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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
--or--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
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, 2004, 3,880,571 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, 2004
(Unaudited) and December 31, 2003................................................ 1
Consolidated Condensed Statements of Income for the Quarters and Six Months
Ended June 30, 2004 and 2003 (Unaudited)......................................... 2
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 (Unaudited).............................. 3
Notes to Consolidated Condensed Financial Statements (Unaudited)................... 4
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 7
3. Quantitative and Qualitative Disclosures about Market Risk......................... 12
4. Controls and Procedures............................................................ 12
II OTHER INFORMATION:
6. Exhibits and Reports on Form 8-K................................................... 12
SIGNATURES......................................................................... 13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30 December 31
ASSETS 2004 2003
-------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash ......................................................... $ 574,000 $ 620,000
Accounts receivable, less allowances for doubtful
accounts of $2,625,000 and $2,250,000 ...................... 68,332,000 53,817,000
Inventories .................................................. 76,457,000 58,173,000
Other current assets ......................................... 3,310,000 3,794,000
------------- -------------
Total current assets ....................................... 148,673,000 116,404,000
Property, plant and equipment - net ............................ 3,402,000 2,585,000
Deposits and other assets ...................................... 3,098,000 3,384,000
------------- -------------
$ 155,173,000 $ 122,373,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Current portion of long-term debt ............................ $ 480,000 $ 5,199,000
Accounts payable and accrued expenses ........................ 60,509,000 47,859,000
Other current liabilities .................................... 289,000 134,000
------------- -------------
Total current liabilities .................................. 61,278,000 53,192,000
Long-term debt:
Notes payable ................................................ 70,588,000 48,046,000
Subordinated debt ............................................ 747,000 778,000
Other long-term debt ......................................... 1,063,000 1,177,000
------------- -------------
133,676,000 103,193,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued .................................... - -
Common stock, $.01 par value, 40,000,000 shares authorized,
3,874,461 and 3,760,001 shares issued and outstanding ...... 39,000 38,000
Capital in excess of par value ............................... 25,521,000 25,121,000
Accumulated deficit .......................................... (4,063,000) (5,979,000)
------------- -------------
21,497,000 19,180,000
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$ 155,173,000 $ 122,373,000
============= =============
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 2004 2003 2004 2003
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NET SALES .................... $ 106,909,000 $ 71,932,000 $ 205,151,000 $ 141,801,000
Cost of sales ................ (88,606,000) (57,967,000) (169,854,000) (113,954,000)
------------- ------------- ------------- -------------
Gross profit ................. 18,303,000 13,965,000 35,297,000 27,847,000
Selling, general and
administrative expenses .... (15,575,000) (13,187,000) (30,135,000) (26,385,000)
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS ....... 2,728,000 778,000 5,162,000 1,462,000
Interest expense ............. (931,000) (668,000) (1,801,000) (1,244,000)
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES ... 1,797,000 110,000 3,361,000 218,000
Income tax provision ......... (772,000) (47,000) (1,445,000) (94,000)
------------- ------------- ------------- -------------
NET INCOME ................... $ 1,025,000 $ 63,000 $ 1,916,000 $ 124,000
============= ============= ============= =============
EARNINGS PER SHARE:
Basic ........................ $.27 $.02 $.51 $.03
==== ==== ==== ====
Diluted ...................... $.25 $.02 $.47 $.03
==== ==== ==== ====
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 2004 2003
---------------------------------------------------------------------------------------------
Cash Flows Used For Operating Activities ..................... $(17,170,000) $ (2,940,000)
------------ ------------
Cash Flows From Investing Activities:
Acquisition of property and equipment ........................ (112,000) (319,000)
Decrease (increase) in other assets .......................... 117,000 (915,000)
------------ ------------
Cash flows provided by (used for) investing activities ... 5,000 (1,234,000)
------------ ------------
Cash Flows From Financing Activities:
Net borrowings under line of credit agreement ................ 21,898,000 4,254,000
Repayments of notes payable .................................. (5,179,000) (30,000)
Net proceeds from issuance of equity securities .............. 400,000 -
Purchase of treasury shares .................................. - (59,000)
------------ ------------
Cash flows provided by financing activities .............. 17,119,000 4,165,000
------------ ------------
Decrease in cash ............................................. (46,000) (9,000)
Cash, beginning of period .................................... 620,000 644,000
------------ ------------
Cash, end of period .......................................... $ 574,000 $ 635,000
============ ============
Supplemental Cash Flow Information:
Interest paid ................................................ $ 1,658,000 $ 1,196,000
============ ============
Income taxes paid (refunded) - net ........................... $ 1,075,000 $ (46,000)
============ ============
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, 2004, 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, 2003) and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 2003, including the
consolidated financial statements and notes thereto which should be read in
conjunction with these financial statements.
