-----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, KVH6iWwfMpSLAYrp+bLLxt7AK484VAahvhjn0ucmGRR9BrqzHPIhSq6357SBkS3q k/YmbluSEQofNcE9osdyHA== 0001019056-01-500032.txt : 20010409 0001019056-01-500032.hdr.sgml : 20010409 ACCESSION NUMBER: 0001019056-01-500032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: SEC FILE NUMBER: 000-16207 FILM NUMBER: 1590606 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 file002.txt FORM 10-K - -------------------------------------------------------------------------------- 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, 2000 COMMISSION FILE NUMBER: 0-16207 ALL AMERICAN SEMICONDUCTOR, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 59-2814714 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16115 N.W. 52nd Avenue Miami, Florida 33014 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (305) 621-8282 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 20, 2001, 4,040,150 shares (including 32,141 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 $31,400,000. 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 - 2000 TABLE OF CONTENTS Part Item Page No. No. Description No. - ---- ---- ----------- ---- I 1 Business................................................ 1 2 Properties.............................................. 12 3 Legal Proceedings....................................... 13 4 Submission of Matters to a Vote of Security-Holders..... 13 II 5 Market for the Registrant's Common Equity and Related Stockholder Matters........................... 13 6 Selected Financial Data................................. 15 7 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 16 7A Quantitative and Qualitative Disclosures about Market Risk........................................... 25 8 Financial Statements and Supplementary Data............. 25 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 25 III 10 Directors and Executive Officers of the Registrant...... 25 11 Executive Compensation.................................. 25 12 Security Ownership of Certain Beneficial Owners and Management............................................ 25 13 Certain Relationships and Related Transactions.......... 25 IV 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K........................................... 26 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, microprocessors, microcontrollers and other integrated circuits, as well as passive components, such as capacitors, resistors, inductors and electromechanical products, including cable, switches, connectors, filters and sockets. These products are sold primarily to original equipment manufacturers in a diverse and growing range of industries, including manufacturers of computers and computer-related products; home office and portable equipment; networking, satellite, wireless and other communications products; Internet infrastructure equipment and appliances; automobiles; consumer goods; robotics and industrial equipment; defense and aerospace equipment; and medical instrumentation. The Company also sells products to contract electronics manufacturers, or electronics manufacturing services, or EMS, providers who manufacture products for companies in all electronics industry segments. Through the Aved Memory Products and Aved Display Technologies 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 "Products." These products are also sold to original equipment manufacturers. While the Company reincorporated in Delaware in 1987, it and its predecessors have operated since 1964. The Company was recognized by industry trade publications as the 5th largest distributor of semiconductors and the 12th largest electronic components distributor overall 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. Our headquarters for sales and marketing functions and the office of our President and Chief Executive Officer are located at 230 Devcon Drive, San Jose, California 95112. Our telephone number in Florida is (305) 621-8282. THIS REPORT (PARTICULARLY "ITEM 1. BUSINESS" AND "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS") CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING STATEMENTS; BUSINESS RISKS." THE ELECTRONICS AND ELECTRONICS DISTRIBUTION INDUSTRIES 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 will continue to grow. The growth of this industry has been driven by increased demand for new products incorporating sophisticated electronic components, such as laptop computers, home office and portable equipment, networking, satellite, wireless and other communications products, infrastructure equipment and appliances for the Internet, and multimedia products; as well as the increased utilization of electronic components in a wide range of industrial, automotive, consumer and military products. Worldwide consumption of semiconductor products grew from $126 billion in 1998 to over $200 billion in 2000. Analysts project that consumption of semiconductor products will reach $319 billion in 2003. 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 1 passive/electromechanical products currently account for approximately 41% and 32%, respectively, of the electronic components distribution marketplace, while systems and computer products account for the remaining 27%. The Company only participates in the distribution of semiconductors and passive/electromechanical products which account for two of the three industry product groups. Distributors are an integral part of the electronics industry. During 2000, an estimated $37 billion of electronic components were sold through distribution in North America, 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. Original equipment manufacturers and contract electronics manufacturers 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 original equipment manufacturers and contract electronics manufacturers, offering a much broader line of products, incremental quality control measures and more support services than individual electronic component manufacturers. Management believes that original equipment