payment of all outstanding debt owed to the landlord. The lease
for this facility contains three six-year options to renew at the then fair
market value rental rates. The lease, which began in May 1994, provides for
annual fixed rental payments totaling approximately $264,000 in the first year,
$267,000 in the second year, $279,000 in each of the third, fourth and fifth
years, $300,600 in the sixth year, $307,800 in the seventh year, and in each
year thereafter during the term the rent shall increase once per year in an
amount equal to the annual percentage increase in the consumer price index not
to exceed 4% in any one year. Although continued growth is not assured, the
Company estimates that this facility has capacity to handle over $400 million in
annual revenues.
As a result of the Added Value Acquisitions, the Company leases a 13,900 square
foot facility in Tustin, California and a 7,600 square foot facility in Denver,
Colorado. The Tustin facility contains a distribution center as well as part of
the staff supporting the Company's kitting and turnkey operations and the
separate divisions created for flat panel displays (ADT) and memory module (AMP)
operations. See "Products." The Denver facility contains a regional distribution
center and sales office.
In October 1995, the Company entered into a lease for a west coast distribution
and semiconductor programming center located in Fremont, California (near San
Jose). This facility contains approximately 20,000 square feet of space. The
Company moved into this facility in January 1996. The Company has used this
space to expand its semiconductor programming and component distribution
capabilities and to improve quality control and service capabilities for its
west coast customers. Additionally, this space was originally intended to house
the Company's distribution and operational support for its computer products
division. As a result of the Company's decision to discontinue operations of its
CPD, this additional facility is underutilized. The Company has begun moving
more of its component distribution inventory to this facility. While no future
growth can be assured, the Company expects that this excess capacity will be
utilized to support the growth of its programming and components distribution
businesses in future periods.
The Company also occupies approximately 11,000 square feet of space in San Jose,
California; approximately 7,500 square feet of which is presently used for sales
and 3,500 square feet of which is used
10
for corporate offices. In addition, the Company leases space for its other sales
offices, which range in size from approximately 1,000 square feet to 8,000
square feet. See "Sales and Marketing-Sales Office Locations."
The Company has significant excess capacity with its distribution centers in
Miami, Florida; Fremont and Tustin, California; and Denver, Colorado. To the
extent that the Company achieves projected sales growth 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 the necessary sales growth will be obtained.
SYSTEMS
The Company's systems and operations are designed to facilitate centralized
warehousing which allows salespeople across the country to have real-time access
to inventory and pricing information and allows a salesperson in any office to
enter orders electronically, which instantaneously print in the appropriate
distribution facility for shipping and invoicing. The combination of the
centralized distribution centers and the electronic order entry, enable the
Company to provide rapid order processing at low costs. The system also provides
for automatic credit checks, which prohibit any product from being shipped until
the customer's credit has been approved. Additionally, the systems allow the
Company to participate with customers and suppliers in electronic data
interchange, or EDI, and to expand customer services, including just-in-time
deliveries, kitting programs, bar coding, automatic inventory replenishment
programs, bonded inventory programs, in-plant stores and in-plant terminals.
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
electronic commerce, the Company has during 1995, 1996 and 1997 expanded, 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. The Company believes that these systems enhancements should assist in
increasing sales and in improving efficiencies and the potential for greater
profitability in future periods through increased employee productivity,
enhanced asset management, improved quality control capabilities and expanded
customer service capabilities. See "Business Strategy-Service Capabilities."
There can be no assurance, however, that these benefits will be achieved.
Foreign Manufacturing and Trade Regulation
- ------------------------------------------
A significant number of the components sold by the Company are manufactured
outside the United States and purchased by the Company from United States
subsidiaries or affiliates of those foreign manufacturers. As a result, the
Company and its ability to sell at competitive prices could be adversely
affected by increases in tariffs or duties, changes in trade treaties, currency
fluctuations, economic or financial turbulence abroad, strikes or delays in air
or sea transportation, and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. The
Company's ability to be competitive in or with the sales of imported components
could also be affected by other governmental actions and changes in policies
related to, among other things, anti-dumping legislation and currency
fluctuations. While the Company does not believe that these factors adversely
impact its business at present, there can be no assurance that such factors will
not have a material adverse affect on the Company in the future. Since the
Company purchases from United States subsidiaries or affiliates of foreign
manufacturers, the Company's purchases are paid for in U.S. dollars.
Employees
- ---------
As of March 1, 1998, the Company employed 519 persons, of which 287 are involved
in sales and sales management; 77 are involved in marketing; 58 are involved in
the distribution centers; 35 are involved in operations; 12 are involved in
management; 36 are involved in bookkeeping and clerical; and 14 are involved
11
in management information systems. None of the Company's employees are covered
by collective bargaining agreements. The Company believes that management's
relations with its employees are good.
Competition
- -----------
The Company believes that there are over 1,000 electronic components
distributors throughout the United States, ranging in size from less than $1
million in revenues to companies with annual sales exceeding $7 billion
worldwide. These distributors can be divided into global distributors who have
operations around the world, national distributors who have offices throughout
the United States, regional distributors and local distributors. With 29 sales
offices in 19 states and Canada, the Company competes as a national distributor.
The Company, which was recently recognized by industry sources as the eighth
largest distributor of semiconductors and the 15th largest distributor of
electronic components in the United States, believes its primary competition
comes from the top 50 distributors in the industry.
The Company competes with many companies that distribute electronic components
and, to a lesser extent, companies that manufacture such products and sell them
directly. Some of these companies have greater assets and possess greater
financial and personnel resources than does the Company. The competition in the
electronics distribution industry can be segregated by target customers: major
(or top tier) accounts; middle market accounts; and emerging growth accounts.
Competition to be the primary supplier for the major customers is dominated by
the top 10 distributors as a result of the product offerings, pricing and
distribution technology offered by these distributors. The Company competes for
a portion of the available business at these major industry customers by seeking
to provide the very best service and quality and by focusing on products that
are not supported by the top 10 distributors, or are fill-in or niche products.
With its expanded service capabilities and quality assurance procedures in
place, the Company believes that it can now compete for a bigger portion of the
business at the top tier customer base, although there can be no assurance that
it will be successful in doing so. The Company believes competition from the top
10 distributors for the middle market customer base is not as strong since the
largest distributors focus their efforts on the major account base. For this
reason, the Company has focused strong efforts on servicing this middle market
customer base. The Company competes for this business by seeking to offer a
broader product base, better pricing and more sophisticated distribution
technology than the regional or local distributors, by seeking to offer more
sophisticated distribution technology than comparably-sized distributors and by
seeking to offer to such middle market companies a higher service level than is
offered to them by the major national and global distributors. The Company
believes that today the top 10 distributors are seeking to penetrate the middle
market customer base more than they have in the past.
ITEM 2. PROPERTIES
See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales
Office Locations" and Note 11 to Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation relating to claims
arising out of its operations in the ordinary course of business. Many of such
claims are covered by insurance or, if they relate to products manufactured by
others for which it distributes, the Company would expect that the manufacturers
of such products would indemnify the Company, as well as defend such claims on
the Company's behalf, although no assurance can be given that any manufacturer
would do so. The Company believes that none of these claims should have a
material adverse impact on its financial condition or results of operations.
There has been a recent trend throughout the United States of increased
grievances over various employee matters. While the Company is presently not
involved in any material litigation relating to such matters, the Company
believes that costs associated with such matters may increase in the future.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on The Nasdaq Stock Market 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
- ---------------------- ---- ---
1996
- ----
First Quarter $ 2 15/16 $ 2
Second Quarter 2 13/16 1 31/32
Third Quarter 2 7/32 1 5/8
Fourth Quarter 1 13/16 1
1997
- ----
First Quarter 1 7/16 15/16
Second Quarter 1 3/32 27/32
Third Quarter 1 21/32 31/32
Fourth Quarter 2 1/2 1 3/8
1998
- ----
First Quarter (through March 20, 1998) 2 1 3/8
As of March 20, 1998, there were approximately 500 holders of record of the
Company's common stock, based on the stockholders list maintained by the
Company's transfer agent. Many of these record holders hold these securities for
the benefit of their customers. The Company believes that it has over 7,400
beneficial holders of its common stock.
Dividend Policy
- ---------------
The Company has never paid cash dividends. In 1989, the Company's Board of
Directors declared a 25% stock split effected in the form of a stock dividend.
Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other relevant factors. It is not
anticipated, however, that the Company will pay cash dividends on its common
stock in the foreseeable future, inasmuch as it expects to employ all available
cash in the continued growth of its business. In addition, the Company's
revolving line of credit agreement prohibits the payment of any dividends. See
Note 8 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, 1997 except as follows:
Pursuant to the Company's Employees', Officers', Directors' Stock Option Plan,
as previously amended and restated, the Company granted during the quarter ended
December 31, 1997 stock options to purchase 8,000 shares of the Company's common
stock to two individuals at an exercise price ranging from $2.04 to
13
$2.18 per share. The stock options are exercisable over a five or six-year
period. See Note 10 to Notes to Consolidated Financial Statements. All of the
stock options were granted by the Company in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the Company for and as of
the years 1993 through 1997 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."
Statement of Operations Data
Years Ended December 31 1997 1996 1995(1) 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Net Sales (2)........................ $ 265,640,000 $ 237,846,000 $ 177,335,000 $ 101,085,000 $ 67,510,000
Cost of Sales (3).................... (207,173,000) (185,367,000) (138,089,000) (74,632,000) (49,010,000)
-------------- ------------- ------------- ------------- -------------
Gross Profit......................... 58,467,000 52,479,000 39,246,000 26,453,000 18,500,000
Selling, General and
Administrative Expenses............ (48,257,000) (51,675,000) (32,321,000) (23,374,000) (14,821,000)
Restructuring and Other Nonrecurring.
Expenses (4)....................... - (4,942,000) (1,098,000) (548,000) (61,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations......................... 10,210,000 (4,138,000) 5,827,000 2,531,000 3,618,000
Interest Expense (5)................. (4,797,000) (7,025,000) (2,739,000) (1,772,000) (1,103,000)
Other Income-Net (6)................. - - - - 281,000
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Income Taxes..... 5,413,000 (11,163,000) 3,088,000 759,000 2,796,000
Income Tax (Provision) Benefit....... (2,163,000) 2,942,000 (1,281,000) (407,000) (1,094,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Discontinued
Operations and Extraordinary Items. 3,250,000 (8,221,000) 1,807,000 352,000 1,702,000
Discontinued Operations (7).......... - (1,757,000) 79,000 - -
Extraordinary Items (8).............. - 58,000 - - -
------------- ------------- ------------- ------------- -------------
Net Income (Loss).................... $ 3,250,000 $ (9,920,000) $ 1,886,000 $ 352,000 $ 1,702,000
============= ============= ============= ============= =============
Earnings (Loss) Per Share (9):
Basic.............................. $.17 $(.50) $.12 $.03 $.19
Diluted............................ $.16 $(.49) $.12 $.03 $.19
Balance Sheet Data
December 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Working Capital...................... $ 63,308,000 $ 69,823,000 $ 59,352,000 $ 39,800,000 $ 27,534,000
Total Assets......................... 112,286,000 112,921,000 114,474,000 57,858,000 37,968,000
Long-Term Debt, Including
Current Portion.................... 46,900,000 58,221,000 37,604,000 27,775,000 14,928,000
Shareholders' Equity................. 25,674,000 22,396,000 32,267,000 16,950,000 15,612,000
Book Value Per Common Share.......... $1.29 $1.13 $1.62 $1.37 $1.30
- -------------------------
(1) On December 29, 1995, the Company completed the Added Value Acquisitions.
