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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, 2003
Commission File Number: 0-16207
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16115 N.W. 52nd Avenue
Miami, Florida 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2003, the last business day of the Registrant's most recently
completed second fiscal quarter, the aggregate market value of the common stock
of ALL AMERICAN SEMICONDUCTOR, INC. held by non-affiliates was $10,100,000.
As of March 18, 2004, 3,773,201 shares of the common stock of ALL AMERICAN
SEMICONDUCTOR, INC. were outstanding.
Documents Incorporated by Reference:
Pursuant to Instruction G(3) of Form 10-K, portions of the definitive proxy
statement to be filed within 120 days after the end of the Registrant's fiscal
year are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.
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ALL AMERICAN SEMICONDUCTOR, INC.
FORM 10-K - 2003
Table of Contents
Part Item Page
No. No. Description No.
---- ---- ----------- ----
I 1 Business................................................................................ 1
2 Properties.............................................................................. 12
3 Legal Proceedings....................................................................... 13
4 Submission of Matters to a Vote of Security-Holders..................................... 13
II 5 Market for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities................................................. 13
6 Selected Financial Data................................................................. 14
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 16
7A Quantitative and Qualitative Disclosures about Market Risk.............................. 32
8 Financial Statements and Supplementary Data............................................. 32
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................... 32
9A Controls and Procedures................................................................. 32
III 10 Directors and Executive Officers of the Registrant...................................... 33
11 Executive Compensation.................................................................. 33
12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................................... 33
13 Certain Relationships and Related Transactions.......................................... 33
14 Principal Accountant Fees and Services.................................................. 33
IV 15 Exhibits, Financial Statement Schedule, and Reports on Form 8-K......................... 33
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PART I
ITEM 1. Business
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General
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All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a distributor of
electronic components manufactured by others. The Company distributes a full
range of semiconductors (active components), including transistors, diodes,
memory devices, microprocessors, microcontrollers and other integrated circuits,
as well as passive components, such as capacitors, resistors, inductors and
electromechanical products, including cable, switches, connectors, filters and
sockets. These products are sold primarily to original equipment manufacturers
in a diverse and growing range of industries, including manufacturers of
computers and computer-related products; home office and portable equipment;
networking, satellite, wireless and other communications products; Internet
infrastructure equipment and appliances; automobiles; consumer goods; voting and
gaming machines; point-of-sale equipment; robotics and industrial equipment;
defense and aerospace equipment; and medical instrumentation. The Company also
sells products to contract electronics manufacturers, or electronics
manufacturing services, or EMS, providers who manufacture products for companies
in all electronics industry segments. Through the Aved Memory Products division
of its subsidiary, Aved Industries, Inc., the Company also designs and has
manufactured under the label of its subsidiary's division, certain memory
modules which are sold to original equipment manufacturers.
While the Company reincorporated in Delaware in 1987, it and its predecessors
have operated since 1964. The Company was recognized by industry trade
publications as the 4th largest distributor of semiconductors and the 10th
largest electronic components distributor overall in North America, out of an
industry group that numbers more than 1,000 distributors.
The Company's principal executive office is located at 16115 N.W. 52nd Avenue,
Miami, Florida 33014. Our headquarters for sales and marketing functions and the
office of our President and Chief Executive Officer are located at 230 Devcon
Drive, San Jose, California 95112. Our telephone number in Florida is (305)
621-8282.
THIS REPORT (PARTICULARLY "ITEM 1. BUSINESS" AND "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS")
CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SEE "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING
STATEMENTS; BUSINESS RISKS AND UNCERTAINTIES."
The Electronics and Electronics Distribution Industries
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The electronics industry is one of the largest industries in the United States.
Prior to 2001, it was also one of the fastest growing industries. Worldwide
consumption of semiconductor products grew from $126 billion in 1998 to over
$200 billion in 2000. During 2001, the electronics and the electronics
distribution industries suffered one of the most severe downturns in the
industries' history with global sales of semiconductors declining by over 30%.
Industry associations estimated that worldwide consumption of semiconductors
declined to $139 billion in 2001 and grew slightly to $141 billion in 2002 and
to $166 billion in 2003. While global sales of semiconductors remained
relatively flat in 2002 as compared to 2001 and grew by 18% in 2003 compared to
2002, consumption in North America declined in 2002 and may have declined
slightly or remained flat in 2003 as an increasing amount of procurement and
manufacturing moved offshore. The Company believes that electronic component
revenue and total U.S. factory sales of electronic products will resume growth
in the future. Historically, the growth of these industries has been driven by
increased demand for new products incorporating sophisticated electronic
components, such as laptop computers, home office and portable equipment,
networking, satellite, wireless and other communications products,
infrastructure equipment and appliances for the Internet, voting and gaming
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machines, point-of-sale equipment and multimedia products; as well as the
increased utilization of electronic components in a wide range of industrial,
automotive, consumer and military products.
The three product groups included in the electronic components subsegment of the
electronics industry are semiconductors, passive/electromechanical components,
and systems and computer products (such as disk drives, terminals and computer
peripherals). The Company believes that semiconductors and
passive/electromechanical products currently account for approximately
two-thirds of the electronic components distribution marketplace, while systems
and computer products account for the remainder. The Company only participates
in the distribution of semiconductors and passive/electromechanical products
which account for two of the three industry product groups.
Distributors are an integral part of the electronics industry. During 2003, an
estimated $31 billion of electronic components were sold through distribution in
North America. While this is up from the approximate level of $10 billion in
1992, it is down from a high of an estimated $37 billion in 2000. Original
equipment manufacturers and most of the smaller contract electronics
manufacturers which utilize electronic components continue to outsource their
procurement, inventory and materials management processes to third parties in
order to concentrate their resources (including management talent, personnel
costs and capital investment) on their core competencies, which include product
development, sales and marketing. Large distribution companies not only fill
these procurement and materials management roles, but further serve as a single
supply source for original equipment manufacturers and contract electronics
manufacturers, offering a much broader line of products, incremental quality
control measures and more support services than individual electronic component
manufacturers. Management believes that original equipment manufacturers and
most of the smaller contract electronics manufacturers will continue to demand
greater service and to increase quality requirements, and that original
equipment manufacturers, contract electronics manufacturers and electronic
component manufacturers will continue to be dependent on distributors in the
future.
Electronic component manufacturers are under similar pressure to allocate a
larger share of their resources to research, product development and
manufacturing capacity as technological advances continue to shorten product
lifecycles. Electronic component manufacturers sell directly to only a small
number of their potential customers. This small segment of their customer base
accounts for a large portion of the total available revenues. It is not
economical for component manufacturers to provide a broad range of sales support
services to handle the large amount of customers that account for the balance of
available revenues. With their expanded technology and service capabilities,
large distributors have now become a reliable means for component manufacturers
to outsource their sales, marketing, customer service and distribution
functions. This trend particularly benefits larger distributors with nationwide
distribution capabilities such as the Company, as manufacturers continue to
allocate a larger amount of their customer base to a more limited number of full
service distribution companies.
A prevalent trend in the electronics distribution industry has been the
consolidation of distribution companies. The Company believes that this
consolidation has to date created, and will continue in the future to create,
growth opportunities for the Company. Consolidation among distributors causes
customers to experience an increased concentration in their approved vendor
base. As a result, the Company believes that some customers will either replace
a consolidated distributor with a different distributor or redistribute a
portion of their purchasing across their distribution network. Accordingly,
through consolidation the Company has increasing opportunities to add customers
and/or do more business with existing customers. Similarly, as a result of
consolidation, many suppliers have either lost a distributor or become a much
less significant supplier to the consolidated distribution company. As a result
of this impact from consolidation, the Company believes that suppliers have
recently added, and will continue in the future to add, new distributors to
their distribution networks. Management believes that the Company has benefited
from, and will continue to benefit in the future from, the consolidation trend.
Business Strategy
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While the Company's long-term strategy is to achieve growth by expanding its
markets, increasing its customer base and selling more to its existing
customers, during the past three years, the Company was
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forced to put its growth plans on hold as a result of the severe downturn in our
industry. During this time period, the Company reduced its workforce and
eliminated certain unprofitable operations. As a result of the severe industry
conditions, the Company's focus, instead of on absolute growth, has been on
market share gain. The Company believes that conditions are starting to improve
and the Company's strategy is to continue to gain market share and, as market
conditions improve, resume growth by: (i) taking advantage of consolidation
trends, (ii) increasing the number of customers it sells to, (iii) increasing
sales to existing customers by continuing to add new suppliers and expand its
product offerings and service capabilities and (iv) expanding to markets outside
North America. While management believes that it may be able to increase market
share and profitability in the future, there can be no assurance that these
goals will be achieved, particularly since their achievement depends to a large
extent on market conditions outside the Company's control.
Expansion
Prior to 2001 the Company drove significant expansion including opening new
offices, relocating and expanding existing offices and acquiring other
companies, all in order to increase its sales volume, expand its geographic
coverage and become recognized as a national distributor. See "Sales and
Marketing-Sales Office Locations." As a result of the implementation of the
Company's business strategy, the Company experienced significant growth in 1999
and 2000. In order to effectively drive and manage its expansion, in 1999 and
2000 the Company: (i) restructured, enhanced and expanded its sales staff and
sales management and marketing teams; (ii) expanded its quality control
programs; (iii) expanded its corporate operations department; (iv) enhanced its
state-of-the-art distribution technology; and (v) enhanced its asset management
capabilities through new computer and telecommunications equipment and, during
2000, through the opening of a west coast asset management group. To keep up
with industry trends the Company made significant investments in its web site
and Internet capabilities as well as other forms of e-commerce; and in that
regard during 1999 created its own web development group. The Company also
expanded its investment in its Field Application Engineer Program. In addition
to adding field application engineers to the program, in 2000 the Company opened
the All American Technical Center. Additionally, the Company continued to
increase its investment in its materials management solutions capabilities which
is now referred to as Supply Chain Management. As the Company developed a
greater visibility at the industry's top tier customer base, the Company created
an Executive Accounts Program. To better service the large customer base in the
western part of the United States and to enhance relationships with a supplier
base that is predominantly based in California, the Company dramatically
expanded its west coast corporate offices and relocated the President and Chief
Executive Officer of the Company to San Jose to be based where sales and
marketing functions are headquartered. The Company also expanded the operations
of its west coast programming and distribution center.
As a result of a severe industry downturn that began with a dramatic slowdown
during the fourth quarter of 2000, the Company progressively reduced its
workforce and discontinued certain of its non-core operations. See "Employees"
and "Products-Flat Panel Display Products" and Note 9 to Notes to Consolidated
Financial Statements. During 2002 and 2003 the Company did not close any offices
or reduce its workforce. During 2003 as part of its plan to expand its markets
and provide enhanced services beyond the boundaries of North America, the
Company began operations in the United Kingdom including a stocking location in
the London area, began sales operations in Northern Asia with the opening of an
office in Seoul, South Korea and started operations in Southeast Asia as well.
Increasing Product Offerings
The Company intends to continue its efforts to increase the number and breadth
of its product offerings, thereby allowing it to attract new customers and to
represent a larger percentage of the purchases being made by its existing
customers. As part of its efforts to attract new suppliers and expand its
product offerings, prior to 2001 the Company had expanded its service
capabilities and opened new sales offices (see "Expansion").
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During recent years, the Company added many new suppliers and expects to add
additional suppliers in the future as a result of its marketing strategies and
consolidation trends. As a result of the consolidation trend previously
discussed, many suppliers have either lost a distributor or become a much less
significant supplier to the consolidated distribution company. Due to the impact
from consolidation, the Company believes that suppliers have recently added, and
will continue in the future to add, new distributors to their distribution
networks. New supplier relationships generally require up-front investments that
could take substantial time to provide a return.
Service Capabilities
During the past several years, customers have been reducing their approved
vendor base in an effort to place a greater percentage of their purchases with
fewer, more capable distributors. As part of its overall strategy to increase
market penetration, the Company has endeavored to develop state-of-the-art
service capabilities. The Company refers to these service capabilities as
"distribution technology." The Company believes that it has developed service
capabilities comparable to some of the largest distributors in the industry,
which service capabilities the Company believes are not yet readily available at
many distributors of comparable size to the Company. The Company further
believes that these capabilities are not generally made available by the largest
distributors to middle market customers, which represent the vast majority of
the Company's customer base. See "Competition." Management believes that smaller
distributors generally do not have the ability to offer as broad an array of
services as the Company. The Company differentiates itself from its competition
by making state-of-the-art distribution technology available to both large and
middle market customers. Although the Company believes that this differentiation
will assist the Company's growth, there can be no assurance that such
differentiation exists to the extent that the Company currently believes or that
it will continue in the future.
The Company's distribution technology incorporates nationwide access to
real-time inventory and pricing information, electronic order entry and rapid
order processing. Over the years, the Company expanded its service capabilities
for just-in-time deliveries, bar coding, bonded inventory programs, kitting and
turnkey services, in-plant stores, in-plant terminals, electronic data
interchange programs, automatic inventory replenishment programs and complete
supply chain management solutions.
In order to further enhance its service capabilities, the Company also expanded
its Field Application Engineer Program. Additionally, the Company opened the All
American Technical Center, which is staffed with design specialists that can
assist our sales force and our field application engineers when a higher level
of expertise is needed. The All American Technical Center staff also works on
creating reference designs and design tools to assist customers and suppliers.
These programs are intended to generate sales by providing customers with
engineering support and increased service at the design and development stages.
These programs are also intended to enhance the technical capabilities of the
Company's entire sales force through regular training sessions. Management
believes that this capability is helpful in attracting new suppliers.
Another important segment of electronics distribution is the sale of
programmable semiconductor products. Programmable semiconductors enable
customers to reduce the number of components they use by highly customizing one
semiconductor to perform a function that otherwise would require several
components to accomplish. This saves space and enables customers to reduce the
size and cost of their products. In order to effectively sell programmable
products, most major distributors have established their own semiconductor
programming centers. To participate in this segment of the industry, the Company
has a 20,000 square foot facility in Fremont, California (near San Jose) which
incorporates a programming and a distribution center. In addition to enabling
the Company to address the market for programmable products, the Company expects
that this capability will allow the Company to attract new product lines that
require programming capabilities.
The Company believes that in the upcoming years an increasing amount of
transactions in its industry will be processed over the Internet. In this
regard, the Company designed and developed its own web site. In order to further
expand its utilization of and functionality on the Internet, the Company has its
own web development team. Additionally, to further its e-commerce strategies the
Company is engaged with
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multiple third party Internet/e-commerce companies to expand the visibility of
the Company and the ways in which customers can conduct commerce with the
Company.
The Company also provides value-added services relating to its
passive/electromechanical business.
Quality Controls and ISO Certification
The Company has a total quality management program. Our operations are performed
within the confines of increasing strictness in quality control programs and
traceability procedures. As a result, the Company's Miami and Fremont
distribution centers and its Fremont programming center have all successfully
completed a procedure and quality audit that resulted in their certification
under the international quality standard of ISO 9001. This quality standard was
established by the International Standards Organization, or ISO, created by the
European Economic Community, or EEC. The ISO created uniform standards of
measuring a company's processes, traceability procedures and quality control in
order to assist and facilitate business among the EEC.
Products
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Active and Passive Components
The Company markets both semiconductors and passive products. Semiconductors,
which are active components, respond to or activate upon receipt of electronic
current. Active products include transistors, diodes, memory devices,
microprocessors, microcontrollers and other integrated circuits. Passive
components, on the other hand, are designed to facilitate completion of
electronic functions. Passive products include capacitors, resistors, inductors
and electromechanical products such as cable, switches, connectors, filters and
sockets. Virtually all of the Company's customers purchase both active and
passive products.
The Company does not offer express warranties with respect to any of its
component products, instead passing on only those warranties, if any, granted by
its suppliers. However, there may be instances where a customer might be able to
enforce an express or implied warranty claim against the Company with respect to
component products manufactured by the Company's suppliers, in addition to or in
lieu of the warranties of the suppliers of such components.
Flat Panel Display Products
The Company believes that one of the faster growing segments of the electronics
industry will result from the expanded utilization of flat panel displays. Flat
panel displays are commonly used in laptop computers and are currently replacing
standard cathode ray tubes in a variety of applications, including medical,
industrial and commercial equipment, as well as personal computers, televisions,
automated teller machines, gaming machines and video monitors. In addition to
replacing cathode ray tubes in traditional applications, as a result of the
lower power requirements and reduced space needs of flat panel displays, the
advent of flat panels is enabling the implementation of display applications
that were not achievable with cathode ray tubes, such as laptop and palmtop
computers, handheld and portable products, voting machines, point-of-sale
equipment and advertising displays.
In order to properly function in any application, flat panel displays need
certain electronic impulses. One solution for generating these electronic
impulses is the use of board level products that control and regulate the
electronic input that drives the flat panel display. These products are commonly
referred to as driver boards. In addition to the driver board, flat panel
displays require a back-light inverter to run the back-light, and cable
assemblies to connect the display, inverter and the driver board to each other
and to the equipment of which it is a part.
The Company has addressed the flat panel display market in several ways. First,
the Company has assembled a comprehensive offering of flat panel display
products, including products from manufacturers of flat panel displays, as well
as manufacturers of the necessary support products such as back-light
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inverters, driver boards, cabling and touch-screen filaments. The second aspect
in addressing the flat panel display market is to develop the technical support
necessary to assist customers with integrating flat panel displays into their
applications. In this regard the Company has added flat panel display
specialists to its sales and marketing groups. In response to the growing need
for support of flat panel display business the Company has a Display Solutions
Group which is a separate group within the Company dedicated entirely to the
support of flat panel display opportunities. Through its Display Solutions
Group, the Company has expanded its internal staff as well as developed
relationships with independent subcontractors, referred to as integrators, in
many different geographic locations. This strategy enables the Company to offer
a broad selection of products, services and solutions needed to service the
varying levels of support required by the customer base.
To further enhance our support for flat panel display applications the Company
has recently added to its product offering multiple suppliers of single-board
computers. These products simplify the design process for companies that are
utilizing flat panel displays.
Memory Modules
The Company also designs, has manufactured and sells memory modules under the
Aved Memory Products label. Memory products, which include the memory module
subsegment, represent one of the largest product sectors of semiconductor
revenues. Memory modules facilitate the incorporation of expanded memory in
limited space. In addition to Aved Memory Products, the Company has other
suppliers of memory module products.
With respect to products manufactured or assembled for Aved Memory Products, the
Company offers a warranty for a period of one year against defects in
workmanship and materials under normal use and service. The warranty applies to
products in their original unmodified condition and is subject to the Company's
terms and conditions.
Customers
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The Company markets its products primarily to original equipment manufacturers
in a diverse and growing range of industries. The Company's customer base
includes manufacturers of computers and computer-related products; home office
and portable equipment; networking, satellite, wireless and other communications
products; Internet infrastructure equipment and appliances; automobiles;
consumer goods; voting and gaming machines; point-of-sale equipment; robotics
and industrial equipment; defense and aerospace equipment; and medical
instrumentation. The Company also sells products to contract electronics
manufacturers, or electronics manufacturing services providers, who manufacture
products for companies in all electronics industry segments. The Company's
customer list includes approximately 12,000 accounts. During 2003, no customer
accounted for more than 6% of the Company's sales and the Company does not
believe that the loss of any one customer would have a material adverse impact
on its business. However, the loss of, or significant disruption in
relationships with, more than one of the Company's larger customers or a
significant number of other customers in a short period of time could have a
material adverse impact on the Company's financial condition or results of
operations.