manufacturers and contract electronics manufacturers will continue to increase their service and quality requirements, and that this trend will result in original equipment manufacturers, contract electronics manufacturers and electronic component manufacturers continuing to be dependent on distributors in the future. Electronic component manufacturers are under similar pressure to allocate a larger share of their resources to research, product development and manufacturing capacity as technological advances continue to shorten product lifecycles. Electronic component manufacturers sell directly to only a small number of their potential customers. This small segment of their customer base accounts for a large portion of the total available revenues. It is not economical for component manufacturers to provide a broad range of sales support services to handle the large amount of customers that account for the balance of available revenues. With their expanded technology and service capabilities, large distributors have now become a reliable means for component manufacturers to outsource their sales, marketing, customer service and distribution functions. This trend particularly benefits larger distributors with nationwide distribution capabilities such as the Company, as manufacturers continue to allocate a larger amount of their customer base to a more limited number of full service distribution companies. As a result of the trends discussed above, management believes that distribution will be involved in an increasing portion of the electronics industry. Another prevalent trend in the electronics distribution industry has been the consolidation of distribution companies. This trend has accelerated, especially in terms of magnitude, in recent years. The Company believes that this consolidation has to date created, and will continue in the future to create, growth opportunities for the Company. The Company believes that consolidation trends have caused customers to lose as many as three of their approved distributors. As a result, the Company believes that the Company has increasing opportunities to add customers and/or do more business with existing customers as consolidation has required the customers to consider realigning their distribution networks. Similarly, as a result of consolidation, many suppliers have either lost a distributor or become a much less significant supplier to the consolidated distribution company. As a result of this impact from consolidation, the Company believes that suppliers have recently added, and will continue in the future to add, new distributors to their distribution networks. Management believes that the Company has benefited from, and will continue to benefit in the future from, the consolidation trend. BUSINESS STRATEGY The Company's strategy is to continue its managed growth and to gain market share by: (i) taking advantage of consolidation trends, (ii) increasing the number of customers it sells to through a combination of expanding existing sales offices, opening new sales offices and making selective acquisitions; (iii) increasing sales to existing customers by continuing to add new suppliers and expand its product offerings and service capabilities; and (iv) increasing its participation in e-commerce. 2 The Company believes that investment in expansion and capabilities is necessary to enable the Company to participate in the dynamics of its rapidly changing industry and to achieve greater profitability in the future. In an effort to accelerate internal growth, during 1998 the Company began to enhance its management team in many areas and reformulate and implement strategies for expansion. The first half of 1999 was marked with continued pressure on profitability throughout the industry as well as turmoil resulting from accelerated consolidation trends. During the second half of 1999 market conditions began to change as the excessive supply environment reversed, product lead times began to stretch and some product groups went on allocation. As a result, gross profit margins began to increase slightly. This reversal of market conditions, combined with the expansion and other strategic decisions implemented by management, enabled the Company to achieve improved results and greater market penetration during the second half of 1999 which improvements accelerated during 2000 resulting in the highest sales and profitability levels in the Company's history. Even though 2000 was a record year, during the fourth quarter the industry experienced a rather dramatic slowdown which may continue for several quarters. While management believes that it may be able to increase market share and increase profitability in the future, there can be no assurance that these goals will be achieved, particularly since their achievement depends to a large extent on market conditions outside the Company's control. Expansion The Company had undergone significant expansion prior to 1998, including opening new offices, relocating and expanding existing offices and acquiring other companies, all in order to increase its sales volume, expand its geographic coverage and become recognized as a national distributor. See "Sales and Marketing-Sales Office Locations." As a result of the implementation of the Company's business strategy, the Company has experienced significant growth every year except 1998. In order to effectively drive and manage its expansion, the Company continues to: (i) restructure, enhance and expand its sales staff and sales management and marketing teams; (ii) expand its quality control programs, including its total quality management program and its continuous process improvement program (referred to as "BPR" or Business Process Reengineering) that ensure quality service, enhance productivity and, over time, reduce costs; (iii) expand its corporate operations department; (iv) enhance its state-of-the-art distribution technology; and (v) enhance its asset management capabilities through new computer and telecommunications equipment and, during 