The statement of operations data for 1995 reflects only the nonrecurring
expenses associated with such acquisitions, while the balance sheet data
reflects the assets and liabilities of the acquired companies at December
31, 1995.
(2) Net sales, including sales generated by the Company's computer products
division which was discontinued in the third quarter of 1996, were
$244,668,000 for 1996 and $180,794,000 for 1995.
(3) 1996 includes non-cash inventory write-offs of $2,000,000 associated with
the Company's restructuring of its kitting and turnkey operations.
14
(4) 1996 includes non-recurring expenses consisting of: $1,092,000 relating to
restructuring the Company's kitting and turnkey operations, $587,000
relating to the termination of certain employment agreements, $445,000
relating to relocating the Company's cable assembly division, $625,000
relating to the accrual of a postretirement benefit cost associated with an
amendment to an employment agreement with one of the Company's executive
officers, and $2,193,000 relating to an impairment of goodwill primarily
related to the acquisitions of the Added Value Companies. 1995 includes a
charge for front-end incentive employment compensation of $1,098,000
associated with the Added Value Acquisitions. 1994 includes a charge for
relocation of plant facilities in the amount of $185,000 and a write-off of
the Company's product development investment of $363,000.
(5) Interest expense for 1996 includes amortization and a write-down of deferred
financing fees relating to obtaining the Company's $100 million credit
facility of approximately $2,148,000.
(6) 1993 includes approximately $237,000 of income from the settlement of a
business interruption claim.
(7) Includes income (losses) from discontinued operations of $(166,000) (net of
$125,000 income tax benefit) and $79,000 (net of $56,000 income tax
provision) for 1996 and 1995, respectively, and a loss on disposal of
$(1,591,000) (net of $1,200,000 income tax benefit) in 1996 relating to
management's decision to discontinue its computer products division.
(8) Reflects an after-tax gain of $272,000 (net of $205,000 income tax
provision) associated with the Company's settlement of a civil litigation
and an after-tax non-cash expense of $214,000 (net of $161,000 income tax
benefit) resulting from the early extinguishment of the Company's $15
million senior subordinated promissory note.
(9) Weighted average common shares outstanding for the years ended December 31,
1997, 1996, 1995, 1994 and 1993 were 19,672,559, 19,742,849, 15,241,458,
12,338,932 and 8,782,033, respectively, for basic earnings per share and
were 19,784,837, 20,105,761, 15,866,866, 12,941,264 and 9,133,158,
respectively, for diluted earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
OVERVIEW
The following table sets forth for the years ended December 31, 1997, 1996 and
1995 certain items in the Company's Consolidated Statements of Operations
expressed as a percentage of net sales. All percentages are based on net sales
after excluding sales from discontinued operations.
Items as a Percentage
of Net Sales
-------------------------------
Years Ended
December 31
-------------------------------
1997 1996 1995
---- ---- ----
Net Sales............................................................ 100.0% 100.0% 100.0%
Gross Profit......................................................... 22.0 22.1 22.1
Selling, General and Administrative Expenses......................... (18.2) (21.7) (18.2)
Restructuring and Other Nonrecurring Expenses........................ - (2.1) (.6)
Income (Loss) from Continuing Operations............................. 3.8 (1.7) 3.3
Interest Expense..................................................... (1.8) (3.0) (1.5)
Income (Loss) from Continuing Operations Before Income Taxes......... 2.0 (4.7) 1.7
Income (Loss) from Continuing Operations Before Discontinued
Operations and Extraordinary Items................................. 1.2 (3.5) 1.0
Discontinued Operations.............................................. - (.7) *
Extraordinary Items.................................................. - * -
Net Income (Loss).................................................... 1.2 (4.2) 1.1
- -------------------
* not meaningful
15
Comparison of Years Ended December 31, 1997 and 1996
- ----------------------------------------------------
SALES
For the year ended December 31, 1997, the Company achieved a record sales level
at $265.6 million, a $27.8 million or 11.7% increase over net sales of $237.8
million in 1996. This represents the 12th consecutive annual sales record. The
increase in net sales was accomplished without acquisitions or new branch
openings and reflects higher sales in most territories. Substantially all of the
increase is attributable to volume increases and the introduction of new
products. The increase in volume more than offset the decline in unit prices on
certain products. In addition, the Company continues to benefit from its
expanded service capabilities including electronic commerce programs. See "Item
1. Business-Business Strategy."
GROSS PROFIT
Gross profit was $58.5 million in 1997 compared to $52.5 million for 1996,
representing an 11.4% increase. The increase in gross profit was primarily due
to the growth in sales which more than offset the decrease in gross profit
margins as a percentage of net sales. The 1996 figure included a $2.0 million
inventory write-off associated primarily with the restructuring of the Company's
kitting and turnkey operations. Gross profit margins as a percentage of net
sales were 22.0% for 1997 compared to 22.9% for 1996 without giving effect to
the inventory write-off. The decrease in gross profit margins reflects a greater
number of low margin, large volume transactions during 1997 than in the previous
year, as well as continued changes in the Company's product mix. In addition,
the Company has experienced lower margins relating to the development of
long-term strategic relationships with accounts which have required aggressive
pricing programs. Management expects downward pressure on gross profit margins
to continue in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") was $48.3 million for 1997
down from $51.7 million for 1996. Even with an increase in net sales, SG&A
decreased in absolute dollars reflecting the benefits of the expense control
programs implemented during the third quarter of 1996 and the restructurings
initiated during the second half of 1996.
SG&A as a percentage of net sales improved dramatically to 18.2% for the year
ended December 31, 1997, compared to 21.7% for 1996. The improvement in SG&A as
a percentage of sales reflects the decrease in SG&A in absolute dollars as well
as the increase in sales. With its present infrastructure, including the
Company's excess plant capacity, the Company believes that it can support higher
sales without a significant increase in fixed costs. This should result in
improved operating efficiencies and greater economies of scale in the future if
the Company succeeds in increasing the sales volume.
INCOME (LOSS) FROM CONTINUING OPERATIONS
After achieving a broad geographic coverage and a critical mass through its
aggressive growth strategies in previous years, the Company has begun to shift
its focus from increasing market share to a combination of continued market
share growth with a greater focus on increasing profitability. As a result,
income from continuing operations reached a record $10.2 million for 1997,
compared to a loss from continuing operations of $(4.1) million for 1996 which
included restructuring and nonrecurring expenses aggregating $6.9 million. The
significant increase in income from continuing operations was attributable to
the increase in net sales, the benefits derived from the Company's
restructurings, improved operating efficiencies and economies of scale as well
as the decrease in SG&A in both absolute dollars and as a percentage of net
sales.
The restructuring and nonrecurring expenses during 1996 included the above
mentioned inventory write-offs; an impairment of goodwill in connection with the
acquisition of the Added Value Companies; restructuring expenses associated with
the kitting and turnkey operations; the termination of certain employment
agreements entered into in connection with certain acquisitions; the relocation
of the Company's cable
16
assembly division; and the acceleration of an existing accrual schedule
associated with certain postretirement benefits for one of the Company's
executive officers. See "Comparison of Years Ended December 31, 1996 and 1995"
below and Notes 6 and 11 to Notes to Consolidated Financial Statements.
INTEREST EXPENSE
Interest expense decreased significantly to $4.8 million for the year ended
December 31, 1997 compared to $7.0 million for 1996. The decrease in interest
expense resulted from lower average borrowings during 1997 primarily as a result
of an increase in cash provided from operations and a decrease in amortization
of deferred financing fees associated with a write-down of $1.7 million of
deferred financing fees in 1996. See "Liquidity and Capital Resources" and Note
8 to Notes to Consolidated Financial Statements.
NET INCOME
Net income reached a record of $3.3 million for the year ended December 31, 1997
compared to a net loss of $(9.9) million for 1996. Earnings per share (basic)
increased to $.17 in 1997 from a loss of $(.50) per share in 1996. The increase
in earnings for 1997 reflects the increase in sales, improved operating
efficiencies, the dramatic improvement in SG&A combined with the reduction in
interest expense all as previously discussed. Included in 1996 are the
restructuring and nonrecurring items described above as well as an after-tax
loss from discontinued operations of $1.8 million associated with the
discontinuance of the Company's computer products division.
Comparison of Years Ended December 31, 1996 and 1995
- ----------------------------------------------------
SALES
Net sales for the year ended December 31, 1996, were $244.7 million before
excluding sales from discontinued operations. Excluding $6.8 million of sales
from discontinued operations, net sales for the year ended December 31, 1996,
were $237.8 million, a 34.1% increase over net sales of $177.3 million excluding
$3.5 million of sales from discontinued operations in 1995. The increase in
sales reflects revenues generated by the Added Value Acquisitions completed on
December 29, 1995, the acquisition of Programming Plus Incorporated ("PPI")
completed effective as of January 1, 1996, revenues generated by new sales
offices and an increase in revenues generated from existing sales offices.
Substantially all of the increase in net sales is attributable to volume
increases and the introduction of new products as opposed to price increases. In
1996, the Company experienced substantial erosion in unit selling prices on a
broad range of products; however, the Company more than compensated for this
price erosion with an increase in unit volume. While sales for 1996 were ahead
of the prior year, sales for the second half of 1996 were substantially below
the Company's expectations due to adverse market conditions and price erosion on
a broad range of products. The second, third and fourth quarters of 1996,
including discontinued operations, each had a quarterly decline in sales when
compared to the prior consecutive quarter. These were the first consecutive
quarterly declines for the Company since the fourth quarter of 1991.
GROSS PROFIT
Gross profit, without giving effect in 1996 to a $2.0 million inventory
write-off associated primarily with the Company's restructuring plan of its
kitting and turnkey operations and excluding gross profits generated from
discontinued operations, was $54.5 million in 1996 representing a 38.8% increase
over gross profit of $39.2 million for 1995 excluding discontinued operations.
The increase was due to the growth in sales as well as the increase 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
22.9% for 1996 compared to 22.1% for 1995. The increase in gross profit margins
primarily reflects a fewer number of low margin, large volume transactions
during 1996 than in the previous year. After giving effect to the inventory
write-offs and discontinued operations, gross profit dollars were $52.5 million
and the gross profit margin was 22.1% for 1996.
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A was $51.7 million for 1996 compared to $32.3 million for 1995. The increase
was primarily the result of the Added Value Acquisitions as well as the
increases in staffing and facilities to prepare for the then anticipated
continuation of rapid growth and the enhancement of computer and communications
systems.
In connection with the Added Value Acquisitions, all categories of SG&A
increased. In addition, the Company incurred consulting fees associated with the
systems conversions of the acquired companies and with the further development
of the Company's value added strategies. SG&A also increased as a result of the
operations of the new divisions, Aved Industries and Apex Solutions, which were
created as part of the acquisitions. Aved Industries, through its Aved Display
Technologies Division, concentrates on the design, manufacture, sales and
marketing of flat panel display products and technical support for these
products and, through its Aved Memory Products Division, on the design,
manufacture, sales and marketing of standard and custom memory module products.
Apex Solutions was created to attempt to expand the Company's ability to support
kitting and turnkey services on a national basis. In connection with these new
divisions, the Company, during the first part of 1996 and prior to the
determination to restructure such divisions at the end of the third quarter of
1996 as discussed below, increased staffing and also incurred additional
operating expenses.
In 1993, 1994 and 1995, respectively, the Company experienced sales growth of
38%, 50% and 79% and ended 1995 with a strong backlog and other indications of
continued rapid growth for 1996. In the first quarter of 1996, sales were 76%
over the same quarter of 1995 with strong indications of continued growth for
the balance of 1996. In order to drive and support the expected future growth as
well as to support the operations of the above referenced acquisitions and the
new divisions created in connection therewith, the Company expanded its
facilities and sales personnel, opened 9 new sales offices during the latter
part of 1995 and in 1996, created and staffed northeast and southwest credit
departments, increased expenses and investments in connection with its computer
and communications systems, and increased staffing in almost all corporate
departments.