Sales and Marketing
-------------------
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 65,000 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
and global distributors, while still providing the
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personalized service levels usually associated only with regional or local
distributors. As a result of its size and capabilities, the Company brings to
the middle market customers a level of service capabilities that the smaller
distributor cannot provide.
The Company's marketing strategy is to be a preferred and expanding source of
supply for all middle market customers. The Company is achieving this by
providing a broader range of products and services than is available from
smaller and comparably sized distributors, and a higher level of attention than
these customers receive from the larger distributors. In addition, the Company
continues its efforts to become a more significant supplier for the top tier
customers by focusing on a niche of products not emphasized by the larger
distributors while providing the high level of quality, service and technical
capabilities required to do business with these accounts.
The Company's marketing strategy also includes its e-commerce capabilities
through its web site functionality and its portal capabilities to enable its
customers to utilize the services available from the Company's strategically
selected e-commerce partners.
Marketing Techniques
As part of the Company's marketing strategy, the marketing department is based
in Silicon Valley near the headquarters of the vast majority of the supplier
base. The Company uses various techniques in marketing its products which
include: (i) direct marketing through personal visits to customers by
management, field salespeople and sales representatives, supported by a staff of
inside sales personnel who handle the quoting, accepting, processing and
administration of sales orders; (ii) advertising in various national industry
publications and trade journals; (iii) general advertising, sales referrals and
marketing support from component manufacturers; (iv) the Company's telemarketing
efforts; and (v) a web site and portals on the Internet. The Company also uses
its expanded service capabilities, its Field Application Engineer Program,
Display Solutions Group, Supply Chain Management capabilities and its status as
an authorized distributor as marketing tools. See "Business Strategy-Service
Capabilities" and "Suppliers."
Sales Personnel
As a result of the severe industry downturn, the Company went through a
significant reduction in its workforce during 2001. During 2002 and 2003 the
workforce remained fairly constant. As of March 1, 2004, the Company employed
294 people in sales on a full-time basis, of whom 114 are field salespeople, 113
are inside salespeople, 34 are in management, 18 are in administration and 15
are engineers in the Field Application Engineer Program. The Company also had 8
sales representatives covering various territories where the Company does not
have sales offices. Salespeople are generally compensated by a combination of
salary and commissions based upon the gross profits obtained on their sales.
Each branch is run by a general manager who reports to a regional manager, who
in turn reports to an area manager. All area managers report to the Company's
Senior Vice President of Sales and Marketing. Area, regional and general
managers are compensated by a combination of salary and incentives based on
achieving gross profit goals.
Sales Locations
In North America, the Company currently operates 33 sales offices in 21 states,
Canada and Mexico. The locations of the sales offices are in each of the
following geographic markets: Huntsville, Alabama; Phoenix, Arizona; Orange
County, Sacramento, San Diego, San Fernando Valley, San Jose and Tustin,
California; Toronto, Canada; Denver, Colorado; Fort Lauderdale, Miami, Orlando
and Tampa, Florida; Atlanta, Georgia; Chicago, Illinois; Kansas City, Kansas;
Baltimore, Maryland; Boston, Massachusetts; Guadalajara, Mexico; Detroit,
Michigan; Minneapolis, Minnesota; Long Island and Rochester, New York; Raleigh,
North Carolina; Cleveland, Ohio; Portland; Oregon; Philadelphia, Pennsylvania;
Austin and Dallas, Texas; Salt Lake City; Utah; Seattle, Washington and
Milwaukee, Wisconsin.
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The Company also retains field sales representatives to market other territories
throughout the United States, Canada, Puerto Rico, Mexico, the United Kingdom
and Southeast Asia. The Company may consider opening branches in these other
territories if the representatives located there achieve certain sales levels.
During 2003 as part of its plan to expand its markets and provide enhanced
services beyond the boundaries of North America, the Company began operations in
the United Kingdom including a stocking location in the London area, began sales
operations in Northern Asia with the opening of an office in Seoul, South Korea
and started operations in Southeast Asia as well.
Transportation
All of the Company's products are shipped through third party carriers. Incoming
freight charges are generally paid by the Company, while outgoing freight
charges are typically paid by the customer.
Seasonality and Cyclicality
The Company's sales have not historically been materially greater in any
particular season or part of the year, however, there is some seasonality to our
industry. The electronic components and the electronics distribution industries
have historically been cyclical with significant volatility in the cycles.
Management believes that this cyclicality and volatility will continue in the
future. During the second half of 1999, the industry began entering an up-cycle
which continued throughout most of 2000 and was one of the industry's most
rapidly growing and strongest up-cycles. In the fourth quarter of 2000 the
up-cycle ended and the industry entered another down-cycle which accelerated and
continued throughout 2001 and 2002 and through the first three quarters of 2003.
This down-cycle was one of the most severe and long-lasting in the industry's
history. In September 2003 the industry appeared to begin experiencing improved
conditions. While the Company believes that industry conditions are improving,
it is not clear whether we are in an up-cycle and, if so, how strong or how long
it will be. There can be no assurance whether and to what extent there will be
an up-cycle nor can there be an assurance that business will not decline again
in the future.
Foreign Sales
Sales to customers' locations in foreign countries aggregated approximately
$42.0 million, $38.1 million, and $15.2 million for 2003, 2002 and 2001,
respectively. Due to the Company's recent global expansion initiatives, sales to
customers' locations in foreign countries may increase in the future. See
"Business Strategy-Expansion."
Backlog
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As is typical of distributors, the Company has a backlog of customer orders.
These orders are generally cancelable by the customer. At December 31, 2003, the
Company had a backlog of $68 million, compared to a backlog of $44 million at
December 31, 2002 and $55 million at December 31, 2001. During periods of excess
product availability, customers keep much lower levels of product on order as
delivery times are short and prices are often declining. As lead times begin to
stretch and certain product groups start becoming allocated by suppliers,
customers begin increasing the amount of their scheduled orders. Conditions of
tight supply often result in customers placing scheduled orders for more product
than they actually need (referred to in the industry as double booking). When
product availability improves, customers begin to have more inventory than they
require and the industry typically experiences backlog cancellations and
inventory corrections. While lead times and product availability began to
improve toward the end of 2000, the severe product shortages earlier in the
year, combined with expectations that the market would continue to expand in
2001, resulted in inflated customer backlogs at the end of 2000. The combination
of improved product availability, a slowing economy and other factors resulted
in customers beginning to cancel their backlog in the first quarter of 2001. As
market conditions worsened, customer backlog deteriorated even further through
2002 and into 2003. Beginning in
8
September 2003, our booking activity started to strengthen and our customer
backlog has been growing again. In addition, some of our suppliers are reporting
that lead times have stretched out.
The Company believes that a substantial portion of its backlog represents
products due to be delivered within the next three months. Historically,
approximately 30% of the backlog relates to purchase orders which call for
scheduled shipments of inventory over a period of time, with the balance
representing products that are on back-order with suppliers. The scheduled
shipments enable the Company to plan purchases of inventory over extended time
periods to satisfy such requirements. At this point in time, the correlation of
backlog to future sales is still less of an indicator than historically for the
reasons discussed above. In addition, the Company has increased its practices of
electronic data interchange transactions where the Company purchases inventory
based on electronically transmitted customer forecasts that may not become an
order until the date of shipment and, therefore, may not be reflected in the
Company's backlog. The Company's backlog was $68 million at December 31, 2003
and increased to $85 million at February 29, 2004. The Company's backlog was $48
million at February 28, 2003.
Suppliers
---------
The Company generally purchases products from component manufacturers pursuant
to non-exclusive distribution agreements. Such suppliers generally limit the
number of distributors they will authorize in a given territory in order to
heighten the distributor's focus on their products as well as to prevent
over-distribution. Suppliers also limit the number of distributors in order to
reduce the costs associated with managing multiple distributors. As a factory
authorized distributor, the Company obtains sales referrals, as well as sales,
marketing and engineering support, from component manufacturers. This support
assists the Company in closing sales and obtaining new customers. The Company's
status as an authorized distributor is a valuable marketing tool as customers
recognize that when dealing with an authorized distributor they receive greater
support from the component manufacturers.
The Company believes that an important factor which suppliers consider in
determining whether to grant or to continue to provide distribution rights to a
certain distributor is that distributor's geographic coverage. The Company is
recognized as a national distributor with offices across North America. To
further strengthen its geographic coverage, the Company recently began to expand
internationally. Another important factor that suppliers consider is whether the
distributor has in place an engineering staff capable of assisting customers in
designing-in the suppliers' products at the customer base. To address this
requirement, the Company has a Field Application Engineer Program which is
currently staffed with 15 engineers.
Almost all distribution agreements are cancelable by either party, typically
upon 30 to 90 days notice. For the year ended December 31, 2003, the Company's
three largest suppliers accounted for 16%, 7% and 5% of consolidated purchases,
respectively. See Note 14 to Notes to Consolidated Financial Statements. While
most of the products that the Company sells are available from other sources,
the Company's future success will depend in large part on maintaining
relationships with existing suppliers and developing relationships with new
ones. While the Company believes that the loss of a key supplier, particularly
its largest supplier, could have a material adverse impact on its business in
the short term, the Company would attempt to replace the products offered by
that supplier with the products of other suppliers. However, if the Company were
to lose its rights to distribute the products of any particular supplier, there
can be no assurance that the Company would be able to replace the products which
were available from that particular supplier. The loss of, or significant
disruption in relationships with, any of the Company's larger suppliers,
particularly its largest supplier, or a significant number of other suppliers in
a short period of time could have a material adverse impact on the Company's
financial condition or results of operations. The Company, from time to time,
alters its list of authorized suppliers in an attempt to provide its customers
with a better product mix.
The Company believes that it benefits from technological change within the
electronics industry as new product introductions accelerate industry growth and
provide the Company with additional sales opportunities. The Company believes
its inventory risk due to technological obsolescence is significantly reduced by
certain provisions typically found in its distribution agreements addressing
price protection,
9
stock rotation privileges, obsolescence credits and return privileges. Price
protection is typically provided in the form of a credit to the Company for any
inventory the Company has of products for which the manufacturer reduces its
prices. Stock rotation privileges typically allow the Company to exchange
inventory in an amount up to 5% of a prior period's purchases. Obsolescence
credits allow the Company to return products which a manufacturer discontinues.
Upon termination of a distribution agreement, the return privileges generally
require the manufacturer to repurchase the Company's inventory at the Company's
purchase price, however, if the Company terminates the distribution agreement,
there is generally a 10% to 15% restocking charge.
The vast majority of the Company's inventory is purchased pursuant to its
distribution agreements. The Company does not generally purchase product for
inventory unless it is a commonly sold product, there is an outstanding customer
order to be filled, a special purchase is available or unless it is an initial
stocking package in connection with a new line of products. As a result of the
Company's strategy in how it has positioned itself in a rapidly consolidating
industry, the Company has been successful in attracting new suppliers. In
connection with adding new suppliers, the Company acquires new stocking
packages. These new stocking packages typically take time to become productive.
While management believes that these new product lines and the resulting
stocking packages should provide growth opportunities in the future as and when
market conditions improve, there can be no assurance that this strategy will be
successful.
Facilities and Systems
----------------------
Facilities
The Company's corporate headquarters and main distribution center are located in
a 110,800 square foot facility in Miami, Florida. The Company occupies this
facility through a lease which expires in 2014, subject to the Company's right
to terminate at any time upon twenty-four months prior written notice and the
payment of all outstanding debt owed to the landlord. The lease for this
facility contains three six-year options to renew at the then fair market value
rental rates.
The Company also leases approximately 20,000 square feet of space for its west
coast distribution and semiconductor programming center located in Fremont,
California (near San Jose) and leases a 5,200 square foot facility near Denver,
Colorado which is dedicated to certain value-added services and a regional
distribution center. This Colorado lease replaced the Company's previous lease
for 7,100 square feet in Denver, Colorado. In Tustin, California the Company
leases a 13,900 square foot facility for its Aved Memory Products division. See
"Products."
The Company also leases approximately 20,000 square feet of space in San Jose,
California to house its west coast corporate offices and the headquarters of the
Company's sales and marketing functions, as well as its northern California
sales operation. Approximately 12,000 square feet of the space is being used for
corporate offices including the office of the President and Chief Executive
Officer of the Company and 8,000 square feet of the space is being utilized for
the sales operation.
In addition, the Company leases space for its other sales offices, which offices
range in size from approximately 1,000 square feet to 10,000 square feet. See
"Sales and Marketing-Sales Office Locations."
Due to the severe industry downturn, the Company currently has excess space in
its sales offices and excess capacity in its distribution centers. To the extent
that the Company increases sales in future periods, management expects to
realize improved operating efficiencies and economies of scale as a result of
its present excess capacity. There can be no assurance, however, that any sales
growth will be achieved or that any growth will be enough to accomplish
improvements in operating efficiencies or economies of scale.
10
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 process enables
the Company to provide rapid order processing at low costs. The system also
provides for automatic credit checks, which prohibit any product from being
shipped until the customer's credit has been approved. Additionally, the systems
allow the Company to participate with customers and suppliers in electronic data
interchange and to expand customer services, including just-in-time deliveries,
kitting programs, bar coding, automatic inventory replenishment programs, bonded
inventory programs, in-plant stores and in-plant terminals and complete supply
chain management solutions.
As a result of rapidly increasing advances in technology, the Company has
recognized that its computer and communications systems will be subject to
continual enhancements. In order to meet the increasing demands of customers and
suppliers, to maintain state-of-the-art capabilities and to participate in
e-commerce, the Company has continually been expanding, and in the future will
continue to develop and expand, its systems capabilities, including hardware and
software upgrades and possibly a new Enterprise Resource Planning (ERP) system
to meet its computer and communications needs. As market conditions improve, the
Company believes that these systems enhancements should assist the Company in
increasing sales, improving efficiencies and providing the potential for
profitability in future periods through increased employee productivity,
enhanced asset management, improved quality control capabilities and expanded
customer service capabilities. See "Business Strategy-Service Capabilities."
There can be no assurance, however, that these benefits will be achieved and
that the Company's present system will be adequate.
Foreign Manufacturing and Trade Regulation
------------------------------------------
A significant number of the components sold by the Company are manufactured by
foreign companies. Until recently all of these components were purchased by the
Company from United States subsidiaries or affiliates of those foreign
manufacturers. The Company has recently begun purchasing a limited amount (less
than 5% of total purchases for 2003) of product offshore and this offshore
purchasing activity may increase in the future. The Company and its ability to
sell at competitive prices could be adversely affected by increases in tariffs
or duties, changes in trade treaties, currency fluctuations, economic or
financial turbulence abroad, strikes or delays in air or sea transportation, and
possible future United States legislation with respect to pricing and import
quotas on products from foreign countries. The Company's ability to be
competitive in or with the sales of imported components could also be affected
by other governmental actions and policy changes related to, among other things,
anti-dumping and other international anti-trust legislation and currency
fluctuations. The Company believes that these factors may have had an adverse
impact on its business during past years, and there can be no assurance that
such factors will not have a more significant adverse effect on the Company in
the future. Since substantially all of the Company's purchases from foreign
companies are still transacted with United States subsidiaries or affiliates of
these foreign manufacturers, substantially all of the Company's purchases are
paid for in U.S. dollars.
Employees
---------
As a result of the severe industry downturn, the Company went through a
significant reduction in its workforce during 2001. During 2002 and 2003 the
workforce remained fairly constant. As of March 1, 2004, the Company employed
533 persons, of whom 294 are involved in sales and sales management; 85 are
involved in marketing; 55 are involved in the distribution centers; 37 are
involved in operations; 12 are involved in management; 30 are involved in
bookkeeping and clerical; and 20 are involved in information technology. None of
the Company's U.S. employees are covered by collective bargaining agreements.
The Company believes that management's relations with its employees are good.
11
Competition
-----------
The Company competes with many companies that distribute electronic components
and, to a lesser extent, companies that manufacture such products and sell them
directly. Some of these companies have greater name recognition and assets and
possess greater financial, personnel and other resources than does the Company.
The Company believes that there are over 1,000 electronic components
distributors throughout the United States, ranging in size from less than $1
million in revenues to companies with annual sales that have in the past
exceeded $13 billion worldwide. These distributors can generally be divided into
global distributors who have operations around the world, national distributors
who have offices throughout the United States, regional distributors with
offices in multiple cities within the United States and local distributors with
just one location. With sales offices in the United States located in 31 cities
in 21 states, the Company generally competes as a national distributor.
Additionally, the Company has offices in Canada, Mexico, and Seoul, South Korea,
has recently established a stocking facility in the United Kingdom and recently
established operations in Southeast Asia. The Company, which was recognized by
industry sources as the 4th largest distributor of semiconductors and the 10th
largest electronic components distributor overall in the United States, believes
its primary competition comes from the top 50 distributors in the industry. The
competition in the electronics distribution industry can be segregated by target
customers: major (or top tier) accounts; middle market accounts; small accounts;
and emerging growth accounts. Competition to be the primary supplier for the
major customers is dominated by the top tier distributors as a result of the
product offerings, global support structure, pricing and distribution technology
offered by these distributors. The Company competes for a portion of the
available business of these major industry customers by seeking to provide the
very best service and quality and by focusing on products that are not
emphasized by the top tier distributors, or are fill-in or niche products. With
its expanded product offering and service capabilities and its quality assurance
procedures in place, the Company believes that it can compete for a bigger
portion of the business at the top tier customer base, although there can be no
assurance that the Company will be successful in doing so. The Company believes
competition from the top tier distributors for the middle and emerging market
customer base is not as strong since the largest distributors focus their
efforts and resources on the major account base. For this reason, the Company
has focused strong efforts on servicing this middle and emerging market customer
base. The Company competes for this business by seeking to offer a broader
product base, better pricing and more sophisticated distribution technology than
the regional or local distributors; by seeking to offer a broader product base
and more sophisticated distribution technology than comparably-sized
distributors and by seeking to offer to middle and emerging market companies a
greater level of service than is offered to them by the major national and
global distributors. The Company believes that today the top tier distributors
continue their efforts to penetrate the middle market customer base more than
they have in the past.
There has also been an increase in competition from brokers, lately being
referred to as independent distributors. Additionally, there has been an
emergence of competition from the advent of third party logistics and
fulfillment companies. There has also been an emergence of businesses commonly
referred to as e-brokers and e-exchanges and several other forms of e-commerce
companies which have grown with the expanded use of the Internet. In addition to
the increased competition from these other groups, some of the total available
distribution market share is being reduced as more and more original equipment
manufacturers transition their procurement into EMS companies and original
design manufacturers. The EMS companies and original design manufacturers
utilize their abilities to aggregate demand to develop direct purchasing
channels with component manufacturers. Furthermore, as more and more
manufacturing moves outside the boundaries of North America the Company believes
that the total available distribution market in North America is being reduced
as procurement channels increase in Asia and Europe. There can be no assurance
that the Company will be able to defend its market share against existing
competition or that new competition will not emerge or that the total available
distribution market share will not be reduced further.