The accompanying unaudited interim financial statements have been prepared in
accordance with instructions to Form 10-Q and, therefore, do not include all
information and footnotes required to be in conformity with accounting
principles generally accepted in the United States of America.
Stock-Based Compensation
------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations to account for the option
plans using the intrinsic value method. Accordingly, no compensation cost has
been recognized for the option plans. Had compensation cost for the option plans
been determined using the fair value based method, as defined in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net earnings and earnings per share
would have been adjusted to the pro forma amounts indicated below. The Company
adopted Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" as of January 1, 2003, which amended SFAS 123. The effect of
the adoption of this statement was not material as the Company continues to use
the intrinsic value method allowed under SFAS 123.
Quarters Six Months
Periods Ended June 30 2004 2003 2004 2003
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Net earnings:
As reported ................. $ 1,025,000 $ 63,000 $ 1,916,000 $ 124,000
Pro forma ................... 1,024,000 63,000 1,882,000 83,000
Basic earnings per share:
As reported ................. $.27 $.02 $.51 $.03
Pro forma ................... .27 .02 .50 .02
Diluted earnings per share:
As reported ................. $.25 $.02 $.47 $.03
Pro forma ................... .25 .02 .46 .02
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 87% for the quarter
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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and six months ended June 30, 2004, compared to 109% for the same periods of
2003; risk-free interest rate of 2.8% for the quarter and six months ended June
30, 2004, compared to 4.1% for the same periods of 2003; and expected lives of 2
to 5 years for all periods presented.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as future amounts are likely to be affected by the
number of grants awarded and since additional awards are generally expected to
be made at varying prices.
Earnings Per Share
------------------
The following average shares were used for the computation of basic and diluted
earnings per share:
Quarters Six Months
Periods Ended June 30 2004 2003 2004 2003
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Basic...................... 3,811,213 3,808,448 3,789,136 3,814,106
Diluted.................... 4,157,996 3,857,476 4,107,474 3,832,586
2. LONG-TERM DEBT
The Company's line of credit facility was amended as of June 11, 2004 to
increase the credit facility to $85 million from $65 million and to amend
certain provisions. Borrowings under the Company's $85 million credit facility,
as amended (the "Credit Facility"), which expires May 14, 2006, 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. Based upon the debt service coverage ratio as
calculated using the Company's December 31, 2003 financial statements, the
Company was at the third pricing level for the first quarter of 2004. Based upon
the debt service coverage ratio as calculated using the March 31, 2004 financial
statements, the Company improved from the third pricing level to the second
pricing level effective in the middle of the second quarter of 2004. This
improvement resulted in a reduction of 50 basis points on the interest rates
charged on the Company's borrowings under the Credit Facility. This decrease in
the interest rates charged on the Company's borrowings under the Credit Facility
did not have a significant impact on interest expense for the second quarter and
first six months of 2004. Based upon the debt service coverage ratio as
calculated using the June 30, 2004 financial statements, we will improve further
to the first pricing level during the third quarter of 2004. In connection with
the Credit Facility, interest expense for the second quarter and first six
months of 2004 included non-cash amortization of deferred financing fees of
$85,000 and $169,000, respectively. Interest expense will reflect an aggregate
of $1,099,000 of deferred financing fees over the term of the Credit 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.
5
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
On June 14, 2004, the Company utilized available borrowings under the Credit
Facility to repay in full $5,150,000 of subordinated debentures that had
matured.
At June 30, 2004, outstanding borrowings under the Company's Credit Facility
aggregated $69,944,000.
