-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q1rk81beRzpxvjJj1lzRkn2fIUIxb07cEjMwD09YEJBxyZsONkaxaYbh7nTVgI72 bC/ieOL0msELqNEDXWOZ8Q== 0000950170-97-000371.txt : 19970402 0000950170-97-000371.hdr.sgml : 19970402 ACCESSION NUMBER: 0000950170-97-000371 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALL AMERICAN SEMICONDUCTOR INC CENTRAL INDEX KEY: 0000818074 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 592814714 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16207 FILM NUMBER: 97572698 BUSINESS ADDRESS: STREET 1: 16115 N W 52ND AVENUE CITY: MIAMI STATE: FL ZIP: 33014 BUSINESS PHONE: 3056218282 MAIL ADDRESS: STREET 1: 16115 NW 52ND AVENUE CITY: MIAMI STATE: FL ZIP: 33014 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 ----------------- COMMISSION FILE NUMBER: 0-16207 ------- ALL AMERICAN SEMICONDUCTOR, INC. -------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 59-2814714 - ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16115 N.W. 52ND AVENUE MIAMI, FLORIDA 33014 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (305) 621-8282 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ---- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 24, 1997, 20,343,894 shares (including 160,703 held by a wholly-owned subsidiary of the Registrant) of the common stock of ALL AMERICAN SEMICONDUCTOR, INC. were outstanding, and the aggregate market value of the common stock held by non-affiliates was $18,700,000. Documents Incorporated by Reference: Portions of the definitive proxy statement to be filed within 120 days after the end of the Registrant's fiscal year are incorporated by reference into Part III. ================================================================================ ALL AMERICAN SEMICONDUCTOR, INC. FORM 10-K - 1996 TABLE OF CONTENTS PART ITEM PAGE NO. NO. DESCRIPTION NO. - ---- --- ----------- ---- I 1 Business.................................................... 1 2 Properties.................................................. 20 3 Legal Proceedings .......................................... 20 4 Submission of Matters to a Vote of Security-Holders......... 20 II 5 Market for the Registrant's Common Equity and Related Stockholder Matters....................................... 21 6 Selected Financial Data..................................... 23 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25 8 Financial Statements and Supplementary Data................. 36 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 36 III 10 Directors and Executive Officers of the Registrant.......... 36 11 Executive Compensation...................................... 36 12 Security Ownership of Certain Beneficial Owners and Management................................................ 36 13 Certain Relationships and Related Transactions.............. 36 IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................. 36 i PART I ITEM 1. BUSINESS GENERAL All American Semiconductor, Inc. and its subsidiaries (collectively, the "Company"; sometimes referred to herein as "Registrant") is a national distributor of electronic components manufactured by others. The Company distributes a full range of semiconductors (active components), including transistors, diodes, memory devices and other integrated circuits, as well as passive components, such as capacitors, resistors, inductors and electromechanical products, including cable, switches, connectors, filters and sockets. These products are sold primarily to original equipment manufacturers ("OEMs") in a diverse and growing range of industries, including manufacturers of computers and computer-related products, satellite and communications products, consumer goods, robotics and industrial equipment, defense and aerospace equipment and medical instrumentation. Through the Aved Memory Products ("AMP") and Aved Display Technologies ("ADT") divisions of its subsidiary, Aved Industries, Inc., the Company also designs and has manufactured under the label of its subsidiary's divisions, certain board level products including memory modules and flat panel display driver boards. See "Business Strategy-Expansion" and "Products." These products are also sold to OEMs. In 1995 and 1996 the Company also distributed a limited offering of computer products including motherboards, computer upgrade kits, keyboards and disk drives. During the third quarter of 1996, the Company discontinued its computer products division ("CPD"). See "Products." Approximately 73% of the Company's 1996 sales were derived from the sale of semiconductors (active components), 20% from passive products, 4% from board level products (3% from AMP and 1% from ADT) and 3% from computer products. The Company expects that this sales mix may change due to the faster growth rate of its semiconductor business and the discontinuance of its CPD. While the Company reincorporated in Delaware in 1987, it and its predecessors have operated since 1964. The Company is one of the faster growing distributors in the industry and, as a result of its growth, the Company was recognized by industry trade publications as the 8th largest distributor of semiconductors and the 16th largest distributor of electronic components in the United States, out of an industry group that numbers more than 1,000 distributors. The Company's principal executive office is located at 16115 N.W. 52nd Avenue, Miami, Florida 33014. 1 THE ELECTRONICS DISTRIBUTION INDUSTRY The electronics industry is one of the largest and fastest growing industries in the United States. Industry associations estimate total U.S. factory sales of electronic products by OEMs, the Company's primary customer base, at approximately $400 billion for 1996 compared to $276 billion in 1991. The growth of this industry has been driven by increased demand for new products incorporating sophisticated electronic components, such as laptop computers, multimedia and Internet related products and satellite and telecommunications equipment; as well as the increased utilization of electronic components in a wide range of industrial, consumer and military products. The three product groups included in the electronic components subsegment of the electronics industry are semiconductors, passive/electromechanical components, and systems and computer products (such as disk drives, terminals and computer peripherals). The Company believes that semiconductors and passive/electromechanical products each account for approximately 34% of the electronic components distribution marketplace, while systems and computer products account for the remaining 32%. Prior to June 1995, the Company was a distributor of only semiconductors and passive/electromechanical products. In mid 1995, the Company created a computer products division (or CPD). The operations of this division, which had carried a very limited product offering, were discontinued in the third quarter of 1996. See "Products." Distributors are an integral part of the electronics industry. During 1996, an estimated $21 billion of electronic components were sold through distribution in the United States, up from $10 billion in 1992. In recent years, there has been a growing trend for distribution to play an increasing role in the electronics industry. OEMs which utilize electronic components are increasingly looking to outsource their procurement, inventory and materials management processes to third parties in order to concentrate their resources (including management talent, personnel costs and capital investment) on their core competencies, which include product development, sales and marketing. Large distribution companies not only fill these procurement and materials management roles, but further serve as a single supply source for OEMs, offering a much broader line of products, incremental quality control measures and more support services than individual electronic component manufacturers. Management believes that OEMs will continue to increase their service and quality requirements, and that this trend will result in both OEMs and electronic component manufacturers becoming more dependent on distributors in the future. Electronic component manufacturers are under similar pressure to allocate a larger share of their resources to research, product development and manufacturing capacity as technological advances continue to shorten product lifecycles. Electronic component manufacturers sell directly to only a small number of their potential customers. This small segment of their customer base accounts for a large portion of the total available revenues. It is not economical for component manufacturers to provide a broad range of sales support services to handle the large amount of customers that account for the balance of available revenues. With their expanded technology and service capabilities, large distributors have 2 now become a reliable means for component manufacturers to outsource their sales, marketing, customer service and distribution functions. This trend particularly benefits larger distributors with nationwide distribution capabilities such as the Company, as manufacturers continue to allocate a larger amount of their business to a more limited number of full service distribution companies. Management believes that this trend should also provide consolidation opportunities within the electronic components distribution industry. As a result of the trends discussed above, management believes that distribution will be involved in an increasing portion of the electronics industry. BUSINESS STRATEGY The Company's strategy is to continue its managed growth and to gain market share by: (i) increasing the number of customers it sells to through a combination of expanding existing sales offices, opening new sales offices and making selective acquisitions, and (ii) increasing sales to existing customers by continuing to expand its product offerings and service capabilities. While the Company's aggressive growth plans caused an adverse effect on profitability, the Company believes that the investment in expansion was necessary to position the Company to participate in the dynamics of its rapidly growing and changing industry and to achieve greater profitability in the future. Now that the Company has achieved a critical mass, has obtained the necessary geographic coverage and has expanded its distribution capacity to facilitate additional growth, the Company has begun to shift its focus from increasing market share to a combination of continued market share growth with a greater focus on increasing profitability. In this regard, the Company has eliminated or reduced certain aspects of its operations and services that were not economically feasible to continue or expand. While management believes that it can continue to increase market share and that it can increase profitability, there can be no assurance that these goals will be achieved. EXPANSION The Company has undergone significant expansion over the last several years. Over the past three years, the Company has opened 16 new sales offices (including its first foreign sales office based in Toronto, Canada in January 1996), relocated and expanded substantially all existing offices and acquired five companies in order to increase its geographic coverage and become recognized as a national distributor. See "Sales and Marketing-Sales Office Locations" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Acquisitions." As a result of the implementation of the Company's business strategy, the Company has experienced significant growth. In order to effectively drive and manage its expansion, the Company has over the last three years: (i) restructured, enhanced and expanded its sales staff and sales management team; (ii) expanded its quality control programs, including the implementation of its total quality management ("TQM") and continuous process improvement programs that ensure quality service, enhance productivity and, over time, 3 reduce costs; (iii) created and staffed a corporate operations department; (iv) increased staffing in almost all corporate departments; (v) developed state-of-the-art distribution technology, and (vi) enhanced its asset management capabilities through new computer and telecommunications equipment. To better service the large customer base in the western part of the United States, the Company opened a west coast corporate office during 1994 which houses a regional credit department, as well as sales and marketing executives for the Company. In addition, during 1995 the Company opened an additional west coast regional credit department and an east coast regional credit department. In 1995 the Company began expanding its marketing department and in 1996 made significant personnel additions. In an effort to create additional opportunities for growth, the Company established a computer products division in 1995. Additionally, in December 1995 the Company purchased through two separate mergers with and into the Company's wholly-owned subsidiaries (the "Added Value Acquisitions") all of the capital stock of Added Value Electronics Distribution, Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain;" Rocky Mountain together with Added Value, collectively the "Added Value Companies"). As a result of these acquisitions, the Company added new sales locations and several new product offerings. See "Sales and Marketing-Sales Office Locations" and "Products." In 1993, 1994 and 1995, including discontinued operations, the Company experienced 38%, 50% and 79% growth, respectively, and ended 1995 with a strong backlog and other indications of continued rapid growth for 1996. In order to process this rapid growth in sales, the Company increased its capacity. In May 1994 the Company moved into a 110,800 square foot facility in Miami, Florida containing new corporate offices and a state-of-the-art distribution center. In addition, the Company leased 20,000 square feet of space in Fremont, California (near San Jose) which was opened in January 1996 to expand its semiconductor programming and distribution capabilities, improve quality control and service capabilities for its west coast customers and to handle all operations of the computer products division. As a result of the acquisitions of the Added Value Companies, the Company obtained distribution facilities in Tustin, California and Denver, Colorado. See "Facilities and Systems." A sharp decline in sales in the second and third quarters of 1996 compared to the first quarter of that year, combined with the Company's decision to discontinue the operations of CPD, created a significant over capacity situation for the Company. While the Company's excess capacity had a negative impact on profitability in 1996 (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Selling, General and Administrative Expenses"), this capacity, combined with future growth in sales, should enable the Company to realize the benefits of improved operating efficiencies and increasing economies of scale in future periods. While the Company believes it is obtainable, there can be no assurance that the Company will achieve the growth needed to utilize its excess capacity. 4 The Company does not plan to open any new offices or to acquire any additional companies in 1997, but plans instead to focus on improving the financial performance and market penetration of each existing location. INCREASING PRODUCT OFFERINGS The Company intends to continue its effort to increase the number and breadth of its product offerings, thereby allowing it to attract new customers and to represent a larger percentage of the purchases being made by its existing customers. As part of its efforts to attract new suppliers and expand its product offerings, the Company opened new sales offices (see "Expansion") in order to achieve the geographic coverage necessary to be recognized as a national distributor. Over the past several years the Company had increased the number of suppliers it represents to over 100 in order to expand its product offering and better serve its customers. Acquisitions have also provided the Company the opportunity to increase its product offerings as the Company has received national franchises from many of the suppliers of the companies it has acquired over the years. As a result of its rapid growth and the acquisitions it has completed over the years, the Company has an overlap of suppliers in many product areas and, while still maintaining an expanded offering of products, the Company has begun to reduce the number of suppliers with which it will do business. While this may initially cause the Company to incur costs and may require the Company to increase inventory reserves, this move is expected to increase the return on investment with, and the productivity of, the remaining suppliers in future periods. SERVICE CAPABILITIES During the past several years, customers have been reducing their approved vendor base in an effort to place a greater percentage of their purchases with fewer, more capable distributors. As part of its overall strategy to increase market penetration, the Company has endeavored to develop state-of-the-art service capabilities. The Company refers to these service capabilities as "distribution technology." The Company believes that it has developed service capabilities comparable to some of the largest distributors in the industry, which service capabilities are not yet readily available at many distributors of comparable size to the Company. The Company further believes that these capabilities are not generally made available by the largest distributors to middle market customers, which represent the vast majority of the Company's customer base. See "Competition." Management believes that smaller distributors generally do not have the ability to offer as broad an array of services as the Company. The Company differentiates itself from its competition by making state-of-the-art distribution technology available to both large and middle market customers. Although the Company believes that this differentiation will assist the Company's growth, there can be no assurance that such differentiation exists to the extent that the Company currently believes or that it will continue in the future. 5 The Company's distribution technology incorporates nationwide access to real-time inventory and pricing information, electronic order entry and rapid order processing. During the past few years, the Company has expanded its services capabilities to include just-in-time deliveries, bar coding, bonded inventory programs, in-plant stores, in-plant terminals and automatic inventory replenishment programs. The Company has also implemented electronic data interchange ("EDI") programs. EDI programs permit the electronic exchange of information between the Company and its customers and suppliers, thus facilitating transactions between them by reducing labor costs, errors and paperwork. In an effort to reduce the number of distributors they deal with, and ultimately reduce their procurement costs, many customers have been selecting distributors that, in addition to providing their standard components, are also able to provide products that are not part of the distributors' regular product offerings. This service is referred to as "kitting." In order to expand its service offerings to address this growing customer requirement, the Company created a kitting department toward the end of 1994. One of the strategic purposes of the Added Value Acquisitions was to enhance the Company's ability to provide kitting services, as one of the acquired companies had kitting capabilities. In addition to kitting capabilities, as a result of the Added Value Acquisitions the Company began developing the expertise in turnkey manufacturing which enables customers to outsource their entire procurement and manufacturing process. Turnkey services are especially attractive to smaller OEMs which do not have the capital resources necessary to invest in state-of-the-art manufacturing equipment nor the capacity requirement necessary to justify such an investment. In performing turnkey services, the Company subcontracts out all of the manufacturing work to third party assemblers. The Company offers warranties against defects in workmanship with respect to its turnkey services, which is a pass-through from the assembler. In order to better support its customer base and improve the utilization of its distribution technology and kitting and turnkey services, the Company has focused on consulting with customers to jointly develop complete materials management solutions or "MMS". In the fourth quarter of 1996, the Company created an MMS Group to facilitate the consultation as well as the development and implementation of materials management solutions. The MMS Group is staffed with personnel experienced in the manufacturing environment who can better understand the customers' processes and needs. The MMS Group has also been instrumental in the evaluation and restructuring of the Company's value added services strategy, particularly in the areas of kitting and turnkey services. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Selling, General and Administrative Expenses." In order to further enhance its service capabilities, the Company also expanded its technical support by creating an engineering or technical sales program in 1994. As part of this program, the Company has hired electrical engineers, or Field Application Engineers (FAEs), at various sales offices across the country. The Company expects to hire additional FAEs in the future. The program is intended to generate sales by providing customers with engineering support and increased service at the design and development stages. The program is also intended to enhance the technical capabilities of the Company's entire sales 6 force through regular training sessions. Management believes that this capability is also of great importance in attracting new suppliers. Another rapidly growing segment of electronics distribution is the sale of programmable semiconductor products. Programmable semiconductors enable customers to reduce the number of components they use by highly customizing one semiconductor to perform a function that otherwise would require several components to accomplish. This saves space and enables customers to reduce the size and cost of their products. In order to effectively sell programmable products, most major distributors have established their own semiconductor programming centers. To participate in this growing segment of the industry, the Company opened a semiconductor programming center during the third quarter of 1995 and in January 1996 moved its programming center into the Company's new 20,000 square foot facility in Fremont, California (near San Jose). In addition to enabling the Company to address a rapidly growing market for programmable products, this capability will allow the Company to attract new product lines that require programming capabilities. To further support the programming needs of certain customers in the Northwest, the Company purchased all of the capital stock of Programming Plus Incorporated ("PPI"), a privately held programming company located in Midvale, Utah which provides programming and tape and reel services. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Acquisitions" and Note 4 to Notes to Consolidated Financial Statements. The Company believes that in the upcoming years an increasing amount of transactions in its industry will be processed over the Internet. In this regard, the Company has begun to design and develop its own home page which will provide certain types of functionality for potential users. The Company's website became operational during the first quarter of 1997 and it expects to add functionality to its website later in the year. In order to further expand its visibility and functionality on the Internet, the Company has engaged with third party Internet service companies. These engagements are expected to increase revenues, reduce transaction costs and afford the Company an opportunity to do business in a new and still developing marketplace. While these engagements will increase operating costs in 1997, the benefits are not expected to be realized until late 1997 or during 1998. In an attempt to further drive the sales of value-added services, the Company created its American Assemblies & Design division in Chicago during the fourth quarter of 1994. American Assemblies & Design was intended to expand the Company's value-added capabilities with respect to electromechanical products. As a result of continued losses as well as a shift in the Company's focus, the operations of American Assemblies were relocated and consolidated into the Company's Miami distribution center in the first quarter of 1996. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Selling, General and Administrative Expenses." QUALITY CONTROLS AND ISO CERTIFICATION 7 During 1994 the Company created an operations department and embarked upon a TQM program in order to properly manage its rapid growth and achieve compliance with the increasingly stringent quality standards of its customer base. The TQM program created continuous process improvement teams empowered to design and direct the ongoing re-engineering of the Company. The intention of the TQM program is to improve service, increase efficiency and productivity and, over time, reduce costs. The expansion in capacity and service capabilities discussed above were done within the confines of increasing strictness in quality control programs and traceability procedures. As a result, the Company's Miami and Fremont distribution centers and its Fremont programming center have all successfully completed a procedure and quality audit that resulted in their certification under the international quality standard of ISO 9002. This quality standard was established by the International Standards Organization (the "ISO") created by the European Economic Community ("EEC"). The ISO created uniform standards of measuring a company's processes, traceability procedures and quality control in order to assist and facilitate business among the EEC. The Company believes that this certification is becoming a requirement of an increasing portion of the customer base. PRODUCTS ACTIVE AND PASSIVE COMPONENTS The Company markets both semiconductors and passive products. Semiconductors, which are active products, respond to or activate upon receipt of electronic current. Active products include transistors, diodes, memory devices and other integrated circuits. Passive components, on the other hand, are designed to facilitate completion of electronic functions. Passive products include capacitors, resistors, inductors and electromechanical products such as cable, switches, connectors, filters and sockets. Virtually all of the Company's customers purchase both active and passive products. While the Company offers many of the latest technology semiconductor and passive products, its focus historically had been on mature products that have a more predictable demand, more stable pricing and more constant sourcing. The Company believes that the greater predictability in the demand for these products and the fact that component manufacturers are not likely to invest capital in order to increase production of older technologies combine to reduce the risks inherent in large volume purchases of mature products. By making large volume purchases of semiconductor and passive products, the Company decreases its per-unit cost, thus increasing its potential for higher profit margins upon resale of these mature products. Although the Company continues to position itself as a leader in the more mature product lines, as part of its growth strategy, the Company has expanded its focus to include offering newer technology products as well as on selling high volumes of commodity products. These newer technologies and commodity products are playing a greater role in the overall sales mix of the Company and are expected to play an even greater role in the overall sales mix to the extent the Company's sales continue to grow. Most of the commodity products, and many of the newer technology products, have lower profit margins than the more mature semiconductor and passive product lines. 8 The Company does not offer express warranties with respect to any of its active or passive products, instead passing on only those warranties, if any, granted by its suppliers. FLAT PANEL DISPLAY PRODUCTS The Company believes that one of the faster growing segments of the electronics industry will result from the expanded utilization of flat panel displays or FPDs. Flat panel displays are commonly used in laptop computers and are currently replacing standard cathode ray tubes in a variety of applications, including medical, industrial and commercial equipment, as well as personal computers and video monitors. FPDs are also being utilized in the development of high definition television ("HDTV"). Industry sources estimate that the U.S. flat panel display market will grow 23% per year from approximately $2 billion in 1995 to over $5.7 billion by the year 2000. In order to properly function in any application, flat panel displays need certain electronic impulses. One solution for generating these electronic impulses is the use of board level products that control and regulate the electronic input that drives the flat panel display. These products are commonly referred to as driver boards. In addition to the driver board, FPDs require a back-light inverter to run the back-light, and cable assemblies to connect the display, inverter and the driver board to each other and to the equipment of which it is a part. The Company has begun to address the FPD market in three ways. First, the Company has assembled a comprehensive offering of FPD products, including products from manufacturers of FPDs, as well as manufacturers of the necessary support products such as back-light inverters and driver boards. The second aspect in addressing the FPD market is to develop the technical support necessary to assist customers with integrating FPD applications. In this regard the Company's FAE program and marketing department have been developing expertise in FPD applications and integration. The third aspect to the Company's approach to the FPD marketplace was accomplished with the creation of Aved Display Technologies ("ADT"). ADT was established in 1996 as a separate division from the personnel and assets acquired in the Added Value Acquisitions. ADT designs, develops and has manufactured under its own label, several proprietary driver board products for FPD applications. ADT also has the expertise to design and assemble the entire kit of parts needed so that the OEM customer can eliminate this design function and use one part number to order all of the components needed. This greatly simplifies the customer's design-in and purchasing process, and allows the customer to optimize the performance of the flat panel displays. ADT presently has FPD kits available for sale. In 1996 ADT had over $1.4 million in revenues and the Company had over $575,000 of revenues from the sale of flat panel display products. While the investment in its FPD strategy has had a negative impact on earnings in 1996, the Company believes that the potential market for these products could be substantial and, by having these comprehensive 9 capabilities available, the Company will have a greater opportunity to participate in this new market. MEMORY MODULES As a result of the Added Value Acquisitions, the Company also designs, has manufactured and sells memory modules under the Aved Memory Products, or AMP label. Memory products, which include the memory module subsegment, represent the largest product sector of semiconductor revenues, estimated by industry sources at $48 billion worldwide. Memory modules facilitate the incorporation of expanded memory in limited space. In 1996 Aved Memory Products contributed $7.8 million to the Company's revenues. The Company believes that the memory module industry will grow from approximately $14 billion in 1996, to $23 billion worldwide by 2000. Growth in memory products is being driven by a variety of factors, including software applications such as Microsoft's WINDOWS 95(/trademark/) and WINDOWS NT(/trademark/) and the proliferation of graphics, multimedia and Internet products. With respect to all products manufactured or assembled for ADT and AMP, the Company offers a warranty for a period of one year against defects in workmanship and materials under normal use and service and in their original, unmodified condition. ELECTROMECHANICAL VALUE-ADDED SERVICES In an effort to reduce overhead, a growing number of customers have been outsourcing certain processes and relying more upon distributors to handle certain assemblies and modification work. These include connector and cable assemblies, cable harnessing, terminal block modifications and other services. These electromechanical value-added services offer distributors an opportunity to sell their components at higher margins when these components become integrated into an assembly. The Company began offering electromechanical value-added services in 1989 as a result of its acquisition of a regional passive component distributor which offered such services. To date, the Company has derived only nominal revenues from these value-added services. Part of the strategy for the acquisition in January 1994 of a Chicago, Illinois-based distributor (see Note 4 to Notes to Consolidated Financial Statements) was to expand the Company's electromechanical value-added capabilities as the acquired company derived a substantially higher percentage of its revenues from these value-added services. In an attempt to further drive the sales of these value-added services, the Company created its American Assemblies & Design division in Chicago during the fourth quarter of 1994, thereby expanding the Company's value-added capabilities with respect to electromechanical products. As a result of continued losses, the operations of American Assemblies has been relocated to and consolidated into the Company's Miami distribution facility. COMPUTER PRODUCTS 10 While the Company currently estimates that 32% of electronics distributors' revenues relate to computer products, the Company has not in the past derived significant revenues from the sale of these products. In June 1995, the Company began to distribute motherboards, and in connection therewith, established a computer products division or CPD. This division expanded its offering to include computer upgrade kits, disk drives and keyboards and operated under the name "Access Micro Products." Sales from this division generated substantially lower profit margins than were generated by the Company's other products. As a result of supply problems and related losses, as well as a decision by the Company to focus its resources on its active and passive components business, the operations of CPD were discontinued in the third quarter of 1996. With respect to all products manufactured or assembled for CPD, the Company offered a warranty for a period of one year against defects in workmanship and materials under normal use and service and in their original, unmodified condition. CUSTOMERS The Company markets its products primarily to OEMs in a diverse and growing range of industries. The Company's customer base includes manufacturers of computers and computer-related products, satellite and communications products, consumer goods, robotics and industrial equipment, defense and aerospace equipment and medical instrumentation. In addition, as a result of its computer products division, in 1995 the Company began expanding its customer base to include VARs, systems integrators, computer products distributors, catalog companies and computer superstores. Sales to this new customer base has been terminated with the Company's decision to discontinue the operations of CPD. The Company's customer list includes approximately 12,000 accounts. During 1996, no customer accounted for more than 3% of the Company's sales and the Company does not believe that the loss of any one customer would have a material adverse impact on its business. SALES AND MARKETING OVERALL STRATEGY The Company differentiates itself from its competitors in the marketplace by the combination of products and services that it can provide to its