ITEM 2. Properties
------- ----------
See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales
Office Locations" and Note 12 to Notes to Consolidated Financial Statements.
12
ITEM 3. Legal Proceedings
------- -----------------
The Company is from time to time involved in litigation primarily relating to
claims arising out of its operations in the ordinary course of business. Some of
these claims are covered by insurance or, if they relate to products
manufactured by others for which it distributes, the Company would expect that
the manufacturers of such products would indemnify the Company to the extent
provided for under its agreement with the manufacturer, as well as defend such
claims on the Company's behalf, although no assurance can be given that any
manufacturer would do so. There has been a recent trend throughout the United
States of increased litigation over various employee and intellectual property
matters. While the Company is presently involved in certain litigation relating
to such matters, the Company believes that none of these claims should have a
material adverse impact on its financial condition or results of operations. The
Company believes, however, that the costs associated with such matters may
increase in the future. There can be no assurance that a particular litigation
will not have a material adverse impact on the Company's financial condition or
results of operations in the future.
ITEM 4. Submission of Matters to a Vote of Security-Holders
------- ---------------------------------------------------
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 2003.
PART II
ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
-------------------------------------------------------------------------------
Sales Prices of Common Stock
----------------------------
The Company's common stock trades on The Nasdaq Stock Market (Nasdaq National
Market) under the symbol SEMI. The following table sets forth the range of high
and low sale prices for the Company's common stock as reported on The Nasdaq
Stock Market during each of the quarters presented:
Quarter of Fiscal Year High Low
---------------------- ------- -------
2002
----
First Quarter $ 4.89 $ 3.15
Second Quarter 4.25 2.37
Third Quarter 3.08 1.45
Fourth Quarter 2.89 1.60
2003
----
First Quarter 2.39 1.86
Second Quarter 3.47 1.80
Third Quarter 4.75 2.65
Fourth Quarter 5.24 3.61
2004
----
First Quarter (through March 18, 2004) 7.62 4.31
As of March 18, 2004, there were approximately 330 holders of record of the
Company's common stock, based on the stockholders list maintained by the
Company's transfer agent. Many of these record holders hold these securities for
the benefit of their customers. The Company believes that, based upon
information provided by its transfer agent, it has over 3,500 beneficial holders
of its common stock.
Common Stock Purchase Rights Plan
---------------------------------
In June 2000, the Board of Directors of the Company adopted a Common Stock
Purchase Rights Plan (the "Rights Plan") and authorized and approved a dividend
distribution of one right (each a "Right" and
13
collectively the "Rights") for each outstanding share of common stock of the
Company to shareholders of record at the close of business on June 23, 2000.
Each share of common stock of the Company that is issued after June 23, 2000
will also include one Right.
Each Right initially entitles the registered holder to purchase from the
Company, but only when exercisable under the Rights Plan, one share of common
stock at a price of $95.00 per share, subject to certain future adjustments. The
Rights will be exercisable only if a person or group acquires 15% or more of the
Company's common stock (or 10% of such stock under certain circumstances) or
announces a tender offer the consummation of which would result in ownership by
a person or group of 15% or more of the common stock (or 10% of such stock under
certain circumstances). Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company the number of shares of the Company's common stock having a market value
equal to twice the exercise price of the Right.
If the Company is acquired in a merger or other business combination
transaction, or sells more than 50% of its assets or earning power, after a
person or group has acquired 15% or more of the Company's outstanding common
stock (or 10% of such stock under certain circumstances), each Right (other than
Rights owned by such person or group) will entitle its holder to purchase, at
the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price.
Following the acquisition by a person or group of 15% or more of the Company's
common stock (or 10% of such stock under certain circumstances) and prior to an
acquisition of 50% or more of the common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group) at an
exchange ratio of one share of common stock per Right.
Prior to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's common stock (or 10% of such stock under certain
circumstances), the Rights are redeemable for $.001 per Right at the option of
the Board of Directors. The Rights will expire on June 8, 2010.
Dividend Policy
---------------
The Company has never declared or paid cash dividends. Future dividend policy
will depend on the Company's earnings, capital requirements, financial condition
and other relevant factors. It is not anticipated, however, that the Company
will pay cash dividends on its common stock in the foreseeable future, inasmuch
as it expects to employ all available cash in the Company's operations and
future growth of its business. In addition, the Company's revolving line of
credit facility prohibits the payment of any dividends. See Note 4 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, 2003.
ITEM 6. Selected Financial Data
------- -----------------------
The following selected consolidated financial data for the Company for and as of
the years 1999 through 2003 has been derived from the audited Consolidated
Financial Statements of the Company. Such information should be read in
conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this report and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." All references to
shares of common stock and per share amounts have been restated to reflect the
effect of a one-for-five reverse stock split which became effective on June 2,
1999. For the Company's unaudited quarterly results of operations for the eight
quarters ended December 31, 2003, see "Quarterly Results of Operations" in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
14
Statement of Operations Data
Years Ended December 31 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Net Sales (1) ..................... $ 311,529,000 $ 332,047,000 $ 381,111,000 $ 516,155,000 $ 326,627,000
Cost of Sales (2) ................. (253,933,000) (271,304,000) (318,363,000) (409,934,000) (263,330,000)
------------- ------------- ------------- ------------- -------------
Gross Profit ...................... 57,596,000 60,743,000 62,748,000 106,221,000 63,297,000
Selling, General and
Administrative Expenses (3) ..... (53,976,000) (56,655,000) (74,213,000) (78,368,000) (55,229,000)
Impairment of Goodwill ............ - - (895,000) - -
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations ...................... 3,620,000 4,088,000 (12,360,000) 27,853,000 8,068,000
Interest Expense (4) .............. (2,648,000) (3,138,000) (8,657,000) (8,642,000) (4,985,000)
Other Income - Net (5) ............ - 2,220,000 - - -
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Income Taxes .. 972,000 3,170,000 (21,017,000) 19,211,000 3,083,000
Income Tax (Provision) Benefit .... (426,000) (1,287,000) 7,424,000 (8,096,000) (1,326,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before
Discontinued Operations ......... 546,000 1,883,000 (13,593,000) 11,115,000 1,757,000
Discontinued Operations:
Income from Operations (6) ...... - - 362,000 84,000 42,000
Loss on Disposal (7) ............ - - (9,344,000) - -
------------- ------------- ------------- ------------- -------------
Net Income (Loss) ................. $ 546,000 $ 1,883,000 $ (22,575,000) $ 11,199,000 $ 1,799,000
============= ============= ============= ============= =============
Basic Earnings Per Share (8):
Income (Loss) from
Continuing Operations ......... $ .14 $ .49 $(3.52) $ 2.90 $ .45
Discontinued Operations ......... - - (2.33) .02 .01
----- ----- ------ ------ ------
Net Income (Loss) ............... $ .14 $ .49 $(5.85) $ 2.92 $ .46
===== ===== ====== ====== ======
Diluted Earnings Per Share (8):
Income (Loss) from
Continuing Operations ......... $ .14 $ .49 $(3.52) $ 2.68 $ .45
Discontinued Operations ......... - - (2.33) .02 .01
----- ----- ------ ------ ------
Net Income (Loss) ............... $ .14 $ .49 $(5.85) $ 2.70 $ .46
===== ===== ====== ====== ======
Balance Sheet Data
December 31 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Working Capital ................... $ 63,212,000 $ 54,670,000 $ 86,569,000 $ 159,644,000 $ 91,217,000
Total Assets ...................... 122,373,000 104,578,000 144,122,000 250,219,000 151,501,000
Long-Term Debt, Including
Current Portion ................. 55,200,000 41,220,000 76,075,000 128,124,000 71,867,000
Shareholders' Equity .............. 19,180,000 18,825,000 17,025,000 39,598,000 27,852,000
Book Value Per Common Share ....... $5.10 $4.93 $4.21 $9.80 $7.01
-------------------------
(1) Net sales including sales generated by the Company's Aved Display
Technologies ("ADT") and Integrated Display Technologies ("IDT") divisions
and the related turnkey support business which were discontinued in 2001
were $388,109,000 for 2001, $522,183,000 for 2000 and $329,563,000 for 1999.
(2) 2001 includes non-cash inventory write-offs of $13,375,000. See Note 10 to
Notes to Consolidated Financial Statements.
(3) 2001 includes non-cash write-offs of accounts receivable of $5,220,000. See
Note 10 to Notes to Consolidated Financial Statements.
(4) Interest expense for 2001 includes write-downs of deferred financing fees of
approximately $448,000.
(5) Other income reflects the combined value of cash and stock received by the
Company in consideration for releasing the then-existing indebtedness of a
customer, together with lease payments that the Company collected from
certain leases that were pledged to the Company as collateral, all of which
aggregated $2,220,000 after deducting related legal expenses associated with
the transaction. See Note 11 to Notes to Consolidated Financial Statements.
15
(6) Reflects income from discontinued operations of $362,000 (net of $208,000
income tax provision) for 2001, $84,000 (net of $61,000 income tax
provision) for 2000 and $42,000 (net of $32,000 income tax provision) for
1999 relating to management's decision to discontinue the ADT and IDT
divisions as well as the related turnkey support business. See Note 9 to
Notes to Consolidated Financial Statements.
(7) Reflects a loss on disposal of $(9,344,000) (net of $5,367,000 income tax
benefit) for 2001 primarily made up of the write-offs of $4,488,000 of
inventory and $7,442,000 of accounts receivable. See Note 9 to Notes to
Consolidated Financial Statements.
(8) Weighted average common shares outstanding for the years ended December 31,
2003, 2002, 2001, 2000 and 1999 after reflecting a one-for-five reverse
stock split which became effective on June 2, 1999 were 3,793,347,
3,849,553, 3,856,813, 3,828,978 and 3,921,138, respectively, for basic
earnings per share and were 3,882,199, 3,850,002, 3,856,813, 4,140,579 and
3,924,166, respectively, for diluted earnings per share.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
This discussion should be read in conjunction with "Item 6. Selected Financial
Data" and Notes to Consolidated Financial Statements contained in this report.
Overview
--------
The electronics and the electronics distribution industries suffered one of the
most severe downturns in the industries' history beginning in 2001 and
continuing through most of 2003. This downturn was marked by oversupply of
components, excess manufacturing capacity and a significant decline in the
demand for electronic components. While the demand for electronic components
began to stabilize in 2002, the industry was still negatively impacted by a
significant migration of procurement and manufacturing to offshore markets as
well as oversupply of components resulting in a weakness in pricing. The Company
is, however, seeing signs that a recovery of North American markets may be
underway as, in the third quarter of 2003, supplier pricing began to firm,
component lead times began to stretch out and customer backlog began to grow.
Our backlog of customer orders improved from $44 million at December 31, 2002 to
$68 million at December 31, 2003 and was $85 million at February 29, 2004. The
book-to-bill ratio has been 1.0 to 1 or above since January 2003 and reached 1.3
to 1 at January 31, 2004 and February 29, 2004.
Industry associations have projected that the global semiconductor market will
grow by 15 to 30 percent during 2004. While we expect that the growth in global
markets will include growth in North America, the Company believes that growth
rates will be higher in foreign markets. To support this trend, the Company has
recently increased its offshore presence. The Company now has operations in the
United Kingdom to support the European market; in Southeast Asia and Northeast
Asia to support the Asian market and expects to expand further into these
markets. Sales to customers' locations in foreign countries was $42.0 million
for 2003 compared to $38.1 million for 2002.
Critical Accounting Policies and Estimates
------------------------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
inventories, income taxes, a postretirement benefit obligation and loss
contingencies. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies, among others,
may be impacted significantly by judgement, assumptions and estimates used in
the preparation of the Consolidated Financial Statements:
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104").
Under SAB 104, revenue is recognized
16
when there is persuasive evidence of an arrangement, delivery has occurred or
services have been rendered, the sales price is determinable, and collectibility
is reasonably assured. Revenue typically is recognized at time of shipment.
Sales are recorded net of discounts, rebates, and returns.
The allowance for doubtful accounts is maintained to provide for losses arising
from customers' inability to make required payments. If there is a deterioration
of our customers' credit worthiness and/or there is an increase in the length of
time that the receivables are past due greater than the historical assumptions
used, additional allowances may be required.
Inventories are stated at the lower of cost (determined on an average cost
basis) or market. Based on our assumptions about future demand and market
conditions as well as the Company's distribution agreements with its suppliers,
which generally provide for price protection and obsolescence credits,
inventories are written-down to market value. If our assumptions about future
demand change, and/or actual market conditions are less favorable than those
projected, additional write-downs of inventories may be required.
Deferred tax assets are recorded based on the Company's projected future taxable
income and the resulting utilization of the deferred tax assets. To the extent
that the Company would not be able to realize all or part of its deferred tax
assets in the future, an adjustment to the deferred tax assets would be
necessary and charged to income.
The Company calculates a postretirement benefit obligation using actuarial life
expectancy tables and an assumed discount rate. If the assumptions used in this
calculation change, an adjustment to the postretirement benefit obligation may
be required.
Loss contingencies arise in the ordinary course of business. In determining loss
contingencies, we evaluate the likelihood of the loss or impairment of an asset
or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of such loss. We accrue for an estimated loss contingency when it is
probable that a liability has been incurred or an asset has been impaired and
the amount of the loss can be reasonably estimated.
Certain Non-GAAP Financial Information
--------------------------------------
In addition to disclosing results that are determined in accordance with
Generally Accepted Accounting Principles (GAAP), the Company disclosed in this
report certain non-GAAP financial information relating to gross profit, selling,
general and administrative expenses, income (loss) from continuing operations,
interest expense, net income (loss) and earnings (loss) per share each as
adjusted for certain charges and write-offs as well as other income that the
Company believes impact the comparability of its results for different operating
periods. These charges and write-offs arise from certain inventory write-offs,
write-offs of accounts receivable, a write-off of goodwill and the write-off of
deferred financing fees. Other income primarily arises from a partial payment in
settlement of an accounts receivable that had been written off in 2001.
The Company believes that this non-GAAP financial information will assist
investors in better understanding the Company's performance and the associated
trends, as management considers these charges and write-offs as well as other
income to be outside the Company's ordinary operations. This non-GAAP financial
information also better enables management to evaluate the Company's
performance.
Non-GAAP financial information is not intended to be a substitute for or to
replace financial information determined in accordance with GAAP, rather it is
presented as a complement to data presented in accordance with GAAP.
Reconciliations of the Company's non-GAAP financial information discussed in
17
"Results of Operations" to GAAP financial information are set forth in the
tables below and are intended to supplement the discussion of results in
"Results of Operations."
Years Ended December 31 2003 2002 2001
---------------------------------------------------------------------------------------------------
Gross profit, as reported .......................... $ 57,596,000 $ 60,743,000 $ 62,748,000
Inventory write-offs ............................... - - 13,375,000
------------ ------------ ------------
Gross profit, as adjusted .......................... $ 57,596,000 $ 60,743,000 $ 76,123,000
============ ============ ============
Selling, general and administrative expenses,
as reported ...................................... $(53,976,000) $(56,655,000) $(74,213,000)
Accounts receivable write-offs ..................... - - 5,220,000
------------ ------------ ------------
Selling, general and administrative expenses,
as adjusted ...................................... $(53,976,000) $(56,655,000) $(68,993,000)
============ ============ ============
Income (loss) from continuing operations,
as reported ...................................... $ 3,620,000 $ 4,088,000 $(12,360,000)
Inventory write-offs ............................... - - 13,375,000
Accounts receivable write-offs ..................... - - 5,220,000
Impairment of goodwill ............................. - - 895,000
------------ ------------ ------------
Income from continuing operations, as adjusted ..... $ 3,620,000 $ 4,088,000 $ 7,130,000
============ ============ ============
Interest expense, as reported ...................... $ (2,648,000) $ (3,138,000) $ (8,657,000)
Non-cash write-off of deferred financing fees ...... - - 448,000
------------ ------------ ------------
Interest expense, as adjusted ...................... $ (2,648,000) $ (3,138,000) $ (8,209,000)
============ ============ ============
Net income (loss), as reported ..................... $ 546,000 $ 1,883,000 $(22,575,000)
Other income, net .................................. - (2,220,000) -
Income tax provision ............................... - 901,000 -
------------ ------------ ------------
Net income (loss), as adjusted ..................... $ 546,000 $ 564,000 $(22,575,000)
============ ============ ============
Earnings (loss) per share (diluted), as reported ... $ .14 $ .49 $ (5.85)
Other income, net .................................. - (.57) -
Income tax provision ............................... - .23 -
------ ------ -------
Earnings (loss) per share (diluted), as adjusted ... $ .14 $ .15 $ (5.85)
====== ====== =======
In addition, the following table sets forth a reconciliation of certain ratios
disclosed in "Results of Operations - Comparison of Years Ended December 31,
2002 and 2001."
Years Ended December 31 2002 2001
----------------------------------------------------------------------------------------------------------
Gross profit margin as a percentage of net sales, as reported................. 18.3% 16.5%
Inventory write-offs as a percentage of net sales............................. - 3.5
------- -------
Gross profit margin as a percentage of net sales, as adjusted................. 18.3% 20.0%
======= =======
Selling, general and administrative expenses as a percentage of net sales,
as reported................................................................. (17.1)% (19.5)%
Accounts receivable write-offs as a percentage of net sales................... - 1.4
------- -------
Selling, general and administrative expenses as a percentage of net sales,
as adjusted................................................................. (17.1)% (18.1)%
======= =======
18
Results of Operations
---------------------
Overview
The following table sets forth for the years ended December 31, 2003, 2002 and
2001, certain items in the Company's Consolidated Statements of Operations
expressed as a percentage of net sales. All percentages are based on net sales.
Items as a Percentage
of Net Sales
------------------------------
Years Ended
December 31
------------------------------
2003 2002 2001
------ ------ -----
Net Sales................................................................. 100.0% 100.0% 100.0%
Gross Profit.............................................................. 18.5 18.3 16.5
Selling, General and Administrative Expenses.............................. (17.3) (17.1) (19.5)
Impairment of Goodwill.................................................... - - (0.2)
Income (Loss) from Continuing Operations.................................. 1.2 1.2 (3.2)
Interest Expense.......................................................... (0.9) (0.9) (2.3)
Other Income - Net........................................................ - 0.7 -
Income (Loss) from Continuing Operations Before Income Taxes.............. 0.3 1.0 (5.5)
Income Tax (Provision) Benefit............................................ (0.1) (0.4) 1.9
Income (Loss) from Continuing Operations Before Discontinued Operations... 0.2 0.6 (3.6)
Discontinued Operations................................................... - - (2.3)
Net Income (Loss)......................................................... 0.2 0.6 (5.9)
-------------------
Comparison of Years Ended December 31, 2003 and 2002
----------------------------------------------------
Sales
Net sales for the year ended December 31, 2003 were $311.5 million, compared to
net sales of $332.0 million for 2002. The decrease was primarily attributable to
a continuation of the industry downturn and the negative impact from weak demand
for electronic components, both of which began during the fourth quarter of
2000. Another factor that contributed to the decrease in sales was the
continuing trend for electronics manufacturing to move offshore where the
Company has very limited sales presence. The negative industry conditions
continued through the beginning of the third quarter of 2003. Conditions began
improving during the latter part of the third quarter of 2003. Sales for the
second half of 2003 increased by 19.7% over sales for the first six months of
2003. In addition to representing our third sequential quarterly increase in
sales, the fourth quarter of 2003 was also the first quarterly period since the
fourth quarter of 2002 where sales increased over the corresponding quarter of
the prior year. In the fourth quarter of 2003 sales increased by 12.9% compared
to the same period of 2002. Management believes that an industry recovery may be
underway. In an effort to increase its offshore presence in response to the
continuing trend of electronics manufacturing moving offshore, the Company has
established operations in the United Kingdom to support the European market and
in Southeast Asia and Northeast Asia to support the Asian market and is
expanding further into these markets.