3. OPTIONS
Option Plan
-----------
During the quarter ended June 30, 2004, 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, 2004, a total of 750 stock options previously granted pursuant to the
Option Plan were canceled at an exercise price of $4.29 per share. During the
quarter ended June 30, 2004, a total of 89,960 stock options previously granted
pursuant to the Option Plan were exercised at exercise prices ranging from $3.27
to $5.64 per share.
During the quarter ended March 31, 2004, 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. During the quarter ended March 31, 2004, a total of 34,670
stock options previously granted pursuant to the Option Plan expired or were
canceled at exercise prices ranging from $1.92 to $7.20 per share. During the
quarter ended March 31, 2004, a total of 23,750 stock options previously granted
pursuant to the Option Plan were exercised at exercise prices ranging from $3.27
to $5.64 per share.
Director Option Plan
--------------------
During the quarter and six months ended June 30, 2004, no stock options were
granted by the Company pursuant to the 2000 Nonemployee Director Stock Option
Plan, as amended (the "Director Stock Option Plan"). During the quarter ended
June 30, 2004, 750 stock options previously granted pursuant to the Director
Stock Option Plan were exercised at an exercise price of $1.96 per share. During
the quarter ended March 31, 2004, a total of 3,500 stock options previously
granted pursuant to the 2000 Nonemployee Director Stock Option Plan, as amended,
expired or were canceled at exercise prices ranging from $1.98 to $10.53 per
share.
4. STOCK REPURCHASE PROGRAM
The Company repurchased no shares of its common stock during the quarter ended
June 30, 2004 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
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
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All American Semiconductor, Inc. and its subsidiaries (the "Company") is a
distributor of electronic components manufactured by others. The Company
distributes a full range of semiconductors (active components), including
transistors, diodes, memory devices, microprocessors, microcontrollers and other
integrated circuits, as well as passive components, such as capacitors,
resistors, inductors and electromechanical products, including cable, switches,
connectors, filters and sockets. These products are sold primarily to original
equipment manufacturers in a diverse and growing range of industries, including
manufacturers of computers and computer-related products; home office and
portable equipment; networking, satellite, wireless and other communications
products; Internet infrastructure equipment and appliances; automobiles;
consumer goods; voting and gaming machines; point-of-sale equipment; robotics
and industrial equipment; defense and aerospace equipment; and medical
instrumentation. The Company also sells products to contract electronics
manufacturers, or electronics manufacturing services, or EMS, providers who
manufacture products for companies in all electronics industry segments. Through
the Aved Memory Products division of its subsidiary, Aved Industries, Inc., the
Company also designs and has manufactured under the label of its subsidiary's
division certain memory modules which are sold to original equipment
manufacturers.
Overview
--------
The Company began seeing signs that a recovery of North American markets was
underway in the third quarter of 2003 as supplier pricing began to firm,
component lead times began to stretch out and customer backlog began to grow.
These signs of improvement continued through the second quarter of 2004 as sales
grew in the second quarter of 2004 by 9% over sales for the first quarter of
2004, representing the Company's fifth sequential quarterly sales increase.
Operating income for the second quarter of 2004 was at the highest quarterly
level since the end of the last industry upcycle. The Company's results for the
second quarter of 2004 reflected a combination of strong industry conditions as
well as the benefits of our operating efficiencies. Additionally, our backlog of
customer orders improved from $68 million at December 31, 2003 to $86 million at
June 30, 2004.
The global semiconductor market grew by 35 percent for the first half of 2004 to
$101.5 billion compared to $75 billion for the first half of 2003. 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 is continuing its efforts to increase its
offshore presence. The Company has operations in the United Kingdom to support
the European market and in Southeast Asia and Northeast Asia to support the
Asian markets. The Company expects to expand further into these territories.
Sales to customers' locations in foreign countries were $15.2 million for the
second quarter of 2004 compared to $14.3 million for the second quarter of 2003.
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, 2004, 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, 2003.
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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, 2004 were $106.9 million
and $205.2 million, respectively, representing a 48.6% and 44.7% increase from
net sales of $71.9 million and $141.8 million for the same periods of 2003.