Furthermore, in an effort to diversify its business and expand its service
capabilities and product offerings, the Company, created a cable assembly
division in 1994 and in mid 1995, created a computer products division, or CPD,
which distributed motherboards and other computer products. During 1996, the
Company relocated its west coast programming and distribution center into a
significantly larger facility and added additional staff for these operations.
Effective as of January 1, 1996, the Company also acquired PPI (see Notes 4 and
5 to Notes to Consolidated Financial Statements) and further increased staffing
to support CPD. As a result of all of the foregoing, SG&A for 1996 reflects
increased salaries, payroll taxes and employee benefit costs as well as
additional operating expenses such as rent and office supplies.
In May 1996, the Company decided to reduce the operation of its cable assembly
division and the division was relocated to the Company's Miami distribution
facility. During the third quarter of 1996, the Company decided to discontinue
the operation of CPD as a result of supply problems and related losses. See
Notes 6 and 7 to Notes to Consolidated Financial Statements.
In addition to the items set forth above, variable SG&A expenses, including
sales commissions and telephone expenses, increased as a result of the increases
in sales in 1996 over 1995.
SG&A as a percentage of net sales was 21.7% for the year ended December 31,
1996, compared to 18.2% for 1995. The increase in SG&A as a percentage of net
sales reflects the increases in expenses associated with the acquisitions and
expansion described above, the additional operating costs in connection with the
restructuring as well as with the continued building of the Company's
infrastructure to support significantly higher sales levels than were actually
attained.
18
Due to the adverse market conditions and the significantly lower than
anticipated sales level during the second and third quarters of 1996, the
Company developed and began implementing expense control strategies and
restructured and discontinued unprofitable divisions. During the third quarter
of 1996, the Company determined that it was not economically feasible to
continue its current level of investment in Apex Solutions, especially in light
of the adverse market conditions which were present within the industry at that
time. As a result, the Company adopted a plan to restructure its kitting and
turnkey operations. In connection with this plan, the Company reduced the
related workforce and accrued for employee severance and related benefits and
wrote down various related assets. This restructuring resulted in a pretax
charge of $1.1 million which is reflected as restructuring and other
nonrecurring expenses in the accompanying Consolidated Statements of Operations.
See Note 6 to Notes to Consolidated Financial Statements. In addition, SG&A for
1996 includes approximately $800,000 of costs primarily associated with
operating Apex Solutions during the restructuring phase. Additionally, based on
a decision made in the third quarter of 1996, the Company ceased the activities
of CPD and this division is reflected in the accompanying Consolidated Financial
Statements as discontinued operations. See Note 7 to Notes to Consolidated
Financial Statements.
At September 30, 1996, the Company recognized an impairment of goodwill in
connection with the Company's acquisitions of the Added Value Companies and PPI.
See "Acquisitions". This non-cash charge of approximately $2.4 million, which is
primarily related to the Added Value Companies, has no associated tax benefit. A
variety of factors contributed to the impairment of the goodwill relating to the
Added Value Companies. These factors included a significant reduction in the
revenues and operating results generated by the Added Value Companies' customer
base acquired by the Company, a restructuring of the Added Value Companies'
kitting and turnkey operations due to the Company determining that it was not
economically feasible to continue and expand such division as originally
planned, as well as the termination of certain principals and senior management
of the Added Value Companies who became employees of the Company at the time of
the closing of the acquisitions. These factors greatly reduced the estimated
future cash flows from the Added Value Companies. In December 1996, as part of a
settlement agreement with certain selling stockholders of the Added Value
Companies, the Company reacquired and canceled 95,000 shares of the Company's
common stock valued at approximately $110,000. In addition, the Company
established a receivable in 1996 for $125,000 related to excess distributions
made to certain principals of the Added Value Companies in connection with the
acquisitions which, together with the benefit associated with the settlement
agreement, reduced the impairment of goodwill to $2.2 million. See Notes 4, 5
and 6 to Notes to Consolidated Financial Statements.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations was adversely impacted by the following
nonrecurring charges: the above mentioned inventory write-offs, impairment of
goodwill and restructuring expenses associated with the kitting and turnkey
operations; the termination of certain employment agreements entered into in
connection with certain acquisitions; the relocation of the Company's cable
assembly division; and the acceleration of an existing accrual schedule
associated with certain postretirement benefits for one of the Company's
executive officers. See Note 6 to Notes to Consolidated Financial Statements.
After giving effect to all of the above mentioned charges, the Company had a
loss from continuing operations of $(4.1) million for 1996. This compared to
$5.8 million of income from continuing operations for 1995 notwithstanding
nonrecurring expenses of $1.1 million relating to front-end incentive employment
compensation paid in connection with the Added Value Acquisitions. The decrease
in income from continuing operations, without giving effect to these charges,
was attributable to the increase in SG&A which more than offset the increase in
sales and gross profit dollars which were well below the Company's expectations.
INTEREST EXPENSE
Interest expense increased to $7.0 million for the year ended December 31, 1996,
as compared to $2.7 million for 1995. The increase resulted from additional
borrowings to fund the Added Value Acquisitions completed in December 1995 as
well as additional borrowings required to support the Company's growth.
19
Borrowings also increased to finance the Company's losses in 1996. As a result
of the growth originally anticipated for 1996 as discussed above, the Company
refinanced its credit facility in 1996 with the Credit Facility (defined below)
which, subject to the terms thereof, could allow for substantial increases in
the Company's capital base. Interest expense for 1996 reflects amortization of
deferred financing fees of $444,000 in connection with obtaining the Credit
Facility. In addition, as a result of a projected decrease in the Company's
future utilization of the Credit Facility based on projected cash flows, as well
as certain changes to the terms of the initial agreement, $1.7 million of the
deferred financing fees was written-off in 1996. See "Liquidity and Capital
Resources" and Note 8 to Notes to Consolidated Financial Statements.
DISCONTINUED OPERATIONS
In the third quarter of 1996, management decided to discontinue CPD due to the
revenues generated by this division being significantly below the Company's
expectations principally as a result of the division's primary supplier
discontinuing the production of certain products that were the mainstay of this
division. The after-tax loss from discontinued operations of $1.8 million
reflected the estimated costs and expenses associated with the discontinuance
and the related disposal, including the write-off of certain assets, as well as
a provision for operating losses during the phase-out period which continued
through March 31, 1997.
NET INCOME (LOSS)
After giving effect to the previously described after-tax write-off of
inventory, impairment of goodwill, restructuring and other nonrecurring
expenses, write-off of certain deferred financing fees, as well as the loss from
discontinued operations of CPD, the Company had a net loss of $(9.9) million, or
$(.50) per share (basic), for the year ended December 31, 1996, compared to net
income of $1.9 million, or $.12 per share (basic), for 1995. Included in the
1996 operating results is an extraordinary after-tax gain of $272,000 recognized
in connection with the Company's settlement of a civil litigation and an
extraordinary after-tax expense of $214,000 resulting from the early
extinguishment of the Company's $15 million senior subordinated promissory note
in connection with the closing of the Credit Facility.
Liquidity and Capital Resources
- -------------------------------
Working capital at December 31, 1997 was $63.3 million, compared to working
capital of $69.8 million at December 31, 1996. The current ratio was 2.58:1 at
December 31, 1997, compared to 3.13:1 at December 31, 1996. The decreases in
working capital and in the current ratio were due primarily to an increase in
accounts payable and a decrease in other current assets. These changes more than
offset an increase in inventory. Accounts receivable levels at December 31, 1997
were $32.9 million, compared to $32.7 million at December 31, 1996. The slight
increase in accounts receivable at December 31, 1997 reflects an increase in the
rate of sales during the fourth quarter of 1997 compared to the last quarter of
1996. The Company also achieved a slight improvement in the average number of
days that accounts receivables were outstanding from 54 days as of December 31,
1996 to 53 days as of December 31, 1997. Inventory levels were $67.9 million at
December 31, 1997 compared to $64.2 million at December 31, 1996. The increase
primarily reflects higher inventory levels needed to support new products.
Accounts payable and accrued expenses increased to $39.2 million at December 31,
1997 from $31.8 million at December 31, 1996 primarily as a result of purchases
of inventory.
On May 3, 1996 the Company entered into a $100 million line of credit facility
with a group of banks (the "Credit Facility") which expires May 3, 2001. The
Credit Facility replaced the Company's then existing $45 million line of credit
facility which was to expire in May 1997 and bore interest, at the Company's
option, either at one-quarter of one percent (.25%) below prime or two percent
(2%) above certain LIBOR rates. See Note 8 to Notes to Consolidated Financial
Statements. At the time of entering into the Credit Facility, borrowings under
the Credit Facility bore interest, at the Company's option, at either prime plus
one-quarter of one percent (.25%) or LIBOR plus two and one-quarter percent
(2.25%), which interest rate was subsequently slightly increased as described
below. Borrowings under the Credit Facility are secured by all of the Company's
assets including accounts receivable, inventories and equipment. The amounts
that the
20
Company may borrow under the Credit Facility are based upon specified
percentages of the Company's eligible accounts receivable and inventories (as
defined). Under the Credit Facility, the Company is required to comply with
certain affirmative and negative covenants as well as to comply with certain
financial ratios. These covenants, among other things, place limitations and
restrictions on the Company's borrowings, investments and transactions with
affiliates and prohibit dividends and stock redemptions. Furthermore, the Credit
Facility requires the Company to maintain certain minimum levels of tangible net
worth throughout the term of the agreement and a minimum debt service coverage
ratio which is tested on a quarterly basis. During 1996, the Company's Credit
Facility was amended whereby certain financial covenants were modified and the
Company's borrowing rate was increased by one-quarter of one percent (.25%). See
Note 8 to Notes to Consolidated Financial Statements. At December 31, 1997,
outstanding borrowings under the Credit Facility aggregated $39.0 million down
substantially from $50 million at December 31, 1996.
The Company expects that its cash flows from operations and additional
borrowings available under the Credit Facility will be sufficient to meet its
current financial requirements over the next twelve months.
Inflation and Currency Fluctuations
- -----------------------------------
The Company does not believe that inflation or currency fluctuations
significantly impacted its business during 1997; however, inflation, changing
interest rates and currency fluctuations have had significant effects on the
economy in the past and could adversely impact the Company's results in the
future.
Acquisitions
- ------------
Effective January 1, 1996, the Company purchased all of the capital stock of
Programming Plus Incorporated ("PPI"). The purchase price for PPI consisted of
$1,375,000 of common stock of the Company, valued at $2.50 per share. Only
60,000 shares of the Company's common stock, valued at $150,000, were released
to the PPI selling shareholders at closing. The $1,225,000 balance of the
consideration ("Additional Consideration"), represented by 489,999 shares of
common stock of the Company, was retained in escrow by the Company, as escrow
agent. The Additional Consideration was to be released to the PPI selling
shareholders annually if certain levels of pre-tax net income were attained by
the acquired company for the years ended December 31, 1996 through December 31,
2000. For the year ended December 31, 1996, the acquired company did not attain
that certain level of pre-tax net income and, accordingly, none of the
Additional Consideration was released. During 1997, the Company and the PPI
selling shareholders agreed to cease the operations of PPI. As a result, all of
the Additional Consideration held in escrow has been canceled and retired
subsequent to the balance sheet date. See Note 4 to Notes to Consolidated
Financial Statements.