Gross Profit
Gross profit was $57.6 million for 2003, compared to gross profit of $60.7
million for 2002. The decrease in gross profit was primarily due to the decrease
in net sales. Gross profit margins as a percentage of net sales were 18.5% for
2003 compared to 18.3% for 2002. The slight improvement in gross profit margins
for 2003 compared to 2002 reflects a fewer number of low margin, large volume
transactions, as well as a change in our product mix during 2003 versus 2002.
Notwithstanding this slight improvement, there is continued pressure on gross
profit margins reflecting the continued development of long-term strategic
relationships with accounts that require aggressive pricing programs, as well as
the continuing change in
19
our product mix. Additionally, management anticipates a greater number of low
margin, large volume transactions in the future. Management therefore expects
that for the long term, downward pressure on gross profit margins may continue
and may result in a decrease in our gross profit margins as a percentage of net
sales. If product availability tightens or becomes allocated later in 2004 (as
to which no assurance can be given), then management expects that the downward
pressure on gross profit margins may be slightly eased.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased to $54.0 million
for 2003 from $56.7 million for 2002. The improvement in SG&A reflects the
reduction in variable expenses associated with the year over year decline in
sales and gross profit dollars. In addition, the improvement reflects reductions
in operating lease expenses as well as reductions in payroll costs and
discretionary expenditures. Management expects that as industry conditions
improve, the Company will strategically increase its personnel in North America.
In an effort to support its customers and to increase its market share outside
of North America, the Company will further expand its infrastructure in Europe
and Asia. Additionally, variable expenses will increase as sales and gross
profit increase. Due to these factors, the Company expects that SG&A will
increase in future periods.
SG&A as a percentage of net sales was 17.3% for 2003 compared to 17.1% for 2002.
The small increase in SG&A as a percentage of net sales for 2003 reflects the
decline in sales which more than offset the absolute dollar improvement in SG&A.
Income from Operations
Income from operations was $3.6 million for 2003 compared to $4.1 million for
2002. The decrease in income from operations was due to the decline in sales and
gross profit dollars as discussed previously, which decreases were substantially
offset by the improvements in SG&A described above.
Interest Expense
Interest expense decreased to $2.6 million for 2003 from $3.1 million for 2002.
The decrease in interest expense for 2003 compared to 2002 was due to decreases
in our average borrowings and decreases in overall interest rates. Our average
borrowings under our credit facility decreased by $5 million when comparing 2003
and 2002. The decrease in average borrowings occurred primarily during the first
nine months of 2003 due to decreases in our inventory as well as a refund of
income taxes. During the fourth quarter of 2003 our average borrowings increased
by $9 million when compared to the third quarter of 2003 and by $12 million when
compared to the fourth quarter of 2002. The increase in average borrowings for
the fourth quarter of 2003 was due to increases in our inventory to support the
increased level of sales towards the end of 2003 and an anticipated increase in
sales for 2004. During the third and fourth quarters of 2003, the Company
benefited from an improvement in its interest pricing levels associated with a
new $65 million credit facility which closed in May of 2003 (the "Credit
Facility"). Based upon the debt service coverage ratio as defined in the Credit
Facility and as calculated using the June 30, 2003 financial statements, the
Company improved from the third pricing level to the first pricing level
effective in the middle of the third quarter of 2003. This improvement resulted
in a reduction of 100 basis points on the interest rates charged on the
Company's borrowings under its Credit Facility. This improved rate continued
through the middle of November 2003, at which point the pricing level again
changed based on the September 30, 2003 financial statements. As of September
30, 2003 the debt service coverage ratio decreased and the Company reverted to
the third pricing level effective from the middle of the fourth quarter of 2003
to the present. Due to the timing of the pricing level changes, interest expense
was not significantly impacted for the fourth quarter and twelve months of 2003;
however, the rate increase may result in an increase in interest expense in
future periods. If business conditions continue to improve and the Company's
working capital needs increase to support the Company's growth, outstanding
borrowings under the Credit Facility will increase and, as a result, interest
expense will grow. Interest expense for 2003 included non-cash amortization of
deferred financing fees of $208,000 and will
20
reflect an aggregate of $999,000 of deferred financing fees over the term of the
Credit Facility. See "Liquidity and Capital Resources" below and Note 4 to Notes
to Consolidated Financial Statements.
Net Income
Net income was $546,000 or $.14 per share (diluted) for the year ended December
31, 2003, compared to $564,000 or $.15 per share (diluted) excluding other
income for the year ended December 31, 2002. Net income for 2002 was $1.9
million or $.49 per share (diluted) after including other income of $1.3 million
on an after-tax basis that primarily relates to a partial payment in settlement
of an accounts receivable that had been written-off in 2001. See "Comparison of
Years Ended December 31, 2002 and 2001 - Other Income" below and Note 11 to
Notes to Consolidated Financial Statements.
Comparison of Years Ended December 31, 2002 and 2001
----------------------------------------------------
Sales
Net sales for the year ended December 31, 2002 were $332.0 million, a 12.9%
decrease from net sales of $381.1 million for 2001. The decrease was primarily
attributable to a continuation of the industry downturn that began during the
fourth quarter of 2000 and progressively and significantly worsened throughout
2001. Net sales were also negatively impacted by a weakness in demand for
electronic components, a trend of electronics manufacturing to move offshore as
well as the general weakness in the overall economy.
Gross Profit
Gross profit was $60.7 million for 2002, a 20.2% decrease from gross profit of
$76.1 million for 2001, without giving effect to non-cash inventory write-offs
during 2001 aggregating $13.4 million resulting from adverse industry conditions
(see Note 10 to Notes to Consolidated Financial Statements). The decrease in
gross profit was primarily due to decreases in net sales and gross profit
margins. Gross profit margins as a percentage of net sales were 18.3% for 2002
compared to 20.0% for 2001, excluding from the 2001 period the inventory
write-offs described above. The decline in gross profit margins reflected the
continued weakness in demand for electronic components, excess product
availability as well as a change in our product mix, including an increase in
sales of flat panel displays which generally sell at lower gross margins. In
addition, we continued to develop long-term strategic relationships with
accounts that have required aggressive pricing programs. After giving effect to
the inventory write-offs during 2001 described above, gross profit was $62.7
million and the gross profit margin was 16.5% for 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased to $56.7 million
for 2002 from $69.0 million for 2001 without giving effect to $5.2 million of
write-offs during 2001 of accounts receivable resulting from the adverse
economic and industry conditions. The improvement in SG&A reflected the benefit
from the implementation of certain expense reduction programs, including
workforce and salary reductions, all of which began during the second quarter of
2001. The decrease in SG&A also reflected a reduction in variable expenses
associated with the decline in sales and gross profit dollars. After giving
effect to the write-offs during 2001 of certain accounts receivable, SG&A was
$74.2 million for 2001.
SG&A as a percentage of net sales was 17.1% for the year ended December 31, 2002
compared to 18.1% for the 2001 period without giving effect to the write-offs of
accounts receivable during 2001. The decrease in SG&A as a percentage of net
sales was due to the improvement in SG&A in absolute dollars discussed above
which more than offset the impact from the decline in net sales. After taking
into account the write-offs during 2001 of accounts receivable, SG&A as a
percentage of net sales was 19.5% for 2001.
Income (Loss) from Continuing Operations
Income from continuing operations was $4.1 million for 2002 compared to $7.1
million for 2001 excluding the non-cash charges during 2001 for inventory and
accounts receivable write-offs discussed above and
21
also excluding an $895,000 non-cash write-off of goodwill in 2001. See Note 8 to
Notes to Consolidated Financial Statements. The decrease in income from
continuing operations was due to the significant decline in sales and gross
profit dollars for the reasons discussed previously, which decreases were
partially offset by the improvement in SG&A described above. After giving effect
to the non-cash charges in 2001, the Company had a loss from continuing
operations of $12.4 million for 2001.
Other Income
In September 2002, the Company entered into an agreement with a customer to whom
the Company had previously supplied display integration and turnkey support. The
agreement provided, among other things, that the Company release the
then-existing indebtedness of the customer, which indebtedness had been
previously written off by the Company during 2001, and certain related security
interests. In consideration of these releases, the Company received
approximately $2.0 million in cash and 11,000,000 shares, $.01 par value per
share, of common stock of this customer. These shares are not registered under
the Securities Act of 1933 and are not publicly traded. The shares are subject
to a voting arrangement outside the control of the Company. As a result of the
voting arrangement, the Company has given up substantially all of its voting
rights. The Company has reflected the value of these shares in Deposits and
Other Assets on the Consolidated Balance Sheets at December 31, 2003 and 2002.
The value of these shares was based on an independent appraisal at $19,000 as of
the date these shares were received by the Company. The combined value of the
cash and stock, together with lease payments that the Company previously
collected from leases that were pledged to the Company as collateral for the
then existing indebtedness of the customer, aggregated approximately $2.2
million, after deducting related legal expenses associated with the transaction.
This amount is reflected as Other Income on the Consolidated Statement of
Operations for 2002.
Interest Expense
Interest expense decreased significantly to $3.1 million for 2002 compared to
$8.2 million for 2001, without giving effect in 2001 to $448,000 of a non-cash
write-off of deferred financing fees in connection with changes in the Company's
credit facility during 2001. After giving effect to the non-cash write-off,
interest expense was $8.7 million for 2001. The substantial decrease in interest
expense resulted from significant decreases in our average borrowings and
decreases in overall interest rates. Our average borrowings decreased by
approximately $57 million when comparing 2002 and 2001. The decrease in average
borrowings was due to decreases in our inventory and income taxes receivable as
well as from the positive effects of our expense reduction programs.
Discontinued Operations
Due to the overall weakness in the economy which began in early 2001, the
negative impact of the severe broad-based industry downturn and other factors,
Aved Display Technologies and Integrated Display Technologies did not generate
the cash flows anticipated. As a result, management decided to discontinue these
divisions in 2001. Accordingly, these divisions are accounted for as
discontinued operations in the accompanying Consolidated Financial Statements.
The loss on disposal of $14.7 million on a pretax basis ($9.3 million after tax)
included the estimated costs and expenses associated with the disposal of $14.6
million primarily made up of the write-off of $4.5 million of inventory and $7.4
million of accounts receivable. In addition, the loss on disposal included a
provision of $112,000 on a pretax basis for operating losses during the
phase-out period which continued for approximately two months. See Note 9 to
Notes to Consolidated Financial Statements.
Net Income (Loss)
Net income excluding other income was $564,000, or $.15 per share (diluted), for
the year ended December 31, 2002, compared to a net loss of $(22.6) million, or
$(5.85) per share (diluted), for the year ended December 31, 2001 after giving
effect to the non-cash charges as discussed above. Including other income, net
income was $1.9 million, or $.49 per share (diluted) for the year ended December
31, 2002. In addition, 2001 also included the loss on disposal of $14.7 million
on a pre-tax basis, including a
22
write-off of $4.5 million of inventory and $7.4 million of accounts receivable,
or $9.3 million after-tax, associated with the discontinuance of our Aved
Display Technologies and Integrated Display Technologies divisions in June of
2001.
Quarterly Results of Operations
-------------------------------
The following table presents unaudited quarterly results of operations for the
eight quarters ended December 31, 2003. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly such quarterly information.
(In thousands, except per share data)
2003 2002
------------------------------------------ -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- --------
Net Sales................ $ 69,869 $ 71,932 $ 82,805 $ 86,923 $ 82,142 $ 87,397 $ 85,523 $ 76,985
Gross Profit............. 13,882 13,965 14,709 15,040 15,641 15,530 15,331 14,241
Income from Operations... 684 778 1,004 1,154 1,151 1,139 1,097 701
Other Income - Net....... - - - - - - 2,220 -
Net Income............... 61 63 177 245 119 198 1,559 7
Diluted Earnings
Per Share............... $.02 $.02 $.04 $.06 $.03 $.05 $.40 $.00
Liquidity and Capital Resources
-------------------------------
Working capital at December 31, 2003 increased to $63.2 million from working
capital of $54.7 million at December 31, 2002. The current ratio was 2.19:1 at
December 31, 2003 compared to 2.23:1 at December 31, 2002. The increase in
working capital was primarily due to increases in accounts receivable and
inventory which were partially offset by increases in the current portion of
long-term debt and in accounts payable and accrued expenses. Accounts receivable
was $53.8 million at December 31, 2003 compared to $41.2 million at December 31,
2002. The increase in accounts receivable reflects an increase in the level of
sales towards the latter part of 2003 as compared to the latter part of 2002.
The average number of days that accounts receivables were outstanding increased
to 58 days as of December 31, 2003 compared to 47 days as of December 31, 2002
reflecting long-term strategic relationships which have required extended
payment terms. Inventory levels were $58.2 million at December 31, 2003 compared
to $52.8 million at December 31, 2002. The increase primarily reflects higher
inventory levels needed to support the current increased level of sales and
anticipated increases in future sales as well as increases in supplier lead
times. Management expects that if sales levels continue their sequential
quarterly increases our inventory may increase in subsequent periods. Accounts
payable and accrued expenses was $47.9 million at December 31, 2003 compared to
$44.3 million at December 31, 2002 due primarily to increased purchases of
inventory in connection with the increased level of sales.
The current portion of long-term debt was $5.2 million at December 31, 2003
compared to $78,000 at December 31, 2002. The change in the current portion of
long-term debt was due to a reclassification from long-term debt of $5,150,000
of subordinated debentures which mature on June 13, 2004. Under the terms of a
$65 million Credit Facility which the Company entered into on May 14, 2003 (the
Credit Facility is described below), the Company may repay up to $5,150,000 of
the subordinated debentures within 15 days prior to or after its maturity on
June 13, 2004 so long as the average excess availability (as defined in the
Credit Facility) for the three-month period immediately preceding the
consummation of such repayment is equal to at least $15.0 million and excess
availability (as defined in the Credit Facility) immediately after such
repayment is equal to at least $10.0 million. Management believes that the
Company will be able to repay the $5,150,000 subordinated debentures upon
maturity through the use of available borrowings under the Credit Facility.
There is, however, no assurance that the Company will be in a position, at the
time of maturity of the subordinated debentures, to utilize the Credit Facility
or to secure alternative sources of financing to repay the subordinated
debentures upon maturity. See Note 4 to Notes to Consolidated Financial
Statements.
23
The Company has other subordinated debt with various maturities through 2015
aggregating approximately $838,000 and has an unfunded postretirement benefit
obligation of approximately $1,171,000. See table below and Note 4 to Notes to
Consolidated Financial Statements.
In August 2002, the Company's Board of Directors authorized the continuance of
the stock repurchase program, originally approved by the Board and announced in
1999, which provided for the repurchase of up to $2.0 million in purchase price
of the Company's common stock. The stock repurchases may, at the discretion of
the Company's management, be made from time to time at prevailing prices in the
open market or through privately negotiated transactions. The Company's
management will base its decision on market conditions, the price of its common
stock, available cash flow and other factors. The Company does not currently
anticipate making stock repurchases during at least the first half of 2004. For
the year ended December 31, 2003, the Company repurchased 60,953 shares of its
common stock at an average price of $3.14 per share, or an aggregate price of
approximately $191,000, which, together with previous purchases since 1999,
represents 244,089 shares at an aggregate price of approximately $758,000
purchased under the program. Currently, shares purchased under this program are
immediately retired and become authorized and unissued shares of common stock
available for reissuance for any corporate purpose.
On May 14, 2003, the Company entered into the Credit Facility which expires May
14, 2006. The Company utilized the Credit Facility to repay all outstanding
borrowings under the Company's previous $60 million facility. Borrowings under
the Credit Facility bear interest at one of three pricing levels dependent on
the Company's debt service coverage ratio at the quarterly pricing date (as
defined), and are secured by all of the Company's assets including accounts
receivable, inventories and equipment. At the first pricing level, at the
Company's option, the rate will be either (a) .5% over the greater of the
Federal funds rate plus .5% and prime or (b) 2.75% over LIBOR. At the second
level, at the Company's option, the rate will be either (a) 1% over the greater
of the Federal funds rate plus .5% and prime or (b) 3.25% over LIBOR. At the
third level, at the Company's option, the rate will be either (a) 1.5% over the
greater of the Federal funds rate plus .5% and prime or (b) 3.75% over LIBOR. In
accordance with the Credit Facility, pricing was at the third level until the
Company's June 30, 2003 financial statements were received by the Administrative
Agent (the first pricing date). Based upon the debt service coverage ratio as
calculated using the June 30, 2003 financial statements, the Company improved
from the third pricing level to the first pricing level effective in the middle
of the third quarter of 2003. This improvement resulted in a reduction of 100
basis points on the interest rates charged on the Company's borrowings under the
Credit Facility. This reduced rate continued through the middle of November
2003, at which point the pricing level again changed based on the September 30,
2003 financial statements. As of September 30, 2003 the debt service coverage
ratio decreased and the Company reverted to the third pricing level effective
from the middle of the fourth quarter of 2003 to the present. This increase in
the interest rates charged on the Company's borrowings under its Credit Facility
did not have a significant impact on interest expense for the fourth quarter and
twelve months of 2003. In connection with the Credit Facility, interest expense
for 2003 included non-cash amortization of deferred financing fees of $208,000
and will reflect an aggregate of $999,000 of deferred financing fees over the
term of the Credit Facility. As with our previous facility, the amounts that the
Company may borrow under the Credit Facility are based upon specified
percentages of the Company's eligible accounts receivable and inventories (as
defined) and the Company is required to comply with certain affirmative and
negative covenants and certain financial ratios. The covenants, among other
things, place limitations and restrictions on the Company's borrowings,
investments, capital expenditures and transactions with affiliates; prohibit
dividends and acquisitions; and prohibit stock redemptions in excess of an
aggregate cost of $2.0 million during the term of the Credit Facility. The
Credit Facility requires the Company to maintain certain minimum levels of
tangible net worth throughout the term of the credit agreement as well as a
minimum debt service coverage ratio and a minimum inventory turnover level, each
tested on a quarterly basis. At December 31, 2003, outstanding borrowings under
the Company's Credit Facility aggregated $48.0 million compared to $34.0 million
at December 31, 2002. See Note 4 to Notes to Consolidated Financial Statements.