customers. The Company is a broad-line distributor offering over 60,000 different products representing approximately 90 different component manufacturers. In addition, the Company employs a decentralized management philosophy whereby branch managers are given latitude to run their operations based on their experience within their particular regions and the needs of their particular customer base. This decentralization results in greater flexibility and a higher level of customer service. Thus, the Company believes it can provide the broad product offering and competitive pricing normally associated with the largest national distributors, while still providing the personalized service levels usually associated only with regional or local distributors. Additionally, because of its size and capabilities, the Company brings to the 11 middle market customers a level of service capabilities that the smaller distributor cannot provide. The Company's marketing strategy is to be a preferred and expanding source of supply for all middle market customers. The Company is achieving this by providing a broader range of products and services than is available from smaller and comparably sized distributors, and a higher level of attention than these customers receive from the larger distributors. In addition, the Company continues its efforts to become a more significant supplier for the top tier customers by providing a niche of products supported by the high level of quality, service and technical capabilities required to do business with these accounts. MARKETING TECHNIQUES The Company has expanded its marketing group by adding a west coast marketing department strategically situated in Silicon Valley during 1996. The Company uses various techniques in marketing its products which include: (i) direct marketing through personal visits to customers by management, field salespeople and sales representatives, supported by a staff of inside sales personnel who handle the quoting, accepting, processing and administration of sales orders; (ii) ongoing advertising in various national industry publications and trade journals; (iii) general advertising, sales referrals and marketing support from component manufacturers; and (iv) the Company's telemarketing efforts. The Company also uses its expanded service capabilities, technical sales or FAE Program, its MMS Group and its status as an authorized distributor, as marketing tools. See "Business Strategy-Service Capabilities" and "Suppliers." SALES PERSONNEL As of March 1, 1997, the Company employed 294 people in sales on a full-time basis, of which 118 are field salespeople, 107 are inside salespeople, 37 are in management, 20 are in administration and 12 are electrical engineers in the technical sales or FAE Program. The Company also had 4 sales representatives covering various territories where the Company does not have sales offices. Salespeople are generally compensated by a combination of salary and commissions based upon the gross profits obtained on their sales. Each branch is run by a general manager who reports to a regional manager, who in turn reports to an area manager. All area managers report to the Company's Senior Vice President of Sales. Area, regional and general managers are compensated by a combination of salary and incentives. Prior to 1997, these incentives were based upon achieving various goals including gross profits from the sales offices in their respective areas or regions. In order to heighten the Company's focus on profitability as opposed to its prior focus on market share growth, in 1997, area, regional and general manager incentives were all changed to be based on achieving operating income goals. SALES OFFICE LOCATIONS 12 As a result of the Added Value Acquisitions in December 1995, the Company acquired sales offices in Tustin, San Diego, Westlake Village and Visalia, California; Scottsdale, Arizona; Denver, Colorado; and Salt Lake City (Midvale), Utah. The Company merged its existing Salt Lake City sales office with the acquired sales office in Midvale, Utah. Additionally, the Company merged the San Diego, California office with its existing San Diego office, the Westlake Village, California office with its existing Calabasas office and the components sales operation of the Tustin, California office with its existing Cypress office. In the third quarter of 1996, the Company closed its Visalia office, and the customers are now being serviced from the Company's existing sales offices in San Jose and Calabasas. During the second quarter of 1995, the Company relocated its San Fernando Valley and Orange County, California offices into two much larger facilities in Calabasas and Cypress, California. As part of such relocations, the Company closed its office in Torrance, California which was originally opened in 1981. During 1995, the Company opened three new offices in Tampa, Florida; Rochester, New York; and Atlanta, Georgia. In addition, the Company opened four more offices during 1996, in Milwaukee, Wisconsin; Seattle, Washington; Raleigh, North Carolina; and the Company's first office outside of the United States in Toronto, Canada. In the third quarter of 1996, the Company closed its offices in Houston, Texas and Danbury, Connecticut. As a result of the Added Value Acquisitions and the consolidations, closings, relocations and new openings since January 1995, the Company currently operates 29 sales offices in 20 states and Canada. The locations of the sales offices are in each of the following geographic markets: Huntsville, Alabama; Phoenix, Arizona; Orange County, San Diego, San Fernando Valley, San Jose and Tustin, California; Toronto, Canada; Denver, Colorado; Fort Lauderdale, Miami and Tampa, Florida; Atlanta, Georgia; Chicago, Illinois; Baltimore, Maryland; Boston, Massachusetts; Detroit, Michigan; Minneapolis, Minnesota; Long Island and Rochester, New York; Raleigh, North Carolina; Cleveland, Ohio; Portland, Oregon; Philadelphia, Pennsylvania; Austin and Dallas, Texas; Salt Lake City, Utah; Seattle, Washington and Milwaukee, Wisconsin. The Company also retains field sales representatives to market other territories throughout the United States, Puerto Rico and Mexico. The Company may consider opening branches in these other territories if the representatives located there achieve certain sales levels. However, the Company does not have plans to open any new sales offices in 1997. 13 TRANSPORTATION All of the Company's products are shipped through third party carriers. Incoming freight charges are generally paid by the Company, while outgoing freight charges are typically paid by the customer. SEASONALITY The Company's sales have not historically been materially greater in any particular season or part of the year. BACKLOG As is typical of distributors, the Company has a backlog of customer orders. While these customer orders are cancelable, the Company believes its backlog is an indicator of future sales. At December 31, 1996, the Company had a backlog in excess of $49 million, compared to a backlog of $74 million at December 31, 1995. In 1993, 1994 and 1995, the Company operated in a highly allocated market where the demand for products was much greater than the supply. As a result of these product shortages, customers had a practice of placing longer term product needs on order with distributors to increase their probabilities of receiving their products on time and to protect against rising prices. At the end of 1995 and during 1996, product availability increased and there was a dramatic shift to an oversupply market. In response to this dramatic shift customers began canceling order backlogs to lower their inventories and to take advantage of the better pricing which became available. Today the customer practice is to keep much lower levels of product on order as delivery times are much shorter than they were in 1993, 1994 and 1995. Additionally, the Company has increased its practices of EDI transactions where the Company purchases inventory based on electronically transmitted customer forecasts that do not become an order until the date of shipment and, therefore, are not reflected in the Company's backlog. As a result of the dramatic shift in the supply-demand balance and the increase in EDI transactions, the Company's backlog is lower than it was one year ago and the Company believes that the backlog figures have a different indication of future sales levels than the backlog figures of the 1993 through 1995 period. By February 28, 1997, the Company's backlog had risen to approximately $55 million. The Company believes that a substantial portion of its backlog represents products due to be delivered within the next three months. Approximately 40% of the backlog relates to purchase orders which call for scheduled shipments of inventory over a period of time, with the balance representing products that are on back-order with suppliers. The scheduled shipments enable the Company to plan purchases of inventory over extended time periods to satisfy such requirements. 14 SUPPLIERS The Company generally purchases products from components manufacturers pursuant to non-exclusive distribution agreements. Such suppliers generally limit the number of distributors they will authorize in a given territory in order to heighten the distributor's focus on their products as well as to prevent over-distribution. Suppliers also limit the number of distributors in order to reduce the costs associated with managing multiple distributors. As a factory authorized distributor, the Company obtains sales referrals, as well as sales, marketing and engineering support, from component manufacturers. This support assists the Company in closing sales and obtaining new customers. The Company's status as an authorized distributor is a valuable marketing tool as customers recognize that when dealing with an authorized distributor they receive greater support from the components manufacturers. The Company believes that an important factor which suppliers consider in determining whether to grant or to continue to provide distribution rights to a certain distributor is that distributor's geographic coverage. In meeting its goal of being recognized as a national distributor, the Company has opened and acquired sales offices in a number of markets throughout the United States and has advertised in national industry publications to demonstrate its distribution capabilities to current and potential customers and suppliers. Another important factor that suppliers consider is whether the distributor has in place an engineering staff capable of designing-in the suppliers' products at the customer base. To address this requirement, the Company established an engineering or FAE Program in 1994 which is currently staffed with 12 engineers. As a result of the Company's strategy, from 1980 to 1996, the Company increased the number of suppliers it represented from 20 to over 100 in order to expand its product offerings and better serve its customers. As a result of its rapid growth and the acquisitions it has completed over the years, the Company has an overlap of suppliers in many product areas and, while still maintaining an expanded offering of products, the Company has begun to reduce the number of suppliers with which it will do business. While this may initially cause the Company to incur costs and may require the Company to increase inventory reserves, this move is expected to increase the return on investment with, and the productivity of, the remaining suppliers in future periods. The Company presently represents 90 suppliers. All distribution agreements are cancelable by either party, typically upon 30 to 90 days notice. For the year ended December 31, 1996, the Company's three largest suppliers accounted for 19%, 8% and 8% of consolidated purchases, respectively. Most of the products that the Company sells are available from other sources. While the Company believes that the loss of a key supplier could have an adverse impact on its business in the short term, the Company would attempt to replace the products offered by that supplier with the products of other suppliers. If the Company were to lose its rights to distribute the products of any particular supplier, there can be no assurance that the Company would be able to replace the products which were available from that particular supplier. The loss of 15 a significant number of suppliers in a short period of time could have a material adverse effect on the Company. The Company, from time to time, alters its list of authorized suppliers in an attempt to provide its customers with a better product mix. As a distributor of electronic components, the Company believes that it benefits from technological change within the electronics industry as new product introductions accelerate industry growth and provide the Company with additional sales opportunities. The Company believes its inventory risk due to technological obsolescence is significantly reduced by certain provisions typically found in its distribution agreements including price protection, stock rotation privileges, obsolescence credits and return privileges. Price protection is typically in the form of a credit to the Company for any inventory the Company has of products for which the manufacturer reduces its prices. Stock rotation privileges typically allow the Company to exchange inventory in an amount up to 5% of a prior period's purchases. Obsolescence credits allow the Company to return any products which the manufacturer discontinues. Upon termination of a distribution agreement, the return privileges typically require the manufacturer to repurchase the Company's inventory at the Company's average purchase price, however, if the Company terminates the distribution agreement, there is typically a 10% to 15% restocking charge. The vast majority of the Company's inventory is purchased pursuant to its distribution agreements. The Company does not generally purchase product for inventory unless it is a commonly sold product, there is an outstanding customer order to be filled, a special purchase is available or unless it is an initial stocking package in connection with a new line of products. FACILITIES AND SYSTEMS FACILITIES As a result of its continued growth, the Company has relocated its corporate headquarters and distribution facility twice since 1990. In order to support substantial future growth without another relocation, in May 1994 the Company moved into a 110,800 square foot facility in Miami, Florida containing new corporate offices and a state-of-the-art distribution center designed by the Company. The Company occupies this facility through a lease which expires in 2014, subject to the Company's right to terminate at any time after the fifth year of the term upon twenty-four months prior written notice and the payment of all outstanding debt owed to the landlord. The lease for this facility contains three six-year options to renew at the then fair market value rental rates. The lease provides for annual fixed rental payments totaling approximately $264,000 in the first year, $267,000 in the second year, $279,000 in each of the third, fourth and fifth years, $300,600 in the sixth year, $307,800 in the seventh year, and in each year thereafter during the term the rent shall increase once per year in an amount equal to the annual percentage increase in the consumer price index not to exceed 4% in any one year. Initially the Company occupied approximately 75% of the facility. In June 1994, the Company entered into a sublease with an unrelated third party for approximately 25% of this facility for a term of three years ending on July 14, 1997, with no 16 renewal options and the Company having the right to recapture a portion of the sublet space from and after the eighteenth month of the three-year term. During 1996, the Company reclaimed 11,300 square feet pursuant to the sublease agreement, which brought the total amount of the building occupied by the Company to 84%. Although continued growth is not assured, the Company estimates that this facility (including the space currently sublet) has capacity to handle over $400 million in annual revenues. As a result of the Added Value Acquisitions, the Company leases a 13,900 square foot facility in Tustin, California and a 7,600 square foot facility in Denver, Colorado. The Tustin facility contains a distribution center as well as part of the staff supporting the Company's kitting and turnkey operations and the separate divisions created for flat panel displays (ADT) and memory module (AMP) operations. See "Products." The Denver facility contains a regional distribution center and sales office. In October 1995, the Company entered into a lease for a new west coast distribution and semiconductor programming center located in Fremont, California (near San Jose). This facility contains approximately 20,000 square feet of space. The Company moved into such facility in January 1996. The Company has used this space to expand its semiconductor programming and component distribution capabilities and to improve quality control and service capabilities for its west coast customers. Additionally, this space was originally intended to house the Company's distribution and operational support for its computer products division. As a result of the Company's decision to discontinue operations of its CPD, this new space is underutilized. While no future growth can be assured, the Company expects that this excess capacity will be utilized to support the growth of its components distribution business in future periods. As a result of a January 1994 acquisition, the Company had leased a 9,700 square foot facility located near Chicago, Illinois, which contained a regional distribution center and the value-added operations of the Company's American Assemblies & Design division. This lease expired in June 1996, by which time the Company had relocated certain of the operations of its American Assemblies division to its Miami distribution facility. See "Products-Electromechanical Value-Added Services." The Chicago sales operations are located in a separate office in the Chicago area. Furthermore, the Company occupies approximately 11,000 square feet of space in San Jose, California; approximately 7,500 square feet of which is presently used for sales and 3,500 square feet of which is used for corporate offices. In addition, the Company leases space for its other sales offices, which range in size from approximately 1,000 square feet to 8,000 square feet. See "Sales and Marketing-Sales Office Locations." The Company has significant excess capacity with its distribution centers in Miami, Florida; Fremont and Tustin, California; and Denver, Colorado. To the extent that the Company achieves projected sales growth in future periods, management expects to realize improved operating efficiencies and economies of scale as a result of its present excess capacity. There can be no assurance, however, that the necessary sales growth will be obtained. 17 SYSTEMS In 1990, the Company created a management information systems ("MIS") department and, in 1991, new computer and communications systems were placed into service. The Company's systems and operations are designed to facilitate centralized warehousing which allows salespeople across the country to have real-time access to inventory and pricing information and allows a salesperson in any office to enter orders electronically, which instantaneously print in the appropriate distribution facility for shipping and invoicing. The combination of the centralized distribution centers and the electronic order entry, enable the Company to provide rapid order processing at low costs. The system also provides for automatic credit checks, which prohibit any product from being shipped until the customer's credit has been approved. Additionally, the systems allow the Company to participate with customers and suppliers in electronic data interchange, or EDI, and to expand customer services, including just-in-time deliveries, kitting programs, bar coding, automatic inventory replenishment programs, bonded inventory programs, in-plant stores and in-plant terminals. As a result of the Company's rapid growth and in order to continue to provide state-of-the-art distribution technology, these systems were expanded during 1994 and 1995. In 1996 the Company determined that its systems were not optimal to obtaining the Company's goals. As a result of rapidly increasing advances in technology, the Company has recognized that its computer and communications systems will be subject to continual enhancements. In response to the changing needs of its customers and suppliers and in order to take advantage of better technology, the Company replaced certain hardware with more up-to-date and substantially more powerful equipment and added some additional equipment to its systems. In order to meet the increasing demands of the customer base, to maintain state-of-the-art capabilities, and to participate in commerce over the Internet, the Company expects to continue to develop and expand its systems capabilities further, including hardware and software upgrades and changes to meet its computer and communications needs. The Company believes that these systems enhancements should assist in increasing sales and in improving efficiencies and the potential for greater profitability in future periods through increased employee productivity, enhanced asset management, improved quality control capabilities and expanded customer service capabilities. See "Business Strategy-Service Capabilities." There can be no assurance, however, that these benefits will be achieved. FOREIGN MANUFACTURING AND TRADE REGULATION A significant number of the components sold by the Company are manufactured outside the United States and purchased by the Company from United States subsidiaries or affiliates of those foreign manufacturers. As a result, the Company and its ability to sell at competitive prices could be adversely affected by increases in tariffs or duties, changes in trade treaties, currency fluctuations, strikes or delays in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. The Company's ability to be competitive in or with the sales of imported 18 components could also be affected by other governmental actions and changes in policies related to, among other things, anti-dumping legislation and currency fluctuations. Since the Company purchases from United States subsidiaries or affiliates of foreign manufacturers, the Company's purchases are paid for in U.S. dollars which reduces the potential adverse effect of currency fluctuations. While the Company does not believe that these factors adversely impact its business at present, there can be no assurance that such factors will not have a material adverse affect on the Company in the future. EMPLOYEES As of March 1, 1997, the Company employed 530 persons, of which 294 are involved in sales and sales management; 88 are involved in marketing; 49 are involved in the distribution centers; 40 are involved in operations; 10 are involved in management; 36 are involved in bookkeeping and clerical; and 13 are involved in MIS. None of the Company's employees are covered by collective bargaining agreements. The Company believes that management's relations with its employees are good. COMPETITION The Company believes that there are over 1,000 electronic components distributors throughout the United States, ranging in size from less than $1 million in revenues to companies with annual sales exceeding $6 billion worldwide. These distributors can be divided into global distributors who have operations around the world, national distributors who have offices throughout the United States, regional distributors and local distributors. With 29 sales offices in 20 states and Canada, the Company competes as a national distributor. The Company, which was recently recognized by industry sources as the eighth largest distributor of semiconductors and the 16th largest distributor of electronic components in the United States, believes its primary competition comes from the top 50 distributors in the industry. The Company competes with many companies that distribute electronic components and, to a lesser extent, companies that manufacture such products and sell them directly. Some of these companies have greater assets and possess greater financial and personnel resources than does the Company. The competition in the electronics distribution industry can be segregated by target customers: major (or top tier) accounts; middle market accounts; and emerging growth accounts. Competition to be the primary supplier for the major customers is dominated by the top 10 distributors as a result of the product offerings, pricing and distribution technology offered by these distributors. The Company competes for a portion of the available business at these major industry customers by seeking to provide the very best service and quality and by focusing on products that are not supported by the top 10 distributors, or are fill-in or niche products. With its expanded service capabilities and quality assurance procedures in place, the Company believes that it can now compete for a bigger portion of the business at the top tier customer base, although there can be no assurance that it will be successful in doing so. The Company believes competition from the top 10 distributors for the middle market customer base is 19 not as strong since the largest distributors focus their efforts on the major account base. For this reason, the Company has focused strong efforts on servicing this middle market customer base. The Company competes for this business by seeking to offer a broader product base, better pricing and more sophisticated distribution technology than the regional or local distributors, by seeking to offer more sophisticated distribution technology than comparably-sized distributors and by seeking to offer to such middle market companies a higher service level than is offered to them by the major national and global distributors. ITEM 2. PROPERTIES See "ITEM 1. Business-Facilities and Systems" and "Sales and Marketing-Sales Office Locations" and Note 11 to Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in litigation relating to claims arising out of its operations in the ordinary course of business. Such claims are generally covered by insurance or, if they relate to products manufactured by others for which it distributes, the Company would expect that the manufacturers of such products would indemnify the Company, as well as defend such claims on the Company's behalf, although no assurance can be given that any manufacturer would do so. The Company believes that none of these claims should have a material adverse impact on its financial condition or results of operations. There has been a recent trend throughout the United States of increased grievances over various employee matters. While the Company is presently not involved in any material litigation relating to such matters, the Company believes that costs associated with such matters may increase in the future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of 1996. 20 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the Symbol: "SEMI." The following table sets forth the range of high and low sale prices for the Company's common stock as reported on The Nasdaq Stock Market during each of the quarters presented: QUARTER OF FISCAL YEAR HIGH LOW - ---------------------- ---- --- 1995 - ---- First Quarter $2 1/8 $1 15/32 Second Quarter 2 7/16 1 5/8 Third Quarter 3 11/16 2 1/8 Fourth Quarter 3 5/16 2 3/16 1996 - ---- First Quarter 2 15/16 2 Second Quarter 2 13/16 1 31/32 Third Quarter 2 7/32 1 5/8 Fourth Quarter 1 13/16 1 1997 - ---- First Quarter (through March 24, 1997) 1 7/16 1 1/32 As of March 24, 1997, there were approximately 500 holders of record of the Company's common stock, based on the stockholders list maintained by the Company's transfer agent. Many of these record holders hold these securities for the benefit of their customers. The Company believes that it has over 8,300 beneficial holders of its common stock. DIVIDEND POLICY The Company has never paid cash dividends. In 1989, the Company's Board of Directors declared a 25% stock split effected in the form of a stock dividend. Future dividend policy will depend on the Company's earnings, capital requirements, financial condition and other relevant factors. It is not anticipated, however, that the Company will pay cash dividends on its common stock in the foreseeable future, inasmuch as it expects to employ all available cash in the continued growth of its business. In addition, the Company's revolving line of credit agreement prohibits the payment of any dividends. See Note 8 to Notes to Consolidated Financial Statements. 21 SALES OF UNREGISTERED SECURITIES The Company has not issued or sold any unregistered securities during 1996 except as follows: (1) Effective January 1, 1996, the Company issued an aggregate of 549,999 shares (the "PPI Shares") of the Company's common stock in connection with the Company's purchase of all of the capital stock of Programming Plus Incorporated. Based upon the PPI Shares being valued at $2.50 per share, the total purchase price paid by the Company was $1,375,000 of the Company's common stock. For a more detailed description of the Company's acquisition of Programming Plus Incorporated, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Acquisitions." The PPI Shares were issued by the Company in reliance upon the exemption from registration available under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). (2) Pursuant to the Company's Employees', Officers', Directors' Stock Option Plan, as previously amended and restated, the Company granted during 1996 stock options to purchase 276,500 shares of the Company's common stock to 25 individuals at an exercise price ranging from $1.50 to $2.31 per share. The stock options are exercisable over a five or six-year period. See Note 10 to Notes to Consolidated Financial Statements. All of the stock options were granted by the Company in reliance upon the exemption from registration available under Section 4(2) of the Securities Act. 22 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the Company for and as of the years 1992 through 1996 has been derived from the audited Consolidated Financial Statements of the Company. Such information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Statement of Operations Data
YEARS ENDED DECEMBER 31 1996 1995(1) 1994 1993 1992 - ----------------------- ------------- ------------- ------------ ------------ ------------ Net Sales(2) ................ $ 237,846,000 $ 177,335,000 $101,085,000 $ 67,510,000 $ 49,015,000 Cost of Sales(3) ............ (185,367,000) (138,089,000) (74,632,000) (49,010,000) (35,083,000) ------------- ------------- ------------ ------------ ------------ Gross Profit ................ 52,479,000 39,246,000 26,453,000 18,500,000 13,932,000 Selling, General and Administrative Expenses ... (51,675,000) (32,321,000) (23,374,000) (14,821,000) (11,384,000) Restructuring and Other Nonrecurring Expenses(4) .. (4,942,000) (1,098,000) (548,000) (61,000) (114,000) ------------- ------------- ------------ ------------ ------------ Income (Loss) from Continuing Operations ................ (4,138,000) 5,827,000 2,531,000 3,618,000 2,434,000 Interest Expense(5) ......... (7,025,000) (2,739,000) (1,772,000) (1,103,000) (1,153,000) Other Income (Expense)-Net(6) -- -- -- 281,000 -- ------------- ------------- ------------ ------------ ------------ Income (Loss) from Continuing Operations Before Income Taxes ..................... (11,163,000) 3,088,000 759,000 2,796,000 1,281,000 Income Tax (Provision) Benefit ................... 2,942,000 (1,281,000) (407,000) (1,094,000) (525,000) ------------- ------------- ------------ ------------ ------------ Income (Loss) from Continuing Operations Before Discontinued Operations and Extraordinary Items ....... (8,221,000) 1,807,000 352,000 1,702,000 756,000 Discontinued Operations(7) .. (1,757,000) 79,000 -- -- -- Extraordinary Items(8) ...... 58,000 -- -- -- -- ------------- ------------- ------------ ------------ ------------ Net Income (Loss) ........... $ (9,920,000) $ 1,886,000 $ 352,000 $ 1,702,000 $ 756,000 ============= ============= ============ ============ ============ Earnings (Loss) Per Share(9): Primary ................... $ (.49) $ .12 $ .03 $ .19 $ .12 Fully Diluted ............. $ (.49) $ .12 $ .03 $ .18 $ .12 Balance Sheet Data DECEMBER 31 1996 1995 1994 1993 1992 - ----------- ----------- ------------ ------------ ------------ ------------ Working Capital ............. $ 69,823,000 $ 59,352,000 $ 39,800,000 $ 27,534,000 $ 19,427,000 Total Assets ................ 112,921,000 114,474,000 57,858,000 37,968,000 28,595,000 Long-Term Debt, Including Current Portion ........... 58,221,000 37,604,000 27,775,000 14,928,000 13,850,000 Shareholders' Equity ........ 22,396,000 32,267,000 16,950,000 15,612,000 8,517,000 Book Value Per Common Share . $ 1.13 $ 1.62 $ 1.37 $ 1.30 $ 1.10 - ------------------------- (1) On December 29, 1995, the Company completed the Added Value Acquisitions. The statement of operations data for 1995 reflects only the nonrecurring expenses associated with such acquisitions, while the balance sheet data reflects the assets and liabilities of the acquired companies at December 31, 1995. (2) Net sales, including sales generated by the Company's computer products division which was discontinued in the third quarter of 1996, were $244,668,000 for 1996 and $180,794,000 for 1995.
23 (3) 1996 includes non-cash inventory write-offs of $2,000,000 associated with the Company's restructuring of its kitting and turnkey operations. (4) 1996 includes non-recurring expenses consisting of: $1,092,000 relating to restructuring the Company's kitting and turnkey operations, $587,000 relating to the termination of certain employment agreements, $445,000 relating to closing the Company's Lisle, Illinois cable assembly division, $625,000 relating to the accrual of a postretirement benefit cost associated with an amendment to an employment agreement with one of the Company's executive officers, and $2,193,000 relating to an impairment of goodwill primarily related to the Added Value Companies. 1995 includes a charge for front-end incentive employment compensation of $1,098,000 associated with the Added Value Acquisitions. 1994 includes a charge for relocation of plant facilities in the amount of $185,000 and a write-off of the Company's product development investment of $363,000. (5) Interest expense for 1996 includes amortization and a write-down of deferred financing fees relating to obtaining the Company's new credit facility of approximately $2,148,000. (6) 1993 includes approximately $237,000 of income from the settlement of a business interruption claim. (7) Includes income (losses) from discontinued operations of $(166,000) (net of $125,000 income tax benefit) and $79,000 (net of $(56,000) income tax provision) for 1996 and 1995, respectively, and a loss on disposal of $(1,591,000) (net of $1,200,000 income tax benefit) in 1996 relating to management's decision to discontinue its computer products division. (8) Reflects an after-tax gain of $272,000 (net of $205,000 income tax provision) associated with the Company's settlement of a civil litigation and an after-tax non-cash expense of $214,000 (net of $161,000 income tax benefit) resulting from the early extinguishment of the Company's $15 million senior subordinated promissory note. (9) Weighted average shares (including common share equivalents) outstanding for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 were 20,115,843, 15,945,696, 13,029,714, 9,166,908 and 6,514,481, respectively, on a primary basis and were 20,115,843, 15,945,696, 13,029,714, 9,511,500 and 6,514,481, respectively, on a fully diluted basis. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW The following table sets forth for the years ended December 31, 1996, 1995 and 1994 (i) certain items in the Company's consolidated statements of operations expressed as a percentage of net sales and (ii) the percentage change in dollar amounts of such items as compared to the indicated prior fiscal year. All percentages are based on net sales after excluding sales from discontinued operations.
