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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
--or--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number: 0-16207
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16115 Northwest 52nd Avenue, Miami, Florida 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 9, 2005, 3,930,466 shares of the common stock of All American
Semiconductor, Inc. were outstanding.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
FORM 10-Q - INDEX
Part Item Page
No. No. Description No.
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I FINANCIAL INFORMATION:
1. Financial Statements
Consolidated Condensed Balance Sheets at June 30, 2005
(Unaudited) and December 31, 2004............................................. 1
Consolidated Condensed Statements of Income for the Quarters and Six Months
Ended June 30, 2005 and 2004 (Unaudited)...................................... 2
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004 (Unaudited)........................... 3
Notes to Consolidated Condensed Financial Statements (Unaudited)................ 4
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 9
3. Quantitative and Qualitative Disclosures about Market Risk...................... 14
4. Controls and Procedures......................................................... 15
II OTHER INFORMATION:
6. Exhibits........................................................................ 15
SIGNATURES...................................................................... 15
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30 December 31
ASSETS 2005 2004
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(Unaudited)
Current assets:
Cash .......................................................... $ 582,000 $ 645,000
Accounts receivable, less allowances for doubtful
accounts of $2,399,000 and $1,955,000 ........................ 75,393,000 69,010,000
Inventories ................................................... 66,376,000 67,608,000
Other current assets .......................................... 2,392,000 4,370,000
------------- -------------
Total current assets ......................................... 144,743,000 141,633,000
Property, plant and equipment - net ............................. 5,144,000 3,185,000
Deposits and other assets ....................................... 2,363,000 2,648,000
------------- -------------
$ 152,250,000 $ 147,466,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Current portion of long-term debt ............................. $ 497,000 $ 705,000
Accounts payable .............................................. 47,083,000 41,100,000
Accrued expenses .............................................. 5,585,000 5,499,000
Other current liabilities ..................................... 331,000 197,000
------------- -------------
Total current liabilities .................................... 53,496,000 47,501,000
Long-term debt:
Notes payable ................................................. 73,521,000 75,174,000
Subordinated debt ............................................. 680,000 714,000
Other long-term debt .......................................... 1,063,000 1,063,000
------------- -------------
128,760,000 124,452,000
------------- -------------
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,
3,930,391 and 3,893,161 shares issued and outstanding ........ 39,000 39,000
Capital in excess of par value ................................ 25,854,000 25,747,000
Accumulated deficit ........................................... (2,403,000) (2,772,000)
------------- -------------
23,490,000 23,014,000
------------- -------------
$ 152,250,000 $ 147,466,000
============= =============
See notes to consolidated condensed financial statements
1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Quarters Six Months
PERIODS ENDED JUNE 30 2005 2004 2005 2004
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NET SALES ......................... $ 111,214,000 $ 106,909,000 $ 205,523,000 $ 205,151,000
Cost of sales ..................... (92,926,000) (88,606,000) (171,471,000) (169,854,000)
------------- ------------- ------------- -------------
Gross profit ...................... 18,288,000 18,303,000 34,052,000 35,297,000
Selling, general and
administrative expenses ......... (16,659,000) (15,575,000) (31,304,000) (30,135,000)
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS ............ 1,629,000 2,728,000 2,748,000 5,162,000
Interest expense .................. (1,140,000) (931,000) (2,153,000) (1,801,000)
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES ........ 489,000 1,797,000 595,000 3,361,000
Income tax provision .............. (181,000) (772,000) (226,000) (1,445,000)
------------- ------------- ------------- -------------
NET INCOME ........................ $ 308,000 $ 1,025,000 $ 369,000 $ 1,916,000
============= ============= ============= =============
EARNINGS PER SHARE:
Basic ............................. $.08 $.27 $.09 $.51
==== ==== ==== ====
Diluted ........................... $.08 $.25 $.09 $.47
==== ==== ==== ====
See notes to consolidated condensed financial statements
2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30 2005 2004
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Cash Flows Provided By (Used For) Operating Activities .......... $ 3,964,000 $ (17,170,000)
------------- -------------
Cash Flows From Investing Activities:
Acquisition of property and equipment ........................... (2,332,000) (112,000)
Decrease in other assets ........................................ 92,000 117,000
------------- -------------
Cash flows provided by (used for) investing activities ...... (2,240,000) 5,000
------------- -------------
Cash Flows From Financing Activities:
Borrowings under line of credit agreement ....................... 202,268,000 215,607,000
Repayments under line of credit agreement ....................... (203,705,000) (193,709,000)
Repayments of notes payable ..................................... (457,000) (5,179,000)
Net proceeds from issuance of equity securities ................. 107,000 400,000
------------- -------------
Cash flows provided by (used for) financing activities ...... (1,787,000) 17,119,000
------------- -------------
Decrease in cash ................................................ (63,000) (46,000)
Cash, beginning of period ....................................... 645,000 620,000
------------- -------------
Cash, end of period ............................................. $ 582,000 $ 574,000
============= =============
Supplemental Cash Flow Information:
Interest paid ................................................... $ 1,856,000 $ 1,658,000
============= =============
Income taxes paid (refunded) - net .............................. $ (1,102,000) $ 1,075,000
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In June 2004, the Company entered into a financing arrangement with a third
party to finance $1.1 million related to the purchase of a portion of a new
enterprise resource planning system.