24
Long-term debt, operating leases and other long-term obligations as of December
31, 2003 mature as follows:
Payments Due by Period
--------------------------------------------------------------
Less than More than
Obligations Total 1 year 1-3 years 4-5 years 5 years
-------------------------------------------------------------------------------------------------------------------
Long-term debt (1).................. $ 54,023,000 $ 5,199,000 $ 48,255,000 $ 162,000 $ 407,000
Operating leases.................... 12,200,000 3,300,000 4,700,000 1,700,000 2,500,000
Other long-term obligations (2)..... 1,177,000 - 6,000 - 1,171,000
-------------- -------------- -------------- -------------- --------------
Total obligations................... $ 67,400,000 $ 8,499,000 $ 52,961,000 $ 1,862,000 $ 4,078,000
============== ============== ============== ============== ==============
---------
(1) Reflected on the Company's Consolidated Balance Sheet as of December 31,
2003 and includes $48,046,000 under the Company's $65 million credit
facility which matures on May 14, 2006 and $5,150,000 of subordinated
debentures which mature on June 13, 2004.
(2) Reflected on the Consolidated Balance Sheet as of December 31, 2003 and
includes a postretirement benefit obligation of $1,171,000.
The Company currently expects that its cash flows from operations and additional
borrowings available under its Credit Facility will be sufficient to meet the
Company's current financial requirements over the next twelve months.
Off-Balance Sheet Arrangements
------------------------------
In September 2002, the Company entered into an agreement with a customer which
provided, among other things, that the Company release the then-existing
indebtedness of the customer, which indebtedness had been previously written off
by the Company primarily in the nine-month period ended September 30, 2001, and
certain related security interests. In consideration of these releases, the
Company received approximately $2.0 million in cash in addition to certain stock
and other consideration. The net cash proceeds received were used to reduce the
outstanding borrowings under the Company's credit facility. The Company
continues to guarantee the future payment to a third party of certain leases
which were previously pledged to the Company as collateral for the payment of
outstanding receivables which were owed by this customer. This guaranty was made
when the leases were sold to this third party who paid to the Company in 2001
the net present value of the future payments of the leases. The maximum exposure
under this guaranty, which continues through the latest lease expiration date of
March 31, 2006, was $601,000 with a net present value of $510,000 at December
31, 2003.
Inflation and Currency Fluctuations
-----------------------------------
The Company does not believe that inflation significantly impacted its business
during 2003; however, inflation has had significant effects on the economy in
the past and could adversely impact the Company's results in the future.
Although it did not adversely impact the Company's financial results in 2003,
the Company believes that currency fluctuations could adversely impact its
financial results in the future if the Company increases transactions in foreign
currencies and/or adds offshore infrastructure which is paid for in foreign
currencies. The Company believes that currency fluctuations could have adverse
effects on its business if the impact from those currency fluctuations makes
components manufactured abroad too expensive, causes limitations in customer
productions due to unfavorable export conditions or causes the Company's
offshore suppliers to limit exports to the United States. In certain prior
years, the Company believes that currency fluctuations have had such adverse
effects. In addition, foreign currency fluctuations could result in increasing
the cost of goods of the Company or reducing its net sales as purchase and sale
prices for the Company's goods fixed in foreign currency may result in the cost
of goods in U.S. dollars being greater when paid or net sales in U.S. dollars on
payment for goods being less when received than anticipated when the price
payable or to be received in foreign currency is originally fixed.
25
New Accounting Pronouncements Applicable to the Company
-------------------------------------------------------
In December 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88, and 106" ("SFAS 132 (revised 2003)"), effective for
fiscal years beginning after December 15, 2002, subject to certain exemptions.
SFAS 132 (revised 2003) revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions," Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement retains the
disclosure requirements contained in Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"), which it replaces. It requires additional disclosures to
those in the original SFAS 132 about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The required information should be provided
separately for pension plans and for other postretirement benefit plans. The
Company adopted SFAS 132 (revised 2003) as of January 1, 2003. The effect of the
adoption of this Statement was not material.
Forward-Looking Statements; Business Risks and Uncertainties
------------------------------------------------------------
This report contains statements that are forward-looking within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this report, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," "contemplates," "may," "will,"
"shall," "assuming," "prospect," "should," "could," "looking forward" and
similar expressions, to the extent used, are intended to identify the
forward-looking statements. All forward-looking statements are based on current
expectations and beliefs concerning future events that are subject to risks and
uncertainties. Actual results may differ materially from the results suggested
in this report. In many cases, we cannot predict the risks or uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements. Factors that may cause or contribute to such
differences, and our business risks generally, include, but are not limited to,
the items described below, as well as in other sections of this report and in
other of our public filings and in our press releases. The Company undertakes no
obligation to update publicly or revise any forward-looking statements, business
risks and/or uncertainties.
Our industry is cyclical, which causes our operating results to fluctuate
significantly.
In the fall of 1999, our industry emerged from a four-year period of excess
supply. As a result of limited supply from the fourth quarter of 1999 to the
fourth quarter of 2000, prices and profit margins went up and our operating
results improved. During the fourth quarter of 2000, a combination of improved
product availability, a slowing economy and other factors caused a sudden
adverse change in market conditions in our industry, which continued to
deteriorate during 2001 resulting in a broad-based industry slowdown, excess
customer inventory and a severe decline in demand for electronic components
which continued during 2002 and into 2003, although we began to see signs of
recovery beginning in the third quarter of 2003 and customer demand has
continued to strengthen since then. However, we cannot predict the timing or the
severity of the cycles within our industry. In particular, it is difficult to
predict how long and to what levels any industry slowdown or downturn and/or
general economic weakness will last or be exacerbated by terrorism or war or
other factors or, alternatively, the likelihood of an industry upturn or the
period of time it will last. The electronic components distribution industry has
historically been affected by general economic downturns, which have often had
an adverse economic effect upon manufacturers, end-users of electronic
components and electronic components distributors, which occurred in 2001 and
2002 and continued in 2003. In addition, our industry directly depends on the
continued growth of the electronic components industry and indirectly on the
level of end-user demand for our customers' products. Due to changing conditions
(such as in late 2000 and all of 2001), our customer base has experienced and
may in the future experience periods of inventory corrections which could
materially
26
adversely impact our results. Furthermore, the timing of new product
developments, the life-cycle of existing electronic products, and the level of
acceptance and growth of new products can affect demand for electronic
components. In that regard, the Company has supported in the past and expects in
the future to support new technologies and emerging markets, the failure of
which to be accepted or grow (as was the situation during 2001 and 2002 and, to
a lesser extent, even in 2003) could have a material adverse effect on our
operating results. These market changes and factors have caused in the past, and
will likely cause in the future, our operating results to significantly
fluctuate.
We are dependent on a limited number of suppliers. If one or more of our largest
suppliers chooses not to sell products to us, our operating results could
suffer.
We rely on a limited number of suppliers for products which generate a
significant portion of our sales. Substantially all of our inventory has and
will be purchased from suppliers with which we have entered into non-exclusive
distributor agreements which are typically cancelable on short notice (generally
30 to 90 days). Products purchased from our three largest suppliers accounted
for approximately 27% of our consolidated purchases during the calendar year
ended December 31, 2003, of which 16% were purchased from one supplier. No other
supplier accounted for more than five percent of our consolidated purchases
during this period. While most of the products that we sell are available from
other sources, our future success will depend in large part on maintaining
relationships with existing suppliers and developing relationships with new
ones. We believe that the loss of a key supplier (particularly our largest
supplier) could have a material adverse impact on our business in the short term
as we attempt to replace the products offered by that supplier with the products
of other suppliers. However, if we were to lose our right to distribute the
products of any particular supplier, there can be no assurance that we would be
able to replace the products which were available from that particular supplier.
Thus, the loss of, or significant disruptions in relationships with, any of our
largest suppliers (particularly our largest supplier) or a significant number of
other suppliers in a short period of time, could have a material adverse effect
on our operating results.
We do not have long-term contracts with our customers and, as a result, our
customers may be able to cancel, reduce or delay their orders without penalty.
We typically do not obtain long-term purchase orders or commitments but instead
work with our customers to develop nonbinding forecasts of future orders. Based
on such nonbinding forecasts, we make commitments regarding the level of
business that we will seek and accept, and the levels and utilization of
personnel and other resources. A variety of conditions, both specific to each
individual customer and generally affecting each customer's industry, may cause
our customers to cancel, reduce or delay orders that were either previously made
or anticipated or attempt to return inventory. Generally, our customers may
cancel, reduce or delay purchase orders and commitments without penalty or other
charges associated with such cancellation, reduction or delay. Significant or
numerous cancellations, reductions or delays in orders by customers have in 2001
and to a lesser extent in 2002 and 2003 had, and could in the future have, a
material adverse effect on our operating results.
We may not be able to sustain or manage growth or achieve satisfactory levels of
profitability.
As and to the extent market conditions improve and if and as we commence our
growth, we will need to manage our expanding operations (including our
developing European and Asian operations) effectively and successfully integrate
into our operations that expansion and any new businesses or divisions which we
may acquire or open. If we are unable to do so, particularly in instances in
which we have made or make significant investments, our failure could have a
material adverse effect on our operating results. We may be unsuccessful in
growing and achieving satisfactory levels of profitability if we are unable to:
- secure adequate supplies of competitive products on a timely basis and
on commercially reasonable prices and other terms, especially in times
of product allocations;
- expand sales to existing customers and increase our customer base;
- turn our inventories and collect our accounts receivable fully and in a
timely manner, especially with respect to customers in new technologies
or in emerging markets and generally as a result of
27
the weakened or further weakening financial condition of certain
customers (including several customer bankruptcies);
- avoid obsolescence of inventory or devaluation of inventory as a result
of adverse market conditions;
- maintain our existing key supplier relationships as well as develop new
relationships with leading suppliers of electronic components;
- hire and retain additional qualified management, marketing and other
personnel to successfully manage our growth, including personnel to
monitor our operations, control costs and maintain effective inventory
and credit controls;
- effectively and fully utilize our level of personnel and facility and
infrastructure overcapacity; and
- invest to maintain and enhance our infrastructure, including
telecommunications and information systems, logistics services and our
service capabilities, including "distribution technology".
A decline in gross profit margins arising from a change in market conditions or
aggressive pricing programs could adversely affect our operating results.
During certain prior periods, we have experienced an increase in gross profit
margins as a result of favorable market conditions in the electronic components
distribution industry, including limited supply of certain products. However,
there is no assurance that negative changes in the economic environment
generally and/or in the electronic components industry in particular will not
occur. In fact, such negative changes in both the economic environment generally
and in the electronic components industry began to occur in the fourth quarter
of 2000, progressively worsened throughout 2001 and remained weak during 2002
and much of 2003. Furthermore, we continue to develop long-term strategic
relationships with accounts which have required aggressive pricing programs, as
well as there is continued price competition for products sold by us. These and
other factors could result in a decline in our gross profit margins, materially
adversely affecting our operating results.
We may not be able to satisfy our funding requirements.
We currently anticipate needing to spend significant amounts of cash to: meet
our working capital requirements (including to support increases in levels of
inventory, as well as customer backlog, and accounts receivable if the recovery
in our industry continues and, as a result, our level of sales increases); repay
the $5,150,000 of subordinated debentures which mature on June 13, 2004; invest
in capital equipment and infrastructure; upgrade our information and
communication systems; acquire businesses or open divisions; or respond to
increases in expenses and costs, unanticipated developments, increasing customer
demands or competitive pressures. If we do not have enough cash on hand, cash
generated from our operations and/or cash available under our credit facility to
meet these cash requirements, we will need to seek alternative sources of
financing to carry out our growth and operating strategies and to repay the
$5,150,000 of subordinated debentures on maturity, particularly if our credit
facility is not available to do so. We may not be able to raise needed cash on
terms acceptable to us, or at all. Financing may be on terms that are dilutive
or potentially dilutive. If alternative sources of financing are required but
are insufficient or unavailable, we will be required to modify our operating
plans to the extent of available funding, if and assuming such modifications
and/or other actions can be made or taken at all.
Our global expansion initiatives may not be successful.
The Company recently commenced global expansion initiatives in an attempt to
increase its sales to customers' locations in foreign countries. Given the
Company's limited experience in the international market and that the Company
only recently, and on a limited basis so far, commenced operations outside of
North America, no assurance can be given that the Company's global expansion
initiatives will be successful.
We are exposed to interest rate changes which could adversely affect our
operating results.
We are exposed to interest rate changes with respect to our credit facility,
which currently is based upon, at our option, the prime rate or LIBOR. In fact,
interest rates are currently at a very low level and no assurance can be given
that interest rates will not begin to rise as the general economy commences its
28
recovery. Any material increase in the level of interest rates could materially
adversely affect our operating results.
We are dependent on foreign manufacturers and subject to trade regulations which
expose us to political and economic risk.
A significant number of components sold by us are manufactured by foreign
companies. As a result, our ability to sell certain products at competitive
prices could be adversely affected by any of the following:
- increases in tariffs or duties;
- changes in trade treaties;
- strikes or delays in air or sea transportation;
- future United States legislation with respect to pricing and/or import
quotas on products imported from foreign countries; and
- turbulence in offshore economies or financial markets.
Our ability to be competitive with respect to sales of imported components could
also be affected by other governmental actions and policy changes, including
anti-dumping and other international antitrust legislation. In addition, adverse
currency fluctuations could have the effect of making components manufactured
abroad more expensive, cause limitations in customer productions due to
unfavorable export conditions or cause our offshore suppliers to limit exports
to the United States. In addition, foreign currency fluctuations could result in
increasing the cost of goods to us or reducing our net sales as purchase and
sale prices for our goods fixed in foreign currency may result in the cost of
goods in U.S. dollars being greater when paid or net sales in U.S. dollars on
payment for goods being less when received than anticipated when the price
payable or to be received in foreign currency is originally fixed. Because we
historically purchase substantially all of our products from United States
subsidiaries and affiliates of foreign manufacturers, almost all of our
purchases are paid for in U.S. dollars, which usually reduces or eliminates the
potential adverse effects of currency fluctuations. However, in late 2002 we
began purchasing a limited amount of our product offshore and this offshore
purchasing activity may increase in the future. Accordingly, there can be no
assurance that such factors could not have a material adverse effect on our
operating results in the future.
Our industry is subject to supply shortages. Any delay or inability to obtain
components may have an adverse effect on our operating results.
At various times prior to 2001 there have been shortages of components in the
electronics industry and the availability of certain components have been
limited by some of our suppliers. Although such shortages and allocations have
not had a material adverse effect on our operating results, there can be no
assurance that any future shortages or allocations would not have such an effect
on us.
The prices of our components are subject to volatility.
A significant portion of the memory products we sell have historically
experienced volatile pricing. If market pricing for these products decreases
significantly, we may experience periods when our investment in inventory
exceeds the market price of such products. In addition, at times there are price
increases from our suppliers that we are unable to pass on to our customers.
These market conditions could have a negative impact on our sales and gross
profit margins unless and until our suppliers reduce the cost of these products
to us. Further, in the future aggressive pricing programs that may be required,
an increased number of low-margin, large volume transactions and/or increased
availability of the supply of certain products can further impact gross profit
margins.
Our industry is highly competitive and competition could harm our ability to
sell our products and services and thereby reduce our market share.
The electronic components distribution industry is highly competitive. We
generally compete with local, regional and national distributors. Some of our
competitors have greater name recognition and financial, personnel and other
resources than we do. There can be no assurance that we will continue to compete
29
successfully with existing or new competitors and failure to do so could have a
material adverse effect on our operating results.
Emergence of new competitive business models or sources of competition could
have adverse effects on our business.
In the last couple of years, additional competition has emerged in the
electronic components distribution industry. This increased competition resulted
in part from the advent of third party logistics and fulfillment companies,
businesses commonly referred to as e-exchanges and e-brokers and several other
forms of e-commerce companies which have grown with the expanded use of the
Internet. In addition to the increased competition from these other groups, some
of the total available distribution market share is being reduced as more and
more original equipment manufacturers transition their procurement into EMS
companies and original design manufacturers. The EMS companies and original
design manufacturers utilize their abilities to aggregate demand to develop
direct purchasing channels with component manufacturers. Furthermore, as more
and more manufacturing moves outside the boundaries of North America, the
Company believes that the total available distribution market share is also
being reduced as procurement channels increase in Asia and Europe. While we have
implemented our e-commerce strategies, including our website and multiple
portals, and recently commenced operations in the United Kingdom, Northeast Asia
and Southeast Asia to confront certain of these new business models and sources
of competition, there can be no assurance that we will be able to defend our
market share against the emergence of these or other new business models and
sources of competition.
A reversal of the trend for distribution to play an increasing role in the
electronic components industry could affect our business.
In recent years, there has been a growing trend for original equipment
manufacturers and contract electronics manufacturers to outsource their
procurement, inventory and materials management processes to third parties,
particularly electronic component distributors. Although we do not currently
foresee this trend reversing, if it did, our business would be materially
adversely affected.
Our operations would be adversely affected if third party carriers were unable
to transport or were materially hindered in transporting our products.
All of our products are shipped through third party carriers, principally one
carrier. If a strike or other event prevented or materially hindered or
disrupted that carrier from transporting our products, there is no assurance
that other carriers would be available or have the capacity to deliver our
products to our customers. If adequate third party sources to ship our products
were not available at any time, our operating results would be materially and
adversely affected.
We depend on the continued services of our executive officers, and their loss
could affect our ability to successfully grow our business.
We are highly dependent upon the services of our President and Chief Executive
Officer. The permanent loss for any reason of our President and Chief Executive
Officer, or any one or more of our other key executives, could have a material
adverse effect upon our operating results. While we believe that we would be
able to locate suitable replacements for our executives if their services were
lost, there can be no assurance that we would, in fact, be able to do so.
We must attract and retain personnel to help support our future growth, and
competition for personnel in our industry has previously been intense.
We require the services of a substantial number of qualified personnel. Our
future success depends to a significant degree upon the continued contributions
of our management, engineering, sales, marketing, information technology,
distribution and finance personnel. Prior to late 2000, the market for such
skilled and experienced personnel was characterized by intense competition and
aggressive recruiting, as well as a high degree of employee mobility. Such a
market, if it was to return, would make it particularly difficult to
30
attract and retain the qualified personnel we require. The loss of or our
inability to continue to attract and retain these key personnel could harm our
business.
We may be exposed to product liability claims.
We are likely to be named as a defendant in any products liability action
brought by an end-user as a result of our value-added services or as a
participant in the distribution chain between the manufacturer and end-user.
Although as of this date there are no material claims asserted against us for
products liability, there can be no assurance that such claims will not arise in
the future. In the event that any products liability claim is not covered by
insurance or we are not indemnified by or cannot recover damages from our
supplier of the product or another third party in the chain of distribution, we
may be required to fund some or all of a product liability claim, which could
have a material adverse effect on us.
We may be exposed to warranty claims.
