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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 March 31, 2006
--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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 11, 2006 3,976,731 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.
------------------------------------------------------------------------------------------------
I FINANCIAL INFORMATION:
1. Financial Statements
Consolidated Condensed Balance Sheets at March 31, 2006
(Unaudited) and December 31, 2005....................................... 1
Consolidated Condensed Statements of Operations for the
Quarters Ended March 31, 2006 and 2005 (Unaudited)...................... 2
Consolidated Condensed Statements of Cash Flows for the
Quarters Ended March 31, 2006 and 2005 (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................................................... 14
II OTHER INFORMATION:
1A. Risk Factors.............................................................. 15
2. Unregistered Sales of Equity Securities and Use of Proceeds............... 16
6. Exhibits.................................................................. 16
SIGNATURES................................................................ 16
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31 December 31
ASSETS 2006 2005
--------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash .......................................................... $ 2,003,000 $ 2,250,000
Accounts receivable, less allowances for doubtful
accounts of $2,546,000 and $2,364,000 ....................... 84,713,000 82,166,000
Inventories ................................................... 83,125,000 74,581,000
Other current assets .......................................... 4,099,000 3,127,000
------------- -------------
Total current assets ........................................ 173,940,000 162,124,000
Property, plant and equipment - net ............................. 8,542,000 8,187,000
Deposits and other assets ....................................... 3,167,000 3,335,000
------------- -------------
$ 185,649,000 $ 173,646,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt ............................. $ 488,000 $ 701,000
Accounts payable .............................................. 59,679,000 51,603,000
Accrued expenses .............................................. 7,180,000 6,155,000
Other current liabilities ..................................... 288,000 197,000
------------- -------------
Total current liabilities ................................... 67,635,000 58,656,000
Long-term debt:
Notes payable ................................................. 94,266,000 89,511,000
Subordinated debt ............................................. 627,000 645,000
Other long-term debt .......................................... 998,000 998,000
------------- -------------
163,526,000 149,810,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued ..................................... - -
Common stock, $.01 par value, 40,000,000 shares authorized,
3,976,731 and 3,976,656 shares issued and outstanding ....... 40,000 40,000
Capital in excess of par value ................................ 25,986,000 25,986,000
Accumulated deficit ........................................... (3,903,000) (2,190,000)
------------- -------------
22,123,000 23,836,000
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$ 185,649,000 $ 173,646,000
============= =============
See notes to consolidated condensed financial statements
1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED MARCH 31 2006 2005
-----------------------------------------------------------------------------------
NET SALES ........................................ $ 118,312,000 $ 94,309,000
Cost of sales .................................... (100,115,000) (78,545,000)
------------- -------------
Gross profit ..................................... 18,197,000 15,764,000
Selling, general and administrative expenses ..... (19,309,000) (14,645,000)
------------- -------------
INCOME (LOSS) FROM OPERATIONS .................... (1,112,000) 1,119,000
Interest expense ................................. (1,604,000) (1,013,000)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES ................ (2,716,000) 106,000
Income tax (provision) benefit ................... 1,003,000 (45,000)
------------- -------------
NET INCOME (LOSS) ................................ $ (1,713,000) $ 61,000
============= =============
EARNINGS (LOSS) PER SHARE:
Basic ............................................ $.(43) $.02
===== ====
Diluted .......................................... $.(43) $.01
===== ====
See notes to consolidated condensed financial statements
2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTERS ENDED MARCH 31 2006 2005
-------------------------------------------------------------------------------------------------
Cash Flows Provided By (Used For) Operating Activities ......... $ (4,289,000) $ 12,385,000
------------- -------------
Cash Flows From Investing Activities:
Acquisition of property and equipment .......................... (629,000) (464,000)
Decrease in other assets ....................................... 146,000 113,000
------------- -------------
Cash flows used for investing activities ................... (483,000) (351,000)
------------- -------------
Cash Flows From Financing Activities:
Borrowings under line of credit agreement ...................... 119,724,000 89,871,000
Repayments under line of credit agreement ...................... (114,863,000) (101,842,000)
Repayments of notes payable .................................... (336,000) (228,000)
Net proceeds from issuance of equity securities ................ - 92,000
------------- -------------
Cash flows provided by (used for) financing activities ..... 4,525,000 (12,107,000)
------------- -------------
Decrease in cash ............................................... (247,000) (73,000)
Cash, beginning of period ...................................... 2,250,000 645,000
------------- -------------
Cash, end of period ............................................ $ 2,003,000 $ 572,000
============= =============
Supplemental Cash Flow Information:
Interest paid .................................................. $ 1,514,000 $ 919,000
============= =============
Income taxes paid - net ........................................ $ 51,000 $ 118,000
============= =============
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 March 31, 2006, 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, 2005, except for the adoption of Statement of Financial Accounting
Standards ("SFAS") 123(R) on January 1, 2006 as explained in Note 3 to Notes to
Consolidated Condensed Financial Statements (Unaudited)) and additional
financial information, see the Company's Annual Report on Form 10-K for the year
ended December 31, 2005, 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.