See notes to consolidated condensed financial statements
3
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited Consolidated Condensed
Financial Statements include all adjustments (consisting of normal recurring
accruals or adjustments only) necessary to present fairly the financial position
at June 30, 2005, and the results of operations and the cash flows for all
periods presented. The results of operations for the interim periods are not
necessarily indicative of the results to be obtained in any future interim
period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 2004) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 2004, including the
consolidated financial statements and notes thereto which should be read in
conjunction with these financial statements.
The accompanying unaudited interim financial statements have been prepared in
accordance with instructions to Form 10-Q and, therefore, do not include all
information and footnotes required to be in conformity with accounting
principles generally accepted in the United States of America.
Stock-Based Compensation
------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations to account for the option
plans using the intrinsic value method. The Company grants its options based on
market value; accordingly, no compensation cost has been recognized for the
option plans. Had compensation cost for the option plans been determined using
the fair value based method, as defined in Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the
Company's net earnings and earnings per share would have been adjusted to the
pro forma amounts indicated below. The Company adopted Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123" as of
January 1, 2003, which amended SFAS 123. The effect of the adoption of this
Statement was not material as the Company continues to use the intrinsic value
method allowed under SFAS 123. Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (SFAS 123 (revised 2004)), requires
the recognition of compensation costs related to services received in exchange
for awards of equity instruments based on the grant-date fair value of those
awards. SFAS 123 (revised 2004) required compliance beginning with the first
interim or annual report beginning on or after June 15, 2005. In April 2005, the
Securities and Exchange Commission amended the date for compliance with SFAS 123
(revised 2004) until the first
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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interim or annual reporting period of the first fiscal year beginning on or
after June 15, 2005. Accordingly, the Company will discontinue application of
the intrinsic method and will adopt SFAS 123 (revised 2004) for the fiscal year
beginning January 1, 2006.
Quarters Six Months
Periods Ended June 30 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------
Net earnings:
As reported $308,000 $1,025,000 $369,000 $1,916,000
Pro forma 307,000 1,024,000 368,000 1,882,000
Basic earnings per share:
As reported $.08 $.27 $.09 $.51
Pro forma .08 .27 .09 .50
Diluted earnings per share:
As reported $.08 $.25 $.09 $.47
Pro forma .07 .25 .09 .46
During the quarter and six months ended June 30, 2005 and the quarter ended June
30, 2004 no options were granted. During the second quarter of 2005 certain
previously issued options became vested. During the quarter ended March 31, 2005
no options became vested. 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 the six months ended June 30, 2004:
expected volatility of 87%; risk-free interest rate of 2.8%; and expected lives
of 2 to 5 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.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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2. EARNINGS PER SHARE
The following table sets forth the calculation of earnings per share on a basic
and diluted basis:
Quarters Six Months
PERIODS ENDED JUNE 30 2005 2004 2005 2004
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BASIC EARNINGS PER SHARE:
-------------------------
Net Income .................................. $ 308,000 $ 1,025,000 $ 369,000 $ 1,916,000
============ ============ ============ ============
Weighted Average Shares Outstanding ......... 3,926,791 3,811,213 3,919,620 3,789,136
============ ============ ============ ============
Basic Earnings Per Share .................... $.08 $.27 $.09 $.51
==== ==== ==== ====
DILUTED EARNINGS PER SHARE:
---------------------------
Net Income .................................. $ 308,000 $ 1,025,000 $ 369,000 $ 1,916,000
============ ============ ============ ============
Weighted Average and Dilutive Shares:
Weighted average shares outstanding ....... 3,926,791 3,811,213 3,919,620 3,789,136
Dilutive shares ........................... 178,480 346,783 198,767 318,338
------------ ------------ ------------ ------------
4,105,271 4,157,996 4,118,387 4,107,474
============ ============ ============ ============
Diluted Earnings Per Share .................. $.08 $.25 $.09 $.47
==== ==== ==== ====
Basic earnings per share are determined by dividing the Company's net income by
the weighted average shares outstanding. Diluted earnings per share include any
dilutive effects of outstanding stock options.