2000, through the opening of a west coast asset management group. To keep up with industry trends the Company continues to make significant investments in its web site and Internet capabilities as well as other forms of e-commerce; and in that regard during 1999 created its own web development group. The Company also continues to expand its investment in its Field Application Engineer Program. In addition to adding field application engineers to the program, in 2000 the Company created the All American Technical Sales Program and opened the All American Technical Center. Additionally, the Company continued to increase its investment in its materials management solutions capabilities which is now referred to as Supply Chain Management. As the Company has now developed a greater visibility at the industry's top tier customer base, the Company has also created an Executive Accounts Program. To better service the large customer base in the western part of the United States and to enhance relationships with a supplier base that is predominantly based in California, the Company has dramatically expanded its west coast corporate offices and relocated the President and Chief Executive Officer of the Company to San Jose to be based where sales and marketing functions are headquartered. The Company has also expanded the operations of its west coast programming and distribution center. Since the beginning of 1998, the Company has opened five new sales offices in the United States including one office which was opened during 2000. The Company expanded its international presence during 1998 with the opening of a sales office in Guadalajara, Mexico and a distribution center there in 2000. The Company currently expects to continue to open new offices and may seek to acquire additional companies in the future. The Company also plans to continue its focus on improving the financial performance and market penetration of each existing location. 3 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, in the last few years the Company further expanded its service capabilities and has opened new sales offices (see "Expansion"). During the last three years, and particularly during 2000, the Company added many new suppliers and expects to add additional suppliers in the future. These new suppliers are intended to offer larger growth opportunities than some of the smaller suppliers that the Company has done business with in the past. New supplier relationships generally require up-front investments that could take substantial time to provide a return. Service Capabilities During the past several years, customers have been reducing their approved vendor base in an effort to place a greater percentage of their purchases with fewer, more capable distributors. As part of its overall strategy to increase market penetration, the Company has endeavored to develop state-of-the-art service capabilities. The Company refers to these service capabilities as "distribution technology." The Company believes that it has developed service capabilities comparable to some of the largest distributors in the industry, which service capabilities the Company believes are not yet readily available at many distributors of comparable size to the Company. The Company further believes that these capabilities are not generally made available by the largest distributors to middle market customers, which represent the vast majority of the Company's customer base. See "Competition." Management believes that smaller distributors generally do not have the ability to offer as broad an array of services as the Company. The Company differentiates itself from its competition by making state-of-the-art distribution technology available to both large and middle market customers. Although the Company believes that this differentiation will assist the Company's growth, there can be no assurance that such differentiation exists to the extent that the Company currently believes or that it will continue in the future. The Company's distribution technology incorporates nationwide access to real-time inventory and pricing information, electronic order entry and rapid order processing. During the past few years, the Company has expanded its service capabilities for just-in-time deliveries, bar coding, bonded inventory programs, kitting and turnkey services, in-plant stores, in-plant terminals, electronic data interchange programs, automatic inventory replenishment programs and complete supply chain management solutions. In order to further enhance its service capabilities, the Company has also expanded its Field Application Engineer Program and the Company expects to hire additional field application engineers in the future. In 2000, the Company augmented its Field Application Engineer Program by starting the All American Technical Sales Program. The All American Technical Sales Program is intended to create another level of salespeople who are certified as technically competent to assist customers in the design process and in design decisions without actually being at the engineering level of a field application engineer. Additionally, the Company opened the All American Technical Center, which is being staffed with design specialists that can assist our sales force, our All American Technical Sales people and our field application engineers when a higher level of expertise is needed. The All American Technical Center staff will also focus on creating reference designs and design tools to assist customers and suppliers. These programs are intended to generate sales by providing customers with engineering support and increased service at the design and development stages. These programs are also intended to enhance the technical capabilities of the Company's entire sales force through regular training sessions. Management believes that this capability is 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 4 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 has a 20,000 square foot facility in Fremont, California (near San Jose) which incorporates a programming and a distribution center. In order to service growing customer demand as well as changing technologies, the Company increased its investments in its programming capabilities during 1999 by purchasing additional programming equipment and increasing its programming staff. 