On December 29, 1995, the Company completed the Added Value Acquisitions. The
purchase price for the Added Value Companies included approximately $2,936,000
in cash and 2,013,401 shares of common stock of the Company valued at
approximately $4,893,000 (exclusive of the 160,703 shares of common stock issued
in the transaction to a wholly-owned subsidiary of the Company). In addition,
the Company paid an aggregate of $1,200,000 in cash to the selling stockholders
in exchange for covenants not to compete, and an aggregate of $1,098,000 in cash
as front-end incentive employment compensation paid to certain key employees of
the Added Value Companies. The Company also assumed substantially all of the
sellers' disclosed liabilities of approximately $8,017,000, including
approximately $3,809,000 in bank notes which have since been repaid. In
connection with the Added Value Acquisitions the Company may be obligated to pay
to certain of the selling stockholders of the Added Value Companies up to
approximately $266,000 of additional consideration ("Additional Consideration")
if the aggregate value of the shares of the Company's common stock issued to
certain of the selling stockholders has not, by June 30, 1998, appreciated in
the aggregate by $266,000. Prior to the Company entering into a settlement
agreement with certain of the selling stockholders in December 1996 and with an
additional selling stockholder in January 1997 (collectively the "Settlement
Agreements"), the Additional Consideration could have been as much as
$1,900,000. See Note 4 to Notes to Consolidated Financial Statements. The
Additional Consideration is payable, subject to certain limitations, at the
election of the Company, in cash or the Company's common
21
stock, or a combination of cash and the Company's common stock. The Settlement
Agreement entered into in December 1996 also provided, among other things, that
certain of the selling stockholders reconvey to the Company an aggregate of
95,000 shares of common stock of the Company which were issued as part of the
purchase price for the Added Value Companies and that the Company grant to
certain selling stockholders stock options to purchase an aggregate of 50,000
shares of the Company's common stock at an exercise price of $1.50 per share
exercisable through December 30, 2001. See Note 10 to Notes to Consolidated
Financial Statements. The acquisitions were accounted for by the purchase method
of accounting which resulted in the recognition of approximately $2,937,000 of
excess cost over fair value of net assets acquired. As a result of a reduction
in the estimated future cash flows from the Added Value Companies, the Company
recognized an impairment of goodwill of approximately $2,200,000 in 1996. See
Note 5 to Notes to Consolidated Financial Statements. The assets, liabilities
and operating results of the acquired companies are included in the Consolidated
Financial Statements of the Company from the date of the acquisitions, December
29, 1995.
Year 2000 Issue
- ---------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to designate the applicable year. Accordingly,
computer programs that utilize date sensitive software may recognize a date
using "00" or another two-digit date as the year 1900 or a year between 1901 and
1999 (as the case may be) rather than the year 2000 or the applicable year
thereafter. This could potentially result in a system failure or miscalculations
causing disruptions of operations. The Company has evaluated its internal
systems and is in the process of surveying its major vendors. The Company
currently believes that its internal systems are in compliance with year 2000
requirements or, to the extent any further required modifications are necessary,
will comply with year 2000 requirements without material expenditures of funds
or internal resources. Although the Company is in the initial stages of
evaluating year 2000 compliance with respect to its vendors, the Company
currently believes that Year 2000 issues of its vendors should not have a
material adverse effect on the Company's business, operations or financial
condition. Nevertheless, to the extent the Company's vendors experience Year
2000 difficulties, the Company may face delays in obtaining or even be unable to
obtain certain products and services and therefore may be unable to make
shipments to customers. Accordingly, at this time, no assurance can be given
that once the Company's review of the Year 2000 issues is complete, the Company
will not determine that Year 2000 issues may have a significant effect on the
Company's business or operations.
Forward-Looking Statements
- --------------------------
This Form 10-K contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs concerning the Company's future
performance and operating results, its products, services, markets and industry,
and/or future events relating to or effecting the Company and its business and
operations. When used in this Form 10-K, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," and similar expressions as they
relate to the Company or its management are intended to identify forward-looking
statements. The actual results or achievements of the Company could differ
materially from those indicated by the forward-looking statements because of
various risks and uncertainties related to and including, without limitation,
the effectiveness of the Company's business and marketing strategies, timing of
delivery of products from suppliers, the product mix sold by the Company, the
Company's development of new customers, existing customer demand as well as the
level of demand for products of its customers, availability of products from and
the establishment and maintenance of relationships with suppliers, price
competition for products sold by the Company, management of growth and expenses,
the Company's ability to collect accounts receivable, price decreases on
inventory that is not price protected, gross profit margins, availability and
terms of financing to fund capital needs, the continued enhancement of
telecommunication, computer and information systems, the achievement by the
Company and its vendors and customers of Year 2000 compliance in a timely and
cost efficient manner, the continued and anticipated growth of the electronics
industry and electronic components distribution industry, the impact on certain
of the Company's suppliers and customers of economic or financial turbulence in
off-shore economies and/or financial markets,
22
change in government tariffs or duties, a change in interest rates, the state of
the general economy, and the other risks and factors detailed in this Form 10-K
and in the Company's other filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control.
In many cases, the Company cannot predict the risks and uncertainties that could
cause actual results to differ materially from those indicated by the
forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries and
supplementary data required by this item are included in Item 14(a)(1) and (2)
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to these items will be included in a definitive proxy statement
filed within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report Page
---------------------------------------------- ----
1. Financial Statements
--------------------
Management's Responsibility for Financial Reporting................ F-1
Independent Auditors' Report....................................... F-1
Consolidated Balance Sheets........................................ F-2
Consolidated Statements of 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 Schedules
-----------------------------
None
3. Exhibits
--------
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibits 3.1 to the Company's Registration Statement
on Form S-1, File No. 33-15345-A, and to the Company's Form 10-K
for the fiscal year ended December 31, 1991), as further amended
by Certificate of Amendment of Certificate of Incorporation dated
August 21, 1995 of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-K for the year ended
December 31, 1995).
3.2 By-Laws, as amended July 29, 1994 (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June
30, 1994).
4.1 Specimen Certificate of Common Stock (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-2, File No. 33-47512).
23
4.2 Fiscal Agency Agreement, dated as of June 8, 1994, between the
Company and American Stock Transfer & Trust Co. ("American Stock
Transfer"), as fiscal agent, paying agent and securities
registrar (incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K dated June 14, 1994 and filed with the
Securities and Exchange Commission on June 15, 1994).
4.3 Warrant Agreement, dated as of June 8, 1994, between the Company
and American Stock Transfer, as warrant agent (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K dated June 14,
1994 and filed with the Securities and Exchange Commission on
June 15, 1994).
4.4 Placement Agent's Warrant Agreement, dated as of June 8, 1994,
between the Company and RAS Securities Corp. (incorporated by
reference to Exhibit 4.3 to the Company's Form 8-K dated June 14,
1994 and filed with the Securities and Exchange Commission on
June 15, 1994).
4.5 Underwriter's Warrant Agreement between the Company and Lew
Lieberbaum & Co., Inc. (incorporated by reference to Exhibit 4.2
to Amendment No. 1 to the Company's Registration Statement on
Form S-1, File No. 33-58661).
9.1 Form of Voting Trust Agreement attached as Exhibit "E" to
Purchase Agreement (incorporated by reference to Exhibit 9.1 to
the Company's Registration Statement on Form S-4, File No.
033-64019).
10.1 Form of Indemnification Contracts with Directors and Executive
Officers (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-2, File No. 33-47512).
10.2 Lease Agreement for Headquarters dated May 1, 1994 between Sam
Berman d/b/a Drake Enterprises ("Drake") and the Company
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended March 31, 1994).
10.3 Promissory Notes, all dated May 1, 1994 payable to the Company's
landlord in the amounts of $865,000, $150,000 and $32,718
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 1994).
10.4 Promissory Note, dated May 1, 1995, payable to Drake, the
Company's landlord, in the amount of $90,300 (incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No. 33-58661).
10.5 Agreement between Drake and the Company dated May 1, 1994
(incorporated by reference to Exhibit 10.5 to the Company's Form
10-K for the year ended December 31, 1994).
10.6 Amended and Restated All American Semiconductor, Inc. Employees',
Officers', Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.36 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No. 33-58661).**
10.7 Deferred Compensation Plan (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-2, File
No. 33-47512).**
10.8 Master Lease Agreement dated March 21, 1994, together with lease
schedules for computer and other equipment (incorporated by
reference to Exhibit 10.9 to the Company's Form 10-K for the year
ended December 31, 1994).
10.9 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).**
10.10 Employment Agreement dated as of May 24, 1995, between the
Company and Bruce M. Goldberg (incorporated by reference to
Exhibit 10.24 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661).**
10.11 Form of Warrant Extension Agreement relating to the Warrant
issued to The Equity Group, Inc. (assigned to Robert D.
Goldstein) (incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-2, File No. 33-47512).
24
10.12 Asset Purchase Agreement dated March 30, 1993 by and between All
American Semiconductor of Rockville, Inc. and All American
Transistor Corporation of D.C. (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended
December 31, 1992).
10.13 Asset Purchase Agreement dated January 5, 1994 by and between All
American Semiconductor of Chicago, Inc. and Components
Incorporated; and as an exhibit thereto the employment agreement
with Robert Ryan (incorporated by reference to exhibits to the
Company's current report on Form 8-K dated January 19, 1994).
10.14 Asset Purchase Agreement dated as of July 1, 1994 by and between
the Company and GCI Corp.; Letter Agreement dated July 1, 1994
among the Company, GCI Corp., Robert Andreini, Joseph Cardarelli
and Joseph Nelson; Guaranty dated July 1, 1994 and Amendment
Letter to Asset Purchase Agreement and Letter Agreement dated
July 15, 1994 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1994).
10.15 Merger Purchase Agreement (the "Purchase Agreement") dated as of
October 31, 1995, among the Company, All American Added Value,
Inc., All American A.V.E.D., Inc. and the Added Value Companies
(incorporated by reference to Appendix A to the Proxy
Statement/Prospectus included in and to Exhibit 2.1 to the
Company's Registration Statement on Form S-4, File No.
033-64019).
10.16 Stock Purchase Agreement (without schedules) dated as of January
1, 1996 among the Company, as purchaser, and Steven E. Culligan,
Alan G. Bowen and Robert Harrington, as sellers (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 31, 1996).
10.17 Loan and Security Agreement (without exhibits or schedules) among
Harris Trust and Savings Bank, as a lender and administrative
agent, American National Bank and Trust Company of Chicago, as a
lender and collateral agent, and the Other Lenders Party thereto
and the Company, as borrower, together with six (6) Revolving
Credit Notes, all dated May 10, 1996, aggregating $100,000,000
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 1996).
10.18 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).
10.19 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).
10.20 Consulting Contract dated July 1, 1995 by and between All
American Semiconductor, Inc. and The Equity Group, Inc.
(incorporated by reference to Exhibit 10.23 to the Company's Form
10-K for the year ended December 31, 1995).
10.21 Form of Consulting Agreement between the Company and Lew
Lieberbaum & Co., Inc. (incorporated by reference to Exhibit
10.19 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-58661).
10.22 Warrant Certificates Nos. 93-1 and 93-2 dated as of May 13, 1993,
issued to The Equity Group, Inc. (incorporated by reference to
Exhibit 10.24 to the Company's Form 10-K for the year ended
December 31, 1994).