The Company may be exposed to warranty claims by its customers both with respect
to products manufactured by others which the Company distributes and with
respect to products on which the Company has performed value added work. With
respect to claims relating to products manufactured by others, the Company would
expect that the manufacturers of such products would indemnify the Company to
the extent provided for under its agreement with the manufacturer, as well as
defend such claims on the Company's behalf, although no assurance can be given
that any manufacturer would so do. In addition, there may be instances where a
customer might be able to enforce an express or implied warranty claim against
the Company with respect to component products manufactured by the Company's
suppliers, in addition to or in lieu of the warranties of the suppliers of such
components. Accordingly, a significant number of such warranty claims could have
a material adverse effect on us.
Any acquisitions could be difficult to integrate, disrupt our business and
adversely affect our operations.
Our growth in the future may depend, in part, on our ability to acquire
compatible electronic components distributors or other businesses and to
integrate the acquired operations. There can be no assurance that we will be
able to locate additional appropriate acquisition candidates, or that we will be
successful in acquiring any identified candidates. In addition and as we have
experienced in the past, we cannot be certain that the operations of any
acquired companies will be effectively integrated or prove profitable. The
completion of future acquisitions may require the expenditure of sizable amounts
of capital and management effort. Moreover, unexpected problems encountered in
connection with our acquisitions could have a material adverse effect on our
operating results.
Our officers and directors have and will continue to have significant control
over us.
If the Company's Chairman and President and Chief Executive Officer exercised
all of their outstanding stock options, they and their respective spouses and
children and related trusts would own an aggregate of approximately 683,000
shares, representing approximately 17% of the outstanding shares of common
stock. As a result of such stock ownership and their positions as executive
officers, as the members of the executive committee of our Board of Directors
and as two of the eight directors of All American, they are and will continue to
be in a position to control the day-to-day affairs of All American.
Our shareholder rights plan, preferred stock and governing documents may
discourage potential acquisitions of our business.
We have a shareholders rights plan and have authorized preferred stock which is
available to be issued with such rights, preferences, privileges and limitations
as are determined by the Board of Directors. In addition, our Certificate of
Incorporation includes provisions designed to discourage attempts by others to
acquire control of us without negotiation with our Board of Directors, and to
attempt to ensure that such transactions are on terms favorable to all of our
shareholders. These provisions provide, among other things:
- that meetings of our shareholders may only be called by the Board of
Directors;
31
- that an affirmative vote of two-thirds of our outstanding shares of
common stock is required to approve certain business combinations
unless 65% of our Board approves such transaction;
- for three classes of directors with each class elected for a three year
staggered term;
- that our Board in evaluating a tender offer or certain business
combinations is authorized to give due consideration to all relevant
factors; and
- that actions of shareholders may not be taken by written consent of
shareholders in lieu of a meeting.
For various reasons, however, these provisions may not always be in the best
interest of our shareholders. These reasons include the fact that the provisions
of our Certificate of Incorporation (i) make it difficult to remove directors
even if removal would be in the best interest of our shareholders; (ii) make it
difficult for our shareholders to approve certain transactions that are not
approved by at least 65% of our Board, even if the transactions would be
beneficial to our shareholders; and (iii) eliminate the ability of our
shareholders to act without a meeting. Our shareholder rights plan, our
blank-check preferred stock and our governing documents may have the effect of
delaying, deterring or preventing a change in control of All American, could
discourage potential investors from bidding for our common stock at a premium
over the market price of the common stock and could adversely affect the market
price and the voting rights of the holders of the common stock.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
-------- ----------------------------------------------------------
The Company's credit facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results. For each 100 basis point fluctuation in the interest rates charged on
the Company's borrowings under its credit facility, interest expense will
increase or decrease by $480,000 based on outstanding borrowings at December 31,
2003. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
ITEM 8. Financial Statements and Supplementary Data
------- -------------------------------------------
The Consolidated Financial Statements of the Company and its subsidiaries and
supplementary data required by this item are included in Item 15(a)(1) and (2)
of this report.
In addition, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Quarterly Results of Operations" for
presentation of unaudited quarterly results of operations for the eight quarters
ended December 31, 2003.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
None.
ITEM 9A. Controls and Procedures
-------- -----------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of the end of the period covered by this Annual Report on Form 10-K, we
evaluated, under the supervision and with the participation of our management,
including our chief executive officer and the chief financial officer, the
effectiveness of the design and operation of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934, Rules 13a -
15(e) and 15d - 15(e)). Based on that evaluation, our management, including our
chief executive officer and chief financial officer, have concluded that as of
the date of the evaluation our disclosure controls and procedures are effective
to ensure that all material information required to be filed in this report has
been made known to them.
32
Changes In Internal Controls Over Financial Reporting
-----------------------------------------------------
There have been no changes in our internal controls over financial reporting
that occurred during the fourth quarter of 2003 that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
PART III
ITEMS 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters; Certain Relationships and Related
Transactions; and Principal Accountant Fees and Services.
--------------------------------------------------------------------------------
The response to these items will be included in a definitive proxy statement
filed within 120 days after the end of the Registrant's fiscal year, which
definitive proxy statement is incorporated herein by this reference.
PART IV
ITEM 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
-------- ---------------------------------------------------------------
(a) List of documents filed as part of this report Page
---------------------------------------------- ----
1. Financial Statements
--------------------
Management's Responsibility for Financial Reporting............ F-1
Independent Auditors' Report................................... F-1
Consolidated Balance Sheets.................................... F-2
Consolidated Statements of Operations.......................... F-3
Consolidated Statements of Changes in Shareholders' Equity..... F-4
Consolidated Statements of Cash Flows.......................... F-5
Notes to Consolidated Financial Statements..................... F-6
2. Financial Statement Schedule
----------------------------
Schedule II - Valuation and Qualifying Accounts................ S-1
3. Exhibits
--------
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibits 3.1 to the Company's Registration Statement
on Form S-1, File No. 33-15345-A, and to the Company's Form 10-K
for the fiscal year ended December 31, 1991), as further amended
by (i) Certificate of Amendment of Certificate of Incorporation
dated August 21, 1995 of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Form 10-K for the year ended
December 31, 1995) and (ii) Certificate of Amendment of
Certificate of Incorporation dated June 1, 1999 of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Form
10-Q for the quarter ended June 30, 1999).
3.2 By-Laws, as amended July 29, 1994 (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June
30, 1994).
4.1 Specimen Certificate of Common Stock (incorporated by reference
to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended
June 30, 1999).
4.2 Fiscal Agency Agreement, dated as of June 8, 1994, between the
Company and American Stock Transfer & Trust Co., as fiscal agent,
paying agent and securities registrar (incorporated by reference
to Exhibit 4.1 to the Company's Form 8-K dated June 14, 1994 and
filed with the Securities and Exchange Commission on June 15,
1994).
4.3 2000 Common Stock Purchase Rights Agreement, dated as of June 9,
2000, between the Company and American Stock Transfer & Trust
Company (incorporated by reference to Exhibit number 4.1 to the
Company's Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on June 13, 2000).
33
10.1 Form of Indemnification Contracts with Directors and Executive
Officers (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-2, File No. 33-47512).
10.2 Lease Agreement for Headquarters dated May 1, 1994 between Sam
Berman d/b/a Drake Enterprises ("Drake") and the Company
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended March 31, 1994).
10.3 Lease Agreement for west coast corporate office and northern
California sales office in San Jose, California dated October 1,
1998 between San Jose Technology Properties, LLC and the Company
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-K for the year ended December 31, 1998).
10.4 Promissory Notes, all dated May 1, 1994 payable to Drake, the
Company's landlord in the amounts of $865,000 and $32,718
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 1994).
10.5 Promissory Note, dated May 1, 1995, payable to Drake, the
Company's landlord, in the amount of $90,300 (incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No. 33-58661).
10.6 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).
10.7 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).
10.8 Amended and Restated All American Semiconductor, Inc. Employees',
Officers', Directors' Stock Option Plan, as amended through
August 22, 2001 (incorporated by reference to Exhibit 10.7 to the
Company's Form 10-K for the year ended December 31, 2001).**
10.9 All American Semiconductor, Inc. Amended and Restated 2000
Nonemployee Director Stock Option Plan, as amended and restated
through August 22, 2001 (incorporated by reference to Exhibit
10.8 to the Company's Form 10-K for the year ended December 31,
2001).**
10.10 Deferred Compensation Plan (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-2, File
No. 33-47512).**
10.11 Amendment No. 1 to the All American Semiconductor, Inc. Deferred
Compensation Plan for Executives (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
June 30, 2003).**
10.12 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).
10.13 Employment Agreement dated as of May 24, 1995, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.22 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-58661), as amended by First Amendment to
Employment Agreement dated as of December 31, 1996, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.9 to the Company's Form 10-K for the year ended December 31,
1996), as amended by Second Amendment to Employment Agreement
dated as of August 21, 1998, between the Company and Paul
Goldberg (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1998), as
amended by Third Amendment to Employment Agreement effective as
of January 1, 2000 and dated as of April 27, 2000, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ended March 31,
2000).**
10.14 Employment Agreement dated as of May 24, 1995, between the
Company and Bruce M. Goldberg (incorporated by reference to
Exhibit 10.24 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661), as amended by First
Amendment to Employment Agreement dated as of August 21, 1998,
between the Company and Bruce M. Goldberg (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1998), as amended by Second Amendment
to Employment Agreement effective as of January 1, 2000 and dated
as of April 27, 2000, between the Company and Bruce M. Goldberg
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
34
10.15 Loan and Security Agreement (without exhibits or schedules) among
Harris Trust and Savings Bank, as a lender and administrative
agent, American National Bank and Trust Company of Chicago, as a
lender and collateral agent, and the Other Lenders Party thereto
and the Company, as borrower (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
March 31, 1996).
10.16 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).
10.17 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).
10.18 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).
10.19 Amendment No. 4 to Loan and Security Agreement dated March 23,
1999 (incorporated by reference to Exhibit 10.18 to the Company's
Form 10-K for the year ended December 31, 1998).
10.20 Amendment No. 5 to Loan and Security Agreement dated August 8,
2000 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 2000).
10.21 Amendment No. 6 to Loan and Security Agreement dated September
29, 2000 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 2000).
10.22 Amendment No. 7 to Loan and Security Agreement dated May 14, 2001
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended March 31, 2001).
10.23 Amendment No. 8 to Loan and Security Agreement dated May 14, 2001
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 2001).
10.24 Amendment No. 9 to Loan and Security Agreement dated August 14,
2001 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 2001).
10.25 Amendment No. 10 to Loan and Security Agreement dated November
14, 2001 (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 2001).
10.26 Amendment No. 11 to Loan and Security Agreement dated March 29,
2002 (incorporated by reference to Exhibit 10.25 to the Company's
Form 10-K for the year ended December 31, 2001).
10.27 Amendment No. 12 to Loan and Security Agreement dated October 31,
2002 (incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 30, 2002).
10.28 All American Semiconductor, Inc. 401(k) Profit Sharing Plan,
amended and restated (incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended September 30,
2003).**
10.29 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).**
10.30 Employment Agreement effective as of January 1, 2000 and dated as
of April 27, 2000, between the Company and Howard L. Flanders
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
10.31 Employment Agreement effective as of January 1, 2000 and dated as
of April 27, 2000, between the Company and Rick Gordon
(incorporated by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
10.32 Composition Agreement dated September 18, 2002 among ParView,
Inc., AmeriCapital, LLC and the Company (without exhibits)
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarter ended September 30, 2002).
10.33 Credit Agreement among Harris Trust and Savings Bank, as a lender
and administrative agent, US Bank National Association, as
co-agent, and the other lenders party thereto and the Company, as
borrower, dated May 14, 2003 (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
March 31, 2003).
11.1 Statement Re: Computation of Per Share Earnings.*
35
21.1 List of subsidiaries of the Registrant.*
23.1 Consent of Lazar Levine & Felix LLP, independent certified public
accountants.*
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350.*
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350.*
------------------
* 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
-------------------
(1) A Current Report on Form 8-K dated November 13, 2003 was filed on
November 13, 2003 reporting in Item 9 (Item 12) the issuance of a press
release announcing the Company's financial results for the third
quarter and nine months ended September 30, 2003.
(2) A Current Report on Form 8-K dated March 16, 2004 was filed on March
16, 2004 reporting in Item 12 the issuance of a press release
announcing the Company's financial results for the fourth quarter and
year ended December 31, 2003.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ALL AMERICAN SEMICONDUCTOR, INC.
(Registrant)
By: /s/ BRUCE M. GOLDBERG
--------------------------------------------------------
Bruce M. Goldberg, President and Chief Executive Officer
Dated: March 30, 2004
By: /s/ HOWARD L. FLANDERS
--------------------------------------------------------
Howard L. Flanders, Executive Vice President and
Chief Financial Officer
Dated: March 30, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 30, 2004.
/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 and Marketing,
-------------------------- Director
Rick Gordon
/s/ ROBIN L. CRANDELL Director
--------------------------
Robin L. Crandell
/s/ MICHAEL W. FORMAN Director
--------------------------
Michael W. Forman
/s/ HOWARD M. PINSLEY Director
--------------------------
Howard M. Pinsley
/s/ RICHARD E. SIEGEL Director
--------------------------
Richard E. Siegel
37
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Company's management is responsible for the preparation of the Consolidated
Financial Statements in accordance with generally accepted accounting principles
and for the integrity of all the financial data included in this Form 10-K. In
preparing the Consolidated Financial Statements, management makes informed
judgements and estimates of the expected effects of events and transactions that
are currently being reported.
Management maintains a system of internal controls that is designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed and recorded in accordance with management's policies for conducting
its business. This system includes policies which require adherence to ethical
business standards and compliance with all laws to which the Company is subject.
The internal controls process is continuously monitored by direct management
review.
The Board of Directors, through its Audit Committee, is responsible for
determining that management fulfils its responsibility with respect to the
Company's Consolidated Financial Statements and the system of internal controls.
The Audit Committee, comprised solely of directors who are not officers or
employees of the Company, meets quarterly with representatives of management and
the Company's independent accountants to review and monitor the financial,
accounting, and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The Company's independent accountants have full and
free access to the Audit Committee.
/s/ BRUCE M. GOLDBERG /s/ HOWARD L. FLANDERS
------------------------------- -------------------------------
Bruce M. Goldberg Howard L. Flanders
President, Executive Vice President,
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
All American Semiconductor, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of All American
Semiconductor, Inc. and subsidiaries as of December 31, 2003 and 2002 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in Part IV, Item
15(a) of this Form 10-K. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of All
American Semiconductor, Inc. and subsidiaries at December 31, 2003 and 2002 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ LAZAR LEVINE & FELIX LLP
--------------------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
March 5, 2004
F-1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS December 31 2003 2002
-----------------------------------------------------------------------------------------
Current assets:
Cash ................................................. $ 620,000 $ 644,000
Accounts receivable, less allowances for doubtful
accounts of $2,250,000 and $1,718,000 .............. 53,817,000 41,234,000
Inventories .......................................... 58,173,000 52,762,000
Other current assets ................................. 3,794,000 4,641,000
------------- -------------
Total current assets ............................... 116,404,000 99,281,000
Property, plant and equipment - net .................... 2,585,000 2,796,000
Deposits and other assets .............................. 3,384,000 2,501,000
------------- -------------
$ 122,373,000 $ 104,578,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt .................... $ 5,199,000 $ 78,000
Accounts payable and accrued expenses ................ 47,859,000 44,336,000
Other current liabilities ............................ 134,000 197,000
------------- -------------
Total current liabilities .......................... 53,192,000 44,611,000
Long-term debt:
Notes payable ........................................ 48,046,000 34,013,000
Subordinated debt .................................... 778,000 5,958,000
Other long-term debt ................................. 1,177,000 1,171,000
------------- -------------
103,193,000 85,753,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued ............................ - -
Common stock, $.01 par value, 40,000,000 shares
authorized, 3,760,001 and 3,820,954 shares issued
and outstanding .................................... 38,000 38,000
Capital in excess of par value ....................... 25,121,000 25,312,000
Accumulated deficit .................................. (5,979,000) (6,525,000)
------------- -------------
19,180,000 18,825,000
------------- -------------
$ 122,373,000 $ 104,578,000
============= =============
See notes to consolidated financial statements
F-2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2003 2002 2001
----------------------------------------------------------------------------------------
NET SALES ............................ $ 311,529,000 $ 332,047,000 $ 381,111,000
Cost of sales ........................ (253,933,000) (271,304,000) (318,363,000)
------------- ------------- -------------
Gross profit ......................... 57,596,000 60,743,000 62,748,000
Selling, general and
administrative expenses ............ (53,976,000) (56,655,000) (74,213,000)
Impairment of goodwill ............... - - (895,000)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ......................... 3,620,000 4,088,000 (12,360,000)
Interest expense ..................... (2,648,000) (3,138,000) (8,657,000)
Other income - net ................... - 2,220,000 -
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ..... 972,000 3,170,000 (21,017,000)
Income tax (provision) benefit ....... (426,000) (1,287,000) 7,424,000
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE
DISCONTINUED OPERATIONS ............ 546,000 1,883,000 (13,593,000)
Discontinued operations:
Income from operations (net of
$(208,000) income tax provision) ... - - 362,000
Loss on disposal (net of $5,367,000
income tax benefit) ................ - - (9,344,000)
------------- ------------- -------------
NET INCOME (LOSS) .................... $ 546,000 $ 1,883,000 $ (22,575,000)
============= ============= =============
BASIC AND DILUTED EARNINGS
PER SHARE:
Income (loss) from
continuing operations............... $ .14 $ .49 $ (3.52)
Discontinued operations............... - - (2.33)
------- ------- -------
Net income (loss)..................... $ .14 $ .49 $ (5.85)
======= ======= =======
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, 2000 ..... 4,039,620 $ 40,000 $ 26,326,000 $ 14,167,000 $ (935,000) $ 39,598,000
Exercise of stock options ...... 530 - 2,000 - - 2,000
Net loss ....................... - - - (22,575,000) - (22,575,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 ..... 4,040,150 40,000 26,328,000 (8,408,000) (935,000) 17,025,000
Purchase of treasury shares .... - - - - (83,000) (83,000)
Retirement of treasury shares .. (219,196) (2,000) (1,016,000) - 1,018,000 -
Net income ..................... - - - 1,883,000 - 1,883,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 ..... 3,820,954 38,000 25,312,000 (6,525,000) - 18,825,000
Purchase of treasury shares .... - - - - (191,000) (191,000)
Retirement of treasury shares .. (60,953) - (191,000) - 191,000 -
Net income ..................... - - - 546,000 - 546,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 ..... 3,760,001 $ 38,000 $ 25,121,000 $ (5,979,000) $ - $ 19,180,000
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements
F-4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 2003 2002 2001
--------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 546,000 $ 1,883,000 $(22,575,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization ............................. 796,000 932,000 1,129,000
Loss on disposal of assets ................................ 39,000 5,000 40,000
Non-cash interest expense ................................. 229,000 19,000 657,000
Inventory write-offs ...................................... - - 13,375,000
Accounts receivable write-offs ............................ - - 5,220,000
Impairment of goodwill .................................... - - 895,000
Changes in assets and liabilities of
continuing operations:
Decrease (increase) in accounts receivable ................ (12,583,000) (17,000) 40,279,000
Decrease (increase) in inventories ........................ (5,411,000) 28,270,000 50,116,000
Decrease (increase) in other current assets ............... 870,000 10,263,000 (11,165,000)
Increase (decrease) in accounts payable and
accrued expenses ........................................ 3,452,000 (6,512,000) (30,386,000)
Increase (decrease) in other current liabilities .......... (73,000) 23,000 (1,089,000)
Decrease in net assets of discontinued operations ......... - 36,000 7,032,000
------------ ------------ ------------
Net cash provided by (used for) operating activities .. (12,135,000) 34,902,000 53,528,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ....................... (647,000) (256,000) (367,000)
Decrease (increase) in other assets ......................... (1,015,000) 320,000 (795,000)
------------ ------------ ------------
Net cash provided by (used for) investing activities .. (1,662,000) 64,000 (1,162,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of
credit agreement .......................................... 14,033,000 (34,649,000) (51,827,000)
Repayments of notes payable ................................. (69,000) (226,000) (240,000)
Purchase of treasury shares ................................. (191,000) (83,000) -
Net proceeds from issuance of equity securities ............. - - 2,000
------------ ------------ ------------
Net cash provided by (used for) financing activities .. 13,773,000 (34,958,000) (52,065,000)
------------ ------------ ------------
Increase (decrease) in cash ................................. (24,000) 8,000 301,000
Cash, beginning of year ..................................... 644,000 636,000 335,000
------------ ------------ ------------
Cash, end of year ........................................... $ 620,000 $ 644,000 $ 636,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................... $ 2,257,000 $ 3,274,000 $ 8,542,000
============ ============ ============
Income taxes paid (refunded) - net .......................... $ (861,000) $ (9,482,000) $ 456,000
============ ============ ============
See notes to consolidated financial statements
F-5
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The Company is a distributor of electronic components manufactured by others.
