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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, 1998
COMMISSION FILE NUMBER: 0-16207
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16115 N.W. 52ND AVENUE
MIAMI, FLORIDA 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of March 17, 1999, 19,866,906 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 $13,200,000.
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 - 1998
TABLE OF CONTENTS
PART ITEM PAGE
NO. NO. DESCRIPTION NO.
- --- --- ----------- ---
I 1 Business................................................................................ 1
2 Properties.............................................................................. 13
3 Legal Proceedings ...................................................................... 13
4 Submission of Matters to a Vote of Security-Holders..................................... 13
II 5 Market for the Registrant's Common Equity and Related Stockholder Matters............... 14
6 Selected Financial Data................................................................. 15
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 17
7A Quantitative and Qualitative Disclosures about Market Risk.............................. 22
8 Financial Statements and Supplementary Data............................................. 22
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................... 22
III 10 Directors and Executive Officers of the Registrant...................................... 22
11 Executive Compensation.................................................................. 22
12 Security Ownership of Certain Beneficial Owners and Management.......................... 22
13 Certain Relationships and Related Transactions.......................................... 22
IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 22
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PART I
ITEM 1. BUSINESS
GENERAL
All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a national
distributor of electronic components manufactured by others. The Company
distributes a full range of semiconductors (active components), including
transistors, diodes, memory devices and other integrated circuits, as well as
passive components, such as capacitors, resistors, inductors and
electromechanical products, including cable, switches, connectors, filters and
sockets. These products are sold primarily to original equipment manufacturers
("OEMs") in a diverse and growing range of industries, including manufacturers
of computers and computer-related products; networking, satellite 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."
While the Company reincorporated in Delaware in 1987, it and its predecessors
have operated since 1964. The Company was recognized by industry trade
publications as the seventh largest distributor of semiconductors and the 14th
largest electronic components distributor overall in the United States, out of
an industry group that numbers more than 1,000 distributors.
The Company's principal executive office is located at 16115 N.W. 52nd Avenue,
Miami, Florida 33014.
THE ELECTRONICS DISTRIBUTION INDUSTRY
The electronics industry is one of the largest and fastest growing industries in
the United States. Industry associations estimate total U.S. factory sales of
electronic products at approximately $475 billion for 1998 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, networking, satellite and telecommunications equipment,
multimedia, Internet-related products; 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 33% and 28%,
respectively, of the electronic components distribution marketplace, while
systems and computer products account for the remaining 39%. 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 1998, an
estimated $22 billion of electronic components were sold through distribution in
the United States, up from $10 billion in 1992. In
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recent years, there has been a growing trend for distribution to play an
increasing role in the electronics industry. OEMs and CEMS which utilize
electronic components are increasingly looking to outsource their procurement,
inventory and materials management processes to third parties in order to
concentrate their resources (including management talent, personnel costs and
capital investment) on their core competencies, which include product
development, sales and marketing. Large distribution companies not only fill
these procurement and materials management roles, but further serve as a single
supply source for OEMs and CEMs, offering a much broader line of products,
incremental quality control measures and more support services than individual
electronic component manufacturers. Management believes that OEMs and CEMs will
continue to increase their service and quality requirements, and that this trend
will result in OEMs, CEMs and electronic component manufacturers continuing to
be dependent on distributors in the future.
Electronic component manufacturers are under similar pressure to allocate a
larger share of their resources to research, product development and
manufacturing capacity as technological advances continue to shorten product
lifecycles. Electronic component manufacturers sell directly to only a small
number of their potential customers. This small segment of their customer base
accounts for a large portion of the total available revenues. It is not
economical for component manufacturers to provide a broad range of sales support
services to handle the large amount of customers that account for the balance of
available revenues. With their expanded technology and service capabilities,
large distributors have now become a reliable means for component manufacturers
to outsource their sales, marketing, customer service and distribution
functions. This trend particularly benefits larger distributors with nationwide
distribution capabilities such as the Company, as manufacturers continue to
allocate a larger amount of their business to a more limited number of full
service distribution companies. Management believes that this trend should also
provide consolidation opportunities within the electronic components
distribution industry.
As a result of the trends discussed above, management believes that distribution
will be involved in an increasing portion of the electronics industry.
BUSINESS STRATEGY
The Company's strategy is to continue its managed growth and to gain market
share by: (i) increasing the number of customers it sells to through a
combination of expanding existing sales offices, opening new sales offices and
making selective acquisitions, 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 changing industry and to achieve greater profitability in the future.
Once the Company achieved a critical mass, obtained the necessary geographic
coverage and expanded its distribution capacity to facilitate additional growth,
the Company began 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 the Company was poised to continue to improve its
profitability during 1998, the industry was changing. At the same time, the
industry was marred with continued price erosion and intensely increased
competitive market conditions. In an effort to better position itself to address
these changing conditions and to become a more formidable force in facing the
challenges of an increasingly competitive and consolidating industry, the
Company entertained a merger proposal which resulted in the Company entering
into a letter of intent to merge with the distribution operations of a sizeable
competitor. While efforts to complete the transaction were underway, financial
markets were in turmoil, industry market conditions were worsening and industry
dynamics were undergoing changes. As a result of these and other factors,
efforts to complete the transaction were prolonged for several months and
ultimately the transaction was terminated due to factors beyond the Company's
control. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Selling, General and Administrative
Expenses" and Note 5 to Notes to Consolidated Financial Statements. As a result
of the attempted merger, the Company put internal expansion on hold and lost its
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momentum for internally generated growth. Additionally, throughout 1998 the
Company was negatively impacted by the distraction resulting from the evaluation
of, and preparations for the integration of operations in connection with the
proposed merger. These merger-related factors, as well as negative market
conditions and price erosion, combined to result in a decline in the Company's
revenues in 1998.
Once the merger efforts were terminated in the fourth quarter of 1998,
management invested a significant amount of time refocusing the Company on
facing the industry challenges and once again achieving internal growth. While
management believes that it can increase market share and that it can increase
profitability, there can be no assurance that these goals will be achieved.
EXPANSION
The Company had undergone significant expansion prior to 1998, including opening
new offices, relocating and expanding existing offices and acquiring other
companies, all in order to increase its sales volume, expand its geographic
coverage and become recognized as a national distributor. See "Sales and
Marketing-Sales Office Locations" and Note 3 to Notes to Consolidated Financial
Statements.
As a result of the implementation of the Company's business strategy, the
Company had until 1998 experienced significant growth. In order to effectively
drive and manage its expansion, the Company had over the last several years
prior to 1998: (i) restructured, enhanced and expanded its sales staff and sales
management and marketing 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,
(v) enhanced its asset management capabilities through new computer and
telecommunications equipment and (vi) opened an additional west coast credit
department and an east coast regional credit department. To keep up with
industry trends the Company has made significant investments in its web site and
Internet capabilities as well as other forms of electronic commerce; has
expanded its investment in its Field Application Engineer ("FAE") program; and
has increased its investment in its materials management solutions, or "MMS",
capabilities. To better service the large customer base in the western part of
the United States and to enhance relationships with a supplier base that is
predominantly based in California, during 1994 the Company opened a west coast
corporate office which initially housed sales and marketing executives and the
head of the Company's FAE program. In 1995 the Company also opened a west coast
distribution center in Fremont, California (near San Jose). In 1998 the Company
dramatically expanded its west coast corporate offices and relocated the
President and CEO of the Company to San Jose to be based where sales and
marketing functions are headquartered.
In December 1995 the Company purchased through two separate mergers with and
into the Company's wholly-owned subsidiaries (the "Added Value Acquisitions";
see Note 3 to Notes to Consolidated Financial Statements) 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."
The Company expanded its international presence during 1998 with the opening of
a sales office in Guadalajara, Mexico. The Company plans to open new offices and
may acquire additional companies in the future. The Company also plans to
continue its focus on improving the financial performance and market penetration
of each existing location.
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
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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 1998, the Company added new suppliers and expects to add additional
suppliers in the future. These new suppliers are intended to offer larger growth
opportunities than some of the smaller suppliers that the Company has done
business with in the past. New supplier relationships generally require up-front
investments that could take substantial time to provide a return.