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. The Company believes that in the upcoming years an increasing amount of transactions in its industry will be processed over the Internet. In this regard, the Company designed and developed its own web site which became operational during the first quarter of 1997. In order to further expand its utilization of and functionality on the Internet, the Company created its own web development team in 1999. Additionally, to further its e-commerce strategies the Company has engaged with multiple third party Internet/e-commerce companies to expand the visibility of the Company and the ways in which customers can conduct commerce with the Company. These engagements are expected to expand and improve customer service, increase revenues, reduce transaction costs and afford the Company an opportunity to do business in a new and still developing marketplace. While these engagements have increased operating costs and may increase costs further in the future, many benefits are expected to be realized from these investments, however, no assurances can be made that the Company will realize such benefits. The Company also provides value-added services relating to its passive/electromechanical business. Quality Controls and ISO Certification The Company has a total quality management and a continuous process improvement program, referred to as "BPR" or Business Process Reengineering, in order 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, or ISO, created by the European Economic Community, or EEC. The ISO created uniform standards of measuring a company's processes, traceability procedures and quality control in order to assist and facilitate business among the EEC. 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 components, respond to or activate upon receipt of electronic current. Active products include transistors, diodes, memory devices, microprocessors, microcontrollers and other integrated circuits. Passive components, on the other hand, are designed to facilitate completion of electronic functions. Passive products include capacitors, resistors, inductors and electromechanical products such as cable, switches, connectors, filters and sockets. Virtually all of the Company's customers purchase both active and passive products. 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. 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 5 Company's sales grow. Most of the commodity products, and many of the newer technology products, have lower profit margins than the more mature product lines. The Company does not offer express warranties with respect to any of its component products, instead passing on only those warranties, if any, granted by its suppliers. Flat Panel Display Products The Company believes that one of the faster growing segments of the electronics industry will result from the expanded utilization of flat panel displays. Flat panel displays are commonly used in laptop computers and are currently replacing standard cathode ray tubes in a variety of applications, including medical, industrial and commercial equipment, as well as personal computers, televisions, automated teller machines and video monitors. In addition to replacing cathode ray tubes in traditional applications, as a result of the lower power requirements and reduced space needs of flat panel displays, the advent of flat panels is enabling the implementation of display applications that were not achievable with cathode ray tubes, such as laptop and palmtop computers, handheld and portable products and advertising displays. In order to properly function in any application, flat panel displays need certain electronic impulses. One solution for generating these electronic impulses is the use of board level products that control and regulate the electronic input that drives the flat panel display. These products are commonly referred to as driver boards. In addition to the driver board, flat panel displays require a back-light inverter to run the back-light, and cable assemblies to connect the display, inverter and the driver board to each other and to the equipment of which it is a part. The Company has addressed the flat panel display market in four ways. First, the Company has assembled a comprehensive offering of flat panel display products, including products from manufacturers of flat panel displays, as well as manufacturers of the necessary support products such as back-light inverters, driver boards, cabling and touch-screen filaments. The second aspect in addressing the flat panel display market is to develop the technical support necessary to assist customers with integrating flat panel display applications. In this regard the Company's Field Application Engineer Program and marketing department have been developing expertise in flat panel display applications and integration. Additionally, the Company has added flat panel display specialists to its sales and marketing groups. In response to the growing need for support of flat panel display business, during 1999 the Company formed its Display Solutions Group to be a separate group within the Company dedicated entirely to the support of flat panel display opportunities. Through its Display Solutions Group, the Company has expanded its internal staff as well as developed relationships with independent subcontractors, referred to as integrators, in many different geographic locations. This strategy enables the Company to offer a broad selection of products, services and solutions needed to service the varying levels of support required by the customer base. The third aspect to the Company's approach to the flat panel display marketplace was accomplished with the creation of Aved Display