Sales for the second quarter of 2004 increased by 8.8% compared to sales for the
first quarter of 2004 and reflected our fifth sequential quarterly sales
increase. Sales for the second quarter of 2004 reflected improved industry
conditions and strength across many market segments.
Gross profit was $18.3 million and $35.3 million for the second quarter and
first six months of 2004, up 31.1% and 26.8% from $14.0 million and $27.8
million for the same periods of 2003. The increases in gross profit were
primarily due to the increases in net sales which more than offset the declines
in gross profit margins. Gross profit margins as a percentage of net sales were
17.1% and 17.2% for the second quarter and first six months of 2004 compared to
19.4% and 19.6% for the second quarter and first six months of 2003. The
decreases in gross profit margins reflect long-term strategic relationships with
accounts that require aggressive pricing programs as well as a larger number of
low margin, large volume transactions. Downward pressure on our gross profit
margins is further impacted by a change in our product mix. Management expects a
greater number of low margin, large volume transactions in the future and
therefore expects long term downward pressure on gross profit margins.
Selling, general and administrative expenses ("SG&A") were $15.6 million for the
second quarter of 2004 compared to $13.2 million for the second quarter of 2003.
SG&A for the first half of 2004 was $30.1 million compared to $26.4 million for
the first six months of 2003. The increases in SG&A reflect increases in
variable expenses associated with the growth in sales and gross profit dollars
as well as increases in certain discretionary expenditures. As industry
conditions have continued to improve, the Company has begun to strategically
increase its personnel in North America. Furthermore, 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 markets. The Company expects to expand
further into these territories. Due to these factors, as well as variable
expenses continuing to increase as and if sales and gross profit increase, the
Company expects that SG&A will increase in future periods.
SG&A as a percentage of net sales improved to 14.6% and 14.7% for the quarter
and six months ended June 30, 2004, from 18.3% and 18.6% for the same periods of
2003. The improvements in SG&A as a percentage of net sales reflect the
substantial increases in net sales as well as the benefits of our operating
efficiencies as the increases in sales more than offset the increases in SG&A.
Income from operations increased over 250% to $2.7 million and $5.2 million for
the second quarter and first six months of 2004 compared to $778,000 and $1.5
million for the second quarter and first six months of 2003. The increases in
income from operations were due to the increases in sales and gross profit
dollars as discussed previously, which increases more than offset the increases
in SG&A described above. This was the highest level of quarterly operating
income we have achieved since the end of the last industry upcycle, and
represented a 12.1% increase over operating income for the first quarter of
2004.
Interest expense increased to $931,000 and $1.8 million for the second quarter
and first six months of 2004 compared to $668,000 and $1.2 million for the same
periods of 2003. The increases in interest expense resulted from increases in
our average borrowings. The increases in interest expense associated with the
increased borrowings were partially offset by decreases in overall interest
rates. Our average borrowings increased by $22 million and $19 million for the
second quarter and first six months of 2004 when compared to the second quarter
and first six months of 2003. The increases in average borrowings were due to
increases in our inventory and accounts receivable associated with the
significant increases in sales. Our inventory levels increased to support the
increased levels of sales beginning
8
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
towards the end of 2003 and the continuing growth in sales during the first six
months of 2004. At the same time, our accounts receivable levels also increased
as a result of the increased sales levels during the first six months of 2004
particularly towards the end of the second quarter. If business conditions
continue to improve and the Company's working capital needs continue to increase
to support the Company's growth, outstanding borrowings under the Credit
Facility will increase and, as a result, interest expense will grow.
Additionally, if the Federal Reserve increases interest rates as anticipated,
interest expense will increase. The adverse impact from these factors will be
partially offset by the repayment in full of $5,150,000 of 9% subordinated
debentures on June 14, 2004 with borrowings under the Credit Facility at present
lower interest rates as well as by a reduction in the interest rate margin
charged under the Credit Facility as a result of the Company's improving to the
first pricing level during the third quarter of 2004. Interest expense for the
second quarter and first six months of 2004 included non-cash amortization of
deferred financing fees of $85,000 and $169,000, respectively. Interest expense
will reflect an aggregate of $1.1 million of deferred financing fees over the
term of the Credit Facility. See "Liquidity and Capital Resources" below and
Note 2 to Notes to Consolidated Condensed Financial Statements (Unaudited).