Excluded from the calculation of earnings per share are stock options to
purchase 84,390 common shares in the quarter and six months ending June 30, 2005
and 228,050 common shares in the quarter and six months ending June 30, 2004, as
their inclusion would have been antidilutive.
3. LONG-TERM DEBT
Line of Credit
--------------
On August 8, 2005, subsequent to the balance sheet date, the Company's line of
credit facility was amended to increase the facility to $100 million from $85
million and to extend the term from May 14, 2006 to May 31, 2009. Additionally,
the Company's credit facility was amended to, among other things, reduce the
interest rate margins and increase the advance rate on certain of the Company's
inventory. Borrowings under the Company's $100 million credit facility, as
amended (the "Credit Facility"), bear interest at one of five 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) .25% below the greater of the
Federal funds rate plus .5% and prime or (b) 1.75% over LIBOR. At the second
level, at the Company's option, the rate will be either (a) the greater of the
Federal funds rate plus .5% and prime or (b) 2.00% over LIBOR. At the third
level, at the Company's option, the rate will be either (a) .25% over the
greater of the Federal funds rate plus .5% and prime or (b) 2.25% over LIBOR. At
the fourth pricing level, at the Company's option, the rate will be either (a)
.5% over the greater of the
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
Federal funds rate plus .5% and prime or (b) 2.50% over LIBOR. At the fifth
pricing level, at the Company's option, the rate will be either (a) .75% over
the greater of the Federal funds rate plus .5% and prime or (b) 2.75% over
LIBOR. In addition to the improved pricing levels, the advance rate used in
determining the borrowing base under the Credit Facility was increased to 50%
from 40% on certain of the Company's inventory. 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). 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 $2,000,000 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. As part of the
August 2005 amendment, the minimum debt service coverage ratio was reduced from
1.20:1.0 to 1.10:1.0 beginning with the quarterly period ending September 30,
2005 and the unused commitment fee was reduced from a range of .25% to .375%
depending on the then pricing levels to .15% at all five pricing levels.
In connection with the interest rate charged under its Credit Facility prior to
this recent amendment, the Company improved from the then third pricing level at
the beginning of 2004, to the then first pricing level effective in the middle
of the third quarter of 2004. This improvement in pricing levels continued
through the first half of 2005. The improvement to the first pricing level,
which aggregated 100 basis points, was based on the Company achieving an
increase in its debt service coverage ratio as calculated pursuant to its Credit
Facility. The Company was in compliance with all covenants under its credit
facility at June 30, 2005. At June 30, 2005, outstanding borrowings under the
Company's credit facility aggregated $73,521,000 compared to $74,958,000 at
December 31, 2004.
4. OPTIONS
Option Plan
-----------
During the quarter ended June 30, 2005, no stock options were granted by the
Company pursuant to the Employees', Officers', Directors' Stock Option Plan, as
previously amended and restated (the "Option Plan"). During the quarter ended
June 30, 2005, a total of 211,760 stock options previously granted pursuant to
the Option Plan were canceled at exercise prices ranging from $1.92 to $14.32
per share. During the quarter ended June 30, 2005, a total of 7,667 stock
options previously granted pursuant to the Option Plan were exercised at
exercise prices ranging from $1.92 to $3.27 per share.
During the quarter ended March 31, 2005, no stock options were granted by the
Company pursuant to the Option Plan. During the quarter ended March 31, 2005, a
total of 29,231 stock options previously granted pursuant to the Option Plan
were canceled at exercise prices ranging from $1.92 to $5.64 per share. During
the quarter ended March 31, 2005, a total of 29,563 stock options previously
granted pursuant to the Option Plan were exercised at exercise prices ranging
from $1.92 to $5.64 per share.