2. EARNINGS PER SHARE
The following table sets forth the calculation of earnings (loss) per share on a
basic and diluted basis:
Quarters Ended March 31 2006 2005
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Basic Earnings (Loss) Per Share:
--------------------------------
Net Income (Loss) ........................... $ (1,713,000) $ 61,000
============= =============
Weighted Average Shares Outstanding ......... 3,976,693 3,912,449
============= =============
Basic Earnings (Loss) Per Share ............. $.(43) $.02
===== ====
Diluted Earnings (Loss) Per Share:
----------------------------------
Net Income (Loss) ........................... $ (1,713,000) $ 61,000
============= =============
Weighted Average and Dilutive Shares:
Weighted average shares outstanding ....... 3,976,693 3,912,449
Dilutive shares ........................... - 221,819
------------- -------------
3,976,693 4,134,268
============= =============
Diluted Earnings (Loss) Per Share ........... $.(43) $.01
===== ====
Basic earnings (loss) per share are determined by dividing the Company's net
income (loss) by the weighted average shares outstanding. Diluted earnings
(loss) per share include any dilutive effects of outstanding stock options.
4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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Excluded from the calculation of earnings (loss) per share are stock options to
purchase 473,000 and 288,000 common shares in the quarters ended March 31, 2006
and 2005, as their inclusion would have been antidilutive.
3. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), which replaces SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires
all share-based payments to employees including grants of employee stock
options, be measured at fair value and expensed in the consolidated statement of
operations over the service period (generally the vesting period). Upon
adoption, the Company transitioned to SFAS 123 (R) using the modified
prospective application, whereby compensation cost is only recognized in the
consolidated statements of operations beginning with the first period that SFAS
123 (R) is effective and thereafter, with prior periods' stock-based
compensation still presented on a pro forma basis. Under the modified
prospective approach, the provisions of SFAS 123 (R) are to be applied to new
employee awards and to employee awards modified, repurchased, or cancelled after
the required effective date. Additionally, compensation cost for the portion of
employee awards for which the requisite service has not been rendered that are
outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of employee awards shall be based on the
grant-date fair value of those awards as calculated for either recognition or
pro-forma disclosures under SFAS 123. The Company continues to use the
Black-Scholes option valuation model to value stock options. As a result of the
adoption of SFAS 123 (R), the Company recognized a pre-tax charge of $55,000
(included in selling, general and administrative expenses), $35,000 after-tax
and $.01 per share on a diluted basis in the quarter ended March 31, 2006
associated with the expensing of stock options. Employee stock option
compensation expense in 2006 includes the estimated fair value of options
granted, amortized on a straight-line basis over the requisite service period
for the entire portion of the award. No stock options were granted or vested
during the three months ended March 31, 2005.