Net income for the quarter ended June 30, 2004 was $1.0 million (or $.25 per
share (diluted)), up more than fifteen-fold from net income of $63,000 (or $.02
per share (diluted)) for the second quarter of 2003. For the first six months of
2004, net income was $1.9 million (or $.47 per share (diluted)), a fourteen-fold
increase from $124,000 (or $.03 per share (diluted)) for the 2003 period.
Liquidity and Capital Resources
-------------------------------
Working capital at June 30, 2004 increased to $87.4 million from working capital
of $63.2 million at December 31, 2003. The current ratio was 2.43:1 at June 30,
2004 compared to 2.19:1 at December 31, 2003. The increase in working capital
and the current ratio were primarily due to increases in accounts receivable and
inventory as well as a decrease in the current portion of long-term debt. These
factors more than offset an increase in accounts payable and accrued expenses.
Accounts receivable was $68.3 million at June 30, 2004 compared to $53.8 million
at December 31, 2003. The increase in accounts receivable reflects a higher
level of sales towards the latter part of the second quarter of 2004 compared to
the latter part of the fourth quarter of 2003. Inventory levels were $76.5
million at June 30, 2004 compared to $58.2 million at December 31, 2003. The
increase primarily reflects higher inventory levels needed to support the
increased level of sales and customer backlog and anticipated increases in
future sales. Management expects that, if sales levels continue their sequential
quarterly increases, the Company's inventory may continue to increase in
subsequent periods. Accounts payable and accrued expenses increased to $60.5
million at June 30, 2004 from $47.9 million at December 31, 2003 due primarily
to increased purchases of inventory in connection with the increased level of
sales and customer backlog.
On June 14, 2004, the Company utilized available borrowings under the Credit
Facility to repay in full $5,150,000 of subordinated debentures that had
matured.
At June 30, 2004, the Company had subordinated debt with various maturities
through 2015 which aggregated $809,000, including the current portion of such
debt, and had an unfunded postretirement benefit obligation of $1,063,000. See
the table below.
The Company's line of credit facility was amended as of June 11, 2004 to
increase the credit facility to $85 million from $65 million and to amend
certain provisions. Borrowings under the Company's $85 million credit facility,
as amended (the "Credit Facility"), which expires May 14, 2006, 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
9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
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. Based upon the debt service coverage ratio as
calculated using the Company's December 31, 2003 financial statements, the
Company was at the third pricing level for the first quarter of 2004. Based upon
the debt service coverage ratio as calculated using the March 31, 2004 financial
statements, the Company improved from the third pricing level to the second
pricing level effective in the middle of the second quarter of 2004. This
improvement resulted in a reduction of 50 basis points on the interest rates
charged on the Company's borrowings under the Credit Facility. This decrease in
the interest rates charged on the Company's borrowings under the Credit Facility
did not have a significant impact on interest expense for the second quarter and
first six months of 2004. Based upon the debt service coverage ratio as
calculated using the June 30, 2004 financial statements, we will improve further
to the first pricing level during the third quarter of 2004. In connection with
the Credit Facility, interest expense for the second quarter and first six
months of 2004 included non-cash amortization of deferred financing fees of
$85,000 and $169,000, respectively. Interest expense will reflect an aggregate
of $1.1 million of deferred financing fees over the term of the Credit 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 June 30, 2004, outstanding borrowings under the
Company's Credit Facility aggregated $69.9 million. See Note 2 to Notes to
Consolidated Condensed Financial Statements (Unaudited).
Long-term debt, operating leases and other long-term obligations as of June 30,
2004 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)................ $ 71,815,000 $ 480,000 $ 70,804,000 $ 168,000 $ 363,000
Operating leases.................. 12,500,000 3,400,000 5,900,000 1,000,000 2,200,000
Other long-term obligations (2)... 1,063,000 - - - 1,063,000
-------------- -------------- -------------- -------------- --------------
Total obligations................. $ 85,378,000 $ 3,880,000 $ 76,704,000 $ 1,168,000 $ 3,626,000
============== ============== ============== ============== ==============
---------
(1) Reflected on the Company's Consolidated Condensed Balance Sheet (Unaudited)
as of June 30, 2004 and includes $69,944,000 under the Company's Credit
Facility which matures on May 14, 2006.