Director Option Plan
--------------------
During the six months ended June 30, 2005, no stock options were granted by the
Company pursuant to the 2000 Nonemployee Director Stock Option Plan, as amended.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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5. STOCK REPURCHASE PROGRAM
The Company repurchased no shares of its common stock during the six months
ended June 30, 2005 in connection with the Company's stock repurchase program,
which provides for the repurchase of up to $2.0 million in purchase price of the
Company's common stock. To date the Company has repurchased 244,089 shares at an
aggregate price of $758,000 under this program. Shares purchased under this
program are immediately retired and become authorized and unissued shares of
common stock available for reissuance for any corporate purpose. The Company
presently does not intend to make further stock repurchases at the current
market prices.
6. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Management believes that the Company is operating in a single business segment,
distribution of electronic components, in accordance with the rules of Statement
of Financial Accounting Standards No. 131 ("Disclosure About Segments of an
Enterprise and Related Information").
Sales by geographic areas are as follows:
Quarters Six Months
Periods Ended June 30 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------------------
Americas (1)............................... $ 99,796,000 $ 99,129,000 $ 185,436,000 $ 191,024,000
Europe..................................... 4,418,000 3,625,000 8,907,000 7,340,000
Asia/Pacific............................... 7,000,000 4,155,000 11,180,000 6,787,000
--------------- -------------- --------------- ---------------
$ 111,214,000 $ 106,909,000 $ 205,523,000 $ 205,151,000
=============== ============== =============== ===============
(1) Includes sales in the United States and Puerto Rico of $90,890,000 and
$92,312,000 for the quarters ended June 30, 2005 and 2004 and $172,240,000
and $173,632,000 for the six months ended June 30, 2005 and 2004.
Long-lived assets (property, plant and equipment - net) are located
substantially in the Americas and include long-lived assets in the United States
of $5,140,000 and $3,177,000 at June 30, 2005 and December 31, 2004.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
All American Semiconductor, Inc. and its subsidiaries (the "Company") is a
distributor of electronic components manufactured by others. The Company
distributes a full range of semiconductors (active components), including
transistors, diodes, memory devices, microprocessors, microcontrollers, other
integrated circuits, active matrix displays and various board-level products, as
well as passive/electromechanical components. Passive products include
capacitors, resistors and inductors. Electromechanical products include power
supplies, 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; office and home office equipment; cellular and portable products;
wireless products; networking, satellite and other communications products;
Internet infrastructure equipment and appliances; automobiles and automotive
subsystems; consumer goods; voting and gaming machines; point-of-sale equipment;
robotics and industrial equipment; defense and aerospace equipment; home
entertainment; security and surveillance 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 by third parties under the label of its
subsidiary's division, certain memory modules which are sold to original
equipment manufacturers.
Overview
--------
Industry conditions, which had improved during the first half of 2004, began to
slow during the second half of 2004 and remained relatively soft through the
first quarter of 2005. From the end of the second quarter of 2004 through the
first quarter of 2005 we experienced a decline in sales. Industry conditions
improved slightly during the second quarter of 2005 with sales increasing 18%
sequentially over sales for the first quarter of this year. While industry
conditions continue to be challenging, the Company was able to increase its
backlog of customer orders from $69 million at December 31, 2004 to $80 million
at June 30, 2005. At June 30, 2004, our customer backlog was $86 million.
While we expect that the future growth in global markets will include growth in
the Americas, the Company believes that growth rates will be higher in Asian
markets and possibly European markets as well. To further support the continuing
trend for business to transfer outside of North America, as well as to take
advantage of developments in industry trends towards consolidation, the Company
is expanding and expects to continue to expand further. There can be no
assurance that the Company will achieve any growth in any particular market in
the future.
Critical Accounting Policies and Estimates
------------------------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the unaudited Consolidated Condensed Financial Statements and
accompanying notes. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts, inventories, income taxes, a
postretirement benefit obligation and loss contingencies. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results could differ
from these estimates under different assumptions or conditions.