Reported and pro forma net income (loss) and earnings (loss) per share are as
follows:
Quarter Ended March 31 2006
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Pre-tax stock-based compensation expense assuming fair value
method applied to all awards ................................. $ 55,000
=============
Stock-based compensation expense, net of tax ................... $ 35,000
=============
Net income (loss), as reported ................................. $ (1,713,000)
Fair value impact of employee stock compensation not reported
in net income, net of tax .................................... -
-------------
Pro forma net income (loss) .................................... $ (1,713,000)
=============
Basic earnings (loss) per share:
As reported ................................................. $.(43)
Pro forma ................................................... .(43)
Diluted earnings (loss) per share:
As reported ................................................. $.(43)
Pro forma ................................................... .(43)
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the assumptions in the table below.
During 2006, the Company took into consideration guidance under SFAS 123 (R) and
SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating
assumptions. The expected volatility is based upon historical volatility of our
stock and other contributing factors. The expected term is based upon
observation of actual time elapsed between date of grant and exercise of options
for all employees. Previously such assumptions were determined based on
historical data.
Quarter Ended March 31 2006
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Expected volatility............................................... 39%
Risk-free interest rate........................................... 4%
Expected lives (years)............................................ 4
At March 31, 2006 the Company had 629,973 shares of common stock reserved for
its stock option plans.
5
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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The following is a summary of the changes in outstanding options for the quarter
ended March 31, 2006:
Weighted Average
Weighted Average Remaining Aggregate
Shares Exercise Price Contractual Life Intrinsic Value
-------- ---------------- ---------------- ---------------
Outstanding at January 1, 2006 .... 427,770 $ 3.56
Granted ........................... 67,500 3.87
Exercised ......................... (75) 1.92
Forfeited or expired .............. (22,544) 3.68
--------
Outstanding at March 31, 2006 ..... 472,651 3.60 3.0 $984,000
======== ========
Exercisable at March 31, 2006 ..... 247,203 3.36 1.5 $520,000
======== ========
The weighted average grant date fair values of share options granted during the
first quarter of 2006 was $.49. There were no options granted during the first
quarter of 2005. The total intrinsic values of share options exercised during
the first quarters of 2006 and 2005 were $ - and $68,000. Cash received from
option exercises during the first quarter of 2006 and 2005 totaled $144 and
$92,000. These cash receipts are included in net proceeds from issuance of
equity securities.
The following is a summary of the changes in non-vested shares for the quarter
ended March 31, 2006:
As of March 31, 2006, there was $191,000 of unrecognized compensation cost
related to non-vested awards granted under the option plans, which is expected
to be recognized over a weighted-average period of one year. The total fair
values of shares vested during the first quarter of 2006 were $50,000. No shares
vested during the first quarter of 2005.
Option Plan
-----------
During the quarter ended March 31, 2006, the Company granted an aggregate of
67,500 stock options to 48 individuals pursuant to the Employees', Officers',
Directors' Stock Option Plan, as previously amended and restated (the "Option
Plan"). These options have an exercise price of $3.87 per share (fair market
value at date of grant), vest over a four-year period and are exercisable over a
five-year period. During the quarter ended March 31, 2006, a total of 22,544
stock options previously granted pursuant to the Option Plan were canceled at
exercise prices ranging from $1.92 to $13.02 per share. During the quarter ended
March 31, 2006, 75 stock options previously granted pursuant to the Option Plan
were exercised at an exercise price of $1.92 per share.
Director Option Plan
--------------------
During the quarter ended March 31, 2006, no stock options were granted by the
Company pursuant to the 2000 Nonemployee Director Stock Option Plan, as amended.
6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
4. SEVERANCE COSTS
During the quarter ended March 31, 2006, the Company accrued an aggregate of
$655,000 for severance costs to three individuals including severance to a
former executive officer. The severance to such former executive officer
included $482,000 which will be paid over a two year period following the
termination of the former executive officer's employment. The $655,000 is
included in selling, general and administrative costs in the accompanying
Consolidated Condensed Statements of Operations (Unaudited) for the quarter
ended March 31, 2006.
5. LONG-TERM DEBT
Line of Credit
--------------
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. 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. In May 2006, the Company's
credit facility was amended subsequent to but effective as of the balance sheet
date whereby the debt service coverage ratio test for the first quarter of 2006
was eliminated and the minimum tangible net worth level was reduced to
$21,000,000. The Company was in compliance with these amended and all other
covenants under the Credit Facility at March 31, 2006. The Company anticipates
that it will need additional amendments in the future. At March 31, 2006,
outstanding borrowings under the Company's credit facility aggregated
$93,760,000 compared to $88,900,000 at December 31, 2005.