10.23 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).**
10.24 Employment Agreement dated as of May 24, 1995, between the
Company and Howard L. Flanders (incorporated by reference to
Exhibit 10.25 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661).**
10.25 Employment Agreement dated as of May 24, 1995, between the
Company and Rick Gordon (incorporated by reference to Exhibit
10.26 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-58661).**
25
10.26 Settlement Agreement dated December 17, 1996, by and among the
Company, certain of its subsidiaries and certain selling
stockholders of the Added Value Companies (incorporated by
reference to Exhibit 10.35 to the Company's Form 10-K for the
year ended December 31, 1996).
10.27 Settlement Agreement dated January 22, 1997, by and among the
Company, certain of its subsidiaries and Thomas Broesamle
(incorporated by reference to Exhibit 10.36 to the Company's Form
10-K for the year ended December 31, 1996).
10.28 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).**
10.29 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).
11.1 Statement Re: Computation of Per Share Earnings.*
21.1 List of subsidiaries of the Registrant.*
23.1 Consent of Lazar, Levine & Felix LLP, independent certified
public accountants.*
27.1 Financial Data Schedule.*
- ------------------
* Filed herewith
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
-------------------
No reports were filed during the fourth quarter of 1997.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ALL AMERICAN SEMICONDUCTOR, INC.
(Registrant)
By: /s/ PAUL GOLDBERG
-----------------
Paul Goldberg, Chairman of the Board
Dated: March 30, 1998
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 30, 1998.
/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/ SHELDON LIEBERBAUM Director
- ------------------------------
Sheldon Lieberbaum
/s/ S. CYE MANDEL Director
- ------------------------------
S. Cye Mandel
/s/ DANIEL M. ROBBIN Director
- ------------------------------
Daniel M. Robbin
27
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 accounting 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 auditing
controls.
The Audit Committee, comprised solely of directors who are not officers or
employees of the Company, meets annually with representatives of management and
the Company's independent accountants to review and monitor the financial,
accounting, and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The Company's independent accountants have full and
free access to the Audit Committee.
/s/ BRUCE M. GOLDBERG /s/ HOWARD L. FLANDERS
- ------------------------------ -----------------------------------
Bruce M. Goldberg Howard L. Flanders
President, Executive Vice President,
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
All American Semiconductor, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of All American
Semiconductor, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of All
American Semiconductor, Inc. and subsidiaries at December 31, 1997 and 1996 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ LAZAR, LEVINE & FELIX LLP
- -------------------------------------
LAZAR, LEVINE & FELIX LLP
New York, New York
February 27, 1998
F-1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Current assets:
Cash................................................................. $ 444,000 $ 525,000
Accounts receivable, less allowances for doubtful
accounts of $1,166,000 and $1,200,000.............................. 32,897,000 32,711,000
Inventories.......................................................... 67,909,000 64,212,000
Other current assets................................................. 2,074,000 5,113,000
---------------- ---------------
Total current assets............................................... 103,324,000 102,561,000
Property, plant and equipment - net.................................... 4,779,000 5,454,000
Deposits and other assets.............................................. 3,157,000 3,832,000
Excess of cost over fair value of net assets acquired - net............ 1,026,000 1,074,000
---------------- ---------------
$ 112,286,000 $ 112,921,000
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt.................................... $ 304,000 $ 434,000
Accounts payable and accrued expenses................................ 39,154,000 31,808,000
Income taxes payable................................................. 389,000 -
Other current liabilities............................................ 169,000 496,000
---------------- ---------------
Total current liabilities.......................................... 40,016,000 32,738,000
Long-term debt:
Notes payable........................................................ 39,084,000 50,012,000
Subordinated debt.................................................... 6,293,000 6,539,000
Other long-term debt................................................. 1,219,000 1,236,000
---------------- ---------------
86,612,000 90,525,000
---------------- ---------------
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,
20,353,894 and 20,323,894 shares issued, 19,863,895 and
19,833,895 shares outstanding...................................... 199,000 198,000
Capital in excess of par value....................................... 25,588,000 25,561,000
Retained earnings (deficit).......................................... 338,000 (2,912,000)
Treasury stock, at cost, 180,295 shares.............................. (451,000) (451,000)
---------------- ---------------
25,674,000 22,396,000
---------------- ---------------
$ 112,286,000 $ 112,921,000
================ ===============
See notes to consolidated financial statements
F-2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
NET SALES........................................ $ 265,640,000 $ 237,846,000 $ 177,335,000
Cost of sales.................................... (207,173,000) (185,367,000) (138,089,000)
--------------- --------------- ---------------
Gross profit..................................... 58,467,000 52,479,000 39,246,000
Selling, general and
administrative expenses........................ (48,257,000) (51,675,000) (32,321,000)
Impairment of goodwill........................... - (2,193,000) -
Restructuring and other nonrecurring
expenses....................................... - (2,749,000) (1,098,000)
--------------- --------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS..................................... 10,210,000 (4,138,000) 5,827,000
Interest expense................................. (4,797,000) (7,025,000) (2,739,000)
--------------- --------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES................. 5,413,000 (11,163,000) 3,088,000
Income tax (provision) benefit................... (2,163,000) 2,942,000 (1,281,000)
--------------- --------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE DISCONTINUED
OPERATIONS AND EXTRAORDINARY
ITEMS.......................................... 3,250,000 (8,221,000) 1,807,000
Discontinued operations:
Gain (loss) from operations
(net of $125,000 and $(56,000) income
tax benefit (provision))....................... - (166,000) 79,000
Loss on disposal (net of $1,200,000
income tax benefit)............................ - (1,591,000) -
--------------- --------------- ---------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS............................ 3,250,000 (9,978,000) 1,886,000
Extraordinary items:
Gain from settlement of litigation (net of
$205,000 income tax provision)................. - 272,000 -
Loss on early retirement of debt (net of
$161,000 income tax benefit)................... - (214,000) -
--------------- --------------- ---------------
NET INCOME (LOSS)................................ $ 3,250,000 $ (9,920,000) $ 1,886,000
=============== =============== ===============
EARNINGS (LOSS) PER SHARE:
Basic:
INCOME (LOSS) FROM CONTINUING
OPERATIONS................................... $ .17 $(.41) $ .11
Discontinued operations........................ - (.09) .01
Extraordinary items............................ - - -
----- ----- -----
NET INCOME (LOSS).............................. $ .17 $(.50) $ .12
===== ===== =====
Diluted:
INCOME (LOSS) FROM CONTINUING
OPERATIONS................................... $ .16 $(.40) $ .11
Discontinued operations........................ - (.09) .01
Extraordinary items............................ - - -
----- ----- -----
NET INCOME (LOSS).............................. $ .16 $(.49) $ .12
===== ===== =====
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, 1994...... 12,416,791 $ 124,000 $ 11,764,000 $ 5,122,000 $ (60,000) $ 16,950,000
Sale of equity securities....... 5,232,500 53,000 8,447,000 - - 8,500,000
Issuance of equity securities... 2,174,104 22,000 5,262,000 - (391,000) 4,893,000
Exercise of stock options and
warrants...................... 40,500 - 38,000 - - 38,000
Net income...................... - - - 1,886,000 - 1,886,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995...... 19,863,895 199,000 25,511,000 7,008,000 (451,000) 32,267,000
Exercise of stock options....... 5,000 - 9,000 - - 9,000
Issuance of equity securities... 60,000 - 150,000 - - 150,000
Reacquisition and cancellation
of equity securities.......... (95,000) (1,000) (109,000) - - (110,000)
Net loss........................ - - - (9,920,000) - (9,920,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996...... 19,833,895 198,000 25,561,000 (2,912,000) (451,000) 22,396,000
EXERCISE OF STOCK OPTIONS....... 30,000 1,000 27,000 - - 28,000
NET INCOME...................... - - - 3,250,000 - 3,250,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997...... 19,863,895 $ 199,000 $ 25,588,000 $ 338,000 $ (451,000) $ 25,674,000
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements
F-4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 3,250,000 $ (9,920,000) $ 1,886,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.................................. 1,440,000 2,757,000 1,038,000
Non-cash interest expense...................................... 254,000 2,273,000 148,000
Nonrecurring expenses.......................................... - 4,428,000 -
Changes in assets and liabilities of continuing operations:
Decrease (increase) in accounts receivable................... (972,000) 1,569,000 (12,324,000)
Decrease (increase) in inventories........................... (3,697,000) 1,206,000 (24,495,000)
Decrease (increase) in other current assets.................. 3,039,000 (2,014,000) (248,000)
Increase (decrease) in accounts payable and
accrued expenses........................................... 7,356,000 (14,032,000) 24,972,000
Increase (decrease) in other current liabilities............. 62,000 (669,000) 809,000
Decrease (increase) in net assets of discontinued operations... 830,000 1,796,000 (72,000)
------------ ------------ ------------
Net cash provided by (used for) operating activities....... 11,562,000 (12,606,000) (8,286,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................ (298,000) (2,293,000) (1,428,000)
Increase in other assets......................................... (83,000) (4,438,000) (1,540,000)
Purchases of net assets of acquired companies.................... - - (2,860,000)
Net investing activities of discontinued operations.............. - (39,000) (7,000)
------------ ------------ ------------
Net cash used for investing activities..................... (381,000) (6,770,000) (5,835,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit agreements...... (11,000,000) 20,290,000 5,910,000
Increase in notes payable........................................ - 15,161,000 134,000
Repayments of notes payable...................................... (290,000) (15,835,000) (385,000)
Net proceeds from issuance of equity securities.................. 28,000 9,000 8,538,000
------------ ------------ ------------
Net cash provided by (used for) financing activities....... (11,262,000) 19,625,000 14,197,000
------------ ------------ ------------
Increase (decrease) in cash...................................... (81,000) 249,000 76,000
Cash, beginning of year.......................................... 525,000 276,000 200,000
------------ ------------ ------------
Cash, end of year................................................ $ 444,000 $ 525,000 $ 276,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................... $ 4,906,000 $ 3,839,000 $ 2,581,000
============ ============ ============
Income taxes paid (refunded) - net............................... $ (989,000) $ 1,108,000 $ 898,000
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1997 a capital lease in the amount of $634,000 for computer equipment,
which first took effect in 1994, was renewed for an additional three years.
Effective January 1, 1996, the Company purchased all of the capital stock of
Programming Plus Incorporated ("PPI"). The consideration paid by the Company for
such capital stock consisted of 549,999 shares of common stock of the Company
valued at $1,375,000 (or $2.50 per share); however, only 60,000 shares of common
stock (valued at $150,000) were released to the PPI selling shareholders at
closing. The balance, which was retained in escrow subject to certain conditions
subsequent, has been canceled and retired. During 1995, the Company purchased
all the capital stock of Added Value Electronics Distribution, Inc. and
A.V.E.D.-Rocky Mountain, Inc. The Company paid approximately $2,936,000 in cash
and 2,013,401 shares of common stock of the Company valued at approximately
$4,893,000.
See notes to consolidated financial statements
F-5
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is a national distributor of electronic components manufactured by
others. The Company primarily distributes a full range of semiconductors (active
components), including transistors, diodes, memory devices and other integrated
circuits, as well as passive components, such as capacitors, resistors,
inductors and electromechanical products, including cable, switches, connectors,
filters and sockets. The Company's products are sold primarily to original
equipment manufacturers ("OEMs") in a diverse and growing range of industries,
including manufacturers of computers and computer-related products, satellite
and communications products, consumer goods, robotics and industrial equipment,
defense and aerospace equipment and medical instrumentation. The Company also
sells products to contract electronics manufacturers ("CEMs") who manufacture
products for companies in all electronics industry segments. The Company also
designs and has manufactured certain board level products including memory
modules and flat panel display driver boards, both of which are sold to OEMs.
The Company's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP"). Those principles considered
particularly significant are detailed below. GAAP requires management to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expenses. While actual results may differ from these estimates,
management does not expect the variances, if any, to have a material effect on
the Consolidated Financial Statements.