SERVICE CAPABILITIES
During the past several years, customers have been reducing their approved
vendor base in an effort to place a greater percentage of their purchases with
fewer, more capable distributors. As part of its overall strategy to increase
market penetration, the Company has endeavored to develop state-of-the-art
service capabilities. The Company refers to these service capabilities as
"distribution technology." The Company believes that it has developed service
capabilities comparable to some of the largest distributors in the industry,
which service capabilities the Company believes are not yet readily available at
many distributors of comparable size to the Company. The Company further
believes that these capabilities are not generally made available by the largest
distributors to middle market customers, which represent the vast majority of
the Company's customer base. See "Competition." Management believes that smaller
distributors generally do not have the ability to offer as broad an array of
services as the Company. The Company differentiates itself from its competition
by making state-of-the-art distribution technology available to both large and
middle market customers. Although the Company believes that this differentiation
will assist the Company's growth, there can be no assurance that such
differentiation exists to the extent that the Company currently believes or that
it will continue in the future.
The Company's distribution technology incorporates nationwide access to
real-time inventory and pricing information, electronic order entry and rapid
order processing. During the past few years, the Company has expanded its
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
4
management solutions. The MMS Group is staffed with personnel experienced in the
manufacturing environment and in supply chain management 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 order to service
growing customer demand as well as changing technologies, in early 1999 the
Company significantly increased its investments in its programming capabilities
by purchasing programming equipment and increasing its programming staff. In
addition to enabling the Company to address a rapidly growing market for
programmable products, this capability will allow the Company to attract new
product lines that require programming capabilities.
The Company believes that in the upcoming years an increasing amount of
transactions in its industry will be processed over the Internet. In this
regard, the Company designed and developed its own web site which became
operational during the first quarter of 1997. In order to further expand its
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 1998 and may increase costs further in
future years, many benefits are expected to be realized from these investments,
however, no assurances can be made that the Company will realize such benefits.
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
5
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 overall sales mix of the Company and are
expected to play an even greater role in the overall sales mix to the extent the
Company's sales grow. Most of the commodity products, and many of the newer
technology products, have lower profit margins than the more mature product
lines.
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. Additionally, the Company has added FPD
specialists to its sales and marketing groups.
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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 39% 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 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.
CUSTOMERS
The Company markets its products primarily to OEMs in a diverse and growing
range of industries. The Company's customer base includes manufacturers of
computers and computer-related products; networking, satellite 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's
customer list includes approximately 12,000 accounts. During 1998, 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
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Company brings to the middle market customers a level of service capabilities
that the smaller distributor cannot provide.
The Company's marketing strategy is to be a preferred and expanding source of
supply for all middle market customers. The Company is achieving this by
providing a broader range of products and services than is available from
smaller and comparably sized distributors, and a higher level of attention than
these customers receive from the larger distributors. In addition, the Company
continues its efforts to become a more significant supplier for the top tier
customers by focusing on a niche of products not emphasized by the larger
distributors while providing the high level of quality, service and technical
capabilities required to do business with these accounts.
MARKETING TECHNIQUES
The Company 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 Company also uses its expanded service capabilities,
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, 1999, the Company employed 290 people in sales on a full-time
basis, of which 113 are field salespeople, 114 are inside salespeople, 24 are in
management, 23 are in administration and 16 are electrical engineers in the
technical sales or FAE Program. The Company also had 19 sales representatives
covering various territories where the Company does not have sales offices.
Salespeople are generally compensated by a combination of salary and commissions
based upon the gross profits obtained on their sales. Each branch is run by a
general manager who reports to a regional manager, who in turn reports to an
area manager. All area managers report to the Company's Senior Vice President of
Sales. Area, regional and general managers are compensated by a combination of
salary and incentives based on achieving gross profit and operating income
goals.
SALES OFFICE LOCATIONS
The Company currently operates 30 sales offices in 20 states, Canada and Mexico.
The locations of the sales offices are in each of the following geographic
markets: Huntsville, Alabama; Phoenix, Arizona; Orange County, San Diego, San
Fernando Valley, San Jose and Tustin, California; Toronto, Canada; Denver,
Colorado; Fort Lauderdale, Miami and Tampa, Florida; Atlanta, Georgia; Chicago,
Illinois; Kansas City, Kansas; Baltimore, Maryland; Boston, Massachusetts;
Guadalajara, Mexico; Detroit, Michigan; Minneapolis, Minnesota; Long Island and
Rochester, New York; Cleveland, Ohio; Portland, Oregon; Philadelphia,
Pennsylvania; Austin and Dallas, Texas; Salt Lake City, Utah; Seattle,
Washington and Milwaukee, Wisconsin. The Company also retains field sales
representatives to market other territories throughout the United States,
Canada, Puerto Rico and Mexico. The Company may consider opening branches in
these other territories if the representatives located there achieve certain
sales levels.
TRANSPORTATION
All of the Company's products are shipped through third party carriers. Incoming
freight charges are generally paid by the Company, while outgoing freight
charges are typically paid by the customer.
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SEASONALITY
The Company's sales have not historically been materially greater in any
particular season or part of the year.
FOREIGN SALES
Sales to foreign countries aggregated approximately $9.4 million, $5.4 million
and $1.9 million for 1998, 1997 and 1996, respectively.
BACKLOG
As is typical of distributors, the Company has a backlog of customer orders.
While these customer orders are cancelable, the Company believes its backlog is
an indicator of future sales. At December 31, 1998, the Company had a backlog in
excess of $43 million, compared to a backlog in excess of $50 million at
December 31, 1997 and $49 million at December 31, 1996. 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 which continued through 1997 and 1998. 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
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 in the past two years 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, 1999, the Company's backlog had risen to approximately $50
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 component manufacturers pursuant
to non-exclusive distribution agreements. Such suppliers generally limit the
number of distributors they will authorize in a given territory in order to
heighten the distributor's focus on their products as well as to prevent
over-distribution. Suppliers also limit the number of distributors in order to
reduce the costs associated with managing multiple distributors. As a factory
authorized distributor, the Company obtains sales referrals, as well as sales,
marketing and engineering support, from component manufacturers. This support
assists the Company in closing sales and obtaining new customers. The Company's
status as an authorized distributor is a valuable marketing tool as customers
recognize that when dealing with an authorized distributor they receive greater
support from the component manufacturers.
The Company believes that an important factor which suppliers consider in
determining whether to grant or to continue to provide distribution rights to a
certain distributor is that distributor's geographic coverage. In meeting its
goal of being recognized as a national distributor, the Company has opened and
acquired sales offices in a number of markets throughout the United States and
has advertised in national industry
9
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 in 1996 to reduce the number of
suppliers with which it does business. While this causes the Company to incur
costs and may require 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, 1998, the Company's three
largest suppliers accounted for 20%, 7% and 5% 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.
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
10
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 presently contains the separate divisions created
for flat panel displays (ADT) and memory module (AMP) operations as well as a
distribution center. See "Products." During 1998 the Denver sales operations
were moved to a separate office. The 7,600 square foot facility is now dedicated
solely to certain value-added services and a regional distribution center.
During 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 further 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 was initially underutilized. The Company has been
moving more of its component distribution inventory to this facility and, with
the additional investment in programming equipment made in early 1999, the
Company expects that any excess capacity will be utilized. No future growth of
its programming and components distribution businesses can be assured in future
periods.
During 1998, the Company entered into a new lease for approximately 20,000
square feet of space in San Jose, California to house its expanded west coast
corporate offices as well as its northern California sales operation. This lease
incorporates the previously leased space of approximately 11,000 square feet and
adds a new adjoining space of approximately 9,000 square feet. Approximately
8,000 square feet of the space is being used for corporate offices including the
office of the President and CEO of the Company and 8,000 square feet of the
space is being utilized for the sales operation. The remaining area of
approximately 4,000 square feet is not presently being utilized and the Company
is currently pursuing a tenant to sublet this space. In addition, the Company
leases space for its other sales offices, which offices range in size from
approximately 1,000 square feet to 8,000 square feet. See "Sales and
Marketing-Sales Office Locations."