7
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
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 Ended March 31 2006 2005
--------------------------------------------------------------------------------
Americas (1) ................................. $107,379,000 $ 85,640,000
Europe ....................................... 3,312,000 4,489,000
Asia/Pacific ................................. 7,621,000 4,180,000
------------ ------------
$118,312,000 $ 94,309,000
============ ============
(1) Includes sales in the United States and Puerto Rico of $101,314,000 and
$81,350,000 for the quarters ended March 31, 2006 and 2005.
Long-lived assets (property, plant and equipment - net) are located
substantially in the Americas and include long-lived assets in the United States
of $8,536,000 and $8,176,000 at March 31, 2006 and December 31, 2005.
8
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 (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a distributor of
electronic components manufactured by others. The Company distributes a full
range of semiconductors (active components), including transistors, diodes,
memory devices, microprocessors, microcontrollers, 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 have been improving since the first quarter of 2005 and have
continued to improve through the first quarter of 2006. We expect that the
improved conditions may continue throughout 2006. Our backlog of customer
orders, which was $69 million at December 31, 2004, had increased significantly
to $89 million by December 31, 2005. As of April 30, 2006, our backlog further
increased to $99 million.
Sales for the first quarter of 2006 represented our fourth consecutive quarterly
increase in sales. 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 has expanded and may continue to expand further. The
Company has operations in Korea, Malaysia and China to support Asian markets.
The Company also has operations in the United Kingdom and Hungary to support
European markets. 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, stock-based
compensation, 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 quarter
ended March 31, 2006, 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, 2005 except as follows:
9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123(R)"), which replaces SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires
all share-based payments to employees including grants of employee stock
options, be measured at fair value and expensed in the consolidated statement of
operations over the service period (generally the vesting period). Upon
adoption, the Company transitioned to SFAS (R) using the modified prospective
application, whereby compensation cost is only recognized in the consolidated
statements of operations beginning with the first period that SFAS 123 (R) is
effective and thereafter, with prior periods' stock-based compensation still
presented on a pro forma basis. The Company continues to use the Black-Scholes
option valuation model to value stock options. See Note 3 to Notes to
Consolidated Condensed Financial Statements for required disclosures under SFAS
123 (R).
Results of Operations
---------------------
Net sales for the first quarter of 2006 were $118.3 million, an increase of
25.5% from net sales of $94.3 million for the same period of 2005. The increase
in sales reflects improvements in industry conditions which began during the
second quarter of 2005 and continued into the first quarter of 2006,
opportunities created from the ongoing consolidation in our industry and gains
resulting from the Company's growth strategies. Management believes that
industry conditions may remain positive throughout 2006, however management is
concerned that continuing issues relating to the conversion onto a new
enterprise resource planning (ERP) system implemented in February 2006 may
inhibit the Company's ability to participate in the industry growth for the next
few quarters.
Gross profit was $18.2 million for the first quarter of 2006 compared to $15.8
million for the first quarter of 2005. The increase in gross profit was due to
the increase in sales which more than offset the decline in gross profit
margins. Gross profit margins as a percentage of net sales were 15.4% for the
first quarter of 2006 compared to 16.7% for the first quarter of 2005. The
significant decrease in gross profit margins reflects issues relating to the
conversion onto a new enterprise resource planning (ERP) system as well as the
continued impact from sales to accounts that require aggressive pricing.
Selling, general and administrative expenses ("SG&A") was $19.3 million for the
first quarter of 2006 compared to $14.6 million for the first quarter of 2005.
SG&A for the first quarter of 2006 reflects increases in variable expenses of
$700,000 over the first quarter of 2005. This increase in variable expenses
reflects increases in commission rates resulting from pressure in labor markets.