Basis of Consolidation and Presentation
- ---------------------------------------
The Consolidated Financial Statements of the Company include the accounts of all
subsidiaries, all of which are wholly-owned. All material intercompany balances
and transactions have been eliminated in consolidation. The Company has a
Canadian subsidiary which conducts substantially all of its business in U.S.
dollars.
Prior years' financial statements have been reclassified to conform with the
current year's presentation.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company,
from time to time, maintains cash balances which exceed the federal depository
insurance coverage limit. The Company performs periodic reviews of the relative
credit rating of its bank to lower its risk. The Company believes that
concentration with regards to accounts receivable is limited due to its large
customer base. Fair values of cash, accounts receivable, accounts payable and
long-term debt reflected in the December 31, 1997 and 1996 Consolidated Balance
Sheets approximate carrying value at these dates.
Inventories
- -----------
Inventories are stated at the lower of cost (determined on an average cost
basis) or market.
Fixed Assets
- ------------
Fixed assets are reflected at cost. Depreciation of office furniture and
equipment and computer equipment is provided on straight-line and accelerated
methods over the estimated useful lives of the respective assets. Amortization
of leasehold improvements is provided using the straight-line method over the
term of the related lease or the life of the respective asset, whichever is
shorter. Maintenance and repairs are charged to expense as incurred; major
renewals and betterments are capitalized.
F-6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Excess of Cost Over Fair Value of Net Assets Acquired (Goodwill)
- ----------------------------------------------------------------
The excess of cost over the fair value of net assets acquired is being amortized
over periods ranging from 15 years to 40 years using the straight-line method.
The Company periodically reviews the value of its excess of cost over the fair
value of net assets acquired to determine if an impairment has occurred. As part
of this review the Company measures the estimated future operating cash flows of
acquired businesses and compares that with the carrying value of excess of cost
over the fair value of net assets. See Note 5 to Notes to Consolidated Financial
Statements.
Income Taxes
- ------------
The Company has elected to file a consolidated federal income tax return with
its subsidiaries. Deferred income taxes are provided on transactions which are
reported in the financial statements in different periods than for income tax
purposes. The Company utilizes Financial Accounting Standards Board Statement
No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
recognition of deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the difference is expected to reverse. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. See Note 9 to Notes to
Consolidated Financial Statements.
Earnings Per Share
- ------------------
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" ("SFAS 128"), which has changed the method for
calculating earnings per share. SFAS 128 requires the presentation of "basic"
and "diluted" earnings per share on the face of the statement of operations.
Prior period earnings per share data has been restated in accordance with SFAS
128. 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 1997 1996 1995
- --------------------------------------------------------------------------------
Basic............................ 19,672,559 19,742,849 15,241,458
Diluted.......................... 19,784,837 20,105,761 15,866,866
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.
Stock-Based Compensation
- ------------------------
In 1996, the Company adopted Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See Note 10 to
Notes to Consolidated Financial Statements.
Comprehensive Income
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which prescribes standards for
reporting comprehensive income and
F-7
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
its components. SFAS 130 is effective for fiscal years beginning after December
15, 1997. The Company will adopt SFAS 130 for the year ending December 31, 1998.
NOTE 2 - PUBLIC OFFERING
In June 1995, the Company completed a public offering of 4,550,000 shares
(exclusive of the over-allotment option) of its common stock at $1.875 per
share. In July 1995, the Company issued an additional 682,500 shares of its
common stock as a result of the exercise of an over-allotment option. The
aggregate net proceeds from this offering, after deducting all associated costs,
aggregated approximately $8,500,000.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31 1997 1996
- -----------------------------------------------------------------------------------
Office furniture and equipment.............. $ 4,074,000 $ 4,018,000
Computer equipment.......................... 3,554,000 3,403,000
Leasehold improvements...................... 1,800,000 1,719,000
---------------- ---------------
9,428,000 9,140,000
Accumulated depreciation and amortization... (4,649,000) (3,686,000)
---------------- ---------------
$ 4,779,000 $ 5,454,000
================ ===============
NOTE 4 - ACQUISITIONS
Effective January 1, 1996, the Company purchased all of the capital stock of
Programming Plus Incorporated ("PPI"), which provided programming and tape and
reel services with respect to electronic components. The purchase price for PPI
consisted of $1,375,000 of common stock of the Company, valued at $2.50 per
share. Only 60,000 shares of the Company's common stock, valued at $150,000,
were released to the PPI selling shareholders at closing. The $1,225,000 balance
of the consideration ("Additional Consideration"), represented by 489,999 shares
of common stock of the Company, was retained in escrow by the Company, as escrow
agent. The Additional Consideration was to be released to the PPI selling
shareholders annually if and based upon certain levels of pre-tax net income
were attained by the acquired company for the years ended December 31, 1996
through December 31, 2000. For the year ended December 31, 1996, the acquired
company did not attain that certain level of pre-tax net income and,
accordingly, none of the Additional Consideration was released. During 1997, the
Company and the PPI selling shareholders agreed to cease the operations of PPI.
As a result, all of the Additional Consideration held in escrow has been
canceled and retired subsequent to the balance sheet date.
On December 29, 1995, the Company purchased through two separate mergers with
and into the Company's wholly-owned subsidiaries (the "Added Value
Acquisitions") all of the capital stock of Added Value Electronics Distribution,
Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain," and
together with Added Value, collectively the "Added Value Companies"). The
purchase price for the Added Value Companies included approximately $2,936,000
in cash and 2,013,401 shares of common stock of the Company valued at
approximately $4,893,000 (exclusive of the 160,703 shares of common stock issued
in the transaction to a wholly-owned subsidiary of the Company). In addition,
the Company paid an aggregate of $1,200,000 in cash to the selling stockholders
in exchange for covenants not to compete, and an aggregate of $1,098,000 in cash
as front-end incentive employment compensation paid to certain key employees of
the Added Value Companies. The Company also assumed substantially all of the
sellers' disclosed liabilities of approximately $8,017,000, including
approximately $3,809,000 in bank notes which have since been repaid. The Company
may be obligated to pay to certain of the selling stockholders of the Added
Value Companies up to approximately $266,000 of additional consideration
("Additional Consideration") if the aggregate value of the shares of the
Company's common stock issued to certain of the selling stockholders has not, by
June 30, 1998, appreciated in the aggregate by $266,000. Prior to the
F-8
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Company entering into a settlement agreement with certain of the selling
stockholders in December 1996 and with an additional selling stockholder in
January 1997 (collectively the "Settlement Agreements") the Additional
Consideration could have been as much as $1,900,000. See Note 5 to Notes to
Consolidated Financial Statements. The Additional Consideration is payable,
subject to certain limitations, at the election of the Company, in cash or the
Company's common stock, or a combination of cash and the Company's common stock.
The Settlement Agreement entered into in December 1996 also provided, among
other things, that certain of the selling stockholders reconvey to the Company
an aggregate of 95,000 shares of common stock of the Company which were issued
as part of the purchase price for the Added Value Companies and that the Company
grant to certain selling stockholders stock options to purchase an aggregate of
50,000 shares of the Company's common stock at an exercise price of $1.50 per
share exercisable through December 30, 2001. See Note 5 to Notes to Consolidated
Financial Statements. The acquisitions were accounted for by the purchase method
of accounting which resulted in the recognition of approximately $2,937,000 of
excess cost over fair value of net assets acquired. As a result of a reduction
in the estimated future cash flows from the Added Value Companies, the Company
recognized an impairment of goodwill of approximately $2,200,000 in 1996. See
Note 5 to Notes to Consolidated Financial Statements. The assets, liabilities
and operating results of the acquired companies are included in the Consolidated
Financial Statements of the Company from the date of the acquisitions, December
29, 1995.
In connection with the acquisition of substantially all of the assets of GCI
Corp., a Philadelphia-area distributor of electronic components, the seller was
able to earn up to an additional $760,000 of contingent purchase price over the
three-year period ending December 31, 1997 if certain gross profit targets were
met. The gross profit targets were not met and, therefore, no additional
purchase price was earned.
The following unaudited pro forma consolidated income statement data presents
the Consolidated Results of Operations of the Company as if the acquisitions of
PPI and the Added Value Companies had occurred at the beginning of the year
presented:
YEAR ENDED DECEMBER 31 1995
- --------------------------------------------------------------------------------
Net sales........................................................ $217,247,000
Net income....................................................... 2,822,000
Basic and diluted earnings per share............................. $.16
The above pro forma information does not purport to be indicative of what would
have occurred had the acquisitions been made as of such date or of the results
which may occur in the future.
NOTE 5 - IMPAIRMENT OF GOODWILL
In connection with the Company's acquisitions of the Added Value Companies and
PPI, at September 30, 1996, the Company recognized an impairment of goodwill.
This non-cash charge was primarily related to the Added Value Companies and had
no associated tax benefit. A variety of factors contributed to the impairment of
the goodwill relating to the Added Value Companies. These factors included a
significant reduction in the revenues and operating results generated by the
Added Value Companies' customer base acquired by the Company, a restructuring of
the Added Value Companies' kitting and turnkey operations due to the Company
determining that it was not economically feasible to continue and expand such
division as originally planned, as well as the termination of certain principals
and senior management of the Added Value Companies who became employees of the
Company at the time of the closing of the acquisitions. See Note 6 to Notes to
Consolidated Financial Statements. These factors greatly reduced the estimated
future cash flows from the Added Value Companies. In determining the amount of
the impairment charge, the Company developed its best estimate of projected
operating cash flows over the remaining period of expected benefit. Projected
future cash flows were discounted and compared to the carrying value of the
F-9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
related goodwill and as a result a write-down of approximately $2,400,000 with
respect to the Added Value Companies was recorded in 1996.
In December 1996 and January 1997, as part of the Settlement Agreements (see
Note 4 to Notes to Consolidated Financial Statements), the Company reacquired
and canceled 95,000 shares of the Company's common stock valued at approximately
$110,000, which, together with certain excess distributions made to certain
principals of the Added Value Companies in connection with the acquisitions,
reduced the impairment of goodwill to $2,193,000.
NOTE 6 - RESTRUCTURING AND OTHER NONRECURRING EXPENSES
During 1996, the Company recorded a pretax charge of $1,092,000 associated
primarily with the restructuring of its kitting and turnkey operations. The
kitting department was created toward the end of 1994 and, at the time of the
December 1995 Added Value Acquisitions, the Company intended to utilize the
extensive kitting capabilities acquired and expand such service nationwide. In
addition, the acquisitions provided the Company with capabilities in turnkey
manufacturing services. After evaluating, with the assistance of consultants,
the Company's cost structure and service capabilities, the Company's management
determined that it was not economically feasible to continue its current level
of investment in such services, especially in light of the adverse market
conditions within the industry at that time. As a result, the Company adopted a
plan to restructure its kitting and turnkey operations. In connection with this
plan, the Company reduced the related workforce and accrued for employee
severance and related benefits and wrote down various related assets. The
portion of the restructuring charge which represented severance and related
benefits aggregated approximately $625,000. The workforce reductions primarily
affected approximately 90 employees of the Company's sales, management and
operations departments. As of December 31, 1996, approximately $194,000 of
termination benefits were applied to the restructuring accrual and by March 31,
1997 the balance of the accrued liability was paid.
In addition, during 1996, the Company wrote-off $2,000,000 of inventory
associated primarily with the restructuring of the kitting and turnkey
operations which is reflected in cost of sales in the accompanying Consolidated
Statements of Operations for the year ended December 31, 1996.
During 1996, the Company terminated certain employment agreements which were
entered into in connection with certain acquisitions. As a result, the Company
accrued $587,000 of nonrecurring expenses in 1996, representing the aggregate of
the payments which were made under such agreements in 1997.