The Company distributes a full range of semiconductors (active components),
including transistors, diodes, memory devices, microprocessors, microcontrollers
and other integrated circuits, as well as passive components, such as
capacitors, resistors, inductors and electromechanical products, including
cable, switches, connectors, filters and sockets. The Company's products are
sold primarily to original equipment manufacturers in a diverse and growing
range of industries, including manufacturers of computers and computer-related
products; home office and portable equipment; networking; satellite, wireless
and other communications products; Internet infrastructure equipment and
appliances; automobiles; consumer goods; voting and gaming machines;
point-of-sale equipment; robotics and industrial equipment; defense and
aerospace equipment; and medical instrumentation. The Company also sells
products to contract electronics manufacturers or electronics manufacturing
services providers who manufacture products for companies in all electronics
industry segments. The Company also designs and has manufactured certain memory
modules which are sold to original equipment manufacturers.
The Company's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States of America. Those
principles considered particularly significant are detailed below. GAAP requires
management to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues and expenses. While actual results may differ from
these estimates, management does not expect the variances, if any, to have a
material effect on the Consolidated Financial Statements.
Basis of Consolidation and Presentation
---------------------------------------
The Consolidated Financial Statements of the Company include the accounts of all
subsidiaries, all of which are wholly-owned. All material intercompany balances
and transactions have been eliminated in consolidation. The Company has
Canadian, Mexican and United Kingdom subsidiaries which conduct substantially
all of their business in U.S. dollars. The Company also has a South Korean
subsidiary which conducts its business in South Korean won. Presently the
business of the Company's South Korean subsidiary is not significant.
Prior years' financial statements have been reclassified to conform with the
current year's presentation.
Concentration of Credit Risk/Fair Values
----------------------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company,
from time to time, maintains cash balances which exceed the federal depository
insurance coverage limit. The Company performs periodic reviews of the relative
credit rating of its bank to lower its risk. The Company believes that
concentration with regards to accounts receivable is limited due to its large
customer base. Fair values of cash, accounts receivable, accounts payable and
long-term debt reflected in the December 31, 2003 and 2002 Consolidated Balance
Sheets approximate carrying value at these dates.
Market Risk
-----------
The Company's credit facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results.
F-6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Inventories
-----------
Inventories are stated at the lower of cost (determined on an average cost
basis) or market.
Fixed Assets
------------
Fixed assets are reflected at cost. Depreciation of office furniture and
equipment and computer equipment is provided on straight-line and accelerated
methods over the estimated useful lives of the respective assets. Amortization
of leasehold improvements is provided using the straight-line method over the
term of the related lease or the life of the respective asset, whichever is
shorter. Maintenance and repairs are charged to expense as incurred; major
renewals and betterments are capitalized.
Revenue Recognition
-------------------
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104").
Under SAB 104, revenue is recognized when there is persuasive evidence of an
arrangement, delivery has occurred or services have been rendered, the sales
price is determinable, and collectibility is reasonably assured. Revenue
typically is recognized at time of shipment. Sales are recorded net of
discounts, rebates, and returns.
Shipping and Handling Costs
---------------------------
Shipping and handling costs associated with inbound freight are included in cost
of sales. Shipping and handling costs associated with outbound freight are
included in selling, general and administrative expenses.
Advertising
-----------
The Company advertises in various national industry publications and trade
journals. Advertising expense is included in selling, general and administrative
expenses.
Income Taxes
------------
The Company has elected to file a consolidated federal income tax return with
its subsidiaries. Deferred income taxes are provided on transactions which are
reported in the financial statements in different periods than for income tax
purposes. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
difference is expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. See Note 5 to Notes to Consolidated Financial
Statements.
Stock-Based Compensation
------------------------
The Company has two stock option plans, which are described in Note 6 to Notes
to Consolidated Financial Statements. The Company applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations to account for the option plans using the intrinsic value
method. Accordingly, no compensation cost has been recognized for the option
plans. Had compensation cost for the option plans been determined using the fair
value based method, as defined in Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's
net earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below. The Company adopted Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" as of January 1, 2003,
which amended SFAS 123. The effect of the adoption of this
F-7
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Statement was not material as the Company continues to use the intrinsic value
method allowed under SFAS 123.
Years Ended December 31 2003 2002 2001
---------------------------------------------------------------------------------------------
Net earnings (loss):
As reported $ 546,000 $ 1,883,000 $(22,575,000)
Total stock-based employee
compensation expense, net of tax 41,000 (94,000) (31,000)
------------ ------------ ------------
Pro forma $ 505,000 $ 1,789,000 $(22,606,000)
============ ============ ============
Basic earnings (loss) per share:
As reported $.14 $.49 $(5.85)
Pro forma .13 .46 (5.86)
Diluted earnings (loss) per share:
As reported $.14 $.49 $(5.85)
Pro forma .13 .46 (5.86)
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 2003, 2002 and 2001, respectively: expected volatility of 103%,
108% and 105%; risk-free interest rate of 2.5%, 4.0% and 4.4%; and expected
lives of 2 to 8 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as future amounts are likely to be affected by the
number of grants awarded and since additional awards are generally expected to
be made at varying prices.
Earnings Per Share
------------------
Earnings per common share is computed by dividing net income by the weighted
average, during each period, of the number of common shares outstanding and for
diluted earnings per share also common equivalent shares outstanding.
The following average shares were used for the computation of basic and diluted
earnings per share:
Years Ended December 31 2003 2002 2001
--------------------------------------------------------------------------------
Basic.......................... 3,793,347 3,849,553 3,856,813
Diluted........................ 3,882,199 3,850,002 3,856,813
Statements of Cash Flows
------------------------
For purposes of the statements of cash flows, the Company considers all
investments purchased with an original maturity of three months or less to be
cash.
Excess of Cost Over Fair Value of Net Assets Acquired (Goodwill)
----------------------------------------------------------------
The Company periodically reviewed the value of its goodwill to determine if an
impairment had occurred. As part of this review, the Company measured the
estimated future operating cash flows of acquired businesses and compared that
with the carrying value of its goodwill. As a result of its review, the
Company's goodwill was fully written-off as of December 31, 2001. See Note 8 to
Notes to Consolidated Financial Statements.
F-8
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
New Accounting Pronouncements Applicable to the Company
-------------------------------------------------------
In December 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88, and 106" ("SFAS 132 (revised 2003)"), effective for
fiscal years beginning after December 15, 2002, subject to certain exemptions.
SFAS 132 (revised 2003) revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions," Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement retains the
disclosure requirements contained in Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"), which it replaces. It requires additional disclosures to
those in the original SFAS 132 about the assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. The required information should be provided
separately for pension plans and for other postretirement benefit plans. The
Company adopted SFAS 132 (revised 2003) as of January 1, 2003. The effect of the
adoption of this Statement was not material.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
December 31 2003 2002
-------------------------------------------------------------------------------
Office furniture and equipment................... $ 1,566,000 $ 2,454,000
Computer equipment............................... 1,922,000 3,434,000
Leasehold improvements........................... 1,839,000 1,790,000
----------- -----------
5,327,000 7,678,000
Accumulated depreciation and amortization........ (2,742,000) (4,882,000)
----------- -----------
$ 2,585,000 $ 2,796,000
=========== ===========
NOTE 3 - STOCK REPURCHASE PROGRAM
---------------------------------
In August 2002, the Company's Board of Directors authorized the continuance of
the stock repurchase program, originally approved by the Board and announced in
1999, which provided for the repurchase of up to $2.0 million in purchase price
of the Company's common stock. The stock repurchases may, at the discretion of
the Company's management, be made from time to time at prevailing prices in the
open market or through privately negotiated transactions. The Company's
management will base its decision on market conditions, the price of its common
stock, available cash flow and other factors. The Company does not currently
anticipate making stock repurchases during at least the first half of 2004. For
the year ended December 31, 2003, the Company repurchased 60,953 shares of its
common stock at an average price of $3.14 per share, or an aggregate price of
approximately $191,000, which, together with previous purchases since 1999,
represents 244,089 shares at an aggregate price of approximately $758,000
purchased under the program. Currently, shares purchased under this program are
immediately retired and become authorized and unissued shares of common stock
available for reissuance for any corporate purpose. See Note 6 to Notes to
Consolidated Financial Statements.
NOTE 4 - LONG-TERM DEBT
-----------------------
Line of Credit
--------------
On May 14, 2003, the Company entered into a $65 million credit facility (the
"Credit Facility") which expires May 14, 2006. The Company utilized the Credit
Facility to repay all outstanding borrowings under the Company's previous $60
million facility. Borrowings under the Credit Facility bear interest at one of
three
F-9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
pricing levels dependent on the Company's debt service coverage ratio at the
quarterly pricing date (as defined), and are secured by all of the Company's
assets including accounts receivable, inventories and equipment. At the first
pricing level, at the Company's option, the rate will be either (a) .5% over the
greater of the Federal funds rate plus .5% and prime or (b) 2.75% over LIBOR. At
the second level, at the Company's option, the rate will be either (a) 1% over
the greater of the Federal funds rate plus .5% and prime or (b) 3.25% over
LIBOR. At the third level, at the Company's option, the rate will be either (a)
1.5% over the greater of the Federal funds rate plus .5% and prime or (b) 3.75%
over LIBOR. In accordance with the Credit Facility, pricing was at the third
level until the Company's June 30, 2003 financial statements were received by
the Administrative Agent (the first pricing date). Based upon the debt service
coverage ratio as calculated using the June 30, 2003 financial statements, the
Company improved from the third pricing level to the first pricing level
effective in the middle of the third quarter of 2003. This improvement resulted
in a reduction of 100 basis points on the interest rates charged on the
Company's borrowings under the Credit Facility. This reduced rate continued
through the middle of November 2003, at which point the pricing level again
changed based on the September 30, 2003 financial statements. As of September
30, 2003 the debt service coverage ratio decreased and the Company reverted to
the third pricing level effective from the middle of the fourth quarter of 2003
to the present. This increase in the interest rates charged on the Company's
borrowings under its Credit Facility did not have a significant impact on
interest expense for the fourth quarter and twelve months of 2003. In connection
with the Credit Facility, interest expense for 2003 included non-cash
amortization of deferred financing fees of $208,000 and will reflect an
aggregate of $999,000 of deferred financing fees over the term of the Credit
Facility. As with our previous facility, the amounts that the Company may borrow
under the Credit Facility are based upon specified percentages of the Company's
eligible accounts receivable and inventories (as defined) and the Company is
required to comply with certain affirmative and negative covenants and certain
financial ratios. The covenants, among other things, place limitations and
restrictions on the Company's borrowings, investments, capital expenditures and
transactions with affiliates; prohibit dividends and acquisitions; and prohibit
stock redemptions in excess of an aggregate cost of $2.0 million during the term
of the Credit Facility. The Credit Facility requires the Company to maintain
certain minimum levels of tangible net worth throughout the term of the credit
agreement as well as a minimum debt service coverage ratio and a minimum
inventory turnover level, each tested on a quarterly basis. At December 31,
2003, outstanding borrowings under the Company's Credit Facility aggregated
$48,046,000 compared to $34,013,000 at December 31, 2002.
Under the terms of the Credit Facility, the Company may repay up to $5,150,000
of the subordinated debentures within 15 days prior to or after its maturity on
June 13, 2004 so long as the average excess availability (as defined in the
Credit Facility) for the three-month period immediately preceding the
consummation of such repayment is equal to at least $15.0 million and excess
availability (as defined in the Credit Facility) immediately after such
repayment is equal to at least $10.0 million. Management believes that the
Company will be able to repay the $5,150,000 subordinated debentures upon
maturity through the use of available borrowings under the Credit Facility.
There is, however, no assurance that the Company will be in a position, at the
time of maturity of the subordinated debentures, to utilize the Credit Facility
or to secure alternative sources of financing to repay the subordinated
debentures upon maturity.
Subordinated Debt
-----------------
In June 1994, the Company completed a private placement (the "1994 Private
Placement") of 51.5 units, with each unit consisting of a 9% non-convertible
subordinated debenture due 2004 in the principal amount of $100,000 issuable at
par, together with 1,500 common stock purchase warrants exercisable at $15.75
per share. The 51.5 units issued represent debentures aggregating $5,150,000
together with an aggregate of 77,250 warrants. The debentures are payable in
semi-annual installments of interest only commencing December 1, 1994, with the
principal amount maturing in full on June 13, 2004. The Company is not required
to make any mandatory redemptions or sinking fund payments. The debentures are
subordinated to the Company's senior indebtedness including the Company's credit
facility and notes issued to the Company's landlord. The 77,250 warrants were
valued at $2.50 per warrant as of the date of the 1994 Private Placement and,
accordingly, the Company recorded the discount in the aggregate amount of
$193,125 as additional paid-in capital. This discount is being amortized over
the ten-year term of the debentures and
F-10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
approximately $19,000 was expensed in each of 2003, 2002 and 2001. All of these
warrants expired during 1999.
In May 1994, the Company executed a twenty-year promissory note in the amount of
$865,000 in favor of the Company's landlord to finance substantially all of the
tenant improvements necessary for the Company's Miami facility. This $865,000
note, which is subordinate to the Company's credit facility, has a repayment
schedule with varying monthly payments of principal after the second year and
bears interest at 8% per annum. Certain additional improvements to the Company's
Miami corporate facility aggregating approximately $90,300 were financed as of
May 1, 1995 by the landlord. This $90,300 obligation is evidenced by a
promissory note payable in 240 consecutive, equal self-amortizing monthly
installments of principal and interest. This note, which is also subordinate to
the Company's credit facility, accrues interest at a fixed rate of 8% per annum.
In October 1996, the Company executed a promissory note in the amount of
$161,500 with the Company's landlord to finance certain additional improvements
to the Company's Miami corporate facility. This note, which is also subordinate
to the credit facility, is payable monthly with interest at 8.5% per annum and
matures in October 2011.
Other Long-Term Debt
--------------------
In connection with an employment agreement with an executive officer, an
unfunded postretirement benefit obligation of $1,171,000 is included in the
Consolidated Balance Sheets at December 31, 2003 and 2002.
Long-term debt of the Company as of December 31, 2003, other than the Company's
credit facility, matures as follows:
2004.......................................................... $ 5,199,000
2005.......................................................... 64,000
2006.......................................................... 76,000
2007.......................................................... 76,000
2008.......................................................... 79,000
Thereafter.................................................... 1,660,000
-----------
$ 7,154,000
===========
NOTE 5- INCOME TAXES
--------------------
The tax effects of the temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 2003 and 2002 are as follows:
Deferred tax assets: 2003 2002
----------- -----------
Accounts receivable......................... $ 835,000 $ 654,000
Inventory................................... 642,000 477,000
Accrued expenses............................ 1,004,000 776,000
Postretirement benefits..................... 575,000 580,000
Net operating loss.......................... 212,000 232,000
Other....................................... - 327,000
----------- -----------
3,268,000 3,046,000
Deferred tax liabilities:
Fixed assets................................ 176,000 219,000
Deferred financing.......................... 121,000 -
----------- -----------
Net deferred tax asset........................ $ 2,971,000 $ 2,827,000
=========== ===========
At December 31, 2003, $2,347,000 of the net deferred tax asset was included in
Other current assets and $624,000 was included in Deposits and other assets in
the accompanying Consolidated Balance Sheet.
F-11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The components of income tax expense (benefit) are as follows:
Years Ended December 31 2003 2002 2001
-------------------------------------------------------------------------------
Current
-------
Federal....................... $ 524,000 $ (1,463,000) $ (9,238,000)
State......................... 46,000 (414,000) (909,000)
------------ ------------ ------------
570,000 (1,877,000) (10,147,000)
------------ ------------ ------------
Deferred
--------
Federal....................... (116,000) 2,769,000 (1,913,000)
State......................... (28,000) 395,000 (523,000)
------------ ------------ ------------
(144,000) 3,164,000 (2,436,000)
------------ ------------ ------------
$ 426,000 $ 1,287,000 $(12,583,000)
============ ============ ============
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 2003 2002 2001
-------------------------------------------------------------------------------------------------
U.S. Federal income tax statutory rate.................... 34.0% 34.0% 35.0%
State income tax, net of federal income tax benefit....... 3.3 3.3 3.3
Goodwill amortization and other - including
non-deductible items.................................... 11.8 3.3 (2.5)
Foreign tax and net operating loss benefit................ (5.3) - -
----- ------ ------
Effective tax rate........................................ 43.8% 40.6% 35.8%
===== ====== ======
NOTE 6 - CAPITAL STOCK, OPTIONS AND WARRANTS
--------------------------------------------
In June 2000, the Company established the 2000 Nonemployee Director Stock Option
Plan, (the "Director Option Plan"). The Director Option Plan provides for awards
of options to purchase shares of common stock, $.01 par value per share, of the
Company to nonemployee directors of the Company. An aggregate of 75,000 shares
of the Company's common stock has been reserved for issuance under the Director
Option Plan. Under the Director Option Plan, on or about the day of each
nonemployee director's initial election to the Company's Board of Directors, he
or she is awarded nonqualified stock options to purchase at least 1,500 shares
of the Company's common stock but not more than 15,000 shares, and on the date
of each annual meeting of the shareholders of the Company each nonemployee
director is automatically awarded additional nonqualified stock options to
purchase 1,000 shares. Pursuant to the Director Option Plan, the Company granted
an aggregate of 4,500 stock options to four individuals during 2003, 4,500 stock
options to four individuals during 2002 and an aggregate of 4,500 stock options
to four individuals during 2001. The outstanding stock options that were granted
in 2003 have exercise prices ranging from $2.19 to $3.41. The outstanding stock
options that were granted in 2002 have exercise prices ranging from $1.96 to
$1.98. The outstanding stock options that were granted in 2001 have an exercise
price of $5.35. All exercise prices are based on fair market value at date of
grant and the options all vest over a two-year period and are exercisable over a
ten-year period. At December 31, 2003, 16,500 stock options were outstanding.