Technologies. Aved Display Technologies, which is run as a separate division, designs, develops and has manufactured under its own label several proprietary driver board products for flat panel display applications. In addition to Aved Display Technologies, the Company also has other suppliers of flat panel display driver board products. The fourth aspect to the Company's approach to the flat panel display marketplace began with the creation of Integrated Display Technologies in the fourth quarter of 2000. Integrated Display Technologies, which is run as a separate division, is dedicated to addressing customer needs for design and integration solutions for specialized applications. Memory Modules The Company also designs, has manufactured and sells memory modules under the Aved Memory Products label. Memory products, which include the memory module subsegment, represent one of the largest product sectors of semiconductor revenues. Memory modules 6 facilitate the incorporation of expanded memory in limited space. In addition to Aved Memory Products, the Company has other suppliers of memory module products. With respect to all products manufactured or assembled for Aved Display Technologies, Integrated Display Technologies and Aved Memory Products, the Company offers a warranty for a period of one year against defects in workmanship and materials under normal use and service, in their original unmodified condition and in compliance with the Company's terms and conditions. CUSTOMERS The Company markets its products primarily to original equipment manufacturers in a diverse and growing range of industries. The Company's customer base includes manufacturers of computers and computer-related products; home office and portable equipment; networking, satellite, wireless and other communications products; Internet infrastructure equipment and appliances; automobiles; consumer goods; robotics and industrial equipment; defense and aerospace equipment; and medical instrumentation. The Company also sells products to contract electronics manufacturers, or electronics manufacturing services providers, who manufacture products for companies in all electronics industry segments. The Company's customer list includes approximately 12,000 accounts. During 2000, no customer accounted for more than 5% 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 75 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. As a result of its size and capabilities, the Company brings to the middle market customers a level of service capabilities that the smaller distributor cannot provide. The Company's marketing strategy is to be a preferred and expanding source of supply for all middle market customers. The Company is achieving this by providing a broader range of products and services than is available from smaller and comparably sized distributors, and a higher level of attention than these customers receive from the larger distributors. In addition, the Company continues its efforts to become a more significant supplier for the top tier customers by focusing on a niche of products not emphasized by the larger distributors while providing the high level of quality, service and technical capabilities required to do business with these accounts. The Company's marketing strategy also includes the expansion of its e-commerce capabilities by enhancing its web site functionality and developing its portal capabilities to enable its customers to utilize the services available from the Company's strategically selected e-commerce partners. Marketing Techniques As part of the Company's marketing strategy, the marketing department is based in Silicon Valley near the headquarters of the vast majority of the supplier base. The Company uses various techniques in marketing its products which include: (i) direct marketing through personal visits to customers by management, field salespeople and sales representatives, supported by a staff of inside sales personnel who handle the quoting, accepting, processing and administration of sales orders; (ii) ongoing advertising 7 in various national industry publications and trade journals; (iii) general advertising, sales referrals and marketing support from component manufacturers; (iv) the Company's telemarketing efforts; and (v) a web site and portals on the Internet. The Company also uses its expanded service capabilities, its Field Application Engineer Program, Display Solutions Group, Supply Chain Management capabilities and its status as an authorized distributor as marketing tools. See "Business Strategy-Service Capabilities" and "Suppliers." Sales Personnel As of March 1, 2001, the Company employed 413 people in sales on a full-time basis, of which 170 are field salespeople (of which over 25 are a part of our new All American Technical Sales Program), 160 are inside salespeople, 36 are in management, 29 are in administration and 18 are engineers in the Field Application Engineer Program. The Company also had 11 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 based on achieving gross profit goals. Sales Office Locations The Company currently operates 33 sales offices in 21 states, Canada and Mexico. The locations of the sales offices are in each of the following geographic markets: Huntsville, Alabama; Phoenix, Arizona; Orange County, Sacramento, San Diego, San Fernando Valley, San Jose and Tustin, California; Toronto, Canada; Denver, Colorado; Fort Lauderdale, Miami, Orlando and Tampa, Florida; Atlanta, Georgia; Chicago, Illinois; Kansas City, Kansas; Baltimore, Maryland; Boston, Massachusetts; Guadalajara, Mexico; Detroit, Michigan; Minneapolis, Minnesota; Long Island and Rochester, New York; Raleigh, North Carolina; Cleveland, Ohio; Portland, Oregon; Philadelphia, Pennsylvania; Austin and Dallas, Texas; Salt Lake City, Utah; Seattle, Washington and Milwaukee, Wisconsin. The Company also retains field sales representatives to market other territories throughout the United States, Canada, Puerto Rico and Mexico. The Company may consider opening branches in these other territories if the representatives located there achieve certain sales levels. 