The Company believes there have been no significant changes, during the six
month period ended June 30, 2005, to the items disclosed as critical accounting
policies and estimates in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's Annual Report on Form 10-K
for the year ended December 31, 2004.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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Results of Operations
---------------------
Net sales for the quarter and six months ended June 30, 2005 were $111.2 million
and $205.5 million representing a 4.0% and .2% increase from net sales of $106.9
million and $205.2 million for the same periods of 2004. Sales for the second
quarter of 2005 increased 17.9% sequentially from sales for the first quarter of
2005 and reflected the Company's highest quarterly sales level since the first
quarter of 2001. The increases in sales reflect a slight improvement in industry
conditions during the second quarter of 2005. The first quarter of 2005 was
impacted by a softness that carried over from the second half of 2004. As a
result, sales for the six months ended June 30, 2005 were impacted by the
softness of the first quarter which more than offset the increase in sales for
the second quarter of 2005. While sales for the second quarter of 2005 improved
significantly over the first quarter of 2005, management believes that it is
still difficult to determine how strong the balance of 2005 will be.
Gross profit was $18.3 million and $34.1 million for the second quarter and
first six months of 2005 compared to $18.3 million and $35.3 million for the
same periods of 2004. Although sales increased 4% for the second quarter of 2005
over the same quarter of 2004, gross profit for the quarterly periods was flat
due to a slight reduction in the gross profit margin for the second quarter of
2005. For the six months ended June 30, 2005 gross profit decreased from the
same period of 2004 due to a decline in the gross profit margin. Gross profit
margins as a percentage of net sales were 16.4% and 16.6% for the second quarter
and first six months of 2005 compared to 17.1% and 17.2% for the second quarter
and first six months of 2004. The decreases in gross profit margins reflect
declines of .6 points and .7 points in the gross profit margins on sales of
active products for the second quarter and first six months of 2005 compared to
the same periods of 2004. Sales of active products represented 90% and 89% of
total sales for the second quarter and six months ended June 30, 2005 compared
to 88% of total sales for each of the second quarter and six months ended June
30, 2004. Additionally, the decreases in gross profit margins reflect an
increase in sales of 43% and 24% for the second quarter and first half of 2005
compared to the same periods of 2004 in connection with low margin, large volume
transactions. For the first half of 2005 the impact from the decline in gross
profit margins on active products as well as from the increase in low margin,
large volume transactions more than offset a 9% reduction during the first
quarter of 2005 in sales to accounts that require aggressive pricing programs.
Furthermore, profit margins continue to be under downward pressure as a result
of slight oversupply conditions that exist in the market. Management expects
that the downward pressure on gross profit margins will continue as a result of
the anticipation of a greater number of low margin, large volume transactions in
the future and the anticipation of an increase in sales to accounts that require
aggressive pricing programs.
Selling, general and administrative expenses ("SG&A") was $16.7 million for the
second quarter of 2005 compared to $15.6 million for the second quarter of 2004.
SG&A was $31.3 million for the first half of 2005 compared to $30.1 million for
the first six months of 2004. SG&A for the second quarter and first six months
of 2005 reflects increases in variable expenses of $333,000 and $555,000
notwithstanding the decreases in gross profit dollars for the second quarter and
first six months of 2005 compared to the same periods of 2004. These increases
in variable expenses reflect increases in commission rates resulting from
pressure in labor markets. In addition to the increases in variable expenses,
fixed expenses increased $751,000 for the second quarter of 2005 and $728,000
for the first six months of 2005 compared to the 2004 periods. The increases in
fixed expenses related primarily to increases in compensation expense and
maintenance and repairs during the second quarter of 2005. For the first half of
2005, the increase in fixed expenses was partially offset by a reduction in
other expenses including occupancy costs. The Company is expanding and expects
to continue to expand further, including personnel additions, to enhance our
position in order to take advantage of industry consolidation and the continuing
trends for business to transfer outside of North America. In addition, in
connection with a new enterprise resource planning (ERP) system which is
expected to be implemented during the third quarter of 2005, SG&A will increase
by approximately $200,000 per quarter representing the depreciation and
amortization of the cost of the new ERP system over a seven year period.
Accordingly, the Company expects that SG&A will increase in future periods.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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SG&A as a percentage of net sales was 15.0% and 15.2% for the quarter and six
months ended June 30, 2005 compared to 14.6% and 14.7% for the same periods of
2004. The increases in SG&A as a percentage of net sales reflect the increases
in SG&A in absolute dollars discussed above which more than offset the impact
from the increases in sales.
Income from operations was $1.6 million and $2.7 million for the quarter and six
months ended June 30, 2005 compared to $2.7 million and $5.2 million for the
same periods of 2004. The decreases in income from operations were due to the
decline in gross profit dollars and the increase in SG&A as discussed
previously.