(2) Reflected on the Company's Consolidated Condensed Balance Sheet (Unaudited)
as of June 30, 2004 and includes a postretirement benefit obligation of
$1,063,000.
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 expected to be approximately $3 million. At June 30, 2004,
$1.1 million associated with this ERP system has been reflected in Property,
plant and equipment - net on the accompanying Consolidated Condensed Balance
Sheet (Unaudited). The Company has financed $1.1 million of the ERP system with
a third party financing company and expects to finance the balance of the
purchase price also with third party financing companies. The financing
agreement in place as well as additional financing agreements to be completed
are expected to have maturities through May 2008.
10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
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. The
Company continues to explore additional sources of financing in order to support
its growth.
Off-Balance Sheet Arrangements
------------------------------
The Company continues to guarantee the future payment to a third party of
certain leases which were previously pledged to the Company as collateral for
the payment of outstanding receivables which were owed by a customer. This
guaranty was made when the leases were sold to this third party who paid to the
Company in 2001 the net present value of the future payments of the leases. The
maximum exposure under this guaranty, which continues through the latest lease
expiration date of March 31, 2006, was $446,000 with a net present value of
$393,000 at June 30, 2004.
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, its improved operating efficiencies,
its future operating results, its bookings, sales, products, services and
markets (including expansion of operations in Asia and Europe), the continuing
of positive signals with respect to industry and market conditions and business
activity (including strength in many market segments) and/or future events
relating to or affecting the Company and its business and operations, including
continuing increasing sales levels in future quarters, and All American's
attainment of new customers and success with new business opportunities and
global expansion. 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 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; the continuance of a trend for electronics manufacturing
to move offshore; the level of effectiveness of the Company's business and
marketing strategies, including those outside North America and particularly in
Asia; 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; 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 and/or increases
in the costs of goods; problems with telecommunication, computer and information
systems; the inability of the Company to expand its product offerings or obtain
product during periods of allocation; the 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, 2003 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.
11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company's Credit Facility bears interest based on interest rates tied to the
Federal funds rate, prime or LIBOR, any of which may fluctuate over time based
on economic conditions. As a result, the Company is subject to market risk for
changes in interest rates and could be subjected to increased or decreased
interest payments if market interest rates fluctuate. If market interest rates
increase, the impact may have a material adverse effect on the Company's
financial results. For each 100 basis point fluctuation in the interest rates
charged on the Company's borrowings under its Credit Facility, interest expense
would increase or decrease by $175,000 per quarter based on outstanding
borrowings at June 30, 2004. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
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 and Reports on Form 8-K
------- --------------------------------
(a) Exhibits
--------
10.1 First Amendment to Credit Agreement dated as of June 11, 2004.
10.2 Software License and Services Agreement dated as of June 30,
2004 by and between the Company and PeopleSoft USA, Inc.
11.1 Statement Re: Computation of Per Share Earnings (Unaudited).
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.
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K dated April 22, 2004 was filed on April
22, 2004 reporting in Item 12 the issuance of a press release
announcing the Company's financial results for the first quarter ended
March 31, 2004.
12
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
A Current Report on Form 8-K dated June 11, 2004 was filed on June 14,
2004 reporting in Item 5 the entering into on June 11, 2004 of an
amendment to the Company's credit facility providing, among other
things, for an increase in the line of credit facility from $65
million to $85 million and for a modification of the definition of
eligible receivables thereby increasing the amount that the Company
may borrow under the credit facility.
A Current Report on Form 8-K dated August 5, 2004 was filed on August
5, 2004 reporting in Item 12 the issuance of a press release
announcing the Company's financial results for the quarter and six
months ended June 30, 2004.
------------------------
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 13, 2004 /s/ BRUCE M. GOLDBERG
------------------------------------------------
Bruce M. Goldberg, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 13, 2004 /s/ HOWARD L. FLANDERS
------------------------------------------------
Howard L. Flanders, Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
13