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. Foreign Sales Sales to foreign countries aggregated approximately $31.6 million, $24.1 million and $9.4 million for 2000, 1999 and 1998, respectively. BACKLOG As is typical of distributors, the Company has a backlog of customer orders. While these customer orders are cancelable, the Company believes that its backlog is usually an indicator of future sales. At December 31, 2000, the Company had a backlog in excess of $158 million, compared to a backlog in excess of $80 million at December 31, 1999 and $43 million at December 31, 1998. During 1998 and the first half of 8 1999 there was an excess availability of product throughout the industry. As a result, customers kept much lower levels of product on order as delivery times were short and prices were often declining. During the second half of 1999 these conditions changed, lead times began to stretch and certain product groups were being allocated by suppliers. As a result, customers began increasing the amount of their scheduled orders. Conditions of tight supply often result in customers placing scheduled orders for more product than they actually need (referred to in the industry as double booking). When product availability improves, customers begin to have more inventory than they need and the industry typically experiences backlog cancellations and inventory corrections. During the second half of 2000, lead times began to shorten and product availability improved. The combination of improved product availability, a slowing economy and other factors caused a sudden change in market conditions in our industry during the fourth quarter of 2000. In response, customers began canceling their backlog of orders. While the Company's backlog was at $158 million at December 31, 2000, it had fallen to $131 million by February 28, 2001. The Company believes that a substantial portion of its backlog represents products due to be delivered within the next three months. Historically, approximately 30% of the backlog relates to purchase orders which call for scheduled shipments of inventory over a period of time, with the balance representing products that are on back-order with suppliers. The scheduled shipments enable the Company to plan purchases of inventory over extended time periods to satisfy such requirements. At this point in time, the correlation of backlog to future sales is less of an indicator than historically. In addition, the Company has increased its practices of electronic data interchange transactions where the Company purchases inventory based on electronically transmitted customer forecasts that may not become an order until the date of shipment and, therefore, may not be reflected in the Company's backlog. SUPPLIERS The Company generally purchases products from component manufacturers pursuant to non-exclusive distribution agreements. Such suppliers generally limit the number of distributors they will authorize in a given territory in order to heighten the distributor's focus on their products as well as to prevent over-distribution. Suppliers also limit the number of distributors in order to reduce the costs associated with managing multiple distributors. As a factory authorized distributor, the Company obtains sales referrals, as well as sales, marketing and engineering support, from component manufacturers. This support assists the Company in closing sales and obtaining new customers. The Company's status as an authorized distributor is a valuable marketing tool as customers recognize that when dealing with an authorized distributor they receive greater support from the component manufacturers. The Company believes that an important factor which suppliers consider in determining whether to grant or to continue to provide distribution rights to a certain distributor is that distributor's geographic coverage. 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 suppliers. Another important factor that suppliers consider is whether the distributor has in place an engineering staff capable of assisting customers in designing-in the suppliers' products at the customer base. To address this requirement, the Company has a Field Application Engineer Program which is currently staffed with 18 engineers. The Company's Field Application Engineer Program is now augmented by the All American Technical Sales Program started in 2000. During the last three years, the Company has been successful in adding new suppliers. Almost all distribution agreements are cancelable by either party, typically upon 30 to 90 days notice. For the year ended December 31, 2000, the Company's three largest suppliers accounted for 22%, 7% and 5% of consolidated purchases, respectively. See Note 12 to Notes to Consolidated Financial Statements. While most of the products that the Company sells are available from other sources, the Company's future success will depend in large part on maintaining relationships with existing suppliers and developing relationships with new ones. While the Company believes that the loss of a key supplier 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 9 would be able to replace the products which were available from that particular supplier. The loss of, or significant disruption in relationships with, any of the Company's largest suppliers or a significant number of other suppliers in a short period of time could have a material adverse effect on the Company and its operating results. The Company, from time to time, alters its list of authorized suppliers in an attempt to provide its customers with a better product mix. The Company believes that it benefits from technological change within the electronics industry as new product introductions accelerate industry growth and provide the Company with additional sales opportunities. The Company believes its inventory risk due to technological obsolescence is significantly reduced by certain provisions typically found in its