In May 1996, the Company decided to close its cable assembly division and
relocate certain of such operations to its Miami distribution facility.
Accordingly, the Company accrued $445,000 of nonrecurring expenses in 1996
relating to such decision, including the write-down of certain cable
assembly-specific inventory, operating costs through the date of relocation and
severance pay.
In December 1996, an employment agreement with an executive officer was amended
whereby the permitted retirement date was accelerated to December 31, 1996. As a
result, the Company accelerated an existing postretirement benefit accrual
schedule and recorded an additional non-cash charge of $625,000. Of the initial
restructuring accrual which aggregated $2,749,000 at December 31, 1996, $625,000
relating to the forgoing postretirement benefits remained at December 31, 1997.
See Note 11 to Notes to Consolidated Financial Statements.
In 1995 in connection with the Added Value Acquisitions, the Company paid an
aggregate of $1,098,000 in cash to certain key employees of the Added Value
Companies as front-end incentive employment compensation.
F-10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - DISCONTINUED OPERATIONS
In June 1995, the Company established a computer products division ("CPD") which
operated under the name Access Micro Products. This division sold
microprocessors, motherboards, computer upgrade kits, keyboards and disk drives
primarily to value added resellers, retailers and distributors of computer
products. During the first quarter of 1996 this division was profitable and
growing. As a result of this growth and at the request of the division's primary
supplier, the Company expanded its staffing and infrastructure to support the
expected continued growth. During the second quarter of 1996, the Company was
notified by the division's primary supplier that it had discontinued the
production of certain products that were the mainstay of the Company's computer
products division. Although the Company obtained additional product offerings,
revenues of Access Micro Products were severely impacted without these mainstay
products and, as a result, management decided to discontinue CPD. The Company
finalized its plan of disposal during the third quarter of 1996. Accordingly,
this division was accounted for as discontinued operations and the results of
operations for 1996 and 1995 are segregated in the accompanying Consolidated
Statements of Operations. Net sales, cost of sales, operating expenses and
income taxes for the prior periods have been reclassified for amounts associated
with the discontinued division. The loss on disposal of $2,791,000, on a pretax
basis, included the estimated costs and expenses associated with the disposal of
$2,326,000 as well as a provision of $465,000 for operating losses during the
phase-out period, which continued through March 31, 1997.
Sales from this division were $6,822,000 and $3,459,000 for 1996 and 1995,
respectively. The net assets of discontinued operations, after reflecting
certain non-cash write-offs of inventory and receivables, included in the
accompanying Consolidated Balance Sheet at December 31, 1996, are summarized as
follows:
Current assets.............................. $ 788,000
Property, plant and equipment - net......... 42,000
-----------
Net assets.................................. $ 830,000
===========
NOTE 8 - LONG-TERM DEBT
Line of Credit
- --------------
In May 1996, the Company entered into a new $100 million line of credit facility
with a group of banks (the "Credit Facility") which expires May 3, 2001. At the
time of entering into such facility, borrowings under the Credit Facility bore
interest, at the Company's option, at either prime plus one-quarter of one
percent (.25%) or LIBOR plus two and one-quarter percent (2.25%). Outstanding
borrowings under the Credit Facility, which are secured by all of the Company's
assets including accounts receivable, inventories and equipment, amounted to
$39,000,000 at December 31, 1997 compared to $50,000,000 at December 31, 1996.
The amounts that the Company may borrow under the Credit Facility are based upon
specified percentages of the Company's eligible accounts receivable and
inventories (as defined). Under the Credit Facility, the Company is required to
comply with certain affirmative and negative covenants as well as to comply with
certain financial ratios. These covenants, among other things, place limitations
and restrictions on the Company's borrowings, investments and transactions with
affiliates and prohibit dividends and stock redemptions. Furthermore, the Credit
Facility requires the Company to maintain certain minimum levels of tangible net
worth throughout the term of the agreement and a minimum debt service coverage
ratio which is tested on a quarterly basis. In connection with obtaining the
Credit Facility the Company paid financing fees which aggregated $3,326,000.
During 1996, the Company's Credit Facility was amended whereby certain financial
covenants were modified and the Company's borrowing rate was increased by
one-quarter of one percent (.25%). As a result of a projected decrease in the
Company's future anticipated utilization of the Credit Facility based on
projected cash flows as well as certain changes to the terms of the initial
agreement, $1,704,000 of the deferred financing fees was written off to interest
expense in 1996, since it was deemed to have no future economic benefit.
F-11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In connection with the Credit Facility, in May 1996, the Company repaid all
outstanding borrowings under the Company's previous $45 million line of credit
facility which was to expire in May 1997 and bore interest, at the Company's
option, either at one-quarter of one percent (.25%) below prime or two percent
(2%) above certain LIBOR rates and repaid the Company's $15 million senior
subordinated promissory note (the "Subordinated Note"). The Subordinated Note
had been issued in March 1996 and was scheduled to mature on July 31, 1997. As a
result of the early extinguishment of the Subordinated Note, the Company
recognized an extraordinary after-tax expense of $214,000, net of a related
income tax benefit of $161,000, in 1996.
Subordinated Debt
- -----------------
In September 1994, in connection with the acquisition of GCI Corp., the Company
issued a promissory note to the seller bearing interest at 7% per annum in the
approximate amount of $306,000 due in 1999. The promissory note, which is
subordinate to the Company's line of credit, is payable interest only on a
quarterly basis for the first two years with the principal amount, together with
accrued interest thereon, payable in equal quarterly installments over the next
three years. One-half of the then outstanding principal balance of the
promissory note was required to be paid if certain Net Earnings (as defined)
were attained for 1995 or 1996. For 1995 and 1996, the level of Net Earnings (as
defined) was not met. In addition, in connection with bonuses earned pursuant to
employment agreements, the Company executed two promissory notes in 1996 to two
of the former principal stockholders of GCI Corp., each in the approximate
amount of $10,100. These notes, which are subordinate to the Company's
institutional lenders, mature in 2001 and bear interest at 7% per annum, payable
quarterly. During 1997, the Company executed an additional promissory note in
the approximate amount of $13,600 to a former principal stockholder of GCI Corp.
This note for bonus earned pursuant to an employment agreement, is subordinate
to the Company's institutional lenders, matures in 2002 and bears interest at 7%
per annum, payable quarterly. Furthermore, the Company executed a promissory
note in the approximate amount of $37,300 payable to GCI Corp. in connection
with the earn-out provision contained in the asset purchase agreement. This note
bears interest at 7% per annum, payable quarterly. The note, which is
subordinate to the Company's institutional lenders, matures in 2001.
In June 1994, the Company completed a private placement (the "1994 Private
Placement") of 51.5 units, with each unit consisting of a 9% non-convertible
subordinated debenture due 2004 in the principal amount of $100,000 issuable at
par, together with 7,500 common stock purchase warrants exercisable at $3.15 per
share. The 51.5 units issued represent debentures aggregating $5,150,000
together with an aggregate of 386,250 warrants. See Note 10 to Notes to
Consolidated Financial Statements. The debentures are payable in semi-annual
installments of interest only commencing December 1, 1994, with the principal
amount maturing in full on June 13, 2004. The Company is not required to make
any mandatory redemptions or sinking fund payments. The debentures are
subordinated to the Company's senior indebtedness including the Credit Facility
and notes issued to the Company's landlord. The 386,250 warrants were valued at
$.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 1997, 1996 and
1995.
In May 1994, the Company executed a promissory note in the amount of $865,000 in
favor of the Company's landlord to finance substantially all of the tenant
improvements necessary for the Company's Miami facility. This $865,000 note
requires no payments in the first year (interest accrues and is added to the
principal balance), is payable interest only in the second year and has a
repayment schedule with varying monthly payments over the remaining 18 years. At
the same time, the Company entered into another promissory note with the
Company's landlord for $150,000 to finance certain personal property for the
facility. This $150,000 note is payable interest only for six months and
thereafter in 60 equal self-amortizing monthly payments of principal and
interest. These notes, which are subordinate to the Credit Facility, bear
interest at 8% per annum and are payable monthly. Certain additional
improvements to the Company's Miami
F-12
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
corporate facility aggregating approximately $90,300 were financed as of May 1,
1995 by the landlord. This $90,300 is evidenced by a promissory note payable in
240 consecutive, equal self-amortizing monthly installments of principal and
interest. This note, which is subordinate to the Credit Facility, accrues
interest at a fixed rate of 8% per annum. In October 1996, the Company executed
a promissory note in the amount of $161,500 with the Company's landlord to
finance certain additional improvements to the Company's Miami corporate
facility. This note, which is subordinate to the Credit Facility, is payable
monthly with interest at 8.5% per annum and matures in October 2011.
Long-term debt of the Company as of December 31, 1997, other than the Credit
Facility, matures as follows:
1998.......................................................... $ 272,000
1999.......................................................... 235,000
2000.......................................................... 90,000
2001.......................................................... 71,000
2002.......................................................... 60,000
Thereafter.................................................... 7,066,000
---------------
$ 7,794,000
===============
Obligations under Capital Leases
- --------------------------------
During 1997 the Company renewed a capital lease for computer equipment which
will expire in 2000. The assets, aggregating $634,000, and liabilities under
the capital lease are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are depreciated over
their estimated productive lives. As of December 31, 1997, accumulated
depreciation of these assets aggregated approximately $317,000. Depreciation of
assets under this capital lease is included in depreciation expense.
Minimum future lease payments under this capital lease as of December 31, 1997
and for each of the remaining years and in the aggregate are approximately as
follows:
1998......................................................... $ 51,000
1999......................................................... 51,000
2000......................................................... 38,000
---------------
Total minimum lease payments................................. 140,000
Less amount representing interest............................ (34,000)
---------------
Total obligations under capital leases....................... 106,000
Current portion.............................................. (32,000)
---------------
$ 74,000
===============
The interest rate on this capital lease is 8.50% per annum and is imputed based
on the lower of the Company's incremental borrowing rate at the inception of
the lease or the lessor's implicit rate of return.
F-13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
====================================================================================================================
NOTE 9 - INCOME TAXES
The tax effects of the temporary differences that give rise to the deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
Deferred tax assets: 1997 1996
-------------- --------------
Accounts receivable...................................................... $ 433,000 $ 448,000
Inventory................................................................ 334,000 297,000
Accrued expenses......................................................... 761,000 -
Postretirement benefits.................................................. 481,000 482,000
Reserves for restructuring and discontinued operations................... - 866,000
Other.................................................................... 671,000 734,000
-------------- --------------
2,680,000 2,827,000
Deferred tax liabilities:
Fixed assets............................................................. 319,000 345,000
-------------- --------------
Net deferred tax asset..................................................... $ 2,361,000 $ 2,482,000
============== ==============
The components of income tax expense (benefit) are as follows:
Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Current
- -------
Federal....................................................... $ 1,836,000 $ (2,018,000) $ 1,450,000
State......................................................... 207,000 (262,000) 225,000
-------------- -------------- --------------
2,043,000 (2,280,000) 1,675,000
-------------- -------------- --------------
Deferred
- --------
Federal....................................................... 105,000 (1,657,000) (292,000)
State......................................................... 15,000 (286,000) (46,000)
-------------- -------------- --------------
120,000 (1,943,000) (338,000)
-------------- -------------- --------------
$ 2,163,000 $ (4,223,000) $ 1,337,000
============== ============== ==============
The provision for income tax expense (benefit) included in the Consolidated Financial Statements is as follows:
Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Continuing operations......................................... $ 2,163,000 $ (2,942,000) $ 1,281,000
Discontinued operations....................................... - (1,325,000) 56,000
Extraordinary items........................................... - 44,000 -
-------------- -------------- --------------
$ 2,163,000 $ (4,223,000) $ 1,337,000
============== ============== ==============
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 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
U.S. Federal income tax statutory rate........................ 34.0% (34.0)% 34.0%
State income tax, net of federal income tax benefit........... 2.7 (2.6) 3.7
Goodwill amortization......................................... .9 16.6 -
Other - including non-deductible items........................ 2.4 (9.9) 3.8
------ ------ ------
Effective tax rate............................................ 40.0% (29.9)% 41.5%
====== ====== ======
F-14
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 10 - CAPITAL STOCK, OPTIONS AND WARRANTS
Effective January 1996, in connection with the acquisition of PPI, the Company
issued an aggregate of 549,999 shares of its common stock, valued at $2.50 per
share. Only 60,000 shares of the Company's common stock, valued at $150,000,
were released to the PPI selling shareholders at closing. The remaining 489,999
shares of common stock were retained in escrow by the Company, as escrow agent,
and were to be released to the PPI selling shareholders annually if and based
upon certain levels of pre-tax net income being attained by PPI for the years
ended December 31, 1996 through December 31, 2000. For the year ended December
31, 1996, the acquired company did not attain that certain level of pre-tax net
income and, accordingly, none of the Additional Consideration was released.