PERIOD TO PERIOD ITEMS AS A PERCENTAGE PERCENTAGE INCREASE OF NET SALES /(DECREASE) -------------------------------- ------------------- YEARS ENDED YEARS ENDED DECEMBER 31 DECEMBER 31 -------------------------------- ------------------- 1996 1995 1994 1996-95 1995-94 ------ ------ ------ ------- ------- Net Sales .................... 100.0% 100.0% 100.0% 34.1% 75.4% Gross Profit ................. 22.1 22.1 26.2 33.7 48.4 Selling, General and Administrative Expenses .... (21.7) (18.2) (23.1) 59.9 38.3 Restructuring and Other Nonrecurring Expenses ...... (2.1) (.6) (.5) 350.1 100.4 Income (Loss) from Continuing Operations ...... (1.7) 3.3 2.5 (171.0) 130.2 Interest Expense ............. (3.0) (1.5) (1.8) 156.5 54.6 Income (Loss) from Continuing Operations Before Income Taxes ............... (4.7) 1.7 .8 (461.5) 306.9 Income (Loss) from Continuing Operations Before Discontinued Operations and Extraordinary Items ........ (3.5) 1.0 .3 (555.0) 413.4 Discontinued Operations ...... (.7) * -- (2324.1) * Extraordinary Items .......... * -- -- * -- Net Income (Loss) ............ (4.2) 1.1 .3 (626.0) 435.8 - ------------------ * not meaningful
25 COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 SALES Net sales for the year ended December 31, 1996, were $244.7 million before excluding sales from discontinued operations. Excluding $6.8 million of sales from discontinued operations, net sales for the year ended December 31, 1996, were $237.8 million, a 34.1% increase over net sales of $177.3 million excluding $3.5 million of sales from discontinued operations in 1995. The increase in sales reflects revenues generated by the Added Value Acquisitions completed on December 29, 1995, the acquisition of PPI completed effective as of January 1, 1996, revenues generated by new sales offices and an increase in revenues generated from existing sales offices. Substantially all of the increase in net sales is attributable to volume increases and the introduction of new products as opposed to price increases. In 1996, the Company experienced substantial erosion in unit selling prices on a broad range of products; however, the Company more than compensated for this price erosion with an increase in unit volume. While sales for 1996 were ahead of last year, sales for the second half of 1996 were substantially below the Company's expectations due to adverse market conditions and price erosion on a broad range of products. See "Item 1. Business-Business Strategy." The second, third and fourth quarters of 1996, including discontinued operations, each represented a quarterly decline in sales when compared to the prior consecutive quarter which were the first consecutive quarterly declines for the Company since the fourth quarter of 1991. GROSS PROFIT Gross profit, without giving effect in 1996 to a $2.0 million inventory write-off associated primarily with the Company's restructuring plan of its kitting and turnkey operations and excluding gross profits generated from discontinued operations, was $54.5 million in 1996 representing a 38.8% increase over gross profit of $39.2 million for 1995 excluding discontinued operations. The increase was due to the growth in sales as well as the increase in gross profit margins as a percentage of net sales. Gross profit margins as a percentage of net sales, without giving effect to the inventory write-offs, were 22.9% for 1996 compared to 22.1% for 1995. The increase in gross profit margins primarily reflects a fewer number of low margin, large volume transactions during 1996 than in the previous year. After giving effect to the inventory write-offs and discontinued operations, gross profit dollars were $52.5 million and the gross profit margin was 22.1% for 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") was $51.7 million for 1996 compared to $32.3 million for 1995. The increase was primarily the result of the Added Value Acquisitions as well as the increases in staffing and facilities to prepare for the anticipated continuation of rapid growth and the enhancement of computer and communications systems. 26 In connection with the Added Value Acquisitions, all categories of SG&A increased. In addition, the Company incurred consulting fees associated with the systems conversions of the acquired companies and with the further development of the Company's value added strategies. SG&A also increased as a result of the operations of the new divisions, Aved Industries and Apex Solutions, which were created as part of the acquisitions. Aved Industries, through its Aved Display Technologies Division, concentrates on the design, manufacture, sales and marketing of flat panel display products and technical support for these products and, through its Aved Memory Products Division, on the design, manufacture, sales and marketing of standard and custom memory module products. Apex Solutions was created to attempt to expand the Company's ability to support kitting and turnkey services on a national basis. In connection with these new divisions, the Company, during the first part of 1996 and prior to the determination to restructure such divisions at the end of the third quarter of 1996 as discussed below, increased staffing and also incurred additional operating expenses. In 1993, 1994 and 1995, respectively, the Company experienced sales growth of 38%, 50% and 79% and ended 1995 with a strong backlog and other indications of continued rapid growth for 1996. In the first quarter of 1996, sales were 76% over the same quarter of 1995 with strong indications of continued growth for the balance of 1996. In order to drive and support the expected future growth as well as to support the operations of the above referenced acquisitions and the new divisions created in connection therewith, the Company expanded its facilities and sales personnel, opened 9 new sales offices during the latter part of 1995 and in 1996, created and staffed northeast and southwest credit departments, increased expenses and investments in connection with its computer and communications systems (see "Item 1. Business-Facilities and Systems"), and increased staffing in almost all corporate departments. Furthermore, in an effort to diversify its business and expand its service capabilities and product offerings, the Company, created a cable assembly division in 1994 and in mid 1995, created a computer products division, or CPD, which distributed motherboards and other computer products. During 1996, the Company relocated its west coast programming and distribution center into a significantly larger facility and added additional staff for these operations. Effective as of January 1, 1996, the Company also acquired Programming Plus Incorporated, or PPI (see Note 4 to Notes to Consolidated Financial Statements) and further increased staffing to support CPD. As a result of all of the foregoing, SG&A for 1996 reflects increased salaries, payroll taxes and employee benefit costs as well as additional operating expenses such as rent and office supplies. In May 1996, the Company decided to reduce the operation of its cable assembly division and, the division, which was originally located in Lisle, Illinois, was relocated to the Company's Miami distribution facility. During the third quarter of 1996, the Company decided to discontinue the operation of CPD as a result of supply problems and related losses. See Notes 6 and 7 to Notes to Consolidated Financial Statements. 27 In addition to the items set forth above, variable SG&A expenses, including sales commissions and telephone expenses, increased as a result of the increases in sales in 1996 over 1995. SG&A in absolute dollars is expected to increase in future periods. SG&A as a percentage of net sales was 21.7% for the year ended December 31, 1996, compared to 18.2% for 1995. The increase in SG&A as a percentage of net sales reflects the increases in expenses associated with the acquisitions and expansion described above, the additional operating costs in connection with the restructuring as well as with the continued building of the Company's infrastructure to support significantly higher sales levels than were actually attained. Due to the adverse market conditions and the significantly lower than anticipated sales level during the second and third quarters of 1996, the Company developed and began implementing expense control strategies and restructured and discontinued unprofitable divisions. During the third quarter of 1996, the Company determined that it was not economically feasible to continue its current level of investment in Apex Solutions, especially in light of the adverse market conditions which were present within the industry at that time. As a result, the Company adopted a plan to restructure its kitting and turnkey operations. In connection with this plan, the Company reduced the related workforce and accrued for employee severance and related benefits and wrote down various related assets. This restructuring resulted in a pretax charge of $1.1 million which is reflected as restructuring and other nonrecurring expenses in the accompanying Consolidated Statements of Operations. See Note 6 to Notes to Consolidated Financial Statements. In addition, SG&A for 1996 includes approximately $800,000 of costs primarily associated with operating Apex Solutions during the restructuring phase. Additionally, based on a decision made in the third quarter of 1996, the Company has ceased the activities of CPD and has reflected this division in the accompanying Consolidated Financial Statements as discontinued operations. See Note 7 to Notes to Consolidated Financial Statements. The positive impact of these strategies may not be realized until future periods. The Company believes that as the expense adjustments take effect, including the benefits of the restructuring of the kitting and turnkey operations and the discontinuance of CPD, and as the adverse market conditions continue to subside, the Company should improve its performance in the future. At September 30, 1996, the Company recognized an impairment of goodwill in connection with the Company's acquisitions of the Added Value Companies and PPI. See "Acquisitions". This non-cash charge of approximately $2,428,000, which is primarily related to the Added Value Companies, has no associated tax benefit. A variety of factors contributed to the impairment of the goodwill relating to the Added Value Companies. These factors include a significant reduction in the revenues and operating results generated by the Added Value Companies' customer base acquired by the Company, a restructuring of the Added Value Companies' kitting and turnkey operations due to the Company determining that it was not economically feasible to continue and expand such division as originally planned, as well as the termination of certain principals and senior management of the Added Value Companies who became employees of the Company at the time of 28 the closing of the acquisitions. These factors have greatly reduced the estimated future cash flows from the Added Value Companies. In December 1996, as part of a settlement agreement with certain selling stockholders of the Added Value Companies, the Company reacquired and canceled 95,000 shares of the Company's common stock valued at approximately $110,000. In addition, the Company established a receivable for $125,000 related to excess distributions made to certain principals of the Added Value Companies in connection with the acquisitions which, together with the benefit associated with the settlement agreement, reduced the impairment of goodwill to $2,193,000. See Notes 4, 5 and 6 to Notes to Consolidated Financial Statements. INCOME (LOSS) FROM CONTINUING OPERATIONS Income from continuing operations was adversely impacted by the following nonrecurring charges: the above mentioned inventory write-offs, impairment of goodwill and restructuring expenses associated with the kitting and turnkey operations; the termination of certain employment agreements entered into in connection with certain acquisitions in the amount of $587,000; the relocation of the Company's Lisle, Illinois cable assembly division in the amount of $445,000; and the acceleration of an existing accrual schedule associated with certain postretirement benefits for one of the Company's executive officers in the amount of $625,000 (see Notes 6 and 11 to Notes to Consolidated Financial Statements). After giving effect to all of the above mentioned charges, the Company had a loss from continuing operations of $4.1 million for 1996. This compared to $5.8 million of income from continuing operations for 1995 notwithstanding nonrecurring expenses of $1.1 million relating to front-end incentive employment compensation paid in connection with the Added Value Acquisitions. The decrease in income from continuing operations, without giving effect to these charges, was attributable to the increase in SG&A which more than offset the increase in sales and gross profit dollars which were well below the Company's expectations. INTEREST EXPENSE Interest expense increased to $7.0 million for the year ended December 31, 1996, as compared to $2.7 million for 1995. The increase resulted from additional borrowings to fund the Added Value Acquisitions completed in December 1995 as well as additional borrowings required to support the Company's growth. Borrowings also increased to finance the Company's losses in 1996. As a result of the growth originally anticipated for 1996 as discussed above, the Company refinanced its credit facility with the New Credit Facility (defined below) which, subject to the terms thereof, could allow for substantial increases in the Company's capital base. Interest expense for 1996 reflects amortization of deferred financing fees of $444,000 in connection with obtaining the New Credit Facility. In addition, as a result of a projected decrease in the Company's future utilization of the New Credit Facility based on projected cash flows, as well as certain changes to the terms of the initial agreement, $1,704,000 of the deferred financing fees was written-off in 1996. See "Liquidity and Capital Resources" and Note 8 to Notes to Consolidated Financial Statements. DISCONTINUED OPERATIONS 29 In the third quarter of 1996, the Company's management decided to discontinue CPD due to the revenues generated by this division being significantly below the Company's expectations principally as a result of the division's primary supplier discontinuing the production of certain products that were the mainstay of this division. The after-tax loss from discontinued operations of $1.8 million reflects the estimated costs and expenses associated with the discontinuance and the related disposal, including the write-off of certain assets, as well as a provision for operating losses during the phase-out period which is expected to continue through March 31, 1997. NET INCOME (LOSS) After giving effect to the previously described after-tax write-off of inventory, impairment of goodwill, restructuring and other nonrecurring expenses, write-off of certain deferred financing fees, as well as the loss from discontinued operations of CPD, the Company had a net loss of $9.9 million, or $.49 per share, for the year ended December 31, 1996, compared to net income of $1.9 million, or $.12 per share, for 1995. Included in the 1996 operating results is an extraordinary after-tax gain of $272,000 recognized in connection with the Company's settlement of a civil litigation and an extraordinary after-tax expense of $214,000 resulting from the early extinguishment of the Company's $15 million senior subordinated promissory note in connection with the closing of the New Credit Facility. COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994 SALES Including sales from discontinued operations, the Company had sales of $180.8 million for 1995 a 78.9% increase over net sales of $101.1 million in 1994. Excluding sales from discontinued operations the Company had net sales of $177.3 million for the year ended December 31, 1995, a 75.4% increase over in 1994. This dramatic increase in sales reflects the success of the Company's aggressive sales strategy and the general increase in demand for electronic products. The increase in sales was comprised of revenues generated from existing territories, revenues generated by new sales offices and revenues generated by a company acquired in September 1994. Substantially all of the increase in net sales is attributable to volume increases and the introduction of new products as opposed to price increases. GROSS PROFIT Gross profit, excluding gross profit from discontinued operations, was $39.2 million in 1995 compared to $26.5 million for 1994, representing a 48.4% increase. The increase was due to the significant growth in sales. Gross profit margins as a percentage of net sales were 22.1% for 1995 compared to 26.2% for 1994. The decline in gross margins was attributable to the development of long-term strategic relationships with accounts who have required 30 aggressive pricing, as well as a change in the Company's product mix and the competitive environment in the electronic distribution marketplace. The decline in gross profit margins was more than offset by increases in sales and improved operating efficiencies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A for 1995, after reclassifying expenses related to discontinued operations, was $32.3 million compared to $23.4 million for 1994. The increase was primarily the result of the Company's rapid growth and aggressive expansion. As sales grew dramatically, selling expenses, including sales commissions and telephone expenses, also increased. In addition, as a result of the relocation of the Company's corporate headquarters and distribution facility in May 1994, the expansion of the computer and communications systems, the opening of new sales offices and the relocating of existing sales offices into larger facilities, rent (both for realty and personalty), occupancy expenses and depreciation and amortization costs increased. Furthermore, the Company expanded its sales personnel, created and staffed a northeast credit department and increased staffing in almost all corporate departments. Additionally, during 1995 the Company opened its new programming center and created a cable assembly division (known as American Assemblies). As a result, SG&A for 1995 reflects start-up costs including additional salaries, payroll taxes and employee benefit costs, increased advertising and promotion expenses and increased training costs. SG&A as a percentage of net sales improved to 18.2% for 1995 from 23.1% for 1994. The significant improvement in SG&A as a percentage of sales reflects the improvement in operating efficiencies and benefits from economies of scale. INCOME FROM CONTINUING OPERATIONS Income from continuing operations, after reflecting discontinued operations, was $5.8 million in 1995, notwithstanding nonrecurring expenses of $1.1 million relating to front-end incentive employment compensation paid in connection with the Added Value Acquisitions. This represents an increase of 130.2% over income from continuing operations of $2.5 million, including nonrecurring expenses aggregating $548,000, in 1994. The increase in income from continuing operations was attributable to the significant increase in sales and improved operating efficiencies which more than offset the decline in gross profit margins and the additional expenses associated with the Company's expansion. INTEREST EXPENSE Interest expense increased to $2.7 million in 1995 as compared to $1.8 million in 1994. The increase reflects an increase in both the prime rate as well as the average borrowings outstanding under the Company's line of credit required to fund the Company's continued growth. Additionally, interest expense also increased as a result of the subordinated debt issued during June 1994, debt issued in connection with tenant improvements relating to the relocation of the Company's corporate headquarters and distribution center in May 1994 and debt associated with capital leases. 31 NET INCOME Net income for 1995 reached $1.9 million, a more than five-fold increase over net income of $352,000 for 1994. Earnings per share increased 300% to $.12 in 1995 from $.03 in 1994, even with a 22% increase in the average number of shares outstanding. The increase in earnings for 1995 resulted primarily from the significant increase in sales and the associated increase in operating efficiencies and benefits from economies of scale as discussed above. In addition, this increase in earnings was achieved notwithstanding the negative impact on earnings associated with start-up costs in connection with the cable assembly division, the opening of the Company's programming center and the nonrecurring expenses associated with the Added Value Acquisitions. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 1996 increased to $69.8 million, from working capital of $59.4 million at December 31, 1995. The current ratio was 3.13:1 at December 31, 1996, as compared to 2.31:1 at December 31, 1995. The increase in the current ratio was primarily due to an increase in other current assets relating to a receivable generated in 1996 in connection with income tax benefits associated with the loss carryback claims, the restructuring and other nonrecurring expenses, and discontinued operations, as well as a reduction in accounts payable and accrued expenses. Accounts receivable levels at December 31, 1996 were $32.7 million, down from accounts receivable of $35.1 million at December 31, 1995. The decrease in accounts receivable at December 31, 1996 was due to a non-cash write-off of $1.1 million of accounts receivable relating to the closing of CPD, as well as a decrease in the average number of days that accounts receivables were outstanding from 56 days as of December 31, 1995 to 54 days as of December 31, 1996. Inventory levels were $64.2 million at December 31, 1996 compared to $67.5 million at December 31, 1995. The decrease primarily reflects non-cash write-offs in 1996 of $2.0 million relating to the restructuring of the kitting and turnkey operations and $650,000 relating to the closing of CPD. Accounts payable and accrued expenses decreased to $31.8 million at December 31, 1996 from $43.5 million at December 31, 1995. This decrease was primarily due to the payment of liabilities incurred in connection with the Added Value Acquisitions completed in December 1995, which was partially offset by the increase in accrued expenses associated with the restructuring of the kitting and turnkey operations and the closing of CPD. The balance of this accrued expense at December 31, 1996, which represented approximately 70% of the original liability, is expected to be paid during 1997. See Notes 6 and 7 to Notes to Consolidated Financial Statements. On May 3, 1996 the Company entered into a new $100 million line of credit facility with a group of banks (the "New Credit Facility") which expires May 3, 2001. The New Credit Facility replaced the Company's then existing $45 million line of credit facility which was to expire in May 1997 and bore interest, at the Company's option, either at one-quarter of one percent (.25%) below prime or two percent (2%) above certain LIBOR rates. See Note 8 to Notes to Consolidated Financial Statements. At the time of entering into the New 32 Credit Facility, borrowings under the New Credit Facility bore interest, at the Company's option, at either prime plus one-quarter of one percent (.25%) or LIBOR plus two and one-quarter percent (2.25%). Borrowings under the New Credit Facility are secured by all of the Company's assets including accounts receivable, inventories and equipment. The amounts that the Company may borrow under the New Credit Facility are based upon specified percentages of the Company's eligible accounts receivable and inventories (as defined). Under the New Credit Facility, the Company is required to comply with certain affirmative and negative covenants as well as to comply with certain financial ratios. These covenants, among other things, place limitations and restrictions on the Company's borrowings, investments and transactions with affiliates and prohibit dividends and stock redemptions. Furthermore, the New Credit Facility requires the Company to maintain certain minimum levels of tangible net worth throughout the term of the agreement and a minimum debt service coverage ratio which is tested on a quarterly basis. During 1996, the Company's New Credit Facility was amended whereby certain financial covenants were modified and the Company's borrowing rate was increased by one-quarter of one percent (.25%). See Note 8 to Notes to Consolidated Financial Statements. At December 31, 1996, outstanding borrowings under the New Credit Facility aggregated $50.0 million. At February 28, 1997 outstanding borrowings under the New Credit Facility had declined to $47.0 million. In March 1996, the Company executed a senior subordinated promissory note in the amount of $15 million to be repaid in July 1997. In May 1996, in connection with the New Credit Facility the Company repaid this note and, as a result of the early extinguishment, recognized an extraordinary after-tax expense of $214,000. See Note 8 to Notes to Consolidated Financial Statements. The Company expects that its cash flows from operations and additional borrowings available under the New Credit Facility will be sufficient to meet its current financial requirements over the next twelve months. INFLATION AND CURRENCY FLUCTUATIONS The Company does not believe that inflation or currency fluctuations significantly impacted its business during 1996; however, inflation, changing interest rates and currency fluctuations have had significant effects on the economy in the past and could adversely impact the Company's results in the future. 33 ACQUISITIONS Effective January 1, 1996, the Company purchased all of the capital stock of Programming Plus Incorporated ("PPI"). The purchase price for PPI consisted of $1,375,000 of common stock of the Company, valued at $2.50 per share. Only 60,000 shares of the Company's common stock, valued at $150,000, were released to the PPI selling shareholders at closing. The $1,225,000 balance of the consideration ("Additional Consideration"), represented by 489,999 shares of common stock of the Company, was retained in escrow by the Company, as escrow agent. The Additional Consideration will be released to the PPI selling shareholders annually if and based upon certain levels of pre-tax net income being attained by the acquired company for the years ended December 31, 1996 through December 31, 2000. For the year ended December 31, 1996, the acquired company did not attain that certain level of pre-tax net income and, accordingly, none of the Additional Consideration was released. If, as of December 31, 2000, all of the Additional Consideration has not been released, the balance held in escrow will be canceled. The PPI selling shareholders must vote all of the Company's common stock issued to them (whether or not held in escrow) as directed by the Company until the escrow is terminated. In addition, the PPI selling shareholders entered into a four-year consulting obligation with PPI in consideration of certain automobile benefits, and a covenant not to compete with PPI. The total amount paid by PPI for such automobile benefits and covenant was $150,000. The acquisition was accounted for by the purchase method of accounting which resulted in the recognition of approximately $70,000 of excess cost over fair value of net assets acquired. The excess cost over fair value of net assets acquired was subsequently deemed impaired and, as of December 31, 1996, was written-off. The assets, liabilities and operating results of PPI are included in the consolidated financial statements of the Company from the date of acquisition. See Note 4 to Notes to Consolidated Financial Statements. On December 29, 1995, the Company purchased through two separate mergers with and into the Company's wholly-owned subsidiaries (the "Added Value Acquisitions") all of the capital stock of Added Value Electronics Distribution, Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain"; Rocky Mountain together with Added Value, collectively the "Added Value Companies"), two affiliated, privately held electronic component distributors. The purchase price for the Added Value Companies included approximately $2,936,000 in cash and 2,013,401 shares of common stock of the Company valued at approximately $4,893,000 (exclusive of the 160,703 shares of common stock issued in the transaction to a wholly-owned subsidiary of the Company). In addition, the Company paid an aggregate of $1,200,000 in cash to the selling stockholders in exchange for covenants not to compete, and an aggregate of $1,098,000 in cash as front-end incentive employment compensation paid to certain key employees of the Added Value Companies. The Company also assumed substantially all of the sellers' disclosed liabilities of approximately $8,017,000, including approximately $3,809,000 in bank notes which have since been repaid. The Company may be obligated to pay to certain of the selling stockholders of the Added Value Companies up to approximately $266,000 of additional consideration ("Additional Consideration") if the aggregate value of the shares of the 34 Company's common stock issued to certain of the selling stockholders has not, by June 30, 1998, appreciated in the aggregate by $266,000. Prior to the Company entering into a settlement agreement with certain of the selling stockholders in December 1996 and with an additional selling stockholder in January 1997 (collectively the "Settlement Agreements") the Additional Consideration could have been as much as $1,900,000. See Note 4 to Notes to Consolidated Financial Statements. The Additional Consideration is payable, subject to certain limitations, at the election of the Company, in cash or the Company's common stock, or a combination of cash and the Company's common stock. The Settlement Agreement entered into in December 1996 also provided, among other things, that certain of the selling stockholders reconvey to the Company an aggregate of 95,000 shares of common stock of the Company which were issued as part of the purchase price for the Added Value Companies and that the Company grant to certain selling stockholders stock options to purchase an aggregate of 50,000 shares of the Company's common stock at an exercise price of $1.50 per share exercisable through December 30, 2001. The acquisitions were accounted for by the purchase method of accounting which resulted in the recognition of approximately $2,937,000 of excess cost over fair value of net assets acquired. As a result of a reduction in the estimated future cash flows from the Added Value Companies, the Company recognized an impairment of goodwill of approximately $2,200,000 in 1996. See Note 5 to Notes to Consolidated Financial Statements. The assets, liabilities and operating results of the acquired companies are included in the consolidated financial statements of the Company from the date of the acquisitions, December 29, 1995. FORWARD-LOOKING STATEMENTS This Form 10-K contains forward-looking statements (within the meaning of Section 21E. of the Securities Exchange Act of 1934, as amended), representing the Company's current expectations and beliefs concerning the Company's future performance and operating results, its products, services, markets and industry, and/or future events relating to or effecting the Company and its business and operations. When used in this Form 10-K, the words "believes," "estimates," "plans," "expects," "intends," "anticipates," and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. The actual results or achievements of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties related to and including, without limitation, the effectiveness of the Company's business and marketing strategies, timing of delivery of products from suppliers, the product mix sold by the Company, the Company's development of new customers, existing customer demand, availability of products from and the establishment and maintenance of relationships with suppliers, price competition for products sold by the Company, management of growth and expenses, the Company's ability to collect accounts receivable, price decreases on inventory that is not price protected, gross profit margins, availability and terms of financing to fund capital needs, the continued enhancement of telecommunication, computer and information systems, the continued and anticipated growth of the electronics industry and electronic components distribution industry, a change in government tariffs or duties, a change in interest rates, and the other risks and 35 factors detailed in this Form 10-K and in the Company's other filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control. In many cases, the Company cannot predict the risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries and supplementary data required by this item are included in Item 14(a)(1) and (2) of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The response to these items will be included in a definitive proxy statement filed within 120 days after the end of the Registrant's fiscal year, which proxy statement is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT PAGE 1. FINANCIAL STATEMENTS Independent Auditors' Report................................ F-1 Consolidated Balance Sheets................................. F-2 Consolidated Statements of Operations....................... F-3 Consolidated Statements of Changes in Shareholders' Equity.. F-4 Consolidated Statements of Cash Flows....................... F-5 Notes to Consolidated Financial Statements.................. F-6 2. FINANCIAL STATEMENT SCHEDULES None 3.EXHIBITS 3.1 Certificate of Incorporation, as amended (incorporated by reference to Exhibits 3.1 to the Company's Registration Statement on Form S-1, File 36 No. 33-15345-A, and to the Company's Form 10-K for the fiscal year ended December 31, 1991), as further amended by Certificate of Amendment of Certificate of Incorporation dated August 21, 1995 of the Company (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1995). 3.2 By-Laws, as amended July 29, 1994 (incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30, 1994). 4.1 Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-2, File No. 33-47512). 4.2 Specimen A Warrant Certificate (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-2, File No. 33-47512). 4.3 Specimen B Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-2, File No. 33-47512). 4.4 Form of Warrant Agreement (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-2, File No. 33-47512). 4.5 Form of Underwriters' Warrant Agreement (incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-2, File No. 33-47512). 4.6 Fiscal Agency Agreement, dated as of June 8, 1994, between the Company and American Stock Transfer & Trust Co. ("American Stock Transfer"), as fiscal agent, paying agent and securities registrar (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K dated June 14, 1994 and filed with the Securities and Exchange Commission on June 15, 1994). 4.7 Warrant Agreement, dated as of June 8, 1994, between the Company and American Stock Transfer, as warrant agent (incorporated by reference to Exhibit 4.2 to the Company's Form 8-K dated June 14, 1994 and filed with the Securities and Exchange Commission on June 15, 1994). 4.8 Placement Agent's Warrant Agreement, dated as of June 8, 1994, between the Company and RAS Securities Corp. (incorporated by reference to Exhibit 4.3 to the Company's Form 8-K dated June 14, 1994 and filed with the Securities and Exchange Commission on June 15, 1994). 4.9 Underwriter's Warrant Agreement between the Company and Lew Lieberbaum & Co., Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661). 9.1 Form of Voting Trust Agreement attached as Exhibit "E" to Purchase Agreement (incorporated by reference to Exhibit 9.1 to the Company's Registration Statement on Form S-4, File No. 033-64019). 37 10.1 Form of Indemnification Contracts with Directors and Executive Officers (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-2, File No. 33-47512). 10.2 Lease Agreement for Headquarters dated May 1, 1994 between Sam Berman d/b/a Drake Enterprises ("Drake") and the Company (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1994). 10.3 Promissory Notes, all dated May 1, 1994 payable to the Company's landlord in the amounts of $865,000, $150,000 and $32,718 (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1994). 10.4 Promissory Note, dated May 1, 1995, payable to Drake, the Company's landlord, in the amount of $90,300 (incorporated by reference to Exhibit 10.35 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661). 10.5 Agreement between Drake and the Company dated May 1, 1994 (incorporated by reference to Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 1994). 10.6 Amended and Restated All American Semiconductor, Inc. Employees', Officers', Directors' Stock Option Plan (incorporated by reference to Exhibit 10.36 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661).** 10.7 Deferred Compensation Plan (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-2, File No. 33-47512).** 10.8 Master Lease Agreement dated March 21, 1994, together with lease schedules for computer and other equipment (incorporated by reference to Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 1994). 10.9 Employment Agreement dated as of May 24, 1995, between the Company and Paul Goldberg (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661), as amended by First Amendment to Employment Agreement dated as of December 31, 1996, between the Company and Paul Goldberg.* ** 10.10 Employment Agreement dated as of May 24, 1995, between the Company and Bruce M. Goldberg (incorporated by reference to Exhibit 10.24 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661).** 10.11 Form of Warrant Extension Agreement relating to the Warrant issued to The Equity Group, Inc. (assigned to Robert D. Goldstein) (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-2, File No. 33-47512). 10.12 Asset Purchase Agreement dated March 30, 1993 by and between All American Semiconductor of Rockville, Inc. and All American Transistor Corporation of D.C. (incorporated by reference to Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended December 31, 1992). 38 10.13 Asset Purchase Agreement dated January 5, 1994 by and between All American Semiconductor of Chicago, Inc. and Components Incorporated; and as an exhibit thereto the employment agreement with Robert Ryan (incorporated by reference to exhibits to the Company's current report on Form 8-K dated January 19, 1994). 10.14 Asset Purchase Agreement dated as of July 1, 1994 by and between the Company and GCI Corp.; Letter Agreement dated July 1, 1994 among the Company, GCI Corp., Robert Andreini, Joseph Cardarelli and Joseph Nelson; Guaranty dated July 1, 1994 and Amendment Letter to Asset Purchase Agreement and Letter Agreement dated July 15, 1994 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1994). 10.15 Merger Purchase Agreement (the "Purchase Agreement") dated as of October 31, 1995, among the Company, All American Added Value, Inc., All American A.V.E.D., Inc. and the Added Value Companies (incorporated by reference to Appendix A to the Proxy Statement/Prospectus included in and to Exhibit 2.1 to the Company's Registration Statement on Form S-4, File No. 033-64019). 10.16 Stock Purchase Agreement (without schedules) dated as of January 1, 1996 among the Company, as purchaser, and Steven E. Culligan, Alan G. Bowen and Robert Harrington, as sellers (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1996). 10.17 Revolving Credit Agreement, Master Promissory Note, Security Agreement and Stock Pledge Agreement, all dated December 29, 1992 with the Company's prior senior lender (incorporated by reference from the Company's Current Report on Form 8-K dated December 29, 1992). 10.18 First Amendment to Revolving Credit Agreement (Letter Agreement), Master Promissory Note and Guaranty Agreement, all dated May 27, 1993, with the Company's prior senior lender (incorporated by reference as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1993). 10.19 Second Amendment to Revolving Credit Agreement and First Amendment to Stock Pledge Agreement and Master Promissory Note, all dated July 19, 1993, with the Company's prior senior lender (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1993). 10.20 Third Amendment to Revolving Credit Agreement and Master Promissory Note, both dated as of August 10, 1994; and Second Amendment to Stock Pledge Agreement, Security Agreement and Guaranty Agreement, all dated as of August 10, 1994, with the Company's prior senior lender (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1994). 39 10.21 Fourth Amendment to Revolving Credit Agreement and Master Promissory Note, both dated as of March 28, 1995, with the Company's prior senior lender (incorporated by reference to Exhibit 10.22 to the Company's Form 10-K for the year ended December 31, 1994). 10.22 Fifth Amendment to Revolving Credit Agreement and Master Promissory Note, both dated as of December 15, 1995, with the Company's prior senior lender (incorporated by reference to Exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1995). 10.23 Sixth Amendment to Revolving Credit Agreement dated as of March 14, 1996, with the Company's' prior senior lender (incorporated by reference to Exhibit 10.22 to the Company's Form 10-K for the year ended December 31, 1995). 10.24 Loan and Security Agreement (without exhibits or schedules) among Harris Trust and Savings Bank, as a lender and administrative agent, American National Bank and Trust Company of Chicago, as a lender and collateral agent, and the Other Lenders Party thereto and the Company, as borrower, together with six (6) Revolving Credit Notes, all dated May 10, 1996, aggregating $100,000,000 (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1996). 10.25 Amendment No. 1 to Loan and Security Agreement dated August 2, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1996). 10.26 Amendment No. 2 to Loan and Security Agreement dated November 14, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1996). 10.27 Consulting Contract dated July 1, 1995 by and between All American Semiconductor, Inc. and The Equity Group, Inc. (incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the year ended December 31, 1995). 10.28 Form of Consulting Agreement between the Company and Lew Lieberbaum & Co., Inc. (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661). 10.29 Warrant Certificates Nos. 93-1 and 93-2 dated as of May 13, 1993, issued to The Equity Group, Inc. (incorporated by reference to Exhibit 10.24 to the Company's Form 10-K for the year ended December 31, 1994). 10.30 All American Semiconductor, Inc. 401(k) Profit Sharing Plan (incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for the year ended December 31, 1994).** 10.31 Employment Agreement dated as of May 24, 1995, between the Company and Howard L. Flanders (incorporated by reference to Exhibit 10.25 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661).** 10.32 Employment Agreement dated as of May 24, 1995, between the Company and Rick Gordon (incorporated by reference to Exhibit 10.26 to 40 Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661).** 10.33 Senior Subordinated Promissory Note dated March 18, 1996 from the Company to and accepted by CIBC Inc. in the principal amount of $15,000,000 (incorporated by reference to Exhibit 10.29 to the Company's Form 10-K for the year ended December 31, 1995). 10.34 Senior Subordinated Subsidiaries Guarantee dated March 18, 1996 from all of the Company's wholly-owned subsidiaries in favor of CIBC Inc. (incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for the year ended December 31, 1995). 10.35 Settlement Agreement dated December 17, 1996, by and among the Company, certain of its subsidiaries and certain selling stockholders of the Added Value Companies.* 10.36 Settlement Agreement dated January 22, 1997, by and among the Company, certain of its subsidiaries and Thomas Broesamle.* 10.37 Form of Salary Continuation Plan.* ** 10.38 Promissory Note, dated October 1, 1996, payable to Sam Berman, d/b/a Drake Enterprises, in the amount of $161,500.* 11.1 Statement Re: Computation of Per Share Earnings.* 21.1 List of subsidiaries of the Registrant.* 23.1 Consent of Lazar, Levine & Company LLP, independent certified public accountants.* 27.1 Financial Data Schedule.* - ------------------ * Filed herewith ** Management contract or compensation plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. (b) REPORTS ON FORM 8-K No reports were filed during the fourth quarter of 1996. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ALL AMERICAN SEMICONDUCTOR, INC. (Registrant) By: /s/ PAUL GOLDBERG ---------------------------------------- Paul Goldberg, Chairman of the Board and Chief Executive Officer Dated: March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 31, 1997. /s/ PAUL GOLDBERG Chairman of the Board and Chief Executive - ------------------------- (Principal Executive Officer) Paul Goldberg /s/ BRUCE M. GOLDBERG President and Chief Operating Officer, - ------------------------- Director Bruce M. Goldberg /s/ HOWARD L. FLANDERS Vice President and Chief Financial Officer, - ------------------------- (Principal Financial and Accounting Officer) Howard L. Flanders /s/ RICK GORDON Senior Vice President of Sales, Director - ------------------------- Rick Gordon /s/ SHELDON LIEBERBAUM Director - ------------------------- Sheldon Lieberbaum /s/ S. CYE MANDEL Director - ------------------------- S. Cye Mandel 42 Independent Auditors' Report To The Board of Directors All American Semiconductor, Inc. Miami, Florida We have audited the accompanying consolidated balance sheets of All American Semiconductor, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of All American Semiconductor, Inc. and subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ LAZAR, LEVINE & COMPANY LLP - ------------------------------- LAZAR, LEVINE & COMPANY LLP New York, New York February 28, 1997 F-1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS 1996 1995 - ------ ------------ ------------ Current assets: Cash ............................................ $ 525,000 $ 276,000 Accounts receivable, less allowances for doubtful accounts of $1,200,000 and $921,000 ........... 32,711,000 35,101,000 Inventories ..................................... 64,212,000 67,463,000 Other current assets ............................ 5,113,000 1,959,000 ------------ ------------ Total current assets .......................... 102,561,000 104,799,000 Property, plant and equipment-net .................. 5,454,000 3,882,000 Deposits and other assets .......................... 3,832,000 2,316,000 Excess of cost over fair value of net assets acquired - net ................................... 1,074,000 3,477,000 ------------ ------------ $112,921,000 $114,474,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt ............... $ 434,000 $ 844,000 Accounts payable and accrued expenses ........... 31,808,000 43,451,000 Income taxes payable ............................ -- 199,000 Other current liabilities ....................... 496,000 953,000 ------------ ------------ Total current liabilities ..................... 32,738,000 45,447,000 Long-term debt: Notes payable ................................... 50,012,000 29,900,000 Subordinated debt ............................... 6,539,000 6,515,000 Other long-term debt ............................ 1,236,000 345,000 ------------ ------------ 90,525,000 82,207,000 ------------ ------------ 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, 20,323,894 and 19,863,895 shares issued, 19,833,895 and 19,863,895 shares outstanding ............................ 198,000 199,000 Capital in excess of par value .................. 25,561,000 25,511,000 Retained earnings (deficit) ..................... (2,912,000) 7,008,000 Treasury stock, at cost, 180,295 shares ......... (451,000) (451,000) ------------ ------------ 22,396,000 32,267,000 ------------ ------------ $112,921,000 $114,474,000 ============ ============
See notes to consolidated financial statements F-2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31 1996 1995 1994 - ----------------------- ------------- -------------- ------------- NET SALES ................................... $237,846,000 $ 177,335,000 $101,085,000 Cost of sales ............................... (185,367,000) (138,089,000) (74,632,000) ------------ ------------- ------------ Gross profit ................................ 52,479,000 39,246,000 26,453,000 Selling, general and administrative expenses ................... (51,675,000) (32,321,000) (23,374,000) Impairment of goodwill ...................... (2,193,000) -- -- Restructuring and other nonrecurring expenses .................................. (2,749,000) (1,098,000) (548,000) ------------ ------------- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS ................................ (4,138,000) 5,827,000 2,531,000 Interest expense ............................ (7,025,000) (2,739,000) (1,772,000) ------------ ------------- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .............................. (11,163,000) 3,088,000 759,000 Income tax (provision) benefit .............. 2,942,000 (1,281,000) (407,000) ------------ ------------- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEMS ..................................... (8,221,000) 1,807,000 352,000 Discontinued operations: Gain (loss) from operations (net of $125,000 and $(56,000) income tax benefit (provision)) .................. (166,000) 79,000 -- Loss on disposal (net of $1,200,000 income tax benefit) ....................... (1,591,000) -- -- ------------ ------------- ------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS ....................... (9,978,000) 1,886,000 352,000 Extraordinary items: Gain from settlement of litigation (net of $205,000 income tax provision) ............ 272,000 -- -- Loss on early retirement of debt (net of $161,000 income tax benefit) .............. (214,000) -- -- ------------ ------------- ------------ NET INCOME (LOSS) ........................... $ (9,920,000) $ 1,886,000 $ 352,000 ============ ============= ============ Primary and fully diluted earnings per share: Income (loss) from continuing operations .... $ (.40) $ .11 $ .03 Discontinued operations ..................... (.09) .01 -- Extraordinary items ......................... -- -- -- ------------ ------------ ------------ Net income (loss) ........................... $ (.49) $ .12 $ .03 ============ ============ ============
See notes to consolidated financial statements F-3
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CAPITAL IN RETAINED TOTAL COMMON EXCESS OF EARNINGS TREASURY SHAREHOLDERS' SHARES STOCK PAR VALUE (DEFICIT) STOCK EQUITY ---------- -------- ----------- ----------- --------- ----------- Balance, December 31, 1993 ... 12,017,750 $120,000 $10,782,000 $ 4,770,000 $ (60,000) $15,612,000 Exercise of stock options and warrants .................. 399,041 4,000 545,000 -- -- 549,000 Issuance of options and warrants .................. -- -- 437,000 -- -- 437,000 Net income ................... -- -- -- 352,000 -- 352,000 ---------- -------- ----------- ----------- --------- ----------- Balance, December 31, 1994 ... 12,416,791 124,000 11,764,000 5,122,000 (60,000) 16,950,000 Sale of equity securities .... 5,232,500 53,000 8,447,000 -- -- 8,500,000 Issuance of equity securities 2,174,104 22,000 5,262,000 -- (391,000) 4,893,000 Exercise of stock options and warrants .................. 40,500 -- 38,000 -- -- 38,000 Net income ................... -- -- -- 1,886,000 -- 1,886,000 ---------- -------- ----------- ----------- --------- ----------- Balance, December 31, 1995 ... 19,863,895 199,000 25,511,000 7,008,000 (451,000) 32,267,000 EXERCISE OF STOCK OPTIONS .... 5,000 -- 9,000 -- -- 9,000 ISSUANCE OF EQUITY SECURITIES 60,000 -- 150,000 -- -- 150,000 REACQUISITION AND CANCELLATION OF EQUITY SECURITIES ...... (95,000) (1,000) (109,000) -- -- (110,000) NET LOSS ..................... -- -- -- (9,920,000) -- (9,920,000) ---------- -------- ----------- ----------- --------- ----------- BALANCE, DECEMBER 31, 1996 ... 19,833,895 $198,000 $25,561,000 $(2,912,000) $(451,000) $22,396,000 ========== ======== =========== =========== ========= ===========
See notes to consolidated financial statements F-4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 1996 1995 1994 - ----------------------- ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .............................................. $ (9,920,000) $ 1,886,000 $ 352,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................ 2,757,000 1,038,000 677,000 Non-cash interest expense .................................... 2,273,000 148,000 47,000 Nonrecurring expenses ........................................ 4,428,000 -- 363,000 Changes in assets and liabilities of continuing operations: Decrease (increase) in accounts receivable ................. 1,569,000 (12,324,000) (3,019,000) Decrease (increase) in inventories ......................... 1,206,000 (24,495,000) (9,508,000) Increase in other current assets ........................... (2,014,000) (248,000) (904,000) Increase (decrease) in accounts payable and accrued expenses (14,032,000) 24,972,000 4,702,000 Increase (decrease) in other current liabilities ........... (669,000) 809,000 (63,000) Decrease (increase) in net assets of discontinued operations . 1,796,000 (72,000) -- ------------ ----------- ----------- Net cash used for operating activities ................... (12,606,000) (8,286,000) (7,353,000) ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment .......................... (2,293,000) (1,428,000) (1,618,000) Increase in other assets ....................................... (4,438,000) (1,540,000) (712,000) Purchases of net assets of acquired companies .................. -- (2,860,000) (1,084,000) Net investing activities of discontinued operations ............ (39,000) (7,000) -- ------------ ----------- ----------- Net cash used for investing activities ................... (6,770,000) (5,835,000) (3,414,000) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreements ................. 20,290,000 5,910,000 6,076,000 Increase in notes payable ...................................... 15,161,000 134,000 6,088,000 Repayments of notes payable .................................... (15,835,000) (385,000) (2,119,000) Net proceeds from issuance of equity securities ................ 9,000 8,538,000 742,000 ------------ ----------- ----------- Net cash provided by financing activities ................ 19,625,000 14,197,000 10,787,000 ------------ ----------- ----------- Increase in cash ............................................... 249,000 76,000 20,000 Cash, beginning of year ........................................ 276,000 200,000 180,000 ------------ ----------- ----------- Cash, end of year .............................................. $ 525,000 $ 276,000 $ 200,000 ============ =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid .................................................. $ 3,839,000 $ 2,581,000 $ 1,604,000 ============ =========== =========== Income taxes paid .............................................. $ 1,108,000 $ 898,000 $ 1,021,000 ============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital leases aggregating $634,000 for computer equipment became effective during 1994. Effective January 1, 1996, the Company purchased all of the capital stock of Programming Plus Incorporated ("PPI"). The consideration paid by the Company for such capital stock consisted of 549,999 shares of common stock of the Company valued at $1,375,000 (or $2.50 per share); however, only 60,000 shares of common stock (valued at $150,000) were released to the PPI selling shareholders at closing, with the balance retained in escrow subject to certain conditions subsequent. During 1995, the Company purchased all the capital stock of Added Value Electronics Distribution, Inc. and A.V.E.D.-Rocky Mountain, Inc. The Company paid approximately $2,936,000 in cash and 2,013,401 shares of common stock of the Company valued at approximately $4,893,000. During 1994, the Company acquired substantially all of the assets of GCI Corporation. The Company paid $485,000 in cash, with the balance by a combination of a promissory note and stock options. In addition, during 1994, the Company acquired substantially all of the assets of Components Incorporated. The Company paid $599,000 in cash, with the balance in a promissory note. See notes to consolidated financial statements F-5 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company is a national distributor of electronic components manufactured by others. The Company primarily distributes a full range of semiconductors (active components), including transistors, diodes, memory devices and other integrated circuits, as well as passive components, such as capacitors, resistors, inductors and electromechanical products, including cable, switches, connectors, filters and sockets. The Company's products are sold primarily to original equipment manufacturers ("OEMs") in a diverse and growing range of industries, including manufacturers of computers and computer-related products, satellite and communications products, consumer goods, robotics and industrial equipment, defense and aerospace equipment and medical instrumentation. The Company also designs and has manufactured certain board level products including memory modules and flat panel display driver boards, both of which are sold to OEMs. The Company's financial statements are prepared in accordance with generally accepted accounting principles ("GAAP"). Those principles considered particularly significant are detailed below. GAAP requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses. While actual results may differ from these estimates, management does not expect the variances, if any, to have a material effect on the consolidated financial statements. BASIS OF CONSOLIDATION AND PRESENTATION The consolidated financial statements of the Company include the accounts of all subsidiaries, all of which are wholly-owned. All material intercompany balances and transactions have been eliminated in consolidation. The Company has a Canadian subsidiary which conducts substantially all of its business in U.S. dollars. Prior years' financial statements have been reclassified to conform with the current year's presentation. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company, from time to time, maintains cash balances which exceed the federal depository insurance coverage limit. The Company performs periodic reviews of the relative credit rating of its bank to lower its risk. The Company believes that concentration with regards to accounts receivable is limited due to its large customer base. F-6 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVENTORIES Inventories are stated at the lower of cost (determined on an average cost basis) or market. DEPRECIATION AND AMORTIZATION Fixed assets are reflected at cost. Depreciation of office furniture and equipment, computer equipment and motor vehicles is provided on straight-line and accelerated methods over the estimated useful lives of the respective assets. Amortization of leasehold improvements is provided using the straight-line method over the term of the related lease or the life of the respective asset, whichever is shorter. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. The excess of cost over the fair value of net assets acquired is being amortized over periods ranging from 15 years to 40 years using the straight-line method. The Company periodically reviews the value of its excess of cost over the fair value of net assets acquired to determine if an impairment has occurred. As part of this review the Company measures the estimated future operating cash flows of acquired businesses and compares that with the carrying value of excess of cost over the fair value of net assets. See Note 5 to Notes to Consolidated Financial Statements. INCOME TAXES The Company has elected to file a consolidated federal income tax return with its subsidiaries. Deferred income taxes are provided on transactions which are reported in the financial statements in different periods than for income tax purposes. The Company utilizes Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and assets for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 9 to Notes to Consolidated Financial Statements. EARNINGS PER SHARE Primary earnings per share has been computed based upon the weighted average number of common and common equivalent shares outstanding during each period presented. Fully diluted earnings per share has been computed assuming conversion of all dilutive stock options and warrants. F-7 The following average shares were used for the computation of primary and fully diluted earnings per share: YEARS ENDED DECEMBER 31 1996 1995 1994 - ----------------------- ---------- ---------- ---------- Primary and fully diluted......... 20,115,843 15,945,696 13,029,714 STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all investments purchased with an original maturity of three months or less to be cash. POSTRETIREMENT BENEFITS In 1993, the Company adopted Financial Accounting Standards Board Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The effect of the adoption of this Statement was not material. STOCK-BASED COMPENSATION In 1996, the Company adopted Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See Note 10 to Notes to Consolidated Financial Statements. NOTE 2 - PUBLIC OFFERING On June 15, 1995, the Company completed a public offering of 4,550,000 shares (exclusive of the over-allotment option) of its common stock at $1.875 per share. On July 13, 1995, the Company issued an additional 682,500 shares of its common stock as a result of the exercise of an over-allotment option. The aggregate net proceeds from this offering, after deducting all associated costs, aggregated approximately $8,500,000. As a result, the Company's common stock and capital in excess of par value increased by $53,000 and $8,447,000, respectively. The net proceeds initially were used to reduce the amount outstanding under the Company's line of credit, pending the use of the line of credit for continued growth and expansion, including opening new sales offices, acquisitions, inventory diversification and general working capital purposes. F-8 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - PROPERTY, PLANT AND EQUIPMENT DECEMBER 31 1996 1995 - ----------- ---------- ---------- Office furniture and equipment................ $4,018,000 $3,283,000 Computer equipment............................ 3,403,000 2,162,000 Leasehold improvements........................ 1,719,000 1,271,000 Motor vehicles................................ - 25,000 ---------- ---------- 9,140,000 6,741,000 Accumulated depreciation and amortization (3,686,000) (2,859,000) ---------- ---------- $5,454,000 $3,882,000 ========== ========== NOTE 4 - ACQUISITIONS Effective January 1, 1996, the Company purchased all of the capital stock of Programming Plus Incorporated ("PPI"), which provides programming and tape and reel services with respect to electronic components. The purchase price for PPI consisted of $1,375,000 of common stock of the Company, valued at $2.50 per share. Only 60,000 shares of the Company's common stock, valued at $150,000, were released to the PPI selling shareholders at closing. The $1,225,000 balance of the consideration ("Additional Consideration"), represented by 489,999 shares of common stock of the Company, was retained in escrow by the Company, as escrow agent. The Additional Consideration will be released to the PPI selling shareholders annually if and based upon certain levels of pre-tax net income being attained by the acquired company for the years ended December 31, 1996 through December 31, 2000. For the year ended December 31, 1996, the acquired company did not attain that certain level of pre-tax net income and, accordingly, none of the Additional Consideration was released. If, as of December 31, 2000, all of the Additional Consideration has not been released, the balance held in escrow will be canceled. The PPI selling shareholders must vote all of the Company's common stock issued to them (whether or not held in escrow) as directed by the Company until the escrow is terminated. In addition, the PPI selling shareholders entered into a four-year consulting obligation with PPI in consideration of certain automobile benefits, and a covenant not to compete with PPI. The total amount paid by PPI for such automobile benefits and covenant was $150,000. The acquisition was accounted for by the purchase method of accounting which resulted in the recognition of approximately $70,000 of excess cost over fair value of net assets acquired. The excess cost over fair value of net assets acquired was subsequently deemed impaired (see Note 5) and, as of September 30, 1996, was written-off. The assets, liabilities and operating results of PPI are included in the consolidated financial statements of the Company from the date of acquisition. F-9 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 29, 1995, the Company purchased through two separate mergers with and into the Company's wholly-owned subsidiaries (the "Added Value Acquisitions") all of the capital stock of Added Value Electronics Distribution, Inc. ("Added Value") and A.V.E.D.