Interest expense increased to $1.1 million and $2.2 million for the second
quarter and first six months of 2005 compared to $931,000 and $1.8 million for
the second quarter and first six months of 2004. The increases in interest
expense resulted from increases in average borrowings and increases in overall
interest rates. Our average borrowings increased by $3.7 million and $8.0
million for the second quarter and first six months of 2005 compared to the same
periods of 2004 primarily as a result of increases in our accounts receivable.
Accounts receivable increased in connection with the increase in sales,
particularly towards the end of the second quarter of 2005. Overall interest
rates increased despite the positive impact from the Company improving its
pricing levels under its credit facility and a positive impact from repayment of
fixed-rate debt. The Company improved from the then third pricing level under
its credit facility at the beginning of 2004 to the then first pricing level
effective in the middle of the third quarter of 2004. This improvement in
pricing levels continued through the first half of 2005. The improvement to the
first pricing level, which aggregated 100 basis points, was based on the Company
achieving an increase in its debt service coverage ratio as calculated pursuant
to the credit facility. On June 14, 2004, the Company repaid $5.2 million of 9%
subordinated debt with borrowings under the credit facility at lower interest
rates. The positive impact on interest expense from the improvement in pricing
levels and the repayment of fixed-rate debt with lower interest rate debt was
more than offset by the adverse effect from interest rate hikes by the Federal
Reserve Board. If the Federal Reserve continues to increase interest rates as
anticipated, interest expense will increase. However, the improvement to the
first pricing level under the credit facility prior to the recent amendment, as
well as a reduction in interest rate margins of approximately 100 basis points
associated with the August 8, 2005 amendment to the credit facility, will
continue to have a positive effect on interest expense when compared to the
prior year. Interest expense for the second quarter and first six months of 2005
included non-cash amortization of deferred financing fees of $96,000 and
$193,000. As a result of the recent amendment which extended the term of the
credit facility to May 31, 2009, non-cash amortization of deferred financing
fees will be reduced to approximately $30,000 per quarter and interest expense
will reflect an aggregate of $1.2 million of deferred financing fees over the
term of the amended credit facility. See "Liquidity and Capital Resources" below
and Note 3 to Notes to Consolidated Condensed Financial Statements (Unaudited).
Net income for the second quarter of 2005 was $308,000 (or $.08 per share
(diluted)), compared to $1.0 million (or $.25 per share (diluted)) for the
second quarter of 2004. For the first six months of 2005, net income was
$369,000 (or $.09 per share (diluted)) compared to $1.9 million (or $.47 per
share (diluted)) for the 2004 period.
Liquidity and Capital Resources
-------------------------------
Working capital at June 30, 2005 decreased to $91.2 million from working capital
of $94.1 million at December 31, 2004. The current ratio was 2.71:1 at June 30,
2005 compared to 2.98:1 at December 31, 2004. The decreases in working capital
and the current ratio were primarily due to an increase in accounts payable as
well as a slight decrease in inventory and other current assets. These changes
were partially offset by an increase in accounts receivable. Accounts receivable
was $75.4 million at June 30, 2005 compared to $69.0 million at December 31,
2004. The increase in accounts receivable reflects an increased level of sales
towards the latter part of the second quarter of 2005 compared to the latter
part of
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
the fourth quarter of 2004. Accounts payable increased to $47.1 million at June
30, 2005 from $41.1 million at December 31, 2004 in connection with an increase
in the level of purchases made during the latter part of the second quarter of
2005 over the same period of the fourth quarter of 2004.
At June 30, 2005, the Company had subordinated debt with various maturities
through 2015 which aggregated $747,000 including the current portion of such
debt, and had an unfunded postretirement benefit obligation of $1.1 million. See
the table below.