During 1997, the Company and the PPI selling shareholders agreed to cease the
operations of PPI. As a result, all of the Additional Consideration held in
escrow has been canceled and retired subsequent to the balance sheet date.
In December 1995, in connection with the acquisition of the Added Value
Companies, the Company issued an aggregate of 2,174,104 shares of common stock.
As a result of Added Value previously owning approximately 37% of Rocky
Mountain, 160,703 shares, valued at approximately $391,000, issued as part of
the Rocky Mountain merger were acquired by the Company's wholly-owned
subsidiary. In addition, in connection with such acquisitions, certain selling
stockholders were granted an aggregate of 50,000 stock options (20,000 stock
options of which have since been canceled) to acquire the Company's common stock
at an exercise price of $2.313 per share exercisable, subject to a six-year
vesting period, through December 29, 2002. In connection with the Company
entering into a settlement agreement with certain of the selling stockholders in
December 1996, an aggregate of 95,000 shares of the Company's common stock was
canceled and the Company granted to certain selling shareholders (who are
employees of the Company) stock options to purchase an aggregate of 50,000
shares of the Company's common stock at an exercise price of $1.50 per share
exercisable through December 30, 2001.
In July 1995, the Company issued to a consulting firm a warrant to acquire
45,000 shares of the Company's common stock at an exercise price of $2.50 per
share exercisable through July 20, 2000. The warrant was issued in consideration
of such consulting firm entering into a new one-year consulting agreement with
the Company covering financial public relations/investor relations services. At
December 31, 1996, these warrants remained unexercised. The same consulting firm
had previously been issued warrants to acquire an aggregate of 180,000 shares in
September 1987 and May 1993 in connection with prior consulting agreements as
discussed below.
In connection with new employment agreements between the Company and each of its
four executive officers entered into in May 1995, an aggregate of 1,000,000
stock options were granted on June 8, 1995 to such four executive officers
pursuant to the Employees', Officers', Directors' Stock Option Plan, as
previously amended and restated (the "Option Plan"). These options have an
exercise price of $1.875 per share and are exercisable through June 7, 2005,
subject to a vesting schedule.
In connection with the public offering in 1995 (see Note 2 to Notes to
Consolidated Financial Statements), the Company issued to the underwriter common
stock purchase warrants covering an aggregate of 523,250 shares of common stock
(including warrants issued in connection with the underwriter's exercise of the
over-allotment option). These warrants are exercisable at a price of $2.625 per
share for a period of four years commencing one year from June 8, 1995. At
December 31, 1997, these warrants had not been exercised.
In June 1994, the Company issued an aggregate of 386,250 common stock purchase
warrants in connection with a private placement of subordinated debentures (see
Note 8 to Notes to Consolidated Financial Statements). The warrants are
exercisable at any time between December 14, 1994 and June 13, 1999 at an
exercise price of $3.15 per share. In connection with this private placement,
the placement agent received warrants to purchase 38,625 shares of the Company's
common stock. The placement agent's
F-15
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
warrants are exercisable for a four-year period commencing June 14, 1995 at an
exercise price of $3.78 per share. At December 31, 1997, these warrants had not
been exercised.
In May 1993, in connection with a consulting agreement, the Company issued
warrants to acquire 90,000 shares of its common stock at $1.35 per share. At
December 31, 1997, these warrants had not been exercised. In addition, a warrant
to acquire 90,000 shares of the Company's common stock at $1.60 per share
expired in June 1997.
The Company has reserved 3,250,000 shares of common stock for issuance under the
Option Plan. A summary of options granted and related information for the years
ended December 31, 1995, 1996 and 1997 under the Option Plan follows:
Weighted Average
Options Exercise Price
------------ ---------------
Outstanding, December 31, 1995 2,210,063 $ 1.65
Weighted average fair value of options
granted during the year .45
Granted 276,500 2.16
Exercised (5,000) 1.84
Canceled (106,750) 2.20
------------
Outstanding, December 31, 1996 2,374,813 1.77
Weighted average fair value of options
granted during the year .24
Granted 1,551,000 1.15
Exercised (30,000) .94
Canceled (1,167,500) 1.68
------------
Outstanding, December 31, 1997 2,728,313 1.46
============
Weighted average fair value of options
granted during the year .42
Options exercisable:
December 31, 1995 689,640 1.33
December 31, 1996 860,495 1.43
December 31, 1997 468,124 1.27
Exercise prices for options outstanding as of December 31, 1997 ranged from
$1.00 to $2.53. The weighted-average remaining contractual life of these options
is approximately 6 years. Outstanding options at December 31, 1997 were held by
88 individuals.
The Company applies APB 25 and related Interpretations in accounting for the
Option Plan. Accordingly, no compensation cost has been recognized for the
Option Plan. Had compensation cost for the Option Plan been determined using the
fair value based method, as defined in SFAS 123, the Company's net earnings
(loss) and earnings (loss) per share would have been adjusted to the pro forma
amounts indicated below:
F-16
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Net earnings (loss):
As reported $3,250,000 $(9,920,000) $1,886,000
Pro forma 2,859,000 (9,967,000) 1,616,000
Basic earnings (loss) per share:
As reported $.17 $(.50) $.12
Pro forma .15 (.50) .11
Diluted earnings (loss) per share:
As reported $.16 $(.49) $.12
Pro forma .14 (.50) .10
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 1997, 1996 and 1995, respectively: expected volatility of 50.0%,
43.4% and 42.3%; risk-free interest rate of 6.1%, 6.5% and 6.5%; and expected
lives of 5 to 8 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1995. Additionally, future amounts are likely to be affected by
the number of grants awarded since additional awards are generally expected to
be made at varying amounts.
In connection with the acquisition of the assets of GCI Corp. in 1994, the
Company issued 117,551 unqualified stock options exercisable from September 1995
through September 1999 at an exercise price of $1.65 per share.
NOTE 11 - COMMITMENTS/RELATED PARTY TRANSACTIONS
Included in the Company's results of operations for 1995 is approximately
$875,000 of sales, at cost, to the Added Value Companies, prior to the
acquisitions. See Note 4 to Notes to Consolidated Financial Statements.
In May 1994, the Company terminated its lease covering the 37,000 sq. ft.
facility and entered into a new lease with its then existing landlord to lease a
new 110,800 sq. ft. facility for its corporate headquarters and Miami
distribution center. The lease has a term expiring in 2014 (subject to the
Company's right to terminate at any time after the fifth year of the term upon
twenty-four months prior written notice and the payment of all outstanding debt
owed to the landlord). The lease gives the Company three six-year options to
renew at the fair market value rental rates. The lease provides for annual fixed
rental payments totaling approximately $264,000 in the first year, $267,000 in
the second year, $279,000 in each of the third, fourth and fifth years, $300,600
in the sixth year, $307,800 in the seventh year and in each year thereafter
during the term the rent shall increase once per year in an amount equal to the
annual percentage increase in the consumer price index not to exceed 4% in any
one year.
As a result of the Added Value Acquisitions, the Company leases a 13,900 square
foot facility in Tustin, California and a 7,600 square foot facility in Denver,
Colorado. The Tustin facility contains a distribution center as well as the
staff supporting the Company's kitting and turnkey operations and the separate
divisions created for flat panel displays and memory module operations. The
Denver facility contains a regional distribution center and sales office.
F-17
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In October 1995, the Company entered into a lease for a west coast distribution
and semiconductor programming center located in Fremont, California (near San
Jose). The Company moved into such facility in January 1996. The Company will
continue to use this space to expand its semiconductor programming and
distribution capabilities and to further improve quality control and service
capabilities for its west coast customers.
The Company leases space for 29 sales offices, including non-cancelable leases
assumed in connection with the acquisitions of the Added Value Companies, which
expire at various dates and include various escalation clauses and renewal
options.
Approximate minimum future rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1997, are as follows for the next five years:
YEAR ENDING DECEMBER 31
1998.............................................................. $2,672,000
1999.............................................................. 2,111,000
2000.............................................................. 1,637,000
2001.............................................................. 720,000
2002.............................................................. 342,000
Total rent expense, including real estate taxes and net of sublease income,
amounted to approximately $1,940,000, $1,772,000 and $1,345,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
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 1997, 1996 and 1995, 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 $22,500 per annum. At December 31, 1997 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 $114,000.
During 1996, the Company established a second deferred compensation plan (the
"1996 Deferred Compensation Plan") for executives of the Company. The executives
eligible to participate in the 1996 Deferred Compensation 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 1996 and 1997 the Company committed to contribute $63,000
and $160,000, respectively, under this plan. Participants in the plan will vest
in their plan benefits over a ten-year period. If the participant terminates 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 contributions made and any
additions based on investment gains.
F-18
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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, 1997 and 1996.
The Company maintains a 401(k) plan (the "401(k) Plan"), which is intended to
qualify under Section 401(k) of the Internal Revenue Code. All full-time
employees of the Company over the age of 21 are eligible to participate in the
401(k) Plan after completing 90 days of employment. Each eligible employee may
elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of
his or her salary, limited to $9,500 in 1997. The Company makes matching
contributions and in 1997 its contributions were in the amount of 25% on the
first 6% contributed of each participating employee's salary. The Company
expensed $472,000, $305,000 and $301,000 for such matching contributions for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 12 - SETTLEMENT OF LITIGATION
In June 1996, the Company settled a civil action in connection with the
Company's prior acquisition of certain computer equipment. In connection with
the settlement agreement, the Company recognized an extraordinary after-tax gain
of $272,000, net of related expenses, which is reflected in the Consolidated
Statements of Operations for the year ended December 31, 1996.
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, as well as defend such
actions on the Company's behalf although there is no guarantee that the
manufacturers will do so. In addition, as a result of the acquisitions of the
Added Value Companies, the Company offers a warranty with respect to its
manufactured products for a period of one year against defects in workmanship
and materials under normal use and service and in the original, unmodified
condition.
NOTE 14 - ECONOMIC DEPENDENCY
For each of the years ended December 31, 1997, 1996 and 1995, purchases from one
supplier were in excess of 10% of the Company's total annual purchases and
aggregated approximately $43,435,000, $35,579,000 and $26,528,000, respectively.
The net outstanding accounts payable to this supplier at December 31, 1997, 1996
and 1995 amounted to approximately $2,854,000, $2,285,000 and $838,000,
respectively.
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