-Rocky Mountain, Inc. ("Rocky Mountain," and together with Added Value, collectively the "Added Value Companies"). The purchase price for the Added Value Companies included approximately $2,936,000 in cash and 2,013,401 shares of common stock of the Company valued at approximately $4,893,000 (exclusive of the 160,703 shares of common stock issued in the transaction to a wholly-owned subsidiary of the Company). In addition, the Company paid an aggregate of $1,200,000 in cash to the selling stockholders in exchange for covenants not to compete, and an aggregate of $1,098,000 in cash as front-end incentive employment compensation paid to certain key employees of the Added Value Companies. The Company also assumed substantially all of the seller's disclosed liabilities of approximately $8,017,000, including approximately $3,809,000 in bank notes which have since been repaid. The Company may be obligated to pay to the selling stockholders of the Added Value Companies up to approximately $266,000 of additional consideration ("Additional Consideration") if the aggregate value of the shares of the Company's common stock issued to certain of the selling stockholders has not, by June 30, 1998, appreciated in the aggregate by $266,000. Prior to the Company entering into a settlement agreement with certain of the selling stockholders in December 1996 and with an additional selling stockholder in January 1997 (collectively the "Settlement Agreements") the Additional Consideration could have been as much as $1,900,000. See Note 5 to Notes to Consolidated Financial Statements. The Additional Consideration is payable, subject to certain limitations, at the election of the Company, in cash or the Company's common stock, or a combination of cash and the Company's common stock. The Settlement Agreement entered into in December 1996 also provided, among other things, that certain of the selling stockholders reconvey to the Company an aggregate of 95,000 shares of common stock of the Company which were issued as part of the purchase price for the Added Value Companies and that the Company grant to certain selling stockholders stock options to purchase an aggregate of 50,000 shares of the Company's common stock at an exercise price of $1.50 per share exercisable through December 30, 2001. The acquisitions were accounted for by the purchase method of accounting which resulted in the recognition of approximately $2,937,000 of excess cost over fair value of net assets acquired. As a result of a reduction in the estimated future cash flows from the Added Value Companies, the Company recognized an impairment of goodwill of approximately $2,200,000 in 1996 (see Note 5 to Notes to Consolidated Financial Statements). The assets, liabilities and operating results of the acquired companies are included in the consolidated financial statements of the Company from the date of the acquisitions, December 29, 1995. On September 9, 1994, the Company completed the acquisition of substantially all of the assets of GCI Corp., a Philadelphia-area distributor of electronic components. As consideration for this acquisition, the Company paid $485,000 in cash, issued a F-10 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS promissory note of approximately $306,000 payable interest only for two years and in quarterly installments over the next three years, and issued stock options valued at $144,000 at September 9, 1994. The Company also assumed substantially all of the seller's disclosed liabilities of approximately $1,930,000, including a $1,400,000 bank note payable which has been repaid. See Notes 8 and 10 to Notes to Consolidated Financial Statements. The promissory note is required to be paid down by one-half of the then outstanding principal balance if certain Net Earnings (as defined) are attained for 1995 or 1996. For 1995 and 1996, the level of Net Earnings (as defined) was not met and therefore no principal payments were made on such promissory note. The seller may earn up to an additional $760,000 of contingent purchase price over the three-year period ending December 31, 1997 if certain gross profit targets are met. For 1995 and 1996, the gross profit targets were not met and, therefore, no additional purchase price was earned. The acquisition was accounted for by the purchase method of accounting which resulted in the recognition of approximately $394,000 of excess cost over fair value of net assets acquired. The operating results of the acquired company are included in the consolidated statement of operations from the date of acquisition. The three principal stockholders and key employees of GCI Corp. (the "GCI Principals") each had received an employment agreement expiring on December 31, 1997 providing for base salary of $122,000, $113,000 and $110,000 per annum, respectively. In addition to base salary, each of the GCI Principals could have earned a bonus based upon the percentage of the Net Earnings generated in the sales Territory, as defined. In addition to the net earnings bonus, two of the GCI Principals could have earned an annual bonus based upon the gross profit of the Company with respect to all sales made in Maryland, Virginia and Delaware, but only if certain minimum gross profit levels are obtained. The Company had also agreed to grant to each of the GCI Principals employee incentive stock options at fair market value on the date of grant (10,000 to each by January 30, 1996; 10,000 to each by January 30, 1997; and 10,000 to each by January 30, 1998), but each such grant was conditional upon sales in the sales Territory, as defined, attaining a minimum gross profit for the year most recently ended. As of December 31, 1996, the minimum gross profit margin was not attained and therefore none of the applicable stock options have been granted. Two of the GCI principals' employment agreements have been terminated. One other key employee of GCI Corp. accepted employment with the Company and was granted 10,000 employee incentive stock options at an exercise price of $2.63 per share, the ability to receive up to 15,000 additional employee incentive stock options (5,000 per year in respect of 1995, 1996 and 1997) if certain minimum gross profit for sales in the sales Territory, as defined, are attained during each such year, and will be issued 1,000 shares of Common Stock as a result of completing 18 months of service. None of the 15,000 additional stock options have been granted as the minimum gross profit was not attained during 1995 and 1996. F-11 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 24, 1994, the Company completed the acquisition of substantially all of the assets of Components Incorporated, a Chicago-based distributor of electronic components ("Components"). As consideration for this acquisition, the Company paid $599,000 in cash and issued a promissory note of approximately $399,000 due two years from closing, which has since been repaid. The Company also assumed substantially all of the seller's disclosed liabilities of approximately $700,000, including a $400,000 bank note payable which has been repaid. See Note 8 to Notes to Consolidated Financial Statements. The Components principal received $350,000 of consideration for a covenant not to compete that restricts any competition with the Company through April 30, 1999, representing a three-year period following the Components principal's termination as an employee which was April 30, 1996. The $350,000 consideration was in the form of a grant of stock options valued at $100,000 as of January 24, 1994 and the delivery to the Components principal of a promissory note in the principal amount of $250,000. See Notes 8 and 10 to Notes to Consolidated Financial Statements. The Company has also granted to the Components principal employee incentive stock options at fair market value on the date of grant (5,000 on January 24, 1995 and 10,000 on January 24, 1996). These options are no longer outstanding as 5,000 were exercised and the balance were canceled in connection with the termination of the Components principal as an employee. The acquisition was accounted for by the purchase method of accounting. The operating results of the acquired company are included in the consolidated statement of operations from the date of acquisition. The following unaudited pro forma consolidated income statement data presents the consolidated results of operations of the Company as if the acquisitions of PPI, the Added Value Companies, GCI Corp. and Components had occurred at the beginning of the years presented: YEARS ENDED DECEMBER 31 1995 1994 - ----------------------- ------------ ------------ Net sales......................... $217,247,000 $145,942,000 Net income........................ 2,822,000 1,809,000 Primary earnings per share........ $.16 $.12 Fully diluted earnings per share.. $.16 $.12 The above pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made as of such date or of the results which may occur in the future. F-12 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - IMPAIRMENT OF GOODWILL In connection with the Company's acquisitions of the Added Value Companies and PPI, at September 30, 1996, the Company recognized an impairment of goodwill. This non-cash charge is primarily related to the Added Value Companies and has no associated tax benefit. A variety of factors contributed to the impairment of the goodwill relating to the Added Value Companies. These factors include a significant reduction in the revenues and operating results generated by the Added Value Companies' customer base acquired by the Company, a restructuring of the Added Value Companies' kitting and turnkey operations due to the Company determining that it was not economically feasible to continue and expand such division as originally planned, as well as the termination of certain principals and senior management of the Added Value Companies who became employees of the Company at the time of the closing of the acquisitions. See Note 6 to Notes to Consolidated Financial Statements. These factors have greatly reduced the estimated future cash flows from the Added Value Companies. In determining the amount of the impairment charge, the Company developed its best estimate of projected operating cash flows over the remaining period of expected benefit. Projected future cash flows were discounted and compared to the carrying value of the related goodwill and as a result a write-down of approximately $2,400,000 with respect to the Added Value Companies was recorded as of September 30, 1996. In December 1996 and January 1997, as part of the Settlement Agreements (see Note 4 to Notes to Consolidated Financial Statements), the Company reacquired and canceled 95,000 shares of the Company's common stock valued at approximately $110,000. In addition, the Company established a receivable for $125,000 related to excess distributions made to certain principals of the Added Value Companies in connection with the acquisitions which, together with the benefit associated with the Settlement Agreements, reduced the impairment of goodwill to $2,193,000. NOTE 6 - RESTRUCTURING AND OTHER NONRECURRING EXPENSES During 1996, the Company recorded a pretax charge of $1,092,000 associated primarily with the restructuring of its kitting and turnkey operations. The kitting department was created toward the end of 1994 and, at the time of the December 1995 Added Value Acquisitions, the Company intended to utilize the extensive kitting capabilities acquired and expand such service nationwide. In addition, the acquisitions provided the Company with capabilities in turnkey manufacturing services. After evaluating, with the assistance of consultants, the Company's cost structure and service capabilities, the Company's management determined that it was not economically feasible to continue its current level of investment in such services, especially in light of the adverse market conditions within the industry at that time. As a result, the Company adopted a plan to restructure its kitting and turnkey operations. In connection with this plan, the Company reduced the related workforce and accrued for employee severance and related benefits and wrote down various related assets. The portion of the restructuring charge which represented severance and F-13 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS related benefits aggregated approximately $625,000. The workforce reductions primarily affected approximately 90 employees of the Company's sales, management and operations departments. As of December 31, 1996, approximately $194,000 of termination benefits were applied to the restructuring accrual. The Company expects to pay the balance of the accrued liability during 1997. After the completion of the restructuring, the Company should have reduced overhead and enhanced operational efficiency. In addition, during 1996, the Company wrote-off $2,000,000 of inventory associated primarily with the restructuring of the kitting and turnkey operations which is reflected in cost of sales in the accompanying Consolidated Statements of Operations. During 1996, the Company terminated certain employment agreements which were entered into in connection with certain acquisitions. As a result, the Company accrued $587,000 of nonrecurring expenses in 1996, representing the aggregate of the payments to be made under such agreements. In May 1996, the Company decided to close its cable assembly division in Lisle, Illinois and to relocate certain of such operations to its Miami distribution facility. Accordingly, the Company accrued $445,000 of nonrecurring expenses in 1996 relating to such decision, including the write-down of certain cable assembly-specific inventory, operating costs through the date of relocation and severance pay. In December 1996, an employment agreement with an executive officer was amended whereby the permitted retirement date was accelerated to December 31, 1996. As a result, the Company accelerated an existing postretirement benefit accrual schedule and recorded an additional non-cash charge of $625,000. See Note 11 to Notes to Consolidated Financial Statements. In 1995 in connection with the Added Value Acquisitions, the Company paid an aggregate of $1,098,000 in cash to certain key employees of the Added Value Companies as front-end incentive employment compensation. NOTE 7 - DISCONTINUED OPERATIONS In June 1995, the Company established a computer products division ("CPD") which operates under the name Access Micro Products. This division sold microprocessors, motherboards, computer upgrade kits, keyboards and disk drives primarily to value added resellers, retailers and distributors of computer products. During the first quarter of 1996 this division was profitable and growing. As a result of this growth and at the request of the division's primary supplier, the Company expanded its staffing and infrastructure to support the expected continued growth. During the second quarter of 1996, the Company was notified by the division's primary supplier that it had discontinued the production of certain F-14 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS products that were the mainstay of the Company's computer products division. Although the Company obtained additional product offerings, revenues of Access Micro Products were severely impacted without these mainstay products and, as a result, management decided to discontinue CPD. The Company finalized its plan of disposal during the third quarter of 1996. Accordingly, this division is accounted for as discontinued operations and the results of operations for all periods shown are segregated in the accompanying Consolidated Statements of Operations. Net sales, cost of sales, operating expenses and income taxes for the prior periods have been reclassified for amounts associated with the discontinued division. The loss on disposal of $2,791,000, on an pretax basis, includes the estimated costs and expenses associated with the disposal of $2,326,000 as well as a provision of $465,000 for operating losses during the phase-out period, which is expected to continue through March 31, 1997. Sales from this division were $6,822,000 and $3,459,000 for 1996 and 1995, respectively. The net assets of discontinued operations, after reflecting certain non-cash write-offs of inventory and receivables, included in the accompanying Consolidated Balance Sheet at December 31, 1996, are summarized as follows: Current assets...................... $ 788,000 Property, plant and equipment - net. 42,000 ----------- Net assets.......................... $ 830,000 =========== NOTE 8 - LONG-TERM DEBT LINE OF CREDIT In May 1996, the Company entered into a new $100 million line of credit facility with a group of banks (the "New Credit Facility") which expires May 3, 2001. At the time of entering into such facility, borrowings under the New Credit Facility bore interest, at the Company's option, at either prime plus one-quarter of one percent (.25%) or LIBOR plus two and one-quarter percent (2.25%). Outstanding borrowings under the New Credit Facility, which are secured by all of the Company's assets including accounts receivable, inventories and equipment, amounted to $50,000,000 at December 31, 1996. The amounts that the Company may borrow under the New Credit Facility are based upon specified percentages of the Company's eligible accounts receivable and inventories (as defined). Under the New Credit Facility, the Company is required to comply with certain affirmative and negative covenants as well as to comply with certain financial ratios. These covenants, among other things, place limitations and restrictions on the Company's borrowings, investments and transactions with affiliates and prohibit dividends and stock redemptions. Furthermore, the F-15 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Credit Facility requires the Company to maintain certain minimum levels of tangible net worth throughout the term of the agreement and a minimum debt service coverage ratio which is tested on a quarterly basis. In connection with obtaining the New Credit Facility the Company paid financing fees which aggregated $3,326,000. During 1996, the Company's New Credit Facility was amended whereby certain financial covenants were modified and the Company's borrowing rate was increased by one-quarter of one percent (.25%). As a result of a projected decrease in the Company's future anticipated utilization of the New Credit Facility based on projected cash flows as well as certain changes to the terms of the initial agreement, $1,704,000 of the deferred financing fees was written off to interest expense in 1996, since it was deemed to have no future economic benefit. In connection with the New Credit Facility, in May 1996, the Company repaid all outstanding borrowings under the Company's previous $45 million line of credit facility which was to expire in May 1997 and bore interest, at the Company's option, either at one-quarter of one percent (.25%) below prime or two percent (2%) above certain LIBOR rates and repaid the Company's $15 million senior subordinated promissory note (the "Subordinated Note"). The Subordinated Note had been issued in March 1996 and was scheduled to mature on July 31, 1997. As a result of the early extinguishment of the Subordinated Note, the Company recognized an extraordinary after-tax expense of $214,000, net of a related income tax benefit of $161,000, in 1996. Outstanding borrowings at December 31, 1995 under the Company's then $45 million facility amounted to $25,900,000. NOTES PAYABLE - BANKS In connection with the acquisitions of the Added Value Companies, the Company assumed two notes payable to banks of approximately $3,809,000 which were subsequently repaid in January 1996. These notes are included in long-term debt as of December 31, 1995. SUBORDINATED DEBT In September 1994, in connection with the acquisition of GCI Corp., the Company issued a promissory note to the seller bearing interest at 7% per annum in the approximate amount of $306,000 due in 1999. The promissory note, which is subordinate to the Company's line of credit, is payable interest only on a quarterly basis for the first two years with the principal amount, together with accrued interest thereon, payable in equal quarterly installments over the next three years. One-half of the then outstanding principal balance of the promissory note was required to be paid if certain Net Earnings (as defined) were attained for 1995 or 1996. For 1995 and 1996, the level of Net Earnings (as defined) was not met. In addition, in connection with bonuses earned pursuant to employment F-16 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS agreements the Company executed two promissory notes in 1996 to two of the former principal stockholders of GCI Corp., each in the approximate amount of $10,100. These notes, which are subordinate to the Company's institutional lenders, mature in 2001 and bear interest at 7% per annum, payable quarterly. Furthermore, the Company executed a promissory note in the approximate amount of $37,300 payable to GCI Corp. in connection with the earn-out provision contained in the asset purchase agreement. This note bears interest at 7% per annum, payable quarterly. The note, which is subordinate to the Company's institutional lenders, matures in 2001. In June 1994, the Company completed a private placement (the "1994 Private Placement") of 51.5 units, with each unit consisting of a 9% non-convertible subordinated debenture due 2004 in the principal amount of $100,000 issuable at par, together with 7,500 common stock purchase warrants exercisable at $3.15 per share. The 51.5 units issued represent debentures aggregating $5,150,000 together with an aggregate of 386,250 warrants. See Note 10 to Notes to Consolidated Financial Statements. The debentures are payable in semi-annual installments of interest only commencing December 1, 1994, with the principal amount maturing in full on June 13, 2004. The Company is not required to make any mandatory redemptions or sinking fund payments. The debentures are subordinated to the Company's senior indebtedness including its line of credit facility and notes issued to the Company's landlord. The 386,250 warrants were valued at $.50 per warrant as of the date of the 1994 Private Placement and, accordingly, the Company has recorded the discount in the aggregate amount of $193,125 as additional paid-in capital. This discount is being amortized over the ten-year term of the debentures and approximately $19,000 was expensed in 1996 and 1995. In May 1994, the Company executed a promissory note in the amount of $865,000 in favor of the Company's landlord to finance substantially all of the tenant improvements necessary for the Company's Miami facility. This $865,000 note requires no payments in the first year (interest accrues and is added to the principal balance), is payable interest only in the second year and has a repayment schedule with varying monthly payments over the remaining 18 years. At the same time, the Company entered into another promissory note with the Company's landlord for $150,000 to finance certain personal property for the facility. This $150,000 note is payable interest only for six months and thereafter in 60 equal self-amortizing monthly payments of principal and interest. These notes, which are subordinate to the Company's line of credit, bear interest at 8% per annum and are payable monthly. In May 1994, the Company executed another promissory note in the approximate amount of $33,000 with the Company's landlord. This note is payable monthly with interest at 9.5% per annum and matures in April 1997. Certain additional improvements to the Company's Miami corporate facility aggregating approximately $90,300 were financed as of May 1, 1995 by the landlord. This $90,300 is evidenced by a promissory note payable in 240 consecutive, equal self-amortizing monthly installments of principal and interest. This note, which is subordinate to the Company's F-17 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS line of credit, accrues interest at a fixed rate of 8% per annum. In October 1996, the Company executed a promissory note in the amount of $161,500 with the Company's landlord to finance certain additional improvements to the Company's Miami corporate facility. This note, which is subordinate to the Company's line of credit, is payable monthly with interest at 8.5% per annum and matures in October 2011. In January 1994, in connection with the acquisition of Components, the Company issued a promissory note to the seller bearing interest at 8% per annum in the approximate amount of $399,000, payable in quarterly installments of interest only for a term of two years. The entire principal amount was repaid in January 1996. In addition, as part of the consideration for a covenant not to compete, the Company issued a promissory note to the principal of the seller in the amount of $250,000 (the "Non-Compete Note"). The Non-Compete Note bears interest at 8% per annum, payable quarterly, with $100,000 of principal due March 10, 1995, $50,000 of principal due April 24, 1996, and the remaining $100,000 payable in eight quarterly principal installments each in the amount of $12,500 payable over the fourth and fifth years of such note. One-half of the then outstanding principal balance of the Non-Compete Note is required to be paid if certain Net Earnings (as defined) are attained in any fiscal year, with the entire then outstanding principal balance of the Non-Compete Note required to be paid if at least the same level of Net Earnings (as defined) are attained in a subsequent fiscal year. For 1996 and 1995, the level of Net Earnings (as defined) was not attained. These notes are subordinate to the Company's line of credit. Long-term debt of the Company as of December 31, 1996, other than the line of credit, matures as follows: 1997.............................................................. $ 258,000 1998.............................................................. 315,000 1999.............................................................. 225,000 2000.............................................................. 78,000 2001.............................................................. 58,000 Thereafter........................................................ 7,111,000 --------- $8,045,000 ========== OBLIGATIONS UNDER CAPITAL LEASES The Company is the lessee of computer and office equipment under a capital lease expiring in 1997. The assets, aggregating $634,000, and liabilities under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over their estimated productive lives. As of December 31, 1996, accumulated depreciation of these assets aggregated approximately F-18 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $228,000. Depreciation of assets under this capital lease is included in depreciation expense. Future minimum lease payments under such capital lease as of December 31, 1996 were $190,000. This obligation, which is payable in full in 1997, includes interest of approximately $14,000. The net amount of $176,000 represents the present value of the minimum lease payments. The interest rate on this capital lease is 11.7% per annum and is imputed based on the lower of the Company's incremental borrowing rate at the inception of the lease or the lessor's implicit rate of return. The capital lease provides for a purchase option. NOTE 9 - INCOME TAXES The tax effects of the temporary differences that give rise to the deferred tax assets and liabilities as of December 31, 1996 and 1995 are as follows:
Deferred tax assets: 1996 1995 ---------- -------- Accounts receivable .................................. $ 448,000 $336,000 Inventory ............................................ 297,000 354,000 Postretirement benefits .............................. 482,000 -- Reserves for restructuring and discontinued operations 866,000 -- Other ................................................ 734,000 145,000 ---------- -------- 2,827,000 835,000 Deferred tax liabilities: Fixed assets............................................ 345,000 270,000 ---------- -------- Net deferred tax asset.................................... $2,482,000 $565,000 ========== =========
F-19 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of income tax expense for the years ended December 31, 1996, 1995 and 1994 are as follows: CURRENT DEFERRED TOTAL ----------- ----------- ----------- 1996 - ---- FEDERAL ........................... $(1,802,000) $(1,380,000) $(3,182,000) STATE ............................. (276,000) (217,000) (493,000) ----------- ----------- ----------- $(2,078,000) $(1,597,000) $(3,675,000) =========== =========== =========== 1995 - ---- Federal ........................... $ 1,450,000 $ (292,000) $ 1,158,000 State ............................. 225,000 (46,000) 179,000 ----------- ----------- ----------- $ 1,675,000 $ (338,000) $ 1,337,000 =========== =========== =========== 1994 - ---- Federal ........................... $ 385,000 $ (3,000) $ 382,000 State ............................. 26,000 (1,000) 25,000 ----------- ----------- ----------- $ 411,000 $ (4,000) $ 407,000 =========== =========== =========== A reconciliation of the difference between the expected income tax rate using the statutory federal tax rate and the Company's effective tax rate is as follows: YEARS ENDED DECEMBER 31 1996 1995 1994 - ----------------------- ----- ---- ---- U.S. Federal income tax statutory rate ...... (34.0)% 34.0% 34.0% State income tax, net of federal income tax benefit ....................... (2.6) 3.7 4.6 Goodwill amortization ....................... 