On August 8, 2005, subsequent to the balance sheet date, the Company's line of
credit facility was amended to increase the facility to $100 million from $85
million and to extend the term from May 14, 2005 to May 31, 2009. Additionally,
the Company's credit facility was amended to, among other things, reduce the
interest rate margins and increase the advance rate on certain of the Company's
inventory. Borrowings under the Company's $100 million credit facility, as
amended (the "Credit Facility"), bear interest at one of five 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) .25% below the greater of the
Federal funds rate plus .5% and prime or (b) 1.75% over LIBOR. At the second
level, at the Company's option, the rate will be either (a) the greater of the
Federal funds rate plus .5% and prime or (b) 2.00% over LIBOR. At the third
level, at the Company's option, the rate will be either (a) .25% over the
greater of the Federal funds rate plus .5% and prime or (b) 2.25% over LIBOR. At
the fourth 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) 2.50%
over LIBOR. At the fifth pricing level, at the Company's option, the rate will
be either (a) .75% over the greater of the Federal funds rate plus .5% and prime
or (b) 2.75% over LIBOR. In addition to the improved pricing levels, the advance
rate used in determining the borrowing base under the Credit Facility was
increased to 50% from 40% on certain of the Company's inventory. 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). 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. As part of the August 2005 amendment, the minimum
debt service coverage ratio was reduced from 1.20:1.0 to 1.10:1.0 beginning with
the quarterly period ending September 30, 2005 and the unused commitment fee was
reduced from a range of .25% to .375% depending on the then pricing levels to
.15% at all five pricing levels.
In connection with the interest rate charged under the Credit Facility prior to
this recent amendment, the Company improved from the then third pricing level at
the beginning of 2004, to the then first pricing level effective in the middle
of the third quarter of 2004. This improvement in pricing levels continued
through the first half of 2005. The improvement to the first pricing level,
which aggregated 100 basis points, was based on the Company achieving an
increase in its debt service coverage ratio as calculated pursuant to the Credit
Facility. The Company was in compliance with all covenants under its credit
facility at June 30, 2005. At June 30, 2005, outstanding borrowings under the
Company's credit facility aggregated $73.5 million compared to $75.0 million at
December 31, 2004. See Note 3 to Notes to Consolidated Condensed Financial
Statements (Unaudited).
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Long-term debt, operating leases and other long-term obligations as of June 30,
2005 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) ..................... $ 74,698,000 $ 497,000 $ 231,000 $ 73,702,000 $ 268,000
Operating leases ....................... 10,500,000 3,200,000 4,500,000 1,400,000 1,400,000
Other long-term obligations (2) ........ 1,063,000 - - - 1,063,000
------------ ------------ ------------ ------------ ------------
Total obligations ...................... $ 86,261,000 $ 3,697,000 $ 4,731,000 $ 75,102,000 $ 2,731,000
============ ============ ============ ============ ============
_________
(1) Reflected on the Company's Consolidated Condensed Balance Sheet (Unaudited)
as of June 30, 2005 and includes $73,521,000 under the Company's Credit
Facility which matures on May 31, 2009.
(2) Reflected on the Company's Consolidated Condensed Balance Sheet (Unaudited)
as of June 30, 2005 and represents a postretirement benefit obligation.
In June 2004 the Company entered into a software license and services agreement
in connection with a new enterprise resource planning (ERP) system. The
aggregate cost of this new ERP system, including estimated costs of training and
implementation, is now expected to be approximately $4.5 to $5.0 million. The
expected cost reflects an increase in hardware requirements as well as software
development costs. At June 30, 2005, $2.7 million associated with this ERP
system has been reflected in property, plant and equipment - net on the
Consolidated Condensed Balance Sheet. In July 2004, the Company financed $1.1
million of its ERP costs with a third party finance company under an installment
payment arrangement. At June 30, 2005, the outstanding balance under this
arrangement was $430,000 which is payable in two equal quarterly installments of
approximately $217,000 through January 1, 2006. The effective interest rate
under this agreement is 1.9% per annum. In addition, the Company has arranged
financing for an additional $1.9 million of the aggregate cost of the ERP system
with another third party finance company, which financing arrangement is
expected to have maturities through May 2008 based upon the Company's
anticipated utilization of the financing arrangement and has an effective
interest rate of 2.2% per annum.
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, including
obligations related to the current portion of long-term debt and operating
leases.