distribution agreements addressing price protection, stock rotation privileges, obsolescence credits and return privileges. Price protection is typically provided in the form of a credit to the Company for any inventory the Company has of products for which the manufacturer reduces its prices. Stock rotation privileges typically allow the Company to exchange inventory in an amount up to 5% of a prior period's purchases. Obsolescence credits allow the Company to return products which a manufacturer discontinues. Upon termination of a distribution agreement, the return privileges generally require the manufacturer to repurchase the Company's inventory at the Company's average purchase price, however, if the Company terminates the distribution agreement, there is generally a 10% to 15% restocking charge. The vast majority of the Company's inventory is purchased pursuant to its distribution agreements. The Company does not generally purchase product for inventory unless it is a commonly sold product, there is an outstanding customer order to be filled, a special purchase is available or unless it is an initial stocking package in connection with a new line of products. As a result of the Company's strategy in how it has positioned itself in a rapidly consolidating industry, the Company has been successful in attracting many new suppliers in recent periods. As a result, the Company has added many new stocking packages to its inventory. These new stocking packages typically take time to become productive. While management believes that these new product lines and the resulting stocking packages should provide growth opportunities in the future, there can be no assurance that this strategy will be successful. FACILITIES AND SYSTEMS Facilities The Company's corporate headquarters and main distribution center are located in a 110,800 square foot facility in Miami, Florida. The Company occupies this facility through a lease which expires in 2014, subject to the Company's right to terminate at any time upon twenty-four months prior written notice and the payment of all outstanding debt owed to the landlord. The lease for this facility contains three six-year options to renew at the then fair market value rental rates. The Company also leases approximately 20,000 square feet of space for its west coast distribution and semiconductor programming center located in Fremont, California (near San Jose). In Denver, Colorado the Company leases a 7,600 square foot facility which is dedicated to certain value-added services and a regional distribution center. In Tustin, California the Company leases a 13,900 square foot facility which presently contains all operations for the separate divisions of Aved Display Technologies and Aved Memory Products. See "Products." In December 2000, the Company leased 26,700 square feet of space in Irvine, California which will house the operations of the Company's newly created Integrated Display Technologies division. The Company also intends to relocate to the Irvine location the operations of Aved Display Technologies when construction of the facility is completed. This will permit the expansion of the operations of Aved Memory Products which will then occupy all of the existing facility in Tustin. During 1998, the Company entered into a new lease for approximately 20,000 square feet of space in San Jose, California to house its expanded west coast corporate offices and the headquarters of the Company's sales and marketing functions, as well as its northern California sales operation. Approximately 8,000 square feet of the space is being used for corporate offices including the office of the 10 President and Chief Executive Officer of the Company and 8,000 square feet of the space is being utilized for the sales operation. The remaining area of approximately 4,000 square feet is presently being sublet. In addition, the Company leases space for its other sales offices, which offices range in size from approximately 1,000 square feet to 8,000 square feet. See "Sales and Marketing-Sales Office Locations." Due to the price erosion that is typical in its industry, as well as the continued growth in the Company's revenues, the Company has utilized some of its excess capacity as its unit volume shipped has increased significantly. As a result of its capacity utilization, as well as the need to increase productivity in its distribution centers, the Company is presently evaluating potential investments to add further storage and automation to its existing distribution centers. Systems The Company's systems and operations are designed to facilitate centralized warehousing which allows salespeople across the country to have real-time access to inventory and pricing information and allows a salesperson in any office to enter orders electronically, which instantaneously print in the appropriate distribution facility for shipping and invoicing. The combination of the centralized distribution centers and the electronic order entry 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 and to expand customer services, including just-in-time deliveries, kitting programs, bar coding, automatic inventory replenishment programs, bonded inventory programs, in-plant stores and in-plant terminals and complete supply chain management solutions. As a result of rapidly increasing advances in technology, the Company has recognized that its computer and communications systems will be subject to continual enhancements. In order to meet the increasing demands of customers and suppliers, to maintain state-of-the-art capabilities and to participate in e-commerce, the Company has continually been expanding, and in the future will continue to develop and expand, its systems capabilities, including hardware and software upgrades to meet its computer and communications needs. The Company believes that these systems enhancements should assist the Company in increasing sales, improving efficiencies and providing 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 by foreign companies 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, economic or financial turbulence abroad, strikes or delays in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. The Company's ability to be competitive in or with the sales of imported components could also be affected by other governmental actions and policy changes related to, among other things, anti-dumping and other international anti-trust legislation and currency fluctuations. The Company believes that these factors may have had an adverse impact on its business during past years, and there can be no assurance that such factors will not have a more significant adverse affect on the Company in the future. Since all of the Company's purchases from foreign companies are transacted with United States subsidiaries or affiliates of these foreign manufacturers, the Company's purchases are paid for in U.S. dollars. 