16.6 -- -- Other - including non-deductible items ...... (9.9) 3.8 15.0 ----- ---- ---- Effective tax rate .......................... (29.9)% 41.5% 53.6% ===== ==== ==== The high effective tax rate for 1994 was primarily due to non-deductible entertainment expenses. NOTE 10 - CAPITAL STOCK, OPTIONS AND WARRANTS Effective January 1996, in connection with the acquisition of PPI, the Company issued an aggregate of 549,999 shares of its common stock, valued at $2.50 per share. Only 60,000 shares of the Company's common stock, valued at $150,000, were released to the PPI selling shareholders at closing. The remaining 489,999 shares of common stock was retained in escrow by the Company, as escrow agent, and will be released to the PPI selling shareholders annually if and based upon certain levels of pre-tax net income being attained by PPI for the years ended December 31, 1996 through December 31, 2000. For F-20 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the year ended December 31, 1996, PPI did not attain that certain level of pre-tax net income and, accordingly, no additional shares of common stock of the Company were released. In December 1995, in connection with the acquisition of the Added Value Companies, the Company issued an aggregate of 2,174,104 shares of common stock. As a result of Added Value previously owning approximately 37% of Rocky Mountain, 160,703 shares, valued at approximately $391,000, issued as part of the Rocky Mountain merger were acquired by the Company's wholly-owned subsidiary. In addition, in connection with such acquisitions, certain selling stockholders were granted an aggregate of 50,000 stock options to acquire the Company's common stock at an exercise price of $2.313 per share exercisable, subject to a six-year vesting period, through December 29, 2002. In connection with the Company entering into a settlement agreement with certain of the selling stockholders in December 1996, an aggregate of 95,000 shares of the Company's common stock was canceled and the Company granted to certain selling shareholders (who are employees of the Company) stock options to purchase an aggregate of 50,000 shares of the Company's common stock at an exercise price of $1.50 per share exercisable through December 30, 2001. In July 1995, the Company issued to a consulting firm a warrant to acquire 45,000 shares of the Company's common stock at an exercise price of $2.50 per share exercisable through July 20, 2000. The warrant was issued in consideration of such consulting firm entering into a new one-year consulting agreement with the Company covering financial public relations/investor relations services. At December 31, 1996, these warrants remained unexercised. The same consulting firm had previously been issued warrants to acquire an aggregate of 180,000 shares in September 1987 and May 1993 in connection with prior consulting agreements as discussed below. In connection with new employment agreements between the Company and each of its four executive officers entered into in May 1995, an aggregate of 1,000,000 stock options were granted on June 8, 1995 to such four executive officers pursuant to the Employees', Officers', Directors' Stock Option Plan, as previously amended and restated (the "Option Plan"). These options have an exercise price of $1.875 per share and are exercisable through June 7, 2005, subject to a vesting schedule. In connection with the public offering (see Note 2 to Notes to Consolidated Financial Statements), the Company issued to the underwriter common stock purchase warrants covering an aggregate of 523,250 shares of common stock (including warrants issued in connection with the underwriter's exercise of the over-allotment option). These warrants are exercisable at a price of $2.625 per share for a period of four years commencing one year from June 8, 1995. F-21 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 1994, the Company issued an aggregate of 386,250 common stock purchase warrants in connection with a private placement of subordinated debentures (see Note 8 to Notes to Consolidated Financial Statements). The warrants are exercisable at any time between December 14, 1994 and June 13, 1999 at an exercise price of $3.15 per share. In connection with this private placement, the placement agent received warrants to purchase 38,625 shares of the Company's common stock. The placement agent's warrants are exercisable for a four-year period commencing June 14, 1995 at an exercise price of $3.78 per share. At December 31, 1996, these warrants had not been exercised. During 1992, the Company sold units, each unit consisting of two shares of common stock and two warrants. In addition, the underwriters of this offering were issued warrants to purchase 175,000 units at $3.30 per unit. The underwriters' warrants are exercisable for a four-year period which commenced in June 1993. During 1993, the Company redeemed its then outstanding warrants. In addition, during 1993, 78,750 of the underwriters' warrants were exercised. As a result of these transactions, the Company received aggregate net proceeds of approximately $5,393,000 in 1993. During 1994, an additional 78,750 of the underwriters' warrants were exercised, leaving a balance of 17,500 warrants. The Company received aggregate net proceeds of approximately $465,000 in 1994. At December 31, 1996, the 17,500 warrants remained unexercised. In September 1987, the Company issued a warrant to acquire 90,000 shares of its common stock at $1.60 per share (after the 1989 stock split) relating to a since expired consulting agreement. In connection with the public offering completed in June 1992, the Company extended the exercise period of this warrant to June 1994. In May 1993, in connection with a new consulting agreement with the same party, the Company further extended the exercise period to June 1997 and issued additional warrants to acquire 90,000 shares of its common stock at $1.35 per share. At December 31, 1996, none of the warrants relating to these consulting agreements had been exercised. In June 1987, the Company reserved 375,000 shares of common stock for issuance under the then Option Plan. In 1992, the number of shares of common stock reserved for issuance was increased to 750,000 shares, in 1993 the number of shares of common stock reserved for issuance was increased to 1,750,000 shares, in 1994 the number of shares of common stock reserved for issuance was increased to 2,250,000 shares, and in 1995 the number of shares of common stock reserved for issuance was increased to 3,250,000 shares. F-22 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of options granted and related information for the years ended December 31, 1994, 1995 and 1996 under the Option Plan follows: WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- ---------------- Outstanding, December 31, 1994 1,165,563 $1.47 Granted 1,055,000 1.90 Exercised (10,500) .84 Canceled - - --------- Outstanding, December 31, 1995 2,210,063 1.65 Weighted average fair value of options granted during the year .45 Granted 276,500 2.16 Exercised (5,000) 1.84 Canceled (106,750) 2.20 --------- Outstanding, December 31, 1996 2,374,813 1.77 ========= Weighted average fair value of options granted during the year .24 Options exercisable: December 31, 1994 526,912 1.19 December 31, 1995 689,640 1.33 December 31, 1996 860,495 1.43 Exercise prices for options outstanding as of December 31, 1996 ranged from $.75 to $2.63. The weighted-average remaining contractual life of these options is approximately 5 years. Outstanding options at December 31, 1996 are held by 64 individuals. The Company applies APB 25 and related Interpretations in accounting for the Option Plan. Accordingly, no compensation cost has been recognized for the Option Plan. Had compensation cost for the Option Plan been determined using the fair value based method, as defined in SFAS 123, the Company's net earnings (loss)and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below: F-23 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1996 1995 ---------- ---------- Net earnings (loss): As reported $(9,920,000) $1,886,000 Pro forma (9,967,000) 1,616,000 Primary and fully diluted earnings (loss) per share: As reported $ (.49) $ .12 Pro forma $ (.50) $ .10 The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: expected volatility of 43.4% and 42.3%; risk-free interest rate of 6.5%; and expected lives of 5 to 8 years. The effects of applying SFAS 123 in the above pro forma disclosures are not indicative of future amounts as they do not include the effects of awards granted prior to 1995. Additionally, future amounts are likely to be affected by the number of grants awarded since additional awards are generally expected to be made at varying amounts. In connection with the acquisition of the assets of Components (see Note 4 to Notes to Consolidated Financial Statements), the Company issued 98,160 unqualified stock options exercisable through January 1999 at an exercise price of $1.65 per share. In connection with the acquisition of the assets of GCI Corp. (see Note 4 to Notes to Consolidated Financial Statements), the Company issued 117,551 unqualified stock options exercisable from September 1995 through September 1999 at an exercise price of $1.65 per share. In addition, the Company is obligated to issue 1,000 shares of its common stock and, under certain circumstances, the Company may be obligated to issue 15,000 incentive stock options. See Note 4 to Notes to Consolidated Financial Statements. NOTE 11 - COMMITMENTS/RELATED PARTY TRANSACTIONS Included in the Company's results of operations for 1995 is approximately $875,000 of sales, at cost, to the Added Value Companies, prior to the acquisitions. See Note 4 to Notes to Consolidated Financial Statements. In December 1991, the Company relocated its corporate offices and Miami warehouse to a 37,000 sq. ft. facility. In addition, a warehouse in New York was consolidated into this new Miami warehouse. In connection with the relocation and consolidation, the F-24 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company entered into a new lease with an unrelated third party which was to expire in December 1997. Annual rent payments under this lease totaled $57,000 in 1994. In May 1994, the Company terminated its lease covering the 37,000 sq. ft. facility and entered into a new lease with its then existing landlord to lease a new 110,800 sq. ft. facility for its corporate headquarters and Miami distribution center. During 1995, the Company was utilizing approximately 75% of this new facility, the balance of which the Company was subleasing to an unrelated third party for a term of three years ending on July 14, 1997. This sublease has no renewal options and the Company has the right to recapture a portion of the sublet space from the tenant after the eighteenth month of the three-year term. During 1996 the Company reclaimed 11,300 square feet pursuant to the sublease agreement, which brought the total amount of the building occupied by the Company to 84%. The sublease provides for base rent of $5,000 per month increasing 5% per year and additional rent representing the subtenant's pro rata share of landlord pass-through expenses and other expenses pertaining to the sublet premises. The lease has a term expiring in 2014 (subject to the Company's right to terminate at any time after the fifth year of the term upon twenty-four months prior written notice and the payment of all outstanding debt owed to the landlord). The lease gives the Company three six-year options to renew at the fair market value rental rates. The lease provides for annual fixed rental payments totaling approximately $264,000 in the first year, $267,000 in the second year, $279,000 in each of the third, fourth and fifth years, $300,600 in the sixth year, $307,800 in the seventh year and in each year thereafter during the term the rent shall increase once per year in an amount equal to the annual percentage increase in the consumer price index not to exceed 4% in any one year. As a result of the Added Value Acquisitions, the Company leases a 13,900 square foot facility in Tustin, California and a 7,600 square foot facility in Denver, Colorado. The Tustin facility contains a distribution center as well as the staff supporting the Company's kitting and turnkey operations and the separate divisions created for flat panel displays and memory module operations. The Denver facility contains a regional distribution center and sales office. In October 1995, the Company entered into a lease for a new west coast distribution and semiconductor programming center located in Fremont, California (near San Jose). The Company moved into such facility in January 1996. The Company will use this space to expand its semiconductor programming and distribution capabilities and improve quality control and service capabilities for its west coast customers. The Company leases space for 29 sales offices, including non-cancelable leases assumed in connection with the acquisitions of the Added Value Companies, which expire at various dates and include various escalation clauses and renewal options. F-25 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Approximate minimum future rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1996, are as follows for the next five years: YEAR ENDING DECEMBER 31 - ----------------------- 1997........................................................ $2,728,000 1998........................................................ 2,251,000 1999........................................................ 1,696,000 2000........................................................ 1,260,000 2001........................................................ 807,000 Total rent expense, including real estate taxes and net of sublease income, amounted to approximately $1,772,000, $1,345,000 and $753,000 for the years ended December 31, 1996, 1995 and 1994, respectively. In May 1995, the Company entered into new employment agreements with each of the four executive officers of the Company (collectively, the "1995 Agreements"). These agreements provide for an aggregate of $845,500 in base salary per annum effective beginning either March or June 1995 and are subject to an annual increase commencing as of January 1, 1996 equal to the greater of 4% per annum as to two agreements and 5% per annum as to the other two agreements or the increase in the cost of living. The 1995 Agreements provide that the executive officers as a group are entitled to receive an annual cash bonus, subject to certain caps, equal to an aggregate of 10% of the Company's pre-tax income, before nonrecurring and extraordinary charges, in excess of $1,000,000 in any calendar year. Excluding certain one-time bonuses for 1995 aggregating $55,000, the total amount of bonuses earned for 1995 was approximately $370,000. No bonuses were earned for 1996. The 1995 Agreements also provide for certain additional benefits, including participation in the Company's benefit plans, disability benefits and various life insurance policies. The 1995 Agreements also contain change-in-control provisions that may result in certain lump sum severance payments based on a multiple (two or three years) of all annual compensation and benefits being payable to them. One agreement contains a retirement benefits package including $100,000 per annum from date of retirement until the later of the death of such executive officer or his spouse. In connection with an amendment to this agreement entered into in December 1996, the permitted retirement date to receive such benefits was accelerated from January 1, 1999 to December 31, 1996. As consideration for this amendment, such executive officer agreed to a salary reduction of $25,000 per annum commencing with 1997 and to the elimination of certain insurance obligations of the Company. As a result of this amendment, the Company accelerated an existing postretirement benefit accrual schedule and recorded an additional non-cash charge of $625,000 in 1996. For 1995, a postretirement benefit cost of $264,000 was recorded. Retirement benefits under this agreement are presently F-26 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS unfunded. Postretirement benefit obligations of $1,171,000 and $264,000 are included in the consolidated balance sheets at December 31, 1996 and 1995. In connection with the acquisitions of the Added Value Companies, the Company entered into employment agreements with a total of 17 employees, including five key employees. The two-year employment agreements for the five key employees provide for annual salaries aggregating $695,000, excluding certain front-end incentive employment compensation aggregating $765,000. The remaining 12 employment agreements provide for annual compensation at rates comparable to what was previously paid to such employees and in certain agreements provide front-end incentive employment compensation (aggregating $333,000) and additional employment compensation aggregating $214,500 payable ratably over their two-year employment periods. During 1996, the Company terminated certain of these employment agreements, resulting in nonrecurring expenses aggregating $485,000. See Note 6 to Notes to Consolidated Financial Statements. Effective January 1, 1988, the Company established a deferred compensation plan (the "1988 Deferred Compensation Plan") for executive officers and key employees of the Company. The employees eligible to participate in the 1988 Deferred Compensation Plan (the "Participants") are chosen at the sole discretion of the Board of Directors upon a recommendation from the Board of Directors' Compensation Committee. Pursuant to the 1988 Deferred Compensation Plan, commencing on a Participant's retirement date, he or she will receive an annuity for ten years. The amount of the annuity shall be computed at 30% of the Participant's Salary, as defined. Any Participant with less than ten years of service to the Company as of his or her retirement date will only receive a pro rata portion of the annuity. Retirement benefits paid under the 1988 Deferred Compensation Plan will be distributed monthly. The Company paid benefits under this plan of approximately $15,600 during each of 1996 and 1995 and $52,000 in 1994, none of which was paid to any executive officer. The maximum benefit payable to a Participant (including each of the executive officers) under the 1988 Deferred Compensation Plan is presently $22,500 per annum. At December 31, 1996 the cash surrender values of insurance policies owned by the Company under the 1988 Deferred Compensation Plan, which provide for the accrued deferred compensation benefits, aggregated approximately $91,000. During 1996, the Company established a second deferred compensation plan (the "1996 Deferred Compensation Plan") for executives of the Company. The executives eligible to participate in the 1996 Deferred Compensation Plan are chosen at the sole discretion of the Board of Directors upon a recommendation from the Board of Directors' Compensation Committee. The Company may make contributions each year in its sole discretion and is under no obligation to make a contribution in any given year. For 1996 the Company committed to contribute $63,000 under this plan. Participants in the plan will vest in their plan benefits over a ten-year period commencing January 1, 1996. If the participant F-27 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS terminates due to death, disability or due to a change in control of management they will vest 100% in all benefits under the plan. Retirement benefits will be paid, as selected by the participant, based on the sum of the contributions made and any additions based on investment gains. The Company maintains a 401(k) plan (the "401(k) Plan"), which is intended to qualify under Section 401(k) of the Internal Revenue Code. All full-time employees of the Company over the age of 21 are eligible to participate in the 401(k) Plan after completing 90 days of employment. Each eligible employee may elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of his or her salary, limited to $9,500 in 1996. The Company makes matching contributions and in 1996 its contributions were in the amount of 25% on the first 6% contributed of each participating employee's salary. NOTE 12 - SETTLEMENT OF LITIGATION In June 1996, the Company settled a civil action in connection with the Company's prior acquisition of certain computer equipment. In connection with the settlement agreement, the Company recognized an extraordinary after-tax gain of $272,000, net of related expenses, which is reflected in the Consolidated Statements of Operations for the year ended December 31, 1996. NOTE 13 - CONTINGENCIES From time to time the Company may be named as a defendant in suits for product defects, breach of warranty, breach of implied warranty of merchantability, patent infringement or other actions relating to products which it distributes which are manufactured by others. In those cases, the Company expects that the manufacturer of such products will indemnify the Company, as well as defend such actions on the Company's behalf although there is no guarantee that the manufacturers will do so. In addition, as a result of the acquisitions of the Added Value Companies, the Company offers a warranty with respect to its manufactured products for a period of one year against defects in workmanship and materials under normal use and service and in the original, unmodified condition. NOTE 14 - ECONOMIC DEPENDENCY For the year ended December 31, 1996, purchases from one supplier were in excess of 10% of the Company's total purchases and aggregated approximately $35,579,000. The net outstanding accounts payable to this supplier at December 31, 1996 amounted to approximately $2,285,000. F-28 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 1995, purchases from one supplier were in excess of 10% of the Company's total purchases and aggregated approximately $26,528,000. The net outstanding accounts payable to this supplier at December 31, 1995 amounted to approximately $838,000. For the year ended December 31, 1994, purchases from one supplier were in excess of 10% of the Company's total purchases and aggregated approximately $12,200,000. The net outstanding accounts payable to this supplier at December 31, 1994 amounted to approximately $246,000. F-29 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.9 Employment Agreement dated as of May 24, 1995, between the Company and Paul Goldberg (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661), as amended by First Amendment to Employment Agreement dated as of December 31, 1996, between the Company and Paul Goldberg. 10.35 Settlement Agreement dated December 17, 1996, by and among the Company, certain of its subsidiaries and certain selling stockholders of the Added Value Companies. 10.36 Settlement Agreement dated January 22, 1997, by and among the Company, certain of its subsidiaries and Thomas Broesamle. 10.37 Form of Salary Continuation Plan. 10.38 Promissory Note, dated October 1, 1996, payable to Sam Berman, d/b/a Drake Enterprises, in the amount of $161,500. 11.1 Statement Re: Computation of Per Share Earnings. 21.1 List of subsidiaries of the Registrant. 23.1 Consent of Lazar, Levine & Company LLP, independent certified public accountants. 27.1 Financial Data Schedule. EX-10.9 2 EXHIBIT 10.9 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT FIRST AMENDMENT, made and entered into as of the 31st day of December, 1996, to the Employment Agreement (the "Agreement") made and entered into on May 24, 1995, by and between ALL AMERICAN SEMICONDUCTOR, INC., a Delaware corporation (the "Company"), and PAUL GOLDBERG (the "Employee"). W I T N E S S E T H : WHEREAS, the Company and the Employee mutually desire and each of them is willing, in accordance with the terms and conditions specifically restated, added, deleted or otherwise set forth below, to amend the Agreement; it being understood by the Company and the Employee that all terms and conditions of the Agreement not otherwise specifically modified by this First Amendment thereto shall remain effective and continue operating in full force throughout the entire term of the Agreement. NOW, THEREFORE, for and in consideration of the covenants and agreements hereinafter set forth, the parties hereto mutually agree as follows: 1. BASE SALARY. Section 3(a) of the Agreement is hereby amended to provide that for calendar year 1997 and each calendar year thereafter during the term of the Employee's employment pursuant to the Agreement the Employee's base salary, as calculated 1 and determined under such Section 3(a), shall be reduced by $25,000 per annum. 2. $1 MILLION POLICY AND SECOND TO DIE POLICY. Sections 3(d)(ii) and 3(d)(iii) of the Agreement requiring, among other things, that the Company pay all premiums due on the $1 Million Policy and the Second To Die Policy (as such terms are defined in such Sections 3(d)(ii) and 3(d)(iii), respectively) are hereby deleted in their entirety from the Agreement and, accordingly, neither party shall have any further obligations under the Agreement with respect thereto. 3. RETIREMENT ELECTION. Section 3(f) of the Agreement is hereby amended to provide that the Employee may elect, in his sole and unquestionable discretion, to retire at any time on or after December 31, 1996, in lieu and replacement of the date of January 1, 1999, currently set forth in such Section. 4. EFFECT. Except as otherwise specifically modified by this First Amendment, all terms, conditions and provisions of the Agreement shall remain effective and continue operating in full force and without change. IN WITNESS WHEREOF, the Employee has hereunto set his hand and the Company has caused this First Amendment to be executed by its 2 duly authorized officer effective as of the day and year first above written. ALL AMERICAN SEMICONDUCTOR, INC. By: /s/ BRUCE M. GOLDBERG --------------------- Bruce M. Goldberg, President EMPLOYEE: /s/ PAUL GOLDBERG -------------------- PAUL GOLDBERG The undersigned, Lola Goldberg, as a third party beneficiary of certain of the provisions of the Agreement being modified by this First Amendment, hereby consents to and approves the amendments to the Agreement set forth in this First Amendment. /s/ LOLA GOLDBERG --------------------- LOLA GOLDBERG 3 EX-10.35 3 EXHIBIT 10.35 SETTLEMENT AGREEMENT SETTLEMENT AGREEMENT, dated December 17, 1996, by and among ALL AMERICAN SEMICONDUCTOR, INC., a Delaware corporation ("All American"), ALL AMERICAN ADDED VALUE, INC., a California corporation ("California Subsidiary"), ALL AMERICAN A.V.E.D., INC., a Colorado corporation ("Colorado Subsidiary"), and each of the persons whose names are set forth on Exhibit "A" AND have executed and delivered this Agreement on or prior to the Opt-In Date (individually, a "Target Stockholder" and, collectively, the "Target Stockholders"). PRELIMINARY STATEMENT All American, California Subsidiary, Colorado Subsidiary, Added Value Electronics Distribution, Inc., A.V.E.D.-Rocky Mountain, Inc., and the Target Stockholders entered into a Merger Purchase Agreement dated as of October 31, 1995 and/or certain other agreements in connection therewith and the closing thereof (collectively, the "Purchase Agreement"), including various employment agreements between California Subsidiary or Colorado Subsidiary and certain of the Target Stockholders (the "Employment Agreements"). Disputes have arisen concerning certain alleged misrepresentations and alleged wrongful acts and omissions of certain of the Target Stockholders relating to the transactions described in the Purchase Agreement and some of their respective employments with California Subsidiary or Colorado Subsidiary. All American, California Subsidiary and Colorado Subsidiary (collectively, the "All American Companies") and the Target Stockholders who have executed and delivered this Agreement on or prior to the Opt-In Date have agreed to settle such disputes on the terms set forth in this Agreement. No party to this Agreement is making any admission of any wrongdoing by agreeing to the matters herein set forth. NOW, THEREFORE, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used herein, which are not defined herein, shall have the respective meanings ascribed to them in the Purchase Agreement or, as applicable, the Employment Agreements. 2. TARGET STOCKHOLDERS AFFECTED. Notwithstanding that this Agreement contains signature lines for several of the Target Stockholders, it is recognized that fewer than all of such Target Stockholders may have executed and delivered this Agreement. This Agreement shall be fully effective as between the All American Companies (on the one hand) and those of the Target Stockholders who have executed and delivered this Agreement (on the other hand) on or before December 20, 1996 (the "Opt-In Date"), even though fewer than all of such Target Stockholders may have executed and delivered this Agreement on or prior to the Opt-In Date. No provision of this Agreement relating to or affecting the Target Stockholders shall benefit or burden, in any way, or be deemed to release, any Target Stockholder who has not executed and delivered this Agreement on or prior to the Opt-In Date, nor shall this Agreement create any obligation of any kind on the part of the All American Companies to any Target Stockholder who has not executed and delivered this Agreement on or prior to the Opt-In Date. The All American Companies reserve all of their respective claims, rights and remedies under the Purchase Agreement, the Employment Agreements at law or in equity against any Target Stockholder who has not executed and delivered this Agreement on or prior to the Opt-In Date, including, without limitation, all matters with respect to which the Target Stockholders are or may be jointly and severally liable. The release of any Target Stockholder herein who has executed and delivered this Agreement on or prior to the Opt-In Date shall not release any Target Stockholder who has not executed and delivered this Agreement on or prior to the Opt-In Date with respect to any joint and several liability such Target Stockholder may have for the released Target Stockholder's misrepresentations or wrongful acts or omissions. 3. ADDITIONAL CONSIDERATION. The obligation of All American to pay the Additional Consideration is hereby irrevocably and unconditionally waived, released, canceled and terminated in its entirety with respect to each Target Stockholder who has executed and delivered this Agreement on or prior to the Opt-In Date, without any obligation on the part of the All American Companies to pay any such Target Stockholder any compensation or consideration therefor. 4. ROBERT LURIE AND GARY MILLER EMPLOYMENT AGREEMENTS. Each of Robert Lurie and Gary Miller agrees, effective as of the Opt-In Date, that his Employment Agreement with California Subsidiary is, subject to the survival of the provisions of Sections 10, 11, 12 and 13 thereof (as to Section 11, as same may be modified pursuant to this Agreement) terminated and of no further force or effect. California Subsidiary shall have no further obligation of any kind to Mr. Lurie or Mr. Miller under such Employment Agreements, except only that each shall continue to receive his Salary through June 30, 1997. 5. CANCELLATION OF CERTAIN ALL AMERICAN SHARES. Each of the Target Stockholders listed below who has executed and delivered this Agreement on or prior to the Opt-In Date agrees that the number of All American Shares issued to him or her as part of the Merger Consideration set forth opposite his or her name below shall be unconditionally and irrevocably canceled, without any obligation on the part of any of the All American Companies to pay any such Target Stockholder any compensation or consideration therefor: Robert D. Lurie 20,000 Gary R. and Rosalie C. Miller 25,000 Wayne Vannoy 25,000 Kenneth A. Plock 12,500 Cathleen M. Plock 12,500 Richard W. McCauley 12,500 2 All American is hereby irrevocably authorized to execute, deliver, cancel and reissue all such documents and certificates, and to do or cause to be done all such acts and things, as may be necessary or appropriate to effectuate such cancellations. 6. STOCK OPTIONS. Each of the following Target Stockholders shall, within fifteen business days following such Target Stockholder's execution and delivery of this Agreement (provided such execution and delivery occurs on or prior to the Opt-In Date), be granted an option to acquire the number of All American Shares set forth opposite his or her name below: Wayne Vannoy 25,000 Kenneth A. Plock 12,500 Cathleen M. Plock 12,500 Richard W. McCauley 12,500 All of such options shall be issued pursuant to All American's Amended and Restated Employees', Officers', Directors' Stock Option Plan (the "Plan") pursuant to stock option agreements in All American's customary form used for issuances of stock options pursuant to the Plan. Each such stock option shall include the following terms: (a) the purchase price at which such options may be exercised shall be the greater of (i) $1.50 per share and (ii) the fair market value at the date of grant (as defined in the Plan); (b) all of the options shall be 100% vested on the date of grant; and (c) all of such options shall be exercisable in whole or in part within the five-year period following the date of grant. Such options are intended to be "incentive stock options" to the extent they qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Plan, and shall constitute "non-qualified stock options" issued pursuant to the Plan to the extent they do not so qualify or a disqualifying event subsequently occurs. 