Off-Balance Sheet Arrangements
------------------------------
The Company continues to guarantee the future payment to a third party of
certain leases which were previously pledged to the Company as collateral for
the payment of outstanding receivables which were owed by a customer. This
guaranty was made when the leases were sold to this third party who paid to the
Company in 2001 the net present value of the future payments of the leases. As
of June 30, 2005, the Company had made unreimbursed payments aggregating $74,000
under this guaranty as a result of nonpayments of rental amounts by lessees. The
Company plans to seek recovery from the lessees for any amounts that the Company
pays under its guaranty. There can be no assurance, however, that the Company
will be successful in recovering all amounts paid under its guaranty. At June
30, 2005 the maximum additional exposure under this guaranty, which continues
through the latest lease expiration date of March 31, 2006, was $165,000 with a
net present value of $157,000.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Forward-Looking Statements; Business Risks and Uncertainties
------------------------------------------------------------
This Form 10-Q contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations, beliefs and intentions relating to the
Company's or industry's future performance, market conditions, its future
operating results, bookings, backlogs, sales, products, services and markets
(including expansion of operations in Asia and Europe), trends or developments
including relating to industry conditions or future growth in global markets,
and/or future events relating to or affecting the Company and its business and
operations. If and when used in this Form 10-Q, the words "believes,"
"estimates," "plans," "expects," "attempts," "intends," "anticipates," "could,"
"may," "explore" and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements. The actual
performance, results or achievements of the Company could differ materially from
those indicated by the forward-looking statements because of various risks and
uncertainties. Factors that could adversely affect the Company's future results,
performance or achievements include, without limitation: the level of strength
of industry and market conditions and business activity being less than we
believe or failing to continue and/or further improve; a tightening by customers
of their inventory levels; a slowdown in sales; the continuance of a trend for
electronics manufacturing to move offshore; the level of effectiveness of the
Company's business and marketing strategies, including those outside the
Americas and particularly in Asia; insufficient funds from operations, from the
Company's Credit Facility and from other sources (debt and/or equity) to support
the Company's operations or the inability of the Company to obtain additional
financing when needed or on terms acceptable to the Company; an increase in
interest rates, including as a result of interest rate hikes by the Federal
Reserve Board, and/or an increase in the Company's average outstanding
borrowings; a reduction in the level of demand for products of its customers
including the level of growth of some of the new technologies supported by the
Company; deterioration in the relationships with existing suppliers,
particularly one of our largest suppliers; decreases in gross profit margins,
including decreasing margins resulting from the Company being required to have
aggressive pricing programs, an increasing number of low-margin, large volume
transactions, inventory oversupply conditions and/or increases in the costs of
goods; problems with telecommunication, computer and information systems,
including related to the completion of the installation of the new ERP system
and the effectiveness of the operation thereof; the inability of the Company to
expand its product offerings or obtain product during periods of allocation; the
impact from changes in accounting rules; adverse currency fluctuations; the
adverse impact of terrorism or the threat of terrorism on the economy; and the
other risks and factors detailed in this Form 10-Q and in the Company's Form
10-K for the fiscal year ended December 31, 2004 and other filings with the
Securities and Exchange Commission and in its press releases. These risks and
uncertainties are beyond the ability of the Company to control. In many cases,
the Company cannot predict the risks and uncertainties that could cause actual
results to differ materially from those indicated by the forward-looking
statements. The Company undertakes no obligation to update publicly or revise
any forward-looking statements, business risks and/or uncertainties.
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company's Credit Facility bears interest based on interest rates tied to the
Federal funds rate, prime or LIBOR rate, any of which may fluctuate over time
based on economic conditions. As a result, the Company is subject to market risk
for changes in interest rates and could be subjected to increased or decreased
interest payments if market interest rates fluctuate. If market interest rates
increase, the impact may have a material adverse effect on the Company's
financial results. 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 $184,000 per quarter based on outstanding
borrowings at June 30, 2005. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of the end of the period covered by this report, we evaluated, under the
supervision and with the participation of our management, including our chief
executive officer and the chief financial officer, the effectiveness of the
design and operation of our "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934, Rules 13a - 15(e) and 15d - 15(e)). Based
on this evaluation our 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 were effective to ensure that all
material information required to be filed in this report has been made known to
them.
Changes In Internal Controls Over Financial Reporting
-----------------------------------------------------
There have been no changes in internal controls over financial reporting that
occurred during the most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 6. Exhibits
------- --------
Exhibits
--------
10.1 Second Amendment to Credit Agreement, dated as of August 8,
2005, among the Company, as borrower, and Harris N.A.,
successor by merger to Harris Trust and Savings Bank, as a
lender and administrative agent, U.S. Bank National
Association, as a lender and co-agent, and the other lenders
party thereto (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K for events the
earliest of which occurred August 8, 2005 and filed on August
10, 2005).
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.
________________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
All American Semiconductor, Inc.
---------------------------------------------
(Registrant)
Date: August 12, 2005 /s/ BRUCE M. GOLDBERG
---------------------------------------------
Bruce M. Goldberg, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 2005 /s/ HOWARD L. FLANDERS
---------------------------------------------
Howard L. Flanders, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
15