Due to the dramatic price erosion during the past few years, the Company
believes its unit volume shipped has increased. As a result, the Company has
utilized some of its excess capacity. Although the excess capacity is somewhat
diminished, the Company still has excess capacity with its distribution centers
in Miami, Florida; Fremont, California; and Denver, Colorado. To the extent that
the Company increases sales in future periods, management expects to realize
improved operating efficiencies and economies of scale. There can be no
assurance, however, that any 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.
11
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, since 1995 the Company has 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. The Company believes that these factors may have had an adverse
impact on its business during the past year, and there can be no assurance that
such factors will not have a more significant adverse affect on the Company in
the future. Since the Company purchases from United States subsidiaries or
affiliates of foreign manufacturers, the Company's purchases are paid for in
U.S. dollars.
EMPLOYEES
As of March 1, 1999, the Company employed 523 persons, of which 290 are involved
in sales and sales management; 77 are involved in marketing; 54 are involved in
the distribution centers; 38 are involved in operations; 10 are involved in
management; 35 are involved in bookkeeping and clerical; and 19 are involved 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 $8 billion
worldwide. These distributors can generally be divided into global distributors
who have operations around the world, national distributors who have offices
throughout the United States, regional distributors and local distributors. With
sales offices in 20 states, the Company competes as a national distributor.
Additionally, the Company is one of the few national distributors which has
offices in Canada and Mexico. The Company, which was recently recognized by
industry sources as the seventh largest distributor of semiconductors and the
14th largest electronic components distributor overall in the United States,
believes its primary competition comes from the top 50 distributors in the
industry. Recently, there has been an emergence of additional competition from
the advent of third party logistics companies and businesses commonly referred
to as e-brokers which have grown as a result of the expanded use of the
Internet.
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 six distributors as a result of the product offerings, pricing and
12
distribution technology offered by these distributors. The Company competes for
a portion of the available business at these major industry customers by seeking
to provide the very best service and quality and by focusing on products that
are not emphasized by the top six distributors, or are fill-in or niche
products. With its expanded service capabilities and quality assurance
procedures in place, the Company believes that it can compete for a bigger
portion of the business at the top tier customer base, although there can be no
assurance that the Company will be successful in doing so. The Company believes
competition from the top six 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 six
distributors are seeking to penetrate the middle market customer base more than
they have in the past.
ITEM 2. PROPERTIES
See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales
Office Locations" and Note 10 to Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation relating to claims
arising out of its operations in the ordinary course of business. Many of such
claims are covered by insurance or, if they relate to products manufactured by
others for which it distributes, the Company would expect that the manufacturers
of such products would indemnify the Company, as well as defend such claims on
the Company's behalf, although no assurance can be given that any manufacturer
would do so. The Company believes that none of these claims should have a
material adverse impact on its financial condition or results of operations.
There has been a recent trend throughout the United States of increased
grievances over various employee matters. While the Company is presently not
involved in any material litigation relating to such matters, the Company
believes that costs associated with such matters may increase in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) On December 10, 1998, the Company held its 1998 annual meeting of
shareholders (the "Annual Meeting").
(b) One matter voted on at the Annual Meeting was the election of three
directors of the Company. The three nominees, who were existing directors
of the Company and nominees of the Company's Board of Directors, were
re-elected at the Annual Meeting as directors of the Company, receiving the
number and percentage of votes for election and abstentions as set forth
next to their respective names below:
NOMINEE FOR DIRECTOR FOR ABSTAIN
-------------------- ---------- --------
Sheldon Lieberbaum 18,519,025 97.5% 468,149 2.5%
S. Cye Mandel 18,612,733 98.0% 374,441 2.0%
Daniel M. Robbin 18,613,653 98.0% 373,521 2.0%
The other directors whose term of office as directors continued after the
Annual Meeting are Paul Goldberg, Bruce M. Goldberg, Howard L. Flanders and
Rick Gordon.
13
(c) The following additional matter was separately voted upon at the Annual
Meeting and received the votes of the holders of the number of shares of
the Company's common stock voted in person or by proxy at the Annual
Meeting and the percentage of total votes cast as indicated below:
Ratification of selection of independent accountants for 1998 fiscal year
For 18,735,779 98.7%
Against 143,195 0.8%
Abstain 108,200 0.5%
(d) Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock currently trades on The Nasdaq Stock Market (Nasdaq
National Market) under the symbol SEMI. The following table sets forth the range
of high and low sale prices for the Company's common stock as reported on The
Nasdaq Stock Market during each of the quarters presented:
QUARTER OF FISCAL YEAR HIGH LOW
- ---------------------- ---- ---
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 2 1 3/8
Second Quarter 2 15/32 1 7/16
Third Quarter 2 3/16 27/32
Fourth Quarter 1 7/16 3/4
1999
- ----
First Quarter (through March 17, 1999) 1 1/16 3/4
As of March 17, 1999, 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 6,300
beneficial holders of its common stock.
On March 17, 1999, the Company was advised by the Nasdaq Listing Qualifications
department of The Nasdaq Stock Market that, based upon its review of the
Company's closing stock price for the past thirty days, that the Company's
common stock had failed to maintain a closing bid price of greater than or equal
to $1.00 for any trading day during such period as required under The Nasdaq
Stock Market maintenance standards for a stock to be continued to be listed on
The Nasdaq Stock Market. Although no delisting action was initiated at this
time, the Company was provided ninety (90) calendar days in which to regain
compliance with this maintenance standard. In the event that during the period
ending June 17, 1999 (or any extended period granted by The Nasdaq Stock Market
in its sole discretion upon application by the Company), the closing bid price
of the Company's common stock is not greater than or equal to $1.00 for a
minimum of ten (10) consecutive trading days, the Company's common stock would
be delisted. If the Company's common stock is not listed on The Nasdaq Stock
Market, trading, if any, in the Company's common stock would thereafter be
conducted in the non-Nasdaq over-the-counter market in the so-called "pink
sheets" or the NASD's "Electronic Bulletin Board." The Company is currently
reviewing its options with respect to the
14
Company's listing on The Nasdaq Stock Market. There can be no assurance that the
Company's common stock will continue to remain eligible for listing on The
Nasdaq Stock Market.
DIVIDEND POLICY
The Company has never paid cash dividends. In 1989, the Company's Board of
Directors declared a 25% stock split effected in the form of a stock dividend.
Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other relevant factors. It is not
anticipated, however, that the Company will pay cash dividends on its common
stock in the foreseeable future, inasmuch as it expects to employ all available
cash in the continued growth of its business. In addition, the Company's
revolving line of credit agreement prohibits the payment of any dividends. See
Note 7 to Notes to Consolidated Financial Statements.
SALES OF UNREGISTERED SECURITIES
The Company has not issued or sold any unregistered securities during the
quarter ended December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the Company for and as of
the years 1994 through 1998 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 1998 1997 1996 1995(1) 1994
- -------------------------------------------------------------------------------------------------------------------
Net Sales (2)....................... $ 250,044,000 $ 265,640,000 $ 237,846,000 $ 177,335,000 $ 101,085,000
Cost of Sales (3)................... (194,599,000) (207,173,000) (185,367,000) (138,089,000) (74,632,000)
------------- ------------- ------------- ------------- -------------
Gross Profit........................ 55,445,000 58,467,000 52,479,000 39,246,000 26,453,000
Selling, General and
Administrative Expenses........... (46,880,000) (48,257,000) (51,675,000) (32,321,000) (23,374,000)
Restructuring and Other Nonrecurring
Expenses (4)...................... (2,860,000) - (4,942,000) (1,098,000) (548,000)
-------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations........................ 5,705,000 10,210,000 (4,138,000) 5,827,000 2,531,000
Interest Expense (5)................ (4,313,000) (4,797,000) (7,025,000) (2,739,000) (1,772,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Income Taxes.... 1,392,000 5,413,000 (11,163,000) 3,088,000 759,000
Income Tax (Provision) Benefit...... (561,000) (2,163,000) 2,942,000 (1,281,000) (407,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Discontinued
Operations and Extraordinary Items 831,000 3,250,000 (8,221,000) 1,807,000 352,000
Discontinued Operations (6)......... - - (1,757,000) 79,000 -
Extraordinary Items (7)............. - - 58,000 - -
------------- ------------- ------------- ------------- -------------
Net Income (Loss)................... $ 831,000 $ 3,250,000 $ (9,920,000) $ 1,886,000 $ 352,000
============= ============= ============= ============= =============
Earnings (Loss) Per Share (8):
Basic............................. $.04 $.17 $(.50) $.12 $.03
Diluted........................... $.04 $.16 $(.49) $.12 $.03
15
Balance Sheet Data
DECEMBER 31 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Working Capital..................... $ 68,192,000 $ 63,308,000 $ 69,823,000 $ 59,352,000 $ 39,800,000
Total Assets........................ 118,957,000 112,286,000 112,921,000 114,474,000 57,858,000
Long-Term Debt, Including
Current Portion................... 50,978,000 46,900,000 58,221,000 37,604,000 27,775,000
Shareholders' Equity................ 26,509,000 25,674,000 22,396,000 32,267,000 16,950,000
Book Value Per Common Share......... $1.33 $1.29 $1.13 $1.62 $1.37
- -------------------------
(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.