11 EMPLOYEES As of March 1, 2001, the Company employed 777 persons, of which 413 are involved in sales and sales management; 130 are involved in marketing; 75 are involved in the distribution centers; 69 are involved in operations; 12 are involved in management; 51 are involved in bookkeeping and clerical; and 27 are involved in information technology. 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 $13 billion worldwide. These distributors can generally be divided into global distributors who have operations around the world, national distributors who have offices throughout the United States, regional distributors with offices in multiple cities within the United States and local distributors with just one location. With sales offices in 31 cities in 21 states, the Company competes as a national distributor. Additionally, the Company is one of the few national distributors which has offices in Canada and Mexico. The Company, which was recognized by industry sources as the 5th largest distributor of semiconductors and the 12th largest electronic components distributor overall in the United States, believes its primary competition comes from the top 50 distributors in the industry. Recently, there has been an emergence of additional competition from the advent of third party logistics and fulfillment companies, businesses commonly referred to as e-brokers and e-exchanges and several other forms of e-commerce companies which have grown with the expanded use of the Internet. While the Company is aggressively implementing its own e-commerce strategies, including its web site and multiple portal development, there can be no assurance that the Company will be able to defend its market share against the emergence of these or other new business models. The Company competes with many companies that distribute electronic components and, to a lesser extent, companies that manufacture such products and sell them directly. Some of these companies have greater name recognition and assets and possess greater financial, personnel and other resources than does the Company. The competition in the electronics distribution industry can be segregated by target customers: major (or top tier) accounts; middle market accounts; small accounts; and emerging growth accounts. Competition to be the primary supplier for the major customers is dominated by the top tier distributors as a result of the product offerings, 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 emphasized by the top tier distributors, or are fill-in or niche products. With its expanded product offering and service capabilities and its quality assurance procedures in place, the Company believes that it can compete for a bigger portion of the business at the top tier customer base, although there can be no assurance that the Company will be successful in doing so. The Company believes competition from the top tier distributors for the middle and emerging market customer base is not as strong since the largest distributors focus their efforts and resources on the major account base. For this reason, the Company has focused strong efforts on servicing this middle and emerging market customer base. The Company competes for this business by seeking to offer a broader product base, better pricing and more sophisticated distribution technology than the regional or local distributors; by seeking to offer a broader product base and more sophisticated distribution technology than comparably-sized distributors and by seeking to offer to middle and emerging market companies a greater level of service than is offered to them by the major national and global distributors. The Company believes that today the top tier distributors are seeking to penetrate the middle market customer base more than they have in the past. ITEM 2. PROPERTIES See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales Office Locations" and Note 10 to Notes to Consolidated Financial Statements. 12 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. Many of such claims are covered by insurance or, if they relate to products manufactured by others for which it distributes, the Company would expect that the manufacturers of such products would indemnify the Company, 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 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS SALES PRICES OF COMMON STOCK The Company's common stock trades on The Nasdaq Stock Market (Nasdaq National Market) under the symbol SEMI. The following table sets forth the range of high and low sale prices for the Company's common stock as reported on The Nasdaq Stock Market during each of the quarters presented: Quarter of Fiscal Year High Low - ---------------------- ---- --- 1999 - ---- First Quarter 5 5/16 3 7/16 Second Quarter 4 17/32 2 1/2 Third Quarter 5 2 13/16 Fourth Quarter 4 1/2 2 11/16 2000 - ---- First Quarter 19 3 1/16 Second Quarter 18 15/16 8 3/4 Third Quarter 24 7/16 14 5/8 Fourth Quarter 21 7/8 7 25/32 2001 - ---- First Quarter (through March 20, 2001) 14 1/2 8 1/2 COMMON STOCK PURCHASE RIGHTS PLAN In June 2000, the Board of Directors of the Company adopted a Common Stock Purchase Rights Plan (the "Rights