7. RESTRICTIVE COVENANT AS TO TRANSFERABILITY OF ALL AMERICAN SHARES. Robert D. Lurie, Gary R. and Rosalie C. Miller, and Jerry D. Fletcher and Marie Fletcher, if they have executed and delivered this Agreement on or prior to the Opt-In Date, are hereby released from the restrictions set forth in Sections 5(a) and 5(b) of the Restrictive Covenant, provided that each such Target Stockholder (Gary R. and Rosalie C. Miller, and Jerry D. and Marie Fletcher, being counted as one Target Stockholder for these purposes) may not sell, transfer or dispose of in open market sales more than 75,000 All American Shares in any week or more than 25,000 All American Shares in any one day. The other Target Stockholders shall retain the right, in accordance with the terms of Section 5(a) of the Restrictive Covenant, to sell in the aggregate up to 50,000 All American Shares during any 14-day period and up to 10,000 All American Shares in any one day. 8. EXTENSION OF EMPLOYMENT AGREEMENTS AND NONCOMPETITION COVENANTS. Each of the following Target Stockholders hereby agrees that, at the election of California Subsidiary or Colorado Subsidiary (as applicable), his or her Employment Term under his or her Employment Agreement shall be extended for one additional year beyond the Employment Term stated in such 3 Employment Agreement: Wayne Vannoy, Richard W. McCauley, Kenneth A. Plock and Cathleen Plock. California Subsidiary or Colorado Subsidiary (as applicable) shall be deemed to have elected to extend each such Employment Term for such one additional year unless it gives notice to the Target Stockholder, at least 30 days prior to the expiration of the currently-stated Employment Term, that it will NOT so extend such Employment Term. If the Employment Term is so extended, during such additional one-year period Employer may terminate the employment of such Target Stockholder without cause upon notice to such Target Stockholder, without any obligation to pay salary or other compensation or provide any other benefits beyond the date of employment termination. In consideration of the agreement of such Target Stockholders to work an additional year if so elected by Employer, but subject to the paragraphs below in this Section 8, the "Covenant- Not-To-Compete" set forth in Section 2 of the Restrictive Covenant (with respect to such Target Stockholders only), and the Covenant-Not-To-Compete set forth in Section 11 of each Employment Agreement with each such Target Stockholder, shall be amended and restated in their respective entireties as follows: (a) COVENANT-NOT-TO-COMPETE IN RESTRICTIVE COVENANT: "2. COVENANT-NOT-TO-COMPETE. In view of (a) the Confidential Information known to each Target Stockholder, (b) the substantial consideration paid and payable to such Target Stockholder under or pursuant to the Purchase Agreement, and (c) the sale of the good will of the business embodied in the Purchase Agreement, and as a material inducement to Purchaser to consummate the Purchase Agreement, each Target Stockholder covenants and agrees that such Target Stockholder shall not, directly or indirectly, for and during the First Applicable Period, (A) solicit the services of, or hire, directly or indirectly, whether on his or her own behalf or on behalf of others, any salesperson (whether an employee or independent contractor of the Purchaser Group) or managerial or executive employee of the Purchaser Group (or any of them) or who was employed or engaged by the Purchaser Group (or any of them) at any time during the period commencing December 1, 1996 and ending five years following the date of Closing under the Purchase Agreement, or (B) obtain any interest in, any employment with, or any right or engagement to participate in, passively or actively, any enterprise, company or business which is either an authorized distributor of electronic components or a turnkey or kitting business relating to electronics manufacturing anywhere within the continental United States (the "Geographical Territory"), or (C) in any capacity, engage in any activity or business, passively or actively, as an owner, participant, employee or agent, competitive with the memory module and/or display technology businesses of the Purchaser Group (or any of them) within the Geographical Territory. The foregoing restrictions shall not prevent a Target Stockholder from accepting employment with a manufacturer's representative or a broker (a "broker" being defined as a broker of electronic components that is not an authorized broker or distributor for any manufacturer of electronic components), provided that, in 4 connection with any such employment, such Target Stockholder does not participate, directly or indirectly, in the solicitation or diversion of any Key Account. A "Key Account" means any customer or former customer of California Subsidiary, Colorado Subsidiary, Added Value or Rocky Mountain which has accounted for sales of at least $50,000 in any consecutive 12-month period within the three-year period ending December 1, 1996. The foregoing restrictions shall also not prevent a Target Stockholder from engaging in the performance of turnkey or kitting services relating to electronics manufacturing, provided that, in connection with such activities, such Target Stockholder does not participate, directly or indirectly, in the solicitation or diversion of any of the following accounts of the Purchaser Group: Cognitive Solutions; VL Labs; Spectrologic; IGT; or BI Incorporated. Each Target Stockholder acknowledges that the business of the Purchaser Group is national in scope, that one can effectively compete with such business in the Geographical Territory from anywhere within the Geographical Territory, and that, therefore, such geographical area of restriction is reasonable in the circumstances to protect the Purchaser Group's legitimate business interests. For purposes hereof, "Purchaser Group" means the All American Companies and all of their respective subsidiaries, parents and other Affiliates, whether now or hereafter existing, including Added Value and Rocky Mountain, and all of such entities' respective successors and assigns by merger, sale, spin-off or otherwise." (b) COVENANT-NOT-TO-COMPETE IN EMPLOYMENT AGREEMENTS: "11. COVENANT-NOT-TO-COMPETE In view of (a) the Confidential Information known to and to be obtained by or disclosed to Employee (including, without limitation, Employee's knowledge of, and familiarity and relationships with, Employer's other employees and Employer's customers and suppliers), (b) the know-how acquired and to be acquired by Employee, (c) the substantial consideration paid and payable to Employee under the Purchase Agreement, and to Employee under this Employment Agreement, and (d) the sale of the good will of the business embodied in the Purchase Agreement, and as a material inducement to Employer to enter into this Employment Agreement and to employ Employee and to pay to Employee the substantial compensation Employee will be receiving, Employee covenants and agrees that, for as long as Employee is employed by Employer and for a period of two (2) years after the later of (i) the date Employee ceases for any reason to be employed by Employer and (ii) the date Employee ceases to receive any Salary (as severance pay or otherwise) from Employer, Employee shall not, directly or indirectly, (A) solicit the services of, or hire, passively or actively, whether on his own behalf or on behalf of others, any salesperson (whether an employee or independent contractor of the Purchaser Group) or managerial or executive employee of the Purchaser Group (or any of them) or who 5 was employed or engaged by the Purchaser Group (or any of them) at any time during the period commencing December 1, 1996 and ending two years following the date of termination of Employee's employment, or (B) obtain any interest in, any employment with, or any right or engagement to participate in, directly or indirectly, any enterprise, company or business which is either an authorized distributor of electronic components or a turnkey or kitting business relating to electronics manufacturing anywhere within the continental United States (the "Geographical Territory"), or (C) in any capacity, engage in any activity or business, passively or actively, as an owner, participant, employee or agent, competitive with the memory module and/or display technology businesses of the Purchaser Group in the Geographical Territory. The foregoing restrictions shall not prevent Employee from accepting employment with a manufacturer's representative or a broker (a "broker" being defined as a broker of electronic components that is not an authorized broker or distributor for any manufacturer of electronic components), provided that, in connection with any such employment, Employee does not participate, directly or indirectly, in the solicitation or diversion of any Key Account. A "Key Account" means any customer or former customer of California Subsidiary, Colorado Subsidiary, Added Value or Rocky Mountain which has accounted for sales of at least $50,000 in any consecutive 12-month period within the three-year period ending December 1, 1996. The foregoing restrictions shall also not prevent Employee from engaging in the performance of turnkey or kitting services relating to electronics manufacturing, provided that, in connection with such activities, such Employee does not participate, directly or indirectly, in the solicitation or diversion of any of the following accounts of the Purchaser Group: Cognitive Solutions; VL Labs; Spectrologic; IGT; or BI Incorporated. Employee acknowledges that the business of the Purchaser Group is national in scope, that one can effectively compete with such business in the Geographical Territory from anywhere in the Geographical Territory and that, therefore, such geographical area of restriction is reasonable in the circumstances to protect Employer's legitimate business interests. The covenants and restrictions contained in this Section 11 are intended to be separate and divisible from, and operate concurrently with, the similar covenants and restrictions contained in the Restrictive Covenant and are each intended to be separately enforceable. Any differences between the covenants and restrictions contained herein and therein, such as with respect to time period restrictions, are intentional. Nothing herein is intended to diminish, nor shall diminish, Employee's obligation to devote Employee's full-time working efforts to and for the benefit of Employer, and to honor and discharge faithfully Employee's duty of loyalty to Employer, while an employee of Employer. For purposes hereof, "Purchaser Group" means the All American Companies and all of their respective subsidiaries, parents and other Affiliates, whether now or hereafter existing, including Added Value and Rocky Mountain, and all of such entities' respective successors and assigns by merger, sale, spin-off or otherwise." 6 Notwithstanding any of the foregoing set forth above in this Section 8 to the contrary, the foregoing amendments and restatements of the covenants-not-to-compete of each Target Stockholder covered by this Section 8 shall not apply if such Target Stockholder resigns or if such Target Stockholder's employment is terminated with Cause during the Employment Term (including as extended, if such election is made by Employer), and, in such event, the covenants-not-to-compete set forth in the original Restrictive Covenant and applicable Employment Agreement shall continue to apply. If Employer elects to extend the Employment Term of a Target Stockholder as provided for above, and such Target Stockholder fulfills his or her employment obligations for the additional year, the applicable time period restriction in each of the Restrictive Covenant and the applicable Employment Agreement with respect to that Target Stockholder shall be reduced by a period of one year. For example, if Wayne Vannoy's employment is so extended for one year and he fulfills his employment obligations for such additional year, effective as of the end of such additional year his First Applicable Period and Second Applicable Period shall be reduced from 5 years to 4 years (i.e., each would terminate December 31, 1999 rather than December 31, 2000), and his covenant-not-to compete under his Employment Agreement would terminate one year following cessation of his employment rather than two years following his cessation of employment. In order to facilitate the compliance by the Target Stockholders affected by the amended and restated covenant not to compete provisions set forth above, Kenneth Plock and/or Wayne Vannoy shall be permitted to compile a list of the Key Accounts and distribute a copy of such list to such other Target Stockholders. Such list may not be used for any purpose other than verifying compliance. The foregoing amendment and restatement of Section 2 of the Restrictive Covenant and Section 11 of the Employment Agreements shall be effective immediately as to Robert D. Lurie and Gary R. Miller (both of whom no longer work for California Subsidiary), if, as to each, he has executed and delivered this Agreement on or prior to the Opt-In Date. 9. RELEASES AND COVENANTS NOT TO SUE. (a) For and in consideration of the agreements herein of the Target Stockholders who have executed and delivered this Agreement on or prior to the Opt-In Date (each, a "Target Stockholder Released Party") , and the release given by each Target Stockholder Released Party as a Target Stockholder Releasing Party below to the All American Group (as defined below), and other valuable consideration received from or on behalf of each Target Stockholder Released Party, the receipt of which is hereby acknowledged, each of the All American Companies hereby remises, releases, acquits, satisfies, and forever discharges each Target Stockholder Released Party of and from all, and all manner of, action and actions, cause and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims and demands whatsoever, at law or in equity, known or unknown, asserted or unasserted, which any of the All American Companies ever had, now has, or hereafter can, shall or may have, or which any 7 representative, successor, predecessor, or assign of any of the All American Companies ever had, now has, or hereafter can, shall or may have against such Target Stockholder Released Party arising or resulting from any past breach by such Target Stockholder Released Party of any of his or her representations, warranties or covenants contained in the Purchase Agreement, past acts or omissions of such Target Stockholder Released Party in connection with the performance of his or her employment duties after closing of the Mergers, the management, affairs, practices or operations of Added Value or Rocky Mountain prior to the closing of the Mergers, or prior injurious or defamatory statements made by any Target Stockholder Released Party prior to the date hereof. Each of the All American Companies further covenants and agrees never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against any Target Stockholder Released Party arising from any of the foregoing claims or causes of action which have been remised, released, acquitted, satisfied and forever discharged. (b) For and in consideration of the agreements of the All American Companies set forth in this Agreement, and the release given by the All American Companies above to each Target Stockholder Released Party (each, for purposes of this subsection (b), a "Target Stockholder Releasing Party"), and other valuable consideration received from or on behalf of the All American Companies, the receipt of which is hereby acknowledged, each Target Stockholder Releasing Party hereby remises, releases, acquits, satisfies, and forever discharges each of the All American Companies, each subsidiary, parent and other Affiliate of the All American Companies, and each successor, assign, officer, director, employee and agent of each of the foregoing entities (collectively, the "All American Group") of and from all, and all manner of, action and actions, cause and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims and demands whatsoever, at law or in equity, known or unknown, asserted or unasserted, which such Target Stockholder Releasing Party ever had, now has, or hereafter can, shall or may have, or which any representative, successor, predecessor, or assign of such Target Stockholder Releasing Party ever had, now has, or hereafter can, shall or may have, against the All American Group or any member thereof arising or resulting from any past breach by the All American Group (or any member thereof) of any of their respective representations, warranties or covenants contained in the Purchase Agreement or past acts or omissions of the All American Group (or any member thereof) in connection with the performance of their respective obligations under the Employment Agreements (and, in this regard, this release covers and releases any claims at law or in equity with respect to any Target Stockholder Releasing Party's employment with California Subsidiary or Colorado Subsidiary or any Affiliate thereof, including claims under any employment, discrimination, health or safety laws), or which in any manner relate to the management, affairs, practices or operations of any member of the All American Group or any decision, act or omission of any kind taken or made by or on behalf of any member of the All American Group, or any injurious or defamatory statements made by any member of the All American Group. Each Target Stockholder Releasing Party further covenants and agrees never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against the All American Group 8 or any member thereof arising from any of the foregoing claims or causes of action which have been remised, released, acquitted, satisfied and forever discharged. (c) It is the intention of the parties hereto in executing this Agreement that this instrument shall be effective as a bar to each and every claim, demand, or cause of action released hereby. Each party recognizes that he or it may have some claim, demand, or cause of action against another party of which he or it is totally unaware and unsuspecting, which he or it is giving up by execution of this Agreement. It is the intention of the parties in executing this instrument that it will deprive them of each such claim, demand or cause of action. In furtherance of this intention, each party hereto expressly waives any rights or benefits conferred by the provisions of Section 1542 of the Civil Code of the State of California, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." 10. NO INJURIOUS ACTS OR STATEMENTS. Each of the Target Stockholders hereby agrees that he or she shall not, at any time hereafter, publish, disseminate or make any critical, insulting, negative or disparaging remarks, statements or materials (orally or in writing) concerning the All American Group (or any member thereof) or their respective businesses, management, operations, condition (financial or otherwise) or affairs. Without limitation of the foregoing, no Target Stockholder shall (or shall attempt to) join or participate in, instigate or cause to be brought or asserted against any member of the All American Group any shareholder action, proxy fight, tender offer or other device, action or proceeding designed to unseat or disrupt current management of All American or its Affiliates or to effect a change of control of All American or its Affiliates. Each of the All American Companies agrees that it shall not, at any time hereafter, publish, disseminate or make any critical, insulting, negative or disparaging remarks, statements or materials (orally or in writing) concerning any of the Target Stockholders who have executed and delivered this Agreement on or prior to the Opt-In Date. Nothing contained in this Section 10 shall be deemed to prevent, or shall prevent, any Target Stockholder from giving truthful testimony under oath or complying with any applicable legal requirement (but no such testimony shall be voluntarily offered unless required by law in the opinion of counsel to the applicable party). 11. RICHARD MCCAULEY SALARY. Effective October 1, 1996, the portion of the first sentence of Section 5.A of Richard McCauley's Employment Agreement which follows the semi- colon is amended in its entirety to read as follows: "the variable amount shall be an annual amount equal to 2% of the aggregate gross profit (determined in accordance with GAAP) derived by Employer and its Affiliates nationwide from the sale of memory modules, MINUS the amount of commissions or compensation paid to manufacturer's representatives and other third parties in connection with the sale of 9 memory modules, MINUS the amount of any write-downs or write-offs of inventory related to memory module business." 12. FURTHER ASSURANCES. Each party to this Agreement shall, at the request of any other party to this Agreement, at its expense and without being entitled to receive further consideration, execute and deliver all such documents, and do all such acts and things, as may be reasonably required to effectuate the terms and provisions of this Agreement. 13. MISCELLANEOUS PROVISIONS. The provisions of Sections 9.2, 9.3, 9.6, 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.14, 9.15 and 9.17 of the Purchase Agreement shall apply to this Agreement; provided, however, that this Agreement is an independent agreement, and no provisions of the Purchase Agreement shall be deemed incorporated herein. 14. CONFIDENTIALITY. The parties shall keep the terms and conditions of this Agreement confidential and shall not disclose same, except to former stockholders of Added Value or Rocky Mountain who have not signed this Agreement and except as otherwise required by law, and, in the case of disclosures by All American, as may be required in the opinion of its counsel to comply with disclosure and other requirements under applicable securities laws. 10 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written, or on the date shown below, whichever is later. ALL AMERICAN SEMICONDUCTOR, INC. By: /s/ BRUCE M. GOLDBERG ----------------------------- Bruce M. Goldberg, President ALL AMERICAN ADDED VALUE, INC. By: /s/ BRUCE M. GOLDBERG ----------------------------- Bruce M. Goldberg, President ALL AMERICAN A.V.E.D., INC. By: /s/ BRUCE M. GOLDBERG ----------------------------- Bruce M. Goldberg, President /s/ WAYNE VANNOY /s/ CATHLEEN M. PLOCK ------------------------------ --------------------- WAYNE VANNOY, individually and as sole CATHLEEN M. PLOCK trustee of The Vannoy Family Charitable Date: 12-19-96 Remainder Trust Date: 12-17-96 /s/ ROSALIE C. MILLER --------------------- ROSALIE C. MILLER Date: 12-20-96 - ------------------------------------ /s/ JERRY D. FLETCHER --------------------- RICHARD W. McCAULEY JERRY D. FLETCHER Date:__________ Date: 12-20-96 /s/ KENNETH A. PLOCK /s/ MARIE A. FLETCHER - -------------------- --------------------- KENNETH A. PLOCK MARIE FLETCHER Date: 12-17-96 Date: 12-20-96 /s/ ROBERT D. LURIE /s/ GARY R. MILLER - ------------------- ------------------ ROBERT D. LURIE GARY R. MILLER Date: 12-17-96 Date: 12-20-96 11 EXHIBIT "A" TARGET STOCKHOLDERS ------------------- Wayne Vannoy Richard W. McCauley Kenneth A. Plock Robert D. Lurie Gary R. Miller Cathleen M. Plock Rosalie C. Miller Jerry D. Fletcher Marie Fletcher 12 EX-10.36 4 EXHIBIT 10.36 SETTLEMENT AGREEMENT SETTLEMENT AGREEMENT, dated January 22, 1997, by and among ALL AMERICAN SEMICONDUCTOR, INC., a Delaware corporation ("All American"), ALL AMERICAN ADDED VALUE, INC., a California corporation ("California Subsidiary"), and THOMAS BROESAMLE ("Broesamle"). PRELIMINARY STATEMENT All American, California Subsidiary, Colorado Subsidiary, Added Value Electronics Distribution, Inc., A.V.E.D.-Rocky Mountain, Inc., and the Target Stockholders (of which Broesamle is one) entered into a Merger Purchase Agreement dated as of October 31, 1995 and/or certain other agreements in connection therewith and the closing thereof (collectively, the "Purchase Agreement"), including an employment agreement between California Subsidiary and Broesamle (the "Employment Agreement"). In connection with the termination of Broesamle's employment under the Employment Agreement, Broesamle has requested certain modifications to his covenants against competition made in the Restrictive Covenant and the Employment Agreement. All American and California Subsidiary have agreed to make such modifications, as set forth below, in exchange for the agreements of Broesamle set forth below. NOW, THEREFORE, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used herein, which are not defined herein, shall have the respective meanings ascribed to them in the Purchase Agreement or, as applicable, the Employment Agreements. 2. ADDITIONAL CONSIDERATION. The obligation of All American to pay the Additional Consideration to Broesamle is hereby irrevocably and unconditionally waived, released, canceled and terminated in its entirety, without any obligation on the part of All American of California Subsidiary to pay Broesamle any compensation or consideration therefor. 3. NONCOMPETITION COVENANTS. The "Covenant-Not-To-Compete" set forth in Section 2 of the Restrictive Covenant (with respect to Broesamle only), and the Covenant-Not-To-Compete set forth in Section 11 of the Employment Agreement, shall be amended and restated in their respective entireties as follows: (a) COVENANT-NOT-TO-COMPETE IN RESTRICTIVE COVENANT: "2. COVENANT-NOT-TO-COMPETE. In view of (a) the Confidential Information known to each Target Stockholder, (b) the substantial consideration paid and payable to such Target Stockholder under or pursuant to the Purchase Agreement, and (c) the sale of the good will of the business embodied in the Purchase Agreement, and as a material inducement to Purchaser to consummate the Purchase Agreement, each Target Stockholder covenants and agrees that such Target Stockholder shall not, directly or indirectly, for and during the First Applicable Period, (A) solicit the services of, or hire, directly or indirectly, whether on his or her own behalf or on behalf of others, any salesperson (whether an employee or independent contractor of the Purchaser Group) or managerial or executive employee of the Purchaser Group (or any of them) or who was employed or engaged by the Purchaser Group (or any of them) at any time during the period commencing one year prior to the date of Closing under the Purchase Agreement and ending five years following the date of Closing under the Purchase Agreement, or (B) obtain any interest in, any employment with, or any right or engagement to participate in, passively or actively, any enterprise, company or business which is either an authorized distributor of electronic components or a turnkey or kitting business relating to electronics manufacturing anywhere within the continental United States (the "Geographical Territory"), or (C) in any capacity, engage in any activity or business, passively or actively, as an owner, participant, employee or agent, competitive with the memory module and/or display technology businesses of the Purchaser Group (or any of them) within the Geographical Territory. The foregoing restrictions shall not prevent a Target Stockholder from accepting employment with a manufacturer's representative or a broker (a "broker" being defined as a broker of electronic components that is not an authorized broker or distributor for any manufacturer of electronic components), provided that, in connection with any such employment, such Target Stockholder does not participate, directly or indirectly, in the solicitation of, or otherwise divert or attempt to divert, any Key Account. A "Key Account" means any customer of the Purchaser Group (or any of them) which has accounted for sales of the Purchaser Group viewed as a whole of at least $50,000 in any of calendar year 1993, 1994, 1995 or 1996 (viewed as of today) or, on a rollingforward basis, in any of the three years preceding the date on which the attempted solicitation or diversion first occurs. The foregoing restrictions shall also not prevent a Target Stockholder from accepting employment with a company which performs turnkey or kitting services relating to electronics manufacturing, provided that, in connection with such employment, such Target Stockholder does not participate, directly or indirectly, in the solicitation of, or otherwise divert or attempt to divert, any of the following accounts of the Purchaser Group: Cognitive Solutions; VL Labs; or any kitting or turnkey customers at any time handled out of the Purchaser Group's Denver, Colorado office. Each Target Stockholder acknowledges that the business of the Purchaser Group is national in scope, that one can effectively compete with such business in the Geographical Territory from anywhere within the Geographical Territory, and that, therefore, such geographical area of restriction is reasonable in the circumstances to protect the Purchaser Group's legitimate business interests. For purposes hereof, "Purchaser Group" means the All American Companies and all of 2 their respective subsidiaries, parents and other Affiliates, whether now or hereafter existing, including Added Value and Rocky Mountain, and all of such entities' respective successors and assigns by merger, sale, spin-off or otherwise." (b) COVENANT-NOT-TO-COMPETE IN EMPLOYMENT AGREEMENTS: "11. COVENANT-NOT-TO-COMPETE In view of (a) the Confidential Information known to and to be obtained by or disclosed to Employee (including, without limitation, Employee's knowledge of, and familiarity and relationships with, Employer's other employees and Employer's customers and suppliers), (b) the know-how acquired and to be acquired by Employee, (c) the substantial consideration paid and payable to Employee under the Purchase Agreement, and to Employee under this Employment Agreement, and (d) the sale of the good will of the business embodied in the Purchase Agreement, and as a material inducement to Employer to enter into this Employment Agreement and to employ Employee and to pay to Employee the substantial compensation Employee will be receiving, Employee covenants and agrees that, for as long as Employee is employed by Employer and for a period of two (2) years after the later of (i) the date Employee ceases for any reason to be employed by Employer and (ii) the date Employee ceases to receive any Salary (as severance pay or otherwise) from Employer, Employee shall not, directly or indirectly, (A) solicit the services of, or hire, passively or actively, whether on his own behalf or on behalf of others, any salesperson (whether an employee or independent contractor of the Purchaser Group) or managerial or executive employee of the Purchaser Group (or any of them) or who was employed or engaged by the Purchaser Group (or any of them) at any time during the period commencing one year prior to the commencement of the Employment Term and ending on the date of termination of Employee's employment, or (B) obtain any interest in, any employment with, or any right or engagement to participate in, directly or indirectly, any enterprise, company or business which is either an authorized distributor of electronic components or a turnkey or kitting business relating to electronics manufacturing anywhere within the continental United States (the "Geographical Territory"), or (C) in any capacity, engage in any activity or business, passively or actively, as an owner, participant, employee or agent, competitive with the memory module and/or display technology businesses of the Purchaser Group in the Geographical Territory. The foregoing restrictions shall not prevent Employee from accepting employment with a manufacturer's representative or a broker (a "broker" being defined as a broker of electronic components that is not an authorized broker or distributor for any manufacturer of electronic components), provided that, in connection with any such employment, Employee does not participate, directly or indirectly, in the solicitation of, or otherwise divert or attempt to divert, any Key Account. A "Key Account" means 3 any customer of the Purchaser Group (or any of them) which has accounted for sales of the Purchaser Group viewed as a whole of at least $50,000 in any of calendar year 1993, 1994, 1995 or 1996 (viewed as of today) or, on a rolling-forward basis, in any of the three years preceding the date on which the attempted solicitation or diversion first occurs. The foregoing restrictions shall also not prevent Employee from accepting employment with a company which performs turnkey or kitting services relating to electronics manufacturing, provided that, in connection with such employment, Employee does not participate, directly or indirectly, in the solicitation of, or otherwise divert or attempt to divert, any of the following accounts of the Purchaser Group: Cognitive Solutions; VL Labs; or any kitting or turnkey customers at any time handled out of the Purchaser Group's Denver, Colorado office. Employee acknowledges that the business of the Purchaser Group is national in scope, that one can effectively compete with such business in the Geographical Territory from anywhere in the Geographical Territory and that, therefore, such geographical area of restriction is reasonable in the circumstances to protect Employer's legitimate business interests. The covenants and restrictions contained in this Section 11 are intended to be separate and divisible from, and operate concurrently with, the similar covenants and restrictions contained in the Restrictive Covenant and are each intended to be separately enforceable. Any differences between the covenants and restrictions contained herein and therein, such as with respect to time period restrictions, are intentional. Nothing herein is intended to diminish, nor shall diminish, Employee's obligation to devote Employee's full-time working efforts to and for the benefit of Employer, and to honor and discharge faithfully Employee's duty of loyalty to Employer, while an employee of Employer. For purposes hereof, "Purchaser Group" means the All American Companies and all of their respective subsidiaries, parents and other Affiliates, whether now or hereafter existing, including Added Value and Rocky Mountain, and all of such entities' respective successors and assigns by merger, sale, spin-off or otherwise." Notwithstanding any of the foregoing set forth above in this Section 3 to the contrary, Broesamle shall not be prohibited from accepting employment similar to his employment with California Subsidiary, provided that, in connection with such employment, Broesamle does not participate, directly or indirectly, in the solicitation of, or otherwise divert or attempt to divert, any Key Account or any of the turnkey or kitting accounts referred to above. This Agreement in no way modifies or alters the Restrictive Covenant with respect to any other Target Stockholder or the employment agreement of any other Target Stockholder. 4 4. RELEASE OF VOTING TRUST AND PLEDGE. The voting trust set forth in the Voting Trust Agreement covering Broesamle's 50,779 All American Shares received in the Mergers (but only covering Broesamle's, and not any other Target Stockholder's, All American Shares) is hereby terminated. The 50,779 Pledged Shares owned by Broesamle (and only those Pledged Shares, and not the Pledged Shares of any other Target Stockholder), which are the same 50,779 All American Shares subject to the voting trust terminated above, are hereby released from the lien thereon created under the Pledge Agreement. Within ten (10) business days following the execution and delivery of this Agreement, All American shall cause its stock transfer agent to deliver to Broesamle an unlegended stock certificate for said 50,779 All American Shares. 