In addition to the increases in variable expenses, fixed expenses increased $4.0
million for the first quarter of 2006 compared to the same period of 2005. The
increase in fixed expenses relates primarily to increases in compensation
expense, bad debt adjustments and write-offs, consulting fees and maintenance
and repairs during the first quarter of 2006 as compared to the same period of
2005. As a result of industry consolidation and improved conditions within the
industry, during 2005 and the first quarter of 2006 the Company strategically
increased its personnel in North America, Europe and Asia. The Company may
expand further including personnel additions, to enhance its position in order
to take advantage of industry consolidation and the continuing trends for
business to transfer outside of North America. As a result of severe
productivity losses caused by the new ERP system, the Company expects to add
people across all departments to manage both operations and data flow.
Management believes that these productivity losses are temporary and
productivity gains will occur as improvements to the new ERP system are obtained
in the second half of 2006 and into 2007. For the first quarter of 2006, the
increase in fixed expenses was partially offset by a reduction in other expenses
including occupancy costs. In addition, in connection with the new ERP system
which was implemented in February of 2006, SG&A increased by $69,000
representing the non-cash depreciation and amortization of the cost of the new
ERP system over a seven year period. Additionally, SG&A increased as a result of
consulting fees of $497,000 associated with the ERP conversion. Furthermore the
Company accrued $655,000 for severance pay and expensed
10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
$806,000 of bad-debt adjustments and write-offs. The Company anticipates
additional expenses for maintenance and further development required in
connection with the new ERP system. Quarterly SG&A will increase by $226,000 per
quarter representing non-cash depreciation and amortization of the cost of the
new ERP system over a seven year period that is in addition to the two months
increase reflected in the first quarter of 2006. Due to the foregoing, the
Company expects that SG&A will increase in future periods.
SG&A as a percentage of net sales was 16.3% for the quarter ended March 31, 2006
compared to 15.5% for the same period of 2005. The increase was due to the
increase is SG&A in absolute dollars described above which increase more than
offset the impact from the increase in sales.
For the first quarter of 2006 the Company had a loss from operations of $(1.1)
million compared to income from operations of $1.1 million for the same period
of 2005. The decrease in income from operations for the quarter was primarily
due to the significant decline in gross profit margins, the issues relating to
the implementation of the new ERP system, including the impact on gross profit
margins and additional consulting fees, significant accruals for severance pay,
bad debt adjustments and write-offs and the other increases in SG&A as discussed
previously.
Interest expense increased to $1.6 million for the first quarter of 2006
compared to $1.0 million for the same period of 2005. The increase in interest
expense resulted from increases in average borrowings and increases in overall
interest rates. Our average borrowings increased by $22.4 million for the first
quarter of 2006 compared to the first quarter of 2005 primarily as a result of
increases in our accounts receivable and inventory levels. Accounts receivable
increased as a result of increases in sales towards the latter part of 2005 and
significant increases in sales during the first quarter of 2006. Accounts
receivable also increased in connection with competitive pressures to provide
extended payment terms to strategic customers and a slow down in our collections
resulting from issues relating to the implementation of our new ERP system. Our
inventory increased to support the increased levels of sales beginning during
the second quarter of 2005 and the continued sequential growth in sales during
the balance of 2005. An increase in supplier delivery times (or lead-times) has
also caused the Company to increase inventory levels in order to be able to meet
customer requirements. As a result of increases in the prime and LIBOR interest
rates, the Company's overall interest rates increased despite the positive
impact from the improved pricing structure under its credit facility. The
Company's rate improved from the then first pricing level under its credit
facility during the first quarter of 2005 to the third pricing level under the
current pricing structure. This improvement, which aggregated 50 basis points,
resulted from the change in the pricing structure under the August 8, 2005
amendment to the credit facility. The positive impact on interest expense from
the improvement in the rate associated with the change in pricing structure was
more than offset by the adverse effect from interest rate hikes by the Federal
Reserve Board. As and to the extent the Federal Reserve continues to increase
interest rates as anticipated, interest expense will increase. Additionally, the
pricing level achieved by the Company in 2005 may not be attainable in the near
future which may cause an increase in the Company's cost of borrowing. To the
extent that the Company continues or increases its current level of borrowing,
interest expense will increase in future periods. Interest expense for the first
quarter of 2006 included non-cash amortization of deferred financing fees of
$22,000. 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 5 to Notes to Consolidated Condensed Financial
Statements (Unaudited).