In 1987, the Company established the Option Plan. The Option Plan provides for
the granting to key employees of both "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and "nonqualified stock options" ("nonqualified stock options" are
options which do not comply with Section 422 of the Code) and for the granting
to nonemployee directors and independent contractors associated with the Company
of nonqualified stock options. Unless earlier terminated, the Option Plan will
continue in effect through April 18, 2009. The expiration of the Option Plan, or
its termination by the Board of Directors, will not affect any options
previously granted and then outstanding under the Option Plan. Such outstanding
options would remain in effect until they have been exercised, terminated or
have expired. A maximum of 1,100,000 shares of the Company's Common Stock has
been reserved for issuance upon the exercise of options granted under the Option
Plan, of
F-12
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
which 105,646 shares of common stock have been previously issued pursuant to the
exercise of options granted under the Option Plan and 994,354 shares of common
stock are available for issuance as of December 31, 2003 in connection with the
exercise of options outstanding and options to be granted.
In January 2004, subsequent to the balance sheet date the Company granted an
aggregate of 127,360 stock options to 126 individuals pursuant to the Option
Plan. These options have exercise prices ranging from $4.29 to $6.93 per share
(fair market value at date of grant), vest over a three-year period and are
exercisable over a four year period.
In connection with the cancellation in June 2001 of 88,900 stock options
previously granted pursuant to the Option Plan, the Company agreed with each of
the Company's employees electing such cancellation ("electing employees") to
issue no earlier than six months but no later than nine months from the date of
cancellation an equal number of options at the then fair market value of the
Company's common stock. The canceled options had exercise prices ranging from
$13.02 to $16.71 per share. Accordingly, in March 2002, the Company granted
81,000 options at an exercise price of $3.45 per share to the electing employees
who were still employed by the Company. These 81,000 options vest over two years
and are exercisable through March 3, 2005. At December 31, 2003, 70,650 of these
stock options were outstanding.
In connection with employment agreements between the Company and each of its
four executive officers entered into in May 1995, an aggregate of 200,000 stock
options were granted on June 8, 1995 to such four executive officers pursuant to
the Option Plan. These options, which became fully vested during 2000, have an
exercise price of $9.375 per share and are exercisable through June 7, 2005. The
number of stock options and exercise price per share reflect a one-for-five
reverse stock split which became effective on June 2, 1999. At December 31, 2003
these options remained unexercised.
A summary of options granted under the option plans and related information for
the years ended December 31, 2001, 2002 and 2003 follows:
Weighted Average
Options Exercise Price
---------- ----------------
Outstanding, December 31, 2000 750,034 $ 7.57
Weighted average fair value of options granted during 2000 4.36
Granted 12,250 5.75
Exercised (530) 4.19
Canceled (126,120) 11.47
----------
Outstanding, December 31, 2001 635,634 6.75
Weighted average fair value of options granted during 2001 3.88
Granted 85,500 3.37
Canceled (96,250) 5.68
----------
Outstanding, December 31, 2002 624,884 6.46
Weighted average fair value of options granted during 2002 1.93
Granted 329,510 1.92
Canceled (143,234) 5.69
----------
Outstanding, December 31, 2003 811,160 4.75
==========
Weighted average fair value of options granted during 2003 1.05
Options exercisable:
December 31, 2001 454,958 7.22
December 31, 2002 453,464 7.22
December 31, 2003 404,855 7.04
Exercise prices for options outstanding as of December 31, 2003 ranged from
$1.92 to $14.32. The weighted-average remaining contractual life of these
options is approximately 3 years. Outstanding options at December 31, 2003 were
held by 132 individuals.
F-13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As of December 31, 2002, the Company retired 219,196 shares of its common stock
which had previously been reflected as Treasury stock on the Consolidated
Balance Sheets. Included in the retirement were the 32,141 shares held by a
wholly-owned subsidiary of the Company in connection with certain acquisitions
by the Company in 1995.
NOTE 7 - STOCK PURCHASE RIGHTS
------------------------------
In June 2000, the Board of Directors of the Company adopted a Common Stock
Purchase Rights Plan (the "Rights Plan") and authorized and approved a dividend
distribution of one right (each a "Right" and collectively the "Rights") for
each outstanding share of common stock of the Company to shareholders of record
at the close of business on June 23, 2000. Each share of common stock of the
Company that is issued after June 23, 2000 will also include one Right.
Each Right initially entitles the registered holder to purchase from the
Company, but only when exercisable under the Rights Plan, one share of common
stock at a price of $95.00 per share, subject to certain future adjustments. The
Rights will be exercisable only if a person or group acquires 15% or more of the
Company's common stock (or 10% of such stock under certain circumstances) or
announces a tender offer the consummation of which would result in ownership by
a person or group of 15% or more of the common stock (or 10% or such stock under
certain circumstances). Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company the number of shares of the Company's common stock having a market value
equal to twice the exercise price of the Right.
If the Company is acquired in a merger or other business combination
transaction, or sells more than 50% of its assets or earning power, after a
person or group has acquired 15% or more of the Company's outstanding common
stock (or 10% of such stock under certain circumstances), each Right (other than
Rights owned by such person or group) will entitle its holder to purchase, at
the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price.
Following the acquisition by a person or group of 15% or more of the Company's
common stock (or 10% of such stock under certain circumstances) and prior to an
acquisition of 50% or more of the common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group) at an
exchange ratio of one share of common stock per Right.
Prior to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's common stock (or 10% of such stock under certain
circumstances), the Rights are redeemable for $.001 per Right at the option of
the Board of Directors. The Rights will expire on June 8, 2010.
NOTE 8 - IMPAIRMENT OF GOODWILL
-------------------------------
As of January 1, 2002, the Company adopted Financial Accounting Standards Board
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") which no
longer allows for the amortization of goodwill but requires that goodwill be
subject to annual impairment tests in accordance with the Statement. Prior to
the adoption of SFAS 142 the Company applied Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), and portions of
Accounting Principles Board Opinion 30, "Reporting the Results of Operations".
Under those rules the Company periodically reviewed the value of its goodwill to
determine if an impairment had occurred. As part of this review, the Company
measured the estimated future operating cash flows of acquired businesses and
compared that with the carrying value of its goodwill. As a result of its
review, the Company determined that impairments had occurred, and, accordingly,
write-downs aggregating $895,000 were recorded during 2001. As a result of these
write-downs, goodwill was fully written-off as of December 31, 2001.
F-14
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 9 - DISCONTINUED OPERATIONS
--------------------------------
As a result of an acquisition in 1995, the Company created Aved Display
Technologies ("ADT"), a separate division engaged in the design, development and
manufacture of several proprietary driver board products for flat panel display
applications. In the fourth quarter of 2000, the Company created a division
which operated under the name Integrated Display Technologies ("IDT"). This
division was intended to address customer needs for design, integration and
turnkey support for display solutions and specialized display applications. Due
to the overall weakness in the economy, the negative impact of the severe
broad-based industry downturn and other factors, ADT and IDT did not generate
cash flows as anticipated. As a result, management decided to discontinue these
divisions. The Company finalized its plan of disposal during the second quarter
of 2001. Accordingly, these divisions were accounted for as discontinued
operations and the results of operations for 2001 are segregated in the
accompanying Consolidated Statement of Operations. The loss on disposal of
$14,711,000 on a pretax basis included the estimated costs and expenses
associated with the disposal of $14,599,000 primarily made up of the write-off
of $4,488,000 of inventory and $7,442,000 of accounts receivable. The inventory
that was written off was subsequently scrapped and removed from stock. In
addition, the loss on disposal included a provision of $112,000 on a pretax
basis for operating losses during the phase-out period, which continued for
approximately two months. Sales from these divisions, including the related
turnkey support business, were $6,998,000 for 2001.
NOTE 10 - SPECIAL CHARGES
-------------------------
As a result of a slowing economy and a severe widespread industry downturn, the
Company was forced to write off certain accounts receivable during 2001
aggregating $5,220,000 which is reflected in Selling, general and administrative
expenses in the accompanying Consolidated Statement of Operations for the year
ended December 31, 2001.
During 2000, the Company's inventory levels increased substantially to support
higher levels of sales based on customer orders and forecasts. Inventory also
increased during 2000 as a result of the addition of major new suppliers and the
anticipated sales growth related thereto. During the fourth quarter of 2000, a
combination of excess product availability, a slowing economy and other factors
caused the industry to begin slowing down. As a result of this change, the
customer base had a significant amount of excess inventory. In an effort to
correct their inventory positions, customers began rescheduling and canceling
their orders and returned significant amounts of inventory. This accelerated
during the first half of 2001. Accordingly, the Company attempted to delay or
cancel purchase orders with its supplier base and to utilize its inventory
return privileges wherever possible. These efforts were made in an attempt to
achieve inventory levels which more closely supported the Company's reduced
backlog from its customers as well as to improve the Company's product mix. Even
after taking these measures, as adverse industry conditions accelerated and got
progressively worse, the prospect of customers taking inventory that was
returned to the Company or subject to rescheduled orders became more and more
remote. As a result of this and the severe industry downturn, the Company wrote
off unusable inventory during 2001 aggregating $13,375,000. The inventory that
was written off was subsequently scrapped and removed from stock. There can be
no assurance that adverse market conditions will not return and that further
corrections may not be necessary in the future.
NOTE 11 - OTHER INCOME
----------------------
In September 2002, the Company entered into an agreement with a customer to whom
the Company had previously supplied display integration and turnkey support. The
agreement provided, among other things, that the Company release the
then-existing indebtedness of the customer, which indebtedness had been
previously written off by the Company primarily in the nine-month period ended
September 30, 2001, and certain related security interests. In consideration of
these releases, the Company received $2,031,000 in cash and 11,000,000 shares,
$.01 par value per share, of common stock of this customer. These shares are not
registered under the Securities Act of 1933 and are not publicly traded. The
shares are subject to
F-15
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
a voting arrangement outside the control of the Company. As a result of the
voting arrangement, the Company has given up substantially all of its voting
rights. The Company has reflected the value of these shares in Deposits and
Other Assets in the accompanying Consolidated Balance Sheets at December 31,
2003 and December 31, 2002, based on an independent appraisal of these shares at
$19,000 as of the date these shares were received by the Company. The combined
value of the cash and stock, together with lease payments that the Company
previously collected from leases that were pledged to the Company as collateral
for the then existing indebtedness, aggregated $2,220,000, after deducting
related legal expenses associated with the transaction. This amount is reflected
as Other Income in the accompanying Consolidated Statements of Operations.
NOTE 12 - COMMITMENTS/RELATED PARTY TRANSACTIONS
------------------------------------------------
In May 1994, the Company entered into a new lease with its then existing
landlord to lease a 110,800 square foot facility for its corporate headquarters
and Miami distribution center. The lease has a term expiring in 2014 (subject to
the Company's right to terminate at any time after the fifth year of the term
upon twenty-four months prior written notice and the payment of all outstanding
debt owed to the landlord). The lease gives the Company three six-year options
to renew at the fair market value rental rates. The lease is currently in its
tenth year and provides for annual fixed rental payments totaling approximately
$346,200 in year ten; and in each year thereafter during the term, the rent
shall increase once per year in an amount equal to the annual percentage
increase in the consumer price index not to exceed 4% in any one year.
The Company also leases approximately 20,000 square feet of space for its west
coast distribution and semiconductor programming center located in Fremont,
California (near San Jose) and leases a 5,200 square foot facility near Denver,
Colorado which is dedicated to certain value-added services and a regional
distribution center. This Colorado lease replaced the Company's previous lease
for 7,100 square feet in Denver, Colorado. In Tustin, California the Company
leases a 13,900 square foot facility for its Aved Memory Products division.
During 1998, the Company entered into a lease for approximately 20,000 square
feet of space in San Jose, California to house its expanded west coast corporate
offices and the headquarters of the Company's sales and marketing functions, as
well as its northern California sales operation. Approximately 12,000 square
feet of the space is being used for corporate offices including the office of
the President and Chief Executive Officer of the Company and 8,000 square feet
of the space is being utilized for the sales operation.
The Company leases space for its other sales offices, which range in size from
approximately 1,000 square feet to 10,000 square feet. The leases for these
offices expire at various dates and include various escalation clauses and
renewal options.
Approximate minimum future lease payments required under operating leases for
office and distribution facility leases as well as equipment leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 2003, are as follows:
YEAR ENDING DECEMBER 31
-----------------------
2004.......................................................... $3,300,000
2005.......................................................... 2,700,000
2006.......................................................... 2,000,000
2007.......................................................... 1,100,000
2008.......................................................... 600,000
Thereafter.................................................... 2,500,000
F-16
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Total rent expense for office and distribution facility leases, including real
estate taxes and net of sublease income, amounted to approximately $3,782,000,
$3,955,000 and $3,600,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Effective January 1, 1988, the Company established a deferred compensation plan
(the "1988 Deferred Compensation Plan") for executive officers and key employees
of the Company. The employees eligible to participate in the 1988 Deferred
Compensation Plan (the "Participants") are chosen at the sole discretion of the
Board of Directors upon a recommendation from the Board of Directors'
Compensation Committee. Pursuant to the 1988 Deferred Compensation Plan,
commencing on a Participant's retirement date, he or she will receive an annuity
for ten years. The amount of the annuity shall be computed at 30% of the
Participant's Salary, as defined. Any Participant with less than ten years of
service to the Company as of his or her retirement date will only receive a pro
rata portion of the annuity. Retirement benefits paid under the 1988 Deferred
Compensation Plan will be distributed monthly. The Company paid benefits under
this plan of approximately $53,600, $15,600 and $15,600, respectively, during
each of 2003, 2002 and 2001, $38,000 of which was paid to an executive officer.
At December 31, 2003, 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 $169,000. The
retirement benefit accrual under this plan was $426,000 at December 31, 2003.
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 the year 2003, no contributions were made to the plan. For 2002
and 2001 the Company committed to contribute $115,000 and $110,000 respectively,
under this plan. Participants in the plan will vest in their plan benefits over
a ten-year period. If the participant's employment is terminated due to death,
disability or due to a change in control of management, they will vest 100% in
all benefits under the plan. Retirement benefits will be paid, as selected by
the participant, based on the sum of the net contributions made and the net
investment activity. The retirement benefit accrual under this plan was $708,000
at December 31, 2003.
During 2000, employment agreements with two of the Company's executive officers
were amended whereby the term, among other things, was extended through December
31, 2005. In addition, during 2000 the Company entered into new agreements with
two other executive officers on similar terms as were contained in their
previous employment agreements with the Company. These new agreements have an
initial term that expired on December 31, 2003 and provide for automatic
one-year renewals unless either party notifies their intention not to renew the
agreements.
In connection with an employment agreement with an executive officer, an
unfunded postretirement benefit obligation of $1,171,000 is included in Other
long-term debt in the accompanying Consolidated Balance Sheets at December 31,
2003 and 2002.
The Company maintains a 401(k) plan (the "401(k) Plan"), which is intended to
qualify under Section 401(k) of the Internal Revenue Code. All full-time
employees of the Company are eligible to participate in the 401(k) Plan after
completing 90 days of employment. During 2003, each eligible employee could
elect to contribute to the 401(k) Plan, through payroll deductions, up to 100%
of his or her salary, limited to $12,000 in 2003. The Company's 401(k) Plan
provides for discretionary matching contributions by the Company. During 2001
and in prior years, the Company's 401(k) Plan provided for standard matching
contributions by the Company in the amount of 25% on the first 6% contributed of
each participating employee's salary. The Company expensed $0, $0 and $443,000
for matching contributions for the years ended December 31, 2003, 2002 and 2001,
respectively.
F-17
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company entered into a lease for residential space in San Jose, California
with a partnership which includes two of the Company's executive officers. The
lease provides for rental payments of $4,800 per month through January 1, 2006.
In consideration of the impact of the severe industry downturn on the Company,
the partnership reduced the monthly rent to $3,400 in 2001. Towards the end of
2002 rental payments were increased to approximately $4,300 per month, still
below the rental amount provided for under the lease. The Company paid a total
of approximately $51,200 to this partnership during 2003.
NOTE 13 - CONTINGENCIES
-----------------------
From time to time the Company may be named as a defendant in suits for product
defects, breach of warranty, breach of implied warranty of merchantability,
patent infringement or other actions relating to products which it distributes
which are manufactured by others. In those cases, the Company expects that the
manufacturer of such products will indemnify the Company to the extent provided
for under its agreement with the manufacturer, as well as defend such actions on
the Company's behalf, although there can be no assurance that the manufacturers
will do so. Recently, there has been a trend throughout the United States of
increased litigation over various employee and intellectual property matters.
While the Company is presently involved in certain litigation relating to such
matters, the Company believes that none of these claims should have a material
adverse impact on its financial condition or results of operations. The Company
believes, however, that the costs associated with such matters may increase in
the future. There can be no assurance that a particular litigation will not have
a material adverse impact on the Company's financial condition or results of
operations in the future. With respect to products manufactured or assembled for
Aved Memory Products, the Company offers a warranty for a period of one year
against defects in workmanship and materials under normal use and service. The
warranty applies to products in their original unmodified condition and is
subject to the Company's terms and conditions.
The Company continues to guarantee the future payment to a third party of
certain leases which were previously pledged to the Company as collateral for
the payment of outstanding receivables which were owed by this customer. This
guaranty was made when the leases were sold to this third party who paid to the
Company in 2001 the net present value of the future payments of the leases. The
maximum exposure under this guaranty, which continues through the latest lease
expiration date of March 31, 2006, was $601,000 with a net present value of
$510,000 at December 31, 2003.
NOTE 14 - ECONOMIC DEPENDENCY
-----------------------------
For each of the years ended December 31, 2003, 2002 and 2001, purchases from one
supplier were in excess of 10% of the Company's total annual purchases and
aggregated approximately $40,842,000, $52,830,000 and $57,980,000, respectively.
The net outstanding accounts payable to this supplier at December 31, 2003, 2002
and 2001 amounted to approximately $5,296,000, $632,000 and $1,413,000,
respectively. For each of the years ended December 31, 2003, 2002 and 2001, no
customer accounted for more than 6% of the Company's sales. Sales to customers'
locations in foreign countries totaled $42,011,000, $38,085,000 and $15,233,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
F-18
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Description Period Expenses Accounts Deductions of Period
------------------------- ------------ ------------ ----------- ------------ -------------
Allowance for Doubtful
Accounts
2003 $ 1,718,000 $ 1,121,000 $ - $ (589,000) $ 2,250,000
2002 $ 1,845,000 $ 756,000 $ - $ (883,000) $ 1,718,000
2001 $ 3,283,000 $ 1,335,000 $ - $ (2,773,000) $ 1,845,000
S-1