(4) 1998 reflects a nonrecurring charge relating to the failed merger of Reptron
Electronics, Inc.'s distribution operations with the Company. The
nonrecurring charge includes expansion costs incurred in anticipation of
supporting the proposed combined entity, employee-related expenses,
professional fees and other merger-related out of pocket costs. 1996
includes non-recurring expenses consisting of: $1,092,000 relating to
restructuring the Company's kitting and turnkey operations, $587,000
relating to the termination of certain employment agreements, $445,000
relating to relocating the Company's cable assembly division, $625,000
relating to the accrual of a postretirement benefit cost associated with an
amendment to an employment agreement with one of the Company's executive
officers, and $2,193,000 relating to an impairment of goodwill primarily
related to the acquisitions of the Added Value Companies. 1995 reflects a
charge for front-end incentive employment compensation 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) Includes income (losses) from discontinued operations of $(166,000) (net of
$125,000 income tax benefit) and $79,000 (net of $56,000 income tax
provision) for 1996 and 1995, respectively, and a loss on disposal of
$(1,591,000) (net of $1,200,000 income tax benefit) in 1996 relating to
management's decision to discontinue its computer products division.
(7) Reflects an after-tax gain of $272,000 (net of $205,000 income tax
provision) associated with the Company's settlement of a civil litigation
and an after-tax non-cash expense of $214,000 (net of $161,000 income tax
benefit) resulting from the early extinguishment of the Company's $15
million senior subordinated promissory note.
(8) Weighted average common shares outstanding for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 were 19,685,106, 19,672,559, 19,742,849,
15,241,458 and 12,338,932, respectively, for basic earnings per share and
were 19,994,009, 19,784,837, 20,105,761, 15,866,866, and 12,941,264,
respectively, for diluted earnings per share.
16
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, 1998, 1997 and
1996, 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
--------------------------------
1998 1997 1996
----- ------ ------
Net Sales.................................................................. 100.0% 100.0% 100.0%
Gross Profit............................................................... 22.2 22.0 22.1
Selling, General and Administrative Expenses............................... (18.7) (18.2) (21.7)
Restructuring and Other Nonrecurring Expenses.............................. (1.1) - (2.1)
Income (Loss) from Continuing Operations................................... 2.3 3.8 (1.7)
Interest Expense........................................................... (1.7) (1.8) (3.0)
Income (Loss) from Continuing Operations Before Income Taxes............... 0.6 2.0 (4.7)
Income (Loss) from Continuing Operations Before Discontinued
Operations and Extraordinary Items....................................... 0.3 1.2 (3.5)
Discontinued Operations.................................................... - - (.7)
Extraordinary Items........................................................ - - *
Net Income (Loss).......................................................... 0.3 1.2 (4.2)
- -------------------
* not meaningful
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
SALES
Net sales for the year ended December 31, 1998 were $250.0 million, compared to
net sales of $265.6 million for 1997. The decrease in net sales was partially
attributable to price erosion and adverse market conditions within our industry.
Sales for 1998 were also negatively impacted by the distractions resulting from
a failed merger. See "Selling, General and Administrative Expenses" below and
Note 5 to Notes to Consolidated Financial Statements.
GROSS PROFIT
Gross profit was $55.4 million in 1998 compared to $58.5 million in 1997. The
decrease in gross profit was due to the decrease in net sales. Gross profit
margins as a percentage of net sales were 22.2% for 1998 compared to 22.0% for
1997. While the gross profit margin for the year was slightly higher than for
the prior year, the gross profit margin began declining toward the end of 1998,
reflecting increased competition and a greater number of low margin, large
volume transactions. In addition, the Company has experienced lower margins
relating to the development of long-term strategic relationships with accounts
which have required aggressive pricing programs. The Company has also
experienced margin pressures resulting from price increases from certain
suppliers that the Company has not been able to pass on to its customers at the
same rate. Management expects downward pressure on gross profit margins to
continue in the future.
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") was $46.9 million for
1998, down from $48.3 million for 1997. The decrease in SG&A reflects a
reduction in variable expenses associated with the decrease in gross profit as
well as the continued benefits of the Company's cost control programs. SG&A as a
percentage of net sales was 18.7% for 1998, compared to 18.2% for 1997. The
increase in SG&A as a percentage of net sales reflects the impact of the
reduction in net sales discussed above. As a result of the industry-wide price
erosion experienced over the past three years, the Company has had to ship more
units for each dollar of revenue. As a result, the Company's excess capacity has
been diminished. Additionally, customer requirements have increased
significantly, resulting in the Company increasing its infrastructure to support
the additional customer needs. Due to these factors, the Company expects that
SG&A will increase in future periods.
During 1998, the Company was involved in merger discussions which led to a
letter of intent being signed in June 1998 with Reptron Electronics, Inc.
("Reptron") regarding the merger of Reptron's distribution operations with the
Company ("the Merger"). Throughout 1998 the Company was actively involved in the
evaluation of, and preparations for the integration of operations in connection
with the proposed Merger. In October 1998, the Merger negotiations between the
Company and Reptron were terminated. As a result, the Company recorded a
nonrecurring charge in 1998, which included expansion costs incurred in
anticipation of supporting the proposed combined entity, certain
employee-related expenses, professional fees and other Merger-related out of
pocket costs, all of which aggregated $2,860,000. See Note 5 to Notes to
Consolidated Financial Statements.
INCOME FROM CONTINUING OPERATIONS
Income from operations was $8.6 million for 1998 excluding the $2.9 million
nonrecurring charge, compared to income from operations of $10.2 million for
1997. The decrease in income from operations was attributable to the decrease in
net sales which more than offset the decrease in SG&A. After reflecting the
nonrecurring charge, income from operations was $5.7 million for 1998.
INTEREST EXPENSE
Interest expense decreased to $4.3 million for the year ended December 31, 1998
compared to $4.8 million for 1997. The decrease in interest expense resulted
from lower average borrowings during 1998 as well as a decrease in the Company's
borrowing rate. See "Liquidity and Capital Resources" and Note 7 to Notes to
Consolidated Financial Statements.
NET INCOME
After giving effect to the nonrecurring charge, net income was $831,000, or $.04
per share (basic), for the year ended December 31, 1998, compared to net income
of $3.3 million, or $.17 per share (basic), for 1997. The decrease in net income
reflects the decrease in sales and the nonrecurring expenses (approximately $1.7
million on an after-tax basis) which more than offset the decreases in SG&A and
interest expense.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
SALES
For the year ended December 31, 1997, net sales were $265.6 million, up from net
sales of $237.8 million in 1996. 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 was 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
continued to benefit from its expanded service capabilities including electronic
commerce programs.
18
GROSS PROFIT
Gross profit was $58.5 million in 1997 compared to $52.5 million for 1996. The
increase in gross profit was primarily due to the growth in net 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.
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 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.