The Company had a net loss of $(1.7) million or $(.43) per share (diluted) for
the quarter ended March 31, 2006, compared to net income of $61,000, or $.01 per
share (diluted) for first quarter of 2005.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Liquidity and Capital Resources
-------------------------------
Working capital at March 31, 2006 increased to $106.3 million from working
capital of $103.5 million at December 31, 2005. The current ratio was 2.57:1 at
March 31, 2006 compared to 2.76:1 at December 31, 2005. The increase in working
capital was primarily due to increases in accounts receivable and inventory
which were partially offset by an increase in accounts payable. Accounts
receivable was $84.7 million at March 31, 2006 compared to $82.2 million at
December 31, 2005. The increase in accounts receivable reflects an increased
level of sales towards the latter part of the first quarter of 2006 compared to
the latter part of the fourth quarter of 2005. Accounts receivable also
increased in connection with competitive pressures to provide extended payment
terms to strategic customers and a slow down in our collections resulting from
issues relating to the implementation of our new ERP system. Inventory levels
were $83.1 million at March 31, 2006 compared to $74.6 million at December 31,
2005. Inventory increased to support the increased levels of sales beginning
during the second quarter of 2005 and the continued sequential growth in sales
during the balance of 2005. An increase in supplier delivery times (or
lead-times) has also caused the Company to increase inventory levels in order to
be able to meet customer requirements. Accounts payable increased to $59.7
million at March 31, 2006 from $51.6 million at December 31, 2005 in connection
with an increase in the level of purchases made during the latter part of the
first quarter of 2006 over the same period of the fourth quarter of 2005.
At March 31, 2006, the Company had subordinated debt with various maturities
through 2015 which aggregated $698,000, including the current portion of such
debt, and had an unfunded postretirement benefit obligation of $1.0 million. See
the table below.
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. 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. In May 2006, the
Company's credit facility was amended subsequent to but effective as of the
balance sheet date whereby the debt service coverage ratio test for the first
quarter of 2006 was eliminated and the minimum tangible net worth level was
reduced to $21.0 million. The Company was in compliance with these amended and
all other covenants under the Credit Facility at March 31, 2006. The Company
anticipates that it will need additional amendments in the future. At March 31,
2006, outstanding borrowings under the Company's credit facility aggregated
$93.8 million compared to $88.9 million at December 31, 2005. See Note 5 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 March 31,
2006 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) ................ $ 94,457,000 $ 70,000 $ 157,000 $ 93,937,000 $ 293,000
Capital leases .................... 924,000 418,000 506,000 - -
Operating leases .................. 12,800,000 3,000,000 4,500,000 3,400,000 1,900,000
Other long-term obligations (2) ... 998,000 - - - 998,000
------------ ------------ ------------ ------------ ------------
Total obligations ................. $109,179,000 $ 3,488,000 $ 5,163,000 $ 97,337,000 $ 3,191,000
============ ============ ============ ============ ============
---------
(1) Reflected on the Company's Consolidated Condensed Balance Sheet (Unaudited)
as of March 31, 2006 and includes $93,760,000 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 March 31, 2006 and represents a postretirement benefit obligation.
In February 2006, the Company implemented a new enterprise resource planning
(ERP) system. The aggregate cost of this new ERP system, including costs of
training and implementation but excluding capitalized payroll costs, is
approximately $8.5 million. At March 31, 2006, $6.2 million associated with this
ERP system was 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. The effective interest rate under this agreement was 1.9%
per annum. The Company also financed an additional $1.8 million of the aggregate
cost of the ERP system with another third party finance company, which financing
arrangement has maturities through November 2008 and has effective interest
rates ranging from 1.6% to 2.2% per annum. Of this $1.8 million financing,
$565,000 is classified as operating leases and $1.3 million is classified as
capital leases.
At March 31, 2006, the outstanding obligation under these capital leases
aggregating $1.3 million was $924,000.