5. RELEASES AND COVENANTS NOT TO SUE. (a) For and in consideration of the agreements herein of Broesamle, and the release given by Broesamle below to the All American Group (as defined below), and other valuable consideration received from or on behalf of Broesamle, the receipt of which is hereby acknowledged, each of All American and California Subsidiary hereby remises, releases, acquits, satisfies, and forever discharges Broesamle of and from all, and all manner of, action and actions, cause and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims and demands whatsoever, at law or in equity, known or unknown, suspected or unsuspected, asserted or unasserted, which All American or California Subsidiary ever had, now has, or hereafter can, shall or may have, or which any representative, successor, predecessor, or assign of All American or California Subsidiary ever had, now has, or hereafter can, shall or may have against Broesamle arising from any matter or thing whatsoever, including, without limitation, those arising or resulting from any past breach by Broesamle of any of his representations, warranties or covenants contained in the Purchase Agreement, past acts or omissions of Broesamle in connection with the performance of his or her employment duties, the management, affairs, practices or operations of Added Value or Rocky Mountain prior to the closing of the Mergers, or prior injurious or defamatory statements made by Broesamle; provided, however, Broesamle is not being released from his obligations under the Restrictive Covenant (as hereby amended). Each of All American and California Subsidiary further covenants and agrees never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against Broesamle arising from any of the foregoing claims or causes of action which have been remised, released, acquitted, satisfied and forever discharged. (b) For and in consideration of the agreements of All American and California Subsidiary set forth in this Agreement, and the release given by them above to Broesamle, and other valuable consideration received from or on behalf of All American and California Subsidiary, the receipt of which is hereby acknowledged, Broesamle hereby remises, releases, 5 acquits, satisfies, and forever discharges each of All American and California Subsidiary, each subsidiary, parent and other Affiliate of each of them, and each successor, assign, officer, director, employee and agent of each of the foregoing (collectively, the "All American Group") of and from all, and all manner of, action and actions, cause and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims and demands whatsoever, at law or in equity, known or unknown, suspected or unsuspected, asserted or unasserted, which Broesamle ever had, now has, or hereafter can, shall or may have, or which any representative, successor, predecessor, or assign of Broesamle ever had, now has, or hereafter can, shall or may have, against the All American Group or any member thereof arising from any matter or thing whatsoever, including, without limitation, those arising or resulting from any past breach by the All American Group (or any member thereof) of any of their respective representations, warranties or covenants contained in the Purchase Agreement or past acts or omissions of the All American Group (or any member thereof) in connection with the performance of their respective obligations under the Employment Agreement (and, in this regard, this release covers and releases any claims at law or in equity with respect to Broesamle's employment with California Subsidiary, including claims under any employment, discrimination, health or safety laws), or which in any manner relate to the management, affairs, practices or operations of any member of the All American Group or any decision, act or omission of any kind taken or made by or on behalf of any member of the All American Group, or any injurious or defamatory statements made by any member of the All American Group. Broesamle further covenants and agrees never to institute or cause to be instituted or continue prosecution of any suit or other form of action or proceeding of any kind or nature whatsoever against the All American Group or any member thereof arising from any of the foregoing claims or causes of action which have been remised, released, acquitted, satisfied and forever discharged. (c) It is the intention of the parties hereto in executing this Agreement that this instrument shall be effective as a bar to each and every claim, demand, or cause of action released hereby. Each party recognizes that he or it may have some claim, demand, or cause of action against another party of which he or it is totally unaware and unsuspecting, which he or it is giving up by execution of this Agreement. It is the intention of the parties in executing this instrument that it will deprive them of each such claim, demand or cause of action. In furtherance of this intention, each party hereto expressly waives any rights or benefits conferred by the provisions of Section 1542 of the Civil Code of the State of California, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." (d) Each party hereto acknowledges and represents that he or it has consulted with legal counsel before effecting this settlement and executing this Agreement and that he or it understands its meaning, including the effect of Section 1542 of the California Civil Code, and 6 expressly consents that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to the release of unknown and unsuspected claims, demands, and causes of action. 6. FURTHER ASSURANCES. Each party to this Agreement shall, at the request of any other party to this Agreement, at its expense and without being entitled to receive further consideration, execute and deliver all such documents, and do all such acts and things, as may be reasonably required to effectuate the terms and provisions of this Agreement. 7. MISCELLANEOUS PROVISIONS. The provisions of Sections 9.2, 9.3, 9.6 (provided that Broesamle's address for notice shall be the address set forth in Schedule 1 to the Guaranty and Agreement, with a copy to Colleen M. Regan, Esq., Perkins Coie, 1999 Avenue of the Stars, 9th Floor, Los Angeles, California 90067), 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.14, 9.15 and 9.17 of the Purchase Agreement shall apply to this Agreement; provided, however, that this Agreement is an independent agreement, and no provisions of the Purchase Agreement shall be deemed incorporated herein. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written, or on the date shown below, whichever is later. ALL AMERICAN SEMICONDUCTOR, INC. By: /s/ BRUCE M. GOLDBERG /s/ THOMAS BROESAMLE ---------------------------- --------------------------- Bruce M. Goldberg, President THOMAS BROESAMLE ALL AMERICAN ADDED VALUE, INC. By: /s/ BRUCE M. GOLDBERG ---------------------------- Bruce M. Goldberg, President 7 EX-10.37 5 EXHIBIT 10.37 ALL AMERICAN SEMICONDUCTOR, INC. SALARY CONTINUATION PLAN AGREEMENT THIS AGREEMENT, made and entered into as of this ______ day of _______________, 1997, by and between ALL AMERICAN SEMICONDUCTOR, INC., a DELAWARE corporation, and its subsidiaries, with principal offices and place of business in the State of FLORIDA (hereinafter collectively referred ____ to ____ as ____ the ____ "Corporation"), ____ and ____________________, an individual residing in the State of _________________ (hereinafter referred to as the "Executive"). WITNESSETH THAT: WHEREAS, the Executive is employed by the Corporation; and WHEREAS, the Corporation recognizes the value of the services performed by the Executive and wishes to encourage his continued employment; and WHEREAS, the Corporation wishes to provide the Executive with certain supplemental payments to the Executive upon his retirement from service with the Corporation; and WHEREAS, the parties hereto wish to provide the terms and conditions upon which the Corporation shall pay such additional compensation to the Executive after his 1 retirement or death benefit to his beneficiary after the Executive's death; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement, maintained primarily to provide deferred compensation to the Executive, a member of a select group of management or highly compensated Executives of the Corporation, for purposes of the Employee Retirement Security Act of 1974, as amended; NOW, THEREFORE, in consideration of the premises and of the mutual promises herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Certain words and phrases are defined when first used in later paragraphs of this Agreement. In addition, the following words and phrases when used herein, unless the context clearly requires otherwise, shall have the following respective meanings: 1.1 ADDITIONS. Additions shall be the amount credited by the Corporation based on its Hypothetical Investment. 1.2 AGREEMENT. This Agreement, together with any and all amendments or supplements thereto. 2 1.3 CHANGE IN CONTROL OF THE MANAGEMENT OF THE CORPORATION. For purposes of this Agreement, Change of Control of the Management of the Corporation shall mean the purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Act of 30 percent or more of either the outstanding shares of common stock or the combined voting power of the Corporation's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of the Corporation of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Corporation's then outstanding securities, or a liquidation or dissolution of the Corporation or of the sale of all or substantially all of the Corporation's assets. 1.4 CODE. The Internal Revenue Code of 1986, as amended or as it may be amended from time to time. 1.5 CONTRIBUTION. The amount the Corporation agrees to credit to the Executive's Retirement Account in any given year. The Corporation's Contribution, if any, is completely 3 at the Corporation's sole discretion and the Corporation is under no obligation to make a Contribution in any given year. 1.6 EFFECTIVE DATE. The effective date of the execution of this Agreement is _________________, 1997. 1.7 FISCAL YEAR. The taxable year of the Corporation. 1.8 NORMAL RETIREMENT DATE. The date the Executive attains age sixty-five (65). 1.9 RETIREMENT ACCOUNT. Book entries maintained by the Corporation reflecting cumulative Contributions and Additions thereon, provided however, that the existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Corporation and the Executive, his designated beneficiary or other beneficiaries under this Agreement. ARTICLE 2 RETIREMENT BENEFIT 2.1 CONTRIBUTION. The Corporation may, at the Corporation's sole discretion, credit to the Executive's Account an amount as determined by the Corporation each year. The Corporation is under no obligation to make a contribution in any year. 4 2.2 ADDITIONS. The Corporation hereby agrees that it will credit Contributions with investment gains or losses as calculated by the Hypothetical Investment in Article 2.3 below, from and after any Contributions are credited to the Executive. Additions shall continue up to the date Retirement Benefits, Disability Benefits, Death Benefits or Termination Benefits, whichever applies, begin hereunder. 2.3 HYPOTHETICAL INVESTMENT. Additions shall be calculated at a rate computed as if the Corporation had invested the Contributions in an investment selected by the Corporation. The Corporation shall report the credited investment result at least annually to the Executive. The Corporation may give the Executive investment preference choices on a quarterly basis. The Corporation, as owner of any asset, will have ultimate control over any investment, if any, made by the Corporation. The Corporation may change the Hypothetical Investment. The Executive or the Executive's beneficiary shall not construe the Hypothetical Investment as creating any fiduciary relationship or trust of any kind between the Corporation and the Executive, his beneficiaries or any other beneficiaries. 2.4 RETIREMENT ACCOUNT. The Executives Retirement Account shall be the sum of the Corporation's cumulative Contributions and Additions thereon, as reflected on the book entry made by the Corporation. 5 2.5 RETIREMENT BENEFIT. The Corporation agrees that, from and after the retirement of the Executive after reaching his Normal Retirement Age, the Corporation shall thereafter pay the Vested Retirement Account to the Executive as a Retirement Benefit according to the payout method the Executive selects. 2.6 PAYOUT ELECTION OPTIONS. The Executive shall designate in writing the method of payment the Executive wishes. The Executive may elect to receive the benefits: a) In one lump sum; b) in sixty (60) equal monthly installments; or c) in one hundred and twenty (120) equal monthly installments. The election relating to Retirement Benefits must be made at least ninety (90) days prior to the date of Normal Retirement and shall be irrevocable within ninety (90) days prior to the date of normal retirement. The first designated payment or the single payment, whichever applies, shall be due and payable on the first day of the second month following the Executive's retirement. Monthly installment payments, if any, shall continue monthly thereafter, for the period designated by the Executive. 6 ARTICLE 3 DEATH BENEFIT 3.1 DEATH BENEFIT PRIOR TO COMMENCEMENT OF BENEFITS. In the event of the Executive's death while in the employment of the Corporation and prior to the commencement of Retirement Benefits or Disability Benefits, the Corporation shall pay a death benefit which is equal to the Executive's Retirement Account, at 100% vesting, on the Executive's date of death. The Corporation will pay the amount in one lump sum, ninety (90) days after the Executive's date of death. 3.1.1 The death benefit shall be paid to the Executive's designated beneficiaries, in accordance with the last such designation received by the Corporation from the Executive prior to death. If no such designation has been received by the Corporation prior to death or if said payments are otherwise to be made as provided herein, said payments shall be made to the Executive's then living spouse; if the Executive is not survived by a spouse, then said payments shall be made to the then living children of the Executive, if any, in equal shares, and if none, any balance thereof in one lump sum to the estate of the Executive. 3.2 DEATH BENEFIT AFTER COMMENCEMENT OF BENEFITS. In the event of the Executive's death after the commencement of Retirement Benefits or Disability Benefits, but prior to the completion of all such payments due and owing hereunder, the 7 Corporation shall pay all remaining benefits due in one lump sum to the Executive's designated beneficiary in accordance with the last such designation received by the Corporation from the Executive prior to death within ninety (90) days after the Executive's date of death. If no such designation has been received by the Corporation from the Executive prior to death or if said payments are otherwise to be made as provided herein, said payments shall be made to the Executive's then living spouse; if the Executive is not survived by a spouse, then said payments shall be made to the then living children of the Executive, if any, in equal shares, and if none, to the estate of the Executive. ARTICLE 4 DISABILITY BENEFITS 4.1 Notwithstanding any other provision hereof, the Executive shall be entitled to receive payments hereunder prior to his Normal Retirement Date, in any case in which it is determined by a duly licensed physician selected by the Corporation, that because of ill health, accident, disability or general inability because of age, the Executive is no longer able, properly and satisfactorily, to perform his regular duties as an Executive. If the Executive's employment is terminated pursuant to this Article 4, the disability retirement benefit payable hereunder ("Disability Retirement Benefit") shall be equal, at 100% vesting, to the Executive's Retirement Account on 8 the date of termination due to disability. Prior to the termination of employment, the Executive may elect a payout under the same payout election provided in Article 2.6 and receive or begin to receive his Retirement Account within ninety (90) days of the termination date. ARTICLE 5 CHANGE IN EMPLOYMENT STATUS 5.1 If prior to Retirement the Corporation's Board of Directors determines that the Executive's employment performance is no longer at a level which deserves reward through participation in the Salary Continuation Plan, but does not terminate the Executive's employment with the Corporation, participation herein and eligibility to receive benefits hereunder shall be limited to the Executive's vested interest in the Retirement Account as of the date of change in employment status, provided that the Corporation gives the Executive advance notice of the termination of his participation herein and eligibility hereunder. 5.2 The Board of Directors' authority to limit an Executive's benefits in this plan under this Article should cease in the event of a Change in Control of the Management of the Corporation. 9 ARTICLE 6 VESTING 6.1 If an Executive's termination of employment occurs because of Death, Disability, Normal Retirement Date, or any reason following a Change in Control of the Management of the Corporation, he will be fully (100%) vested in all benefits he is eligible to receive under this plan. 6.2 Except as otherwise indicated in Article 7, the Executive shall vest in the Salary Continuation Plan according to the following schedule. The start date for the first year in the schedule is January 1st, 1996. End of Year % Vested ----------- -------- 1 0 2 0 3 0 4 0 5 0 6 20 7 40 8 60 9 80 10 100 10 ARTICLE 7 TERMINATION FOR CAUSE 7.1 If the Executive is Terminated for Cause, he shall forfeit all benefits whether vested or not under this Salary Continuation Plan. 7.2 Termination for Cause shall mean termination of employment from the Corporation because of: a) The final conviction or confession of an Executive of a felony connected with or related to or which affects the performance of Executive's obligations as an Executive of the Corporation. b) Perpetration of fraud against or affecting the Corporation; and c) Gross negligence in connection with an Executive's employment with the Corporation. ARTICLE 8 VOLUNTARY TERMINATION 8.1 If the Executive voluntarily resigns, the Executive benefits under this Plan shall equal the Executive's vested Retirement Account on date of resignation. 8.2 The Executive's Retirement Account shall be paid at the Executive's Normal Retirement Date under payout provisions provided in Article 2.6. 11 8.3 If the Executive voluntarily resigns after a Change in Control of the Management of the Corporation, the Executive shall be entitled to receive his Retirement Account, whether vested or not, within ninety (90) days of termination date under the payout election provision to Article 2.6. ARTICLE 9 TERMINATION WITHOUT CAUSE 9.1 If an Executive is terminated without cause, he shall be entitled to elect a form of payment pursuant to Article 2.6 prior to such termination and receive or begin to receive his vested Retirement Account within ninety (90) days of termination under the payout election pursuant to Article 2.6. ARTICLE 10 NON-COMPETITION DURING EMPLOYMENT 10.1 In consideration of the foregoing agreement of the Corporation and of the payments to be made by the Corporation pursuant hereto, the Executive hereby agrees that, so long as he remains employed by the Corporation, he will devote substantially all of his time, skill, diligence 12 and attention to the business of the Corporation, and will not actively engage, either directly or indirectly, in any business or other activity which is or may be deemed to be in any way competitive with or adverse to the best interests of the business of the Corporation. ARTICLE 11 NO CONTRACT OF EMPLOYMENT 11.1 Nothing contained in this Agreement shall be construed to be a contract of employment for any term of years, nor as conferring upon the Executive the right to continue to be employed by the Corporation in his present capacity, or in any other capacity. It is expressly understood by the parties hereto that this Agreement relates exclusively to additional compensation for the Executive's services, which compensation is payable after his retirement from active service of the Corporation or his death, and is not intended to be an employment contract. ARTICLE 12 NO TRUST CREATED 12.1 Nothing contained in this Agreement, and no action taken pursuant to its provisions by either party hereto, shall create, nor be construed to create, a trust of 13 any kind or a fiduciary relationship between the Corporation and the Executive, his designated beneficiary, any other beneficiary of the Executive or any other person. ARTICLE 13 BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS: UNSECURED GENERAL CREDITOR STATUS OF EXECUTIVE 13.1 The payments to the Executive, his designated beneficiary or any other beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Corporation; no person shall have nor acquire any interest in such assets by virtue of the provisions of this Agreement. The Corporation's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that the Executive or any person acquires a right to receive payments from the Corporation under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Corporation; no such person shall have nor acquire any legal or equitable right, interest or claim in or to any property or assets of the Corporation. 13.2 In the event that, in its discretion, the Corporation purchases an insurance policy or policies insuring the life of the Executive (or any other property) to allow the Corporation to recover the cost of providing the benefits, in whole or in part, hereunder, neither the 14 Executive, his designated beneficiary, any other beneficiary nor any other person shall have nor acquire any rights whatsoever therein or in the proceeds therefrom. The Corporation shall be the sole owner and beneficiary of any such policy or policies and, as such shall possess and, may exercise all incidents of ownership therein. No such policy, policies or other property shall be held in any trust for the Executive or any other person, nor as collateral security for any obligation of the Corporation hereunder. ARTICLE 14 DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION 14.1 CLAIM. A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as "Claimant") may file a written request for such benefit with the Corporation, setting forth his claim. The request must be addressed to the CFO of the Corporation at its then principal place of business. 14.2 CLAIM DECISION. Upon receipt of a claim, the Corporation shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Corporation may, however, extend the reply period for an additional ninety (90) days for reasonable cause. 15 14.2.1 If the claim is denied in whole or in part, the Corporation shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (a) The specific reason or reasons for such denial; (b) The specific reference to pertinent provisions of this Agreement on which such denial is based; (c) A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary; (d) Appropriate information as to steps to be taken if the Claimant wishes to submit the claim for review; and (e) The time limits for requesting a review under subsection c. and for review under subsection d. hereof. 14.3 REQUEST FOR REVIEW. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Human Resources Director and the Senior Vice President of Sales of the Corporation review the determination of the Corporation. Such request must be addressed to the Secretary of the Corporation, at its then principal place of business. The Claimant or his duly authorized representative may, but need not, review the pertinent 16 documents and submit issues and comments in writing for consideration by the Corporation. If the Claimant does not request a review of the Corporation's determination by the Human Resources Director and the Senior Vice President of Sales of the Corporation within such sixty (60) day period, he shall be barred and estopped from challenging the Corporation's determination. 14.4 REVIEW OF DECISION. Within sixty (60) days after the receipt by the Human Resources Director and the Senior Vice President of Sales of the request for review, they will review the Corporation's determination. After considering all materials presented by the Claimant, the Human Resources Director and the Senior Vice President of Sales will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the (60) day time period be extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. ARTICLE 15 NON-ASSIGNABILITY OF BENEFITS 15.1 Neither the Executive, his designated beneficiary nor any other beneficiary under this Agreement 17 shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder, which are expressly declared to be unassignable and non-transferable. Any such attempted assignment or transfer shall be void and shall terminate this Agreement; the Corporation shall thereupon have no further liability hereunder. No amount payable hereunder shall, prior to actual payment thereof, be subject to seizure by any creditor of any such beneficiary for the payment of any debt, judgment or other obligation, by a proceeding at law or in equity, nor transferable by operation of law in the event of the bankruptcy, insolvency or death of the Executive, his designated beneficiary or any other beneficiary hereunder. ARTICLE 16 AMENDMENT 16.1 This Agreement may not be amended, altered or modified, except by a written instrument signed by the parties hereto, or their respective successors and may not be otherwise terminated except as provided herein. ARTICLE 17 INUREMENT 17.1 This Agreement shall be binding upon and inure to the benefit of the Corporation and its successors and 18 assigns, and the Executive, his successors, heirs, executors, administrators and beneficiaries. ARTICLE 18 NOTICES 18.1 Any notice, consent or demand required or permitted to be given under the provisions of this Agreement shall be in writing, and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed to a party hereto, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Corporation. The date of such mailing shall be deemed the date of notice, consent or demand. ARTICLE 19 GOVERNING LAW 19.1 This Agreement, and the rights of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of FLORIDA . 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in duplicate, as of the day and year first above written. ALL AMERICAN SEMICONDUCTOR, INC. By ---------------------------- President ATTEST: - --------------------------- Secretary ---------------------------- Executive 20 EX-10.38 6 EXHIBIT 10.38 PROMISSORY NOTE $161,500.00 October 1, 1996 FOR VALUE RECEIVED, the undersigned ("Maker") promises to pay to the order of SAM BERMAN, d/b/a DRAKE ENTERPRISES ("Holder"), at 4784 Northwest 167 Street, Miami, Florida 33014, or such other place as shall be designated by Holder in writing, the sum of ONE HUNDRED SIXTY ONE THOUSAND AND FIVE HUNDRED DOLLARS and 00/100 ($161,500.00) (the "Principal Balance") together with interest on the Principal Balance outstanding from time to time at the rate of eight and one-half percent (8.50%) per annum, in 180 consecutive, equal, self-amortizing monthly installments of principal and interest of 1,590.36 per installment, with the first such installment due November 1, 1996, and each subsequent installment due on the same day of each month thereafter. The entire remaining Principal Balance, plus accrued interest, if any, shall be fully due and payable on October 1, 2011. Failure to pay any installment of principal and/or interest under this Note when due, which failure continues for more than ten (10) days following the receipt by Maker of written notice thereof, shall constitute a default under this Note, and shall, at the election of Holder, cause the full unpaid Principal Balance to become immediately due and payable, and shall afford Holder all rights to collect upon the same. Maker agrees that in the event that suit shall be brought for the collection hereof, or the same has to be collected upon demand of an attorney, to pay reasonable attorneys' fees for making such collection. Following a default, all amounts then due hereunder shall bear interest at the lower of (i) 18% annum and (ii) the highest rate allowed by law, until paid. The happening of any of the following events shall constitute a default hereunder: (a) Failure of Maker to pay in full any payment due hereunder promptly when due after the applicable notice and grace period, as set forth above, and (b) a default by Maker as lessee under that certain business lease agreement (the "Lease") between Maker and Holder dated May 1, 1994, pertaining to premises known as 16115 N.W. 52 Avenue, Miami, Florida, subject to applicable notice, grace period and cure provisions set forth therein. Holder's right to payment of interest and principal under this Note is subordinate to the rights to receive payment of principal or interest under any obligations made by Maker in favor of the present or future principal institutional lender (including any participating institutional lenders, as the case may be) ("Superior Creditor") of Maker. The Superior Creditor shall have the right to receive payment when due it on all obligations made by Maker in its favor (whether now or hereafter borrowed) prior to payment of any amount due hereunder to Holder; provided, however, that the aforesaid subordination shall become operative, and Maker shall have the obligation to withhold or defer payments owed to Holder hereunder, only upon receipt by Maker of a written notice of default from the Superior Creditor (a copy of which shall be immediately delivered to Holder), and then, for only such time as Maker shall remain in default of its obligations to the Superior Creditor. Pursuant to Article 28 of the Lease, Holder, as lessor, is obligated to provide to Maker, as Lessee, a certain Non-Disturbance and Attornment Agreement (the "Non-Disturbance Agreement"). Notwithstanding anything to the contrary contained in this Note, no payments of any kind or nature shall be due or payable to Holder hereunder unless and until the Non-Disturbance Agreement is delivered to Maker as required by the Lease; provided, however, upon delivery to Maker of the Non-Disturbance Agreement, this Note shall be payable in accordance with its terms, and Maker shall immediately pay in accordance with its terms, and Maker shall immediately pay to Holder any sums withheld on account of this paragraph, as if this paragraph had not been included herein. Address: All American Semiconductor, Inc. 16115 N.W. 52 Avenue Miami, Florida 33014 ALL AMERICAN SEMICONDUCTOR, INC. By /s/ HOWARD L. FLANDERS ------------------------------------------ Howard L. Flanders, Vice President and CFO EX-11.1 7 EXHIBIT 11.1 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED DECEMBER 31 1996 1995 1994 ------------ ------------ ------------ PRIMARY EARNINGS (LOSS) PER SHARE: NET INCOME (LOSS) ......................... $ (9,920,000) $ 1,886,000 $ 352,000 ============ ============ ============ WEIGHTED AVERAGE SHARES: Common shares outstanding .............. 19,742,849 15,241,458 12,358,524 Common share equivalents ............... 372,994 704,238 671,190 ------------ ------------ ------------ Weighted average number of common shares and common share equivalents outstanding .............. 20,115,843 15,945,696 13,029,714 ============ ============ ============ PRIMARY EARNINGS (LOSS) PER COMMON SHARE ........................... $ (.49) $ .12 $ .03 ============ ============ ============ FULLY DILUTED EARNINGS (LOSS) PER SHARE: NET INCOME (LOSS) ......................... $ (9,920,000) $ 1,886,000 $ 352,000 ============ ============ ============ WEIGHTED AVERAGE SHARES: Weighted average number of common shares and common share equivalents outstanding .............. 20,115,843 159,945,696 13,029,714 Additional options not included above... -- -- -- ------------ ------------ ------------ Weighted average number of common shares outstanding as adjusted ....... 20,115,843 159,945,696 13,029,714 ============ ============ ============ FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE ....................... $ (.49) $ .12 $ .03 ============ ============ ============
EX-21.1 8 EXHIBIT 21.1 ALL AMERICAN SEMICONDUCTOR, INC. LIST OF SUBSIDIARIES Access Micro Products, Inc. All American A.V.E.D., Inc. All American Added Value, Inc. All American Semiconductor of Atlanta, Inc. All American Semiconductor of Canada, Inc. All American Semiconductor of Chicago, Inc. All American Semiconductor of Florida, Inc. All American Semiconductor of Huntsville, Inc. All American Semiconductor of Massachusetts, Inc. All American Semiconductor of Michigan, Inc. All American Semiconductor of Minnesota, Inc. All American Semiconductor of New York, Inc. All American Semiconductor of Ohio, Inc. All American Semiconductor of Philadelphia, Inc. All American Semiconductor of Phoenix, Inc. All American Semiconductor of Portland, Inc. All American Semiconductor of Rockville, Inc. All American Semiconductor of Salt Lake, Inc. All American Semiconductor of Texas, Inc. All American Semiconductor-Northern California, Inc. All American Semiconductor of Washington, Inc. All American Semiconductor of Wisconsin, Inc. All American Technologies, Inc. All American Transistor of California, Inc. Aved Industries, Inc. Palm Electronics Manufacturing Corp. EX-23.1 9 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS All American Semiconductor, Inc. We hereby consent to the use in this Registration Statement on Form S-8 of our report dated February 28, 1997 relating to the consolidated financial statements of All American Semiconductor, Inc. and Subsidiaries and to the reference to our firm under the caption "Experts" in the registration statement. /s/ LAZAR, LEVINE & COMPANY LLP - ------------------------------- LAZAR, LEVINE & COMPANY LLP New York, New York March 24, 1997 EX-27.1 10
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 525 0 33,911 1,200 64,212 102,561 9,140 3,686 112,921 32,738 57,787 0 0 198 22,198 112,291 237,846 237,846 185,367 185,367 55,947 670 7,025 (11,163) 2,942 (8,221) (1,757) 58 0 (9,920) (.49) (.49)
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