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 began 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 assembly division; and the acceleration of an existing
accrual schedule associated with certain postretirement benefits for one of the
Company's executive officers. See Notes 5 and 10 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 Note 7 to Notes to Consolidated Financial
Statements.
NET INCOME
Net income was $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
19
improvement in SG&A and the reduction in interest expense all as previously
discussed. Included in 1996 were 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1998 was $68.2 million, compared to working
capital of $63.3 million at December 31, 1997. The current ratio was 2.63:1 at
December 31, 1998, compared to 2.58:1 at December 31, 1997. The increases in
working capital and in the current ratio were due primarily to increases in
accounts receivable and inventory. These changes more than offset an increase in
accounts payable. Accounts receivable levels at December 31, 1998 were $37.8
million, compared to $32.9 million at December 31, 1997. The increase in
accounts receivable reflects an increase in the rate of sales during the end of
1998 compared to the end of 1997. The Company achieved a slight improvement in
the average number of days that accounts receivables were outstanding from 53
days as of December 31, 1997 to 50 days as of December 31, 1998. Inventory
levels were $69.1 million at December 31, 1998 compared to $67.9 million at
December 31, 1997. The increase primarily reflects higher inventory levels
needed to support sales of new products. Accounts payable and accrued expenses
increased to $41.2 million at December 31, 1998 from $39.2 million at December
31, 1997, primarily as a result of the 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
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 7 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 increased slightly and then in 1998 reduced by
said increase, 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 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%). During the first quarter of
1998, as a result of the Company satisfying certain conditions, the Company's
borrowing rate under its Credit Facility was decreased by one-quarter of one
percent (.25%). The Company's Credit Facility was further amended on March 23,
1999 whereby certain financial covenants were modified. See Note 7 to Notes to
Consolidated Financial Statements. At December 31, 1998, outstanding borrowings
under the Credit Facility aggregated $43.3 million compared to $39.0 million at
December 31, 1997.
The Company expects that its cash flows from operations and additional
borrowings available under the Credit Facility will be sufficient to meet its
current financial requirements over the next twelve months.
INFLATION AND CURRENCY FLUCTUATIONS
The Company does not believe that inflation significantly impacted its business
during 1998; however, inflation has had significant effects on the economy in
the past and could adversely impact the Company's
20
results in the future. The Company believes that currency fluctuations may have
had an indirect adverse effect on its business during 1998 due to limitation of
customer production resulting from declining exports and limitation of the
Company's offshore suppliers' exports to the United States. The Company believes
that currency fluctuations may continue to have a negative impact in the future.
YEAR 2000 ISSUE
The Company has evaluated its business information technology (IT) systems as
well as its non-IT systems and has surveyed its major vendors. The Company
currently believes that its internal systems are in compliance with Year 2000
requirements or, to the extent any further required modifications are necessary,
will comply with Year 2000 requirements without material expenditures of funds
or internal resources. Based upon the survey of the Company's major suppliers,
the Company currently believes that Year 2000 issues of its suppliers should not
have a material adverse effect on the Company's business, operations or
financial condition. Nevertheless, to the extent the Company's vendors
(particularly its major vendors) experience Year 2000 difficulties, the Company
may face delays in obtaining or even be unable to obtain certain products and
services and therefore may be unable to make shipments to customers resulting in
a material adverse effect on the Company's business, operations and financial
condition. The Company has not surveyed its customers and on a limited basis has
surveyed certain other third parties with which it has a business relationship.
As no assessment has been made of any potential impact by customers'
non-compliance (such as the ability of customers to electronically interface
with the Company), the Company does not have a cost estimate to address any
non-compliance by these customers nor can any assurance be given that such
non-compliance will not result in a material adverse effect on the Company's
business, operations and financial condition. The Company has not undertaken an
analysis (nor does it currently intend to analyze) the effect of a worst-case
Year 2000 scenario on the Company's business, operations or financial condition
and, accordingly, the materiality of such effect (if any) is uncertain and the
Company does not have a contingency plan and currently does not intend to create
one.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs 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. Factors that could adversely affect the
Company's future results, performance or achievements include, without
limitation, the effectiveness of the Company's business and marketing
strategies, timing of delivery of products from suppliers, price increases from
suppliers that cannot be passed on to the Company's customers at the same rate,
the product mix sold by the Company, the Company's development of new customers,
existing customer demand as well as the level of demand for products of its
customers, utilization by the Company of excess capacity, availability of
products from and the establishment and maintenance of relationships with
suppliers, price erosion in and price competition for products sold by the
Company, the ability of the Company to enter or expand new market areas, the
ability of the Company to expand its product offerings and to continue to
enhance its service capabilities, the ability of the Company to open new
branches in a timely and cost-effective manner, the availability of acquisition
opportunities and the associated costs, 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, including decreasing margins
relating to the Company being required to have aggressive pricing programs,
increased competition from third party logistics companies and e-brokers through
the use of the Internet as well as from its traditional competitors,
availability and terms of financing to fund capital needs, the continued
enhancement of telecommunication, computer and information systems, the
achievement by
21
the Company and its vendors and customers and other third parties with which the
Company has a business relationship 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, change in government tariffs or
duties, currency fluctuations, a change in interest rates, the state of the
general economy, the success of the Company in avoiding the delisting of its
common stock from The Nasdaq Stock Market, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Credit Facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries and
supplementary data required by this item are included in Item 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
22
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).
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 Lease Agreement for west coast corporate office and northern
California sales office in San Jose, California dated October 1,
1998 between San Jose Technology Properties, LLC and the
Company.*
10.4 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).
10.5 Promissory Note, dated May 1, 1995, payable to Drake, the
Company's landlord, in the amount of $90,300 (incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No. 33-58661).
10.6 Agreement between Drake and the Company dated May 1, 1994
(incorporated by reference to Exhibit 10.5 to the Company's Form
10-K for the year ended December 31, 1994).
10.7 Amended and Restated All American Semiconductor, Inc. Employees',
Officers', Directors' Stock Option Plan (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).**
10.8 Deferred Compensation Plan (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-2, File
No. 33-47512).**
23
10.9 Master Lease Agreement dated March 21, 1994, together with lease
schedules for computer and other equipment (incorporated by
reference to Exhibit 10.9 to the Company's Form 10-K for the year
ended December 31, 1994).
10.10 Employment Agreement dated as of May 24, 1995, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.22 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-58661), as amended by First Amendment to
Employment Agreement dated as of December 31, 1996, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.9 to the Company's Form 10-K for the year ended December 31,
1996), as amended by Second Amendment to Employment Agreement
dated as of August 21, 1998, between the Company and Paul
Goldberg (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1998).**
10.11 Employment Agreement dated as of May 24, 1995, between the
Company and Bruce M. Goldberg (incorporated by reference to
Exhibit 10.24 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661), as amended by First
Amendment to Employment Agreement dated as of August 21, 1998,
between the Company and Bruce M. Goldberg (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1998).**
10.12 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).
10.13 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).
10.14 Loan and Security Agreement (without exhibits or schedules) among
Harris Trust and Savings Bank, as a lender and administrative
agent, American National Bank and Trust Company of Chicago, as a
lender and collateral agent, and the Other Lenders Party thereto
and the Company, as borrower, 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).
10.15 Amendment No. 1 to Loan and Security Agreement dated August 2,
1996 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 1996).
10.16 Amendment No. 2 to Loan and Security Agreement dated November 14,
1996 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 1996).
10.17 Amendment No. 3 to Loan and Security Agreement dated July 31,
1998 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 1998).
10.18 Amendment No. 4 to Loan and Security Agreement dated March 23,
1999.*
10.19 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).
10.20 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).**
10.21 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), as amended by First
Amendment to Employment Agreement dated as of August 21, 1998,
between the Company and Howard L. Flanders (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended September 30, 1998).**
24
10.22 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), as amended by First Amendment to
Employment Agreement dated as of August 21, 1998, between the
Company and Rick Gordon (incorporated by reference to Exhibit
10.4 to the Company's Form 10-Q for the quarter ended September
30, 1998).**
10.23 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).
10.24 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).
10.25 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).**
10.26 Promissory Note, dated October 1, 1996, payable to Sam Berman,
d/b/a Drake Enterprises, in the amount of $161,500 (incorporated
by reference to Exhibit 10.38 to the Company's Form 10-K for the
year ended December 31, 1996).
10.27 Note dated August 21, 1998, by Bruce Mitchell Goldberg and Jayne
Ellen Goldberg in favor of the Company in the principal amount of
$125,000 (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q for the quarter ended September 30, 1998).
11.1 Statement Re: Computation of Per Share Earnings.*
21.1 List of subsidiaries of the Registrant.*
23.1 Consent of Lazar Levine & Felix LLP, independent certified public
accountants.*
27.1 Financial Data Schedule.*
- ------------------
* Filed herewith
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
No reports were filed during the fourth quarter of 1998.
25
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 31, 1999
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 31, 1999.
/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
26
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, 1998 and 1997 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the three years in the period ended December 31, 1998. 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, 1998 and 1997 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ LAZAR LEVINE & FELIX LLP
- --------------------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
March 5, 1999, except as to Note 14, the date of which is
March 17, 1999 and Note 7, the date of which is March 23, 1999
F-1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------------
Current assets:
Cash ....................................................... $ 473,000 $ 444,000
Accounts receivable, less allowances for doubtful
accounts of $1,412,000 and $1,166,000 .................... 37,821,000 32,897,000
Inventories ................................................ 69,063,000 67,909,000
Other current assets ....................................... 2,574,000 2,074,000
------------- -------------
Total current assets ..................................... 109,931,000 103,324,000
Property, plant and equipment - net .......................... 4,506,000 4,779,000
Deposits and other assets .................................... 3,458,000 3,157,000
Excess of cost over fair value of net assets acquired - net .. 1,062,000 1,026,000
------------- -------------
$ 118,957,000 $ 112,286,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................... $ 269,000 $ 304,000
Accounts payable and accrued expenses ...................... 41,229,000 39,154,000
Income taxes payable ....................................... 56,000 389,000
Other current liabilities .................................. 185,000 169,000
------------- -------------
Total current liabilities ................................ 41,739,000 40,016,000
Long-term debt:
Notes payable .............................................. 43,306,000 39,084,000
Subordinated debt .......................................... 6,187,000 6,293,000
Other long-term debt ....................................... 1,216,000 1,219,000
------------- -------------
92,448,000 86,612,000
------------- -------------
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,
19,866,906 and 20,353,894 shares issued, 19,866,906 and
19,863,895 shares outstanding ............................ 199,000 199,000
Capital in excess of par value ............................. 25,592,000 25,588,000
Retained earnings .......................................... 1,169,000 338,000
Treasury stock, at cost, 180,295 shares .................... (451,000) (451,000)
------------- -------------
26,509,000 25,674,000
------------- -------------
$ 118,957,000 $ 112,286,000
============= =============
See notes to consolidated financial statements
F-2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------
NET SALES ................................ $ 250,044,000 $ 265,640,000 $ 237,846,000
Cost of sales ............................ (194,599,000) (207,173,000) (185,367,000)
------------- ------------- -------------
Gross profit ............................. 55,445,000 58,467,000 52,479,000
Selling, general and
administrative expenses ................ (46,880,000) (48,257,000) (51,675,000)
Impairment of goodwill ................... - - (2,193,000)
Restructuring and other nonrecurring
expenses ............................... (2,860,000) - (2,749,000)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ............................. 5,705,000 10,210,000 (4,138,000)
Interest expense ......................... (4,313,000) (4,797,000) (7,025,000)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ......... 1,392,000 5,413,000 (11,163,000)
Income tax (provision) benefit ........... (561,000) (2,163,000) 2,942,000
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE DISCONTINUED
OPERATIONS AND EXTRAORDINARY
ITEMS .................................. 831,000 3,250,000 (8,221,000)
Discontinued operations:
Loss from operations (net of $125,000
income tax benefit) .................... - - (166,000)
Loss on disposal (net of $1,200,000
income tax benefit) .................... - - (1,591,000)
------------- ------------- -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .................... 831,000 3,250,000 (9,978,000)
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) ........................ $ 831,000 $ 3,250,000 $ (9,920,000)
============= ============= =============
EARNINGS (LOSS) PER SHARE:
Basic:
INCOME (LOSS) FROM CONTINUING
OPERATIONS ........................... $ .04 $ .17 $ (.41)
Discontinued operations ................ - - (.09)
Extraordinary items .................... - - -
----- ----- ------
NET INCOME (LOSS) ...................... $ .04 $ .17 $ (.50)
===== ===== ======
Diluted:
INCOME (LOSS) FROM CONTINUING
OPERATIONS ........................... $ .04 $ .16 $ (.40)
Discontinued operations ................ - - (.09)
Extraordinary items .................... - - -
---- ----- ------
NET INCOME (LOSS) ...................... $ .04 $ .16 $ (.49)
===== ===== ======
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, 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
EXERCISE OF STOCK OPTIONS....... 3,011 - 4,000 - - 4,000
NET INCOME...................... - - - 831,000 - 831,000
---------- ---------- ------------ ------------ ------------ --------------
BALANCE, DECEMBER 31, 1998...... 19,866,906 $ 199,000 $ 25,592,000 $ 1,169,000 $ (451,000) $ 26,509,000
========== ========== ============ ============ ============ ==============
See notes to consolidated financial statements
F-4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 831,000 $ 3,250,000 $ (9,920,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.................................. 1,236,000 1,440,000 2,757,000
Non-cash interest expense...................................... 352,000 254,000 2,273,000
Nonrecurring expenses.......................................... - - 4,428,000
Changes in assets and liabilities of continuing operations:
Decrease (increase) in accounts receivable................... (4,924,000) (972,000) 1,569,000
Decrease (increase) in inventories........................... (1,154,000) (3,697,000) 1,206,000
Decrease (increase) in other current assets.................. (500,000) 3,039,000 (2,014,000)
Increase (decrease) in accounts payable and
accrued expenses........................................... 2,075,000 7,356,000 (14,032,000)
Increase (decrease) in other current liabilities............. (317,000) 62,000 (669,000)
Decrease in net assets of discontinued operations.............. - 830,000 1,796,000
------------ ------------ ------------
Net cash provided by (used for) operating activities....... (2,401,000) 11,562,000 (12,606,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................ (564,000) (298,000) (2,293,000)
Increase in other assets......................................... (944,000) (83,000) (4,438,000)
Net investing activities of discontinued operations.............. - - (39,000)
------------ ------------ ------------
Net cash used for investing activities..................... (1,508,000) (381,000) (6,770,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit agreements...... 4,263,000 (11,000,000) 20,290,000
Increase in notes payable........................................ 10,000 - 15,161,000
Repayments of notes payable...................................... (339,000) (290,000) (15,835,000)
Net proceeds from issuance of equity securities.................. 4,000 28,000 9,000
------------ ------------ ------------
Net cash provided by (used for) financing activities....... 3,938,000 (11,262,000) 19,625,000
------------ ------------ ------------
Increase (decrease) in cash...................................... 29,000 (81,000) 249,000
Cash, beginning of year.......................................... 444,000 525,000 276,000
------------ ------------ ------------
Cash, end of year................................................ $ 473,000 $ 444,000 $ 525,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................... $ 4,223,000 $ 4,906,000 $ 3,839,000
============ ============ ============
Income taxes paid (refunded) - net............................... $ 1,756,000 $ (989,000) $ 1,108,000
============ ============ ============
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.
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; networking;
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, 1998 and 1997 Consolidated Balance
Sheets approximate carrying value at these dates.
MARKET RISK
The Company's Credit Facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results.
INVENTORIES
Inventories are stated at the lower of cost (determined on an average cost
basis) or market.
F-6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
FIXED ASSETS
Fixed assets are reflected at cost. Depreciation of office furniture and
equipment and computer equipment is provided on straight-line and accelerated
methods over the estimated useful lives of the respective assets. Amortization
of leasehold improvements is provided using the straight-line method over the
term of the related lease or the life of the respective asset, whichever is
shorter. Maintenance and repairs are charged to expense as incurred; major
renewals and betterments are capitalized.
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 4 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 8 to Notes to
Consolidated Financial Statements.
EARNINGS PER SHARE
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" ("SFAS 128"), which changed the method for calculating
earnings per share. SFAS 128 requires the presentation of "basic" and "diluted"
earnings per share on the face of the statement of 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 1998 1997 1996
- --------------------------------------------------------------------------------
Basic........................... 19,685,106 19,672,559 19,742,849
Diluted......................... 19,994,009 19,784,837 20,105,761
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.
F-7
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
STOCK-BASED COMPENSATION
In 1996, the Company adopted Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See Note 9 to Notes
to Consolidated Financial Statements.
COMPREHENSIVE INCOME
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
130, "Reporting Comprehensive Income", which prescribes standards for reporting
comprehensive income and its components. The Company had no items of other
comprehensive income in any period presented and accordingly is not required to
report comprehensive income.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes standards for reporting about operating segments. The Company
has determined that no operating segment outside of its core business met the
quantitative thresholds for separate reporting. Accordingly, no separate
information has been reported.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."
The effect of the adoption of this statement was not material.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------------------
Office furniture and equipment.................. $ 4,179,000 $ 4,074,000
Computer equipment.............................. 3,924,000 3,554,000
Leasehold improvements.......................... 2,017,000 1,800,000
---------------- ---------------
10,120,000 9,428,000
Accumulated depreciation and amortization....... (5,614,000) (4,649,000)
---------------- ---------------
$ 4,506,000 $ 4,779,000
================ ===============
NOTE 3 - 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 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 was canceled and retired.
F-8
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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
has also paid approximately $107,000 of additional consideration to certain of
the selling stockholders of the Added Value Companies since the aggregate value
of the shares of the Company's common stock issued to these individuals did not,
by June 30, 1998, appreciate in the aggregate by $107,000. The additional
consideration is included in excess of cost over fair value of net assets
acquired in the accompanying Consolidated Balance Sheet as of December 31, 1998.
The Company has not included in excess of cost over fair value of net assets
acquired as of December 31, 1998 approximately $159,000 of additional
consideration that would have been payable to another selling stockholder of the
Added Value Companies since such additional consideration has been applied by
the Company to partially satisfy certain claims alleged by the Company against
such selling stockholder arising with respect to the transaction with the Added
Value Companies. The Company entered 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
Settlement Agreements provided, among other things, that the additional
consideration that could have been payable to those selling stockholders be
eliminated, 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. 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 4 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. in 1994, 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.
NOTE 4 - 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.
F-9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
See Note 5 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 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 3 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 5 - RESTRUCTURING AND OTHER NONRECURRING EXPENSES
During 1998, the Company was involved in merger discussions which led to a
letter of intent being signed in June 1998 with Reptron Electronics, Inc.
("Reptron") regarding the merger of Reptron's distribution operations with the
Company ("the Merger"). Throughout 1998 the Company was actively involved in the
evaluation of, and preparations for the integration of operations in connection
with the proposed Merger. In October 1998, the Merger negotiations between the
Company and Reptron were terminated. As a result, the Company recorded a
nonrecurring charge in 1998, which included expansion costs incurred in
anticipation of supporting the proposed combined entity, certain
employee-related expenses, professional fees and other Merger-related out of
pocket costs, all of which aggregated $2,860,000.
During 1996, the Company recorded restructuring and nonrecurring expenses
aggregating $2,749,000. Of this total, $1,092,000 represented expenses in
connection with the restructuring of the Company's kitting and turnkey
operations, $625,000 represented a non-cash charge associated with the Company
accelerating a postretirement benefit accrual relating to an amendment of an
executive officer's employment agreement, $587,000 represented the aggregate
payments made in connection with the termination of certain employment
agreements relating to prior acquisitions, and $445,000 represented expenses
associated with the closing and relocation of the Company's cable assembly
division.
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
Statement of Operations for the year ended December 31, 1996.
NOTE 6 - 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.
During 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. Accordingly, this division was accounted for as discontinued
operations and the results of operations for 1996 are segregated in the
accompanying Consolidated Statement of Operations. Sales from this division were
$6,822,000 for 1996. 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.
F-10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - 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
$43,263,000 at December 31, 1998 compared to $39,000,000 at December 31, 1997.
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%). During the first quarter of 1998, as a result
of the Company satisfying certain conditions, the Company's borrowing rate under
its Credit Facility was decreased by one-quarter of one percent (.25%). The
Company's Credit Facility was further amended on March 23, 1999 whereby certain
financial covenants were modified.
During 1996, 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.
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
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. In addition, 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. This 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
F-11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
share. The 51.5 units issued represent debentures aggregating $5,150,000
together with an aggregate of 386,250 warrants. See Note 9 to Notes to
Consolidated Financial Statements. The debentures are payable in semi-annual
installments of interest only commencing December 1, 1994, with the principal
amount maturing in full on June 13, 2004. The Company is not required to make
any mandatory redemptions or sinking fund payments. The debentures are
subordinated to the Company's senior indebtedness including the Credit Facility
and notes issued to the Company's landlord. The 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 1998, 1997 and
1996.
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 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, 1998, other than the Credit
Facility, matures as follows:
1999......................................................... $ 230,000
2000......................................................... 96,000
2001......................................................... 99,000
2002......................................................... 88,000
2003......................................................... 75,000
Thereafter................................................... 7,053,000
--------------
$ 7,641,000
==============
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, 1998, accumulated
depreciation of these assets aggregated approximately $408,000. Depreciation of
assets under this capital lease is included in depreciation expense.
F-12
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Minimum future lease payments under this capital lease as of December 31, 1998
and for each of the remaining years and in the aggregate are approximately as
follows:
1999......................................................... $ 51,000
2000......................................................... 38,000
--------------
Total minimum lease payments................................. 89,000
Less amount representing interest............................ (15,000)
--------------
Total obligations under capital leases....................... 74,000
Current portion.............................................. (39,000)
--------------
$ 35,000
==============
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.
NOTE 8 - INCOME TAXES
The tax effects of the temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 1998 and 1997 are as follows:
Deferred tax assets: 1998 1997
-------------- -------------
Accounts receivable.................. $ 524,000 $ 433,000
Inventory............................ 384,000 334,000
Accrued expenses..................... 1,569,000 761,000
Postretirement benefits.............. 481,000 481,000
Other................................ 649,000 671,000
-------------- -------------
3,607,000 2,680,000
Deferred tax liabilities:
Fixed assets......................... 387,000 319,000
-------------- -------------
Net deferred tax asset................. $ 3,220,000 $ 2,361,000
============== =============
At December 31, 1998 $1,930,000 of the net deferred tax asset was included in
"Other Current Assets" and $1,290,000 was included in "Deposits and Other
Assets" in the accompanying Consolidated Balance Sheet.
The components of income tax expense (benefit) are as follows:
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------
Current
- -------
Federal................... $ 1,210,000 $ 1,836,000 $ (2,018,000)
State..................... 210,000 207,000 (262,000)
-------------- -------------- -------------
1,420,000 2,043,000 (2,280,000)
-------------- -------------- -------------
Deferred
- --------
Federal................... (749,000) 105,000 (1,657,000)
State..................... (110,000) 15,000 (286,000)
-------------- -------------- -------------
(859,000) 120,000 (1,943,000)
-------------- -------------- -------------
$ 561,000 $ 2,163,000 $ (4,223,000)
============== ============== =============
F-13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The provision for income tax expense (benefit) included in the Consolidated
Financial Statements is as follows:
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Continuing operations................................. $ 561,000 $ 2,163,000 $ (2,942,000)
Discontinued operations............................... - - (1,325,000)
Extraordinary items................................... - - 44,000
-------------- -------------- -------------
$ 561,000 $ 2,163,000 $ (4,223,000)
============== ============== =============
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 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
U.S. Federal income tax statutory rate................ 34.0% 34.0% (34.0)%
State income tax, net of federal income tax benefit... 5.4 2.7 (2.6)
Goodwill amortization................................. 4.2 .9 16.6
Other - including non-deductible items................ (2.1) 2.4 (9.9)
------ ----- -----
Effective tax rate.................................... 41.5% 40.0% (29.9)%
====== ===== =====
NOTE 9 - 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 certain
levels of pre-tax net income were 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 was canceled and
retired as of December 31, 1997.
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 (30,000 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. At December 31, 1998, 37,500 of these
options remained unexercised and 12,500 were canceled.
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, 1998, these warrants remained unexercised. The same consulting firm
had previously been issued warrants to acquire
F-14
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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, 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, 1998, 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 7 to Notes to Consolidated Financial Statements). The warrants are
exercisable at any time between December 14, 1994 and June 13, 1999 at an
exercise price of $3.15 per share. In connection with this private placement,
the placement agent received warrants to purchase 38,625 shares of the Company's
common stock. The placement agent's warrants are exercisable for a four-year
period commencing June 14, 1995 at an exercise price of $3.78 per share. At
December 31, 1998, 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. These
warrants were not exercised and expired in May 1998. 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, 1996, 1997 and 1998 under the Option Plan follows:
Weighted Average
Options Exercise Price
------------ --------------
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
Granted 195,000 1.44
Exercised (3,011) 1.12
Canceled (88,750) 1.39
------------
Outstanding, December 31, 1998 2,831,552 1.46
============
Weighted average fair value of options
granted during the year .27
Options exercisable:
December 31, 1996 860,495 1.43
December 31, 1997 468,124 1.27
December 31, 1998 832,080 1.22
F-15
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Exercise prices for options outstanding as of December 31, 1998 ranged from
$1.00 to $2.53. The weighted-average remaining contractual life of these options
is approximately 5 years. Outstanding options at December 31, 1998 were held by
83 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:
YEARS ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------
Net earnings (loss):
As reported $831,000 $3,250,000 $(9,920,000)
Pro forma 800,000 2,859,000 (9,967,000)
Basic earnings (loss) per share:
As reported $.04 $.17 $(.50)
Pro forma .04 .15 (.50)
Diluted earnings (loss) per share:
As reported $.04 $.16 $(.49)
Pro forma .04 .14 (.50)
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 1998, 1997 and 1996, respectively: expected volatility of 60.0%,
50.0% and 43.4%; risk-free interest rate of 5.7%, 6.1% 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.
In connection with the acquisition of the assets of Components Incorporated in
1994, the Company issued 98,160 unqualified stock options at an exercise price
of $1.65 per share. These options expired in January 1999.
NOTE 10 - COMMITMENTS/RELATED PARTY TRANSACTIONS
In May 1994, the Company entered into a new lease with its then existing
landlord to lease a 110,800 square foot facility for its corporate headquarters
and Miami distribution center. The lease has a term expiring in 2014 (subject to
the Company's right to terminate at any time after the fifth year of the term
upon twenty-four months prior written notice and the payment of all outstanding
debt owed to the landlord). The lease gives the Company three six-year options
to renew at the fair market value rental rates. The lease 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.
F-16
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 presently contains the separate divisions created
for flat panel displays (ADT) and memory module (AMP) operations as well as a
distribution center. See "Products." During 1998 the Denver sales operations
were moved to a separate office. The 7,600 square foot facility is now dedicated
solely to certain value-added services and a regional distribution center.
During 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 further improve quality control and service capabilities for its west coast
customers.
During 1998, the Company entered into a new lease for approximately 20,000
square feet of space in San Jose, California to house its expanded west coast
corporate offices as well as its northern California sales operation. This lease
incorporates the previously leased space of approximately 11,000 square feet and
adds a new adjoining space of approximately 9,000 square feet. Approximately
8,000 square feet of the space is being used for corporate offices including the
office of the President and CEO of the Company and 8,000 square feet of the
space is being utilized for the sales operation. The remaining area of
approximately 4,000 square feet is not presently being utilized and the Company
is currently pursuing a tenant to sublet this space.
The Company leases space for its other sales offices, which range in size from
approximately 1,000 square feet to 8,000 square feet. The leases for these
offices expire at various dates and include various escalation clauses and
renewal options.
Approximate minimum future lease payments required under operating leases for
office leases as well as equipment leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1998, are as
follows for the next five years:
YEAR ENDING DECEMBER 31
1999............................................................ $3,281,000
2000............................................................ 2,583,000
2001............................................................ 1,343,000
2002............................................................ 699,000
2003............................................................ 660,000
Total rent expense for office leases, including real estate taxes and net of
sublease income, amounted to approximately $2,165,000, $1,940,000 and $1,772,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
In 1998, the Board of Directors approved a loan to the President and CEO of the
Company in the amount of $125,000 in connection with his relocation to Silicon
Valley. This loan is evidenced by a promissory note, which bears interest at 5%
per annum and is payable interest only for the first five years and four months;
principal and interest thereafter until maturity on a twenty-year
self-amortizing annual basis; and any unpaid principal and accrued interest is
payable in full in August 2013. This note receivable is included in "Deposits
and Other Assets" in the accompanying Consolidated Balance Sheet at December 31,
1998.
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
F-17
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 1998, 1997 and 1996, none of
which was paid to any executive officer. The maximum benefit payable to a
Participant (including each of the executive officers) under the 1988 Deferred
Compensation Plan is presently $30,000 per annum. At December 31, 1998, 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 $133,000.
During 1996, the Company established a second deferred compensation plan (the
"Salary Continuation Plan") for executives of the Company. The executives
eligible to participate in the Salary Continuation Plan are chosen at the sole
discretion of the Board of Directors upon a recommendation from the Board of
Directors' Compensation Committee. The Company may make contributions each year
in its sole discretion and is under no obligation to make a contribution in any
given year. For 1996, 1997, and 1998 the Company committed to contribute
$63,000, $160,000, and $192,000 respectively, under this plan. Participants in
the plan will vest in their plan benefits over a ten-year period. If the
participant's employment is terminated due to death, disability or due to a
change in control of management, they will vest 100% in all benefits under the
plan. Retirement benefits will be paid, as selected by the participant, based on
the sum of the net contributions made and the net investment activity.
In connection with an employment agreement with an executive officer an unfunded
postretirement benefit obligation of $1,171,000 is included in the Consolidated
Balance Sheets at December 31, 1998 and 1997.
The Company maintains a 401(k) plan (the "401(k) Plan"), which is intended to
qualify under Section 401(k) of the Internal Revenue Code. All full-time
employees of the Company over the age of 21 are eligible to participate in the
401(k) Plan after completing 90 days of employment. Each eligible employee may
elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of
his or her salary, limited to $10,000 in 1998. The Company makes matching
contributions and in 1998 its contributions were in the amount of 25% on the
first 6% contributed of each participating employee's salary. The Company
expensed $521,000, $472,000 and $305,000 for such matching contributions for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 11 - 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
Statement of Operations for the year ended December 31, 1996.
NOTE 12 - 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.
F-18
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13 - ECONOMIC DEPENDENCY
For each of the years ended December 31, 1998, 1997 and 1996, purchases from one
supplier were in excess of 10% of the Company's total annual purchases and
aggregated approximately $39,893,000, $43,435,000 and $35,579,000, respectively.
The net outstanding accounts payable to this supplier at December 31, 1998, 1997
and 1996 amounted to approximately $5,832,000, $2,854,000 and $2,285,000,
respectively.
NOTE 14 - SUBSEQUENT EVENT
On March 17, 1999, the Company was advised by the Nasdaq Listing Qualifications
department of The Nasdaq Stock Market that the Company has failed to maintain a
closing bid price for its common stock in excess of $1 per share as required
under The Nasdaq Stock Market maintenance standards. Although no delisting
action was initiated at this time, the Company was provided ninety (90) calendar
days in which to regain compliance with this maintenance standard. Failure to
meet this standard could result in delisting from The Nasdaq Stock Market. The
Company is currently reviewing its options with respect to the Company's listing
on The Nasdaq Stock Market. There can be no assurance that the Company's common
stock will continue to remain eligible for listing on The Nasdaq Stock Market.
See "Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters."
F-19