The Company currently expects that its cash flows from operations and additional
borrowings available under its Credit Facility will be sufficient to meet the
Company's current financial requirements over the next twelve months, including
obligations related to the current portion of long-term debt and capital and
operating leases. However, the Company continues to explore additional sources
of financing in order to support its growth.
Off-Balance Sheet Arrangements
------------------------------
The Company guaranteed 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 guaranty expired
during the quarter ended March 31, 2006.
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, investments in the growth of its business, bookings,
backlogs, sales, products, services and markets (including expansion of
operations in Asia and Europe), trends or developments including relating to
industry
13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
conditions or industry consolidation or future growth in global markets,
expected capital expenditures (including for the new ERP system) 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 weakening;
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, investment 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 an increase in
pricing levels under its Credit Facility, 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, as well as the ultimate total
cost of installing and implementing the ERP system being materially greater than
expected; 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, 2005 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 approximately $234,000 per quarter based on
outstanding borrowings at March 31, 2006. 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
14
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
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, except as follows:
In February 2006, the Company implemented a new enterprise resource planning
(ERP) system that it uses in its daily operations. It converted the database and
operational processing systems to this new ERP system. The Company believes the
new ERP system will allow the Company to retain the control and integrity of its
information systems as and to the extent that the Company's operations grow into
the future.
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors
-------- ------------
There have been no material changes to our risk factors from those disclosed in
our Form 10-K for the year ended December 31, 2005, except as follows:
We may not be able to satisfy our funding requirements.
We currently anticipate needing to spend significant amounts of cash to: meet
our working capital requirements (including to support increases in levels of
inventory, as well as customer backlog, and accounts receivable as our level of
sales increases); invest in and finance capital equipment and infrastructure;
upgrade our information and communication systems, including our new enterprise
resource planning (ERP) system; expand our foreign operations and/or acquire
businesses or open divisions; and/or respond to increases in expenses and costs,
unanticipated developments, increasing customer demands and/or competitive
pressures. If we do not have enough cash on hand, cash generated from our
operations and/or cash available under our credit facility to meet these cash
requirements, we will need to seek alternative sources of financing to carry out
our growth and operating strategies, particularly if our credit facility is not
available to do so. We may not be able to raise needed cash on terms acceptable
to us, or at all. Financing may be on terms that are dilutive or potentially
dilutive. If alternative sources of financing are required but are insufficient
or unavailable, we will be required to modify our operating plans to the extent
of available funding, if and assuming such modifications and/or other actions
can be made or taken at all.
Our new enterprise resource planning (ERP) system could continue to interfere
with our operations.
Although we are seeing some improvement recently, service to and relationships
with our customers and suppliers have been adversely impacted by the
implementation of our new ERP system. The strain on the Company's employees, as
well as on its financial resources, in connection with the implementation of
this new ERP system has been significant. We can offer no assurance that the
implementation will be successful or that it will not cause additional
interruption in operations and services. Failure of the new ERP system to
improve or perform as expected would have a further material adverse impact on
our operating results.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
(c) Sales of Unregistered Securities
--------------------------------
During the quarter ended March 31, 2006, the Company did not issue or sell
any unregistered securities, although, pursuant to the Company's
Employees', Officers', Directors' Stock Option Plan, as previously amended
and restated, the Company granted stock options to 48 individuals to
purchase an aggregate of 67,500 shares of the Company's common stock at an
exercise price of $3.87 per share. The stock options vest over a four-year
period and are exercisable over a five-year period. The stock options were
granted by the Company in reliance upon the exemption from registration
available under Section 4(2) of the Securities Act of 1933, as amended. See
Note 3 to Notes to Consolidated Condensed Financial Statements (Unaudited).
ITEM 6. Exhibits
------- --------
Exhibits
--------
10.1 Fourth Amendment to Credit Agreement, dated as of May 22, 2006
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.*
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: May 22, 2006 /s/ BRUCE M. GOLDBERG
---------------------------------------------
Bruce M. Goldberg, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 22, 2006 /s/ HOWARD L. FLANDERS
---------------------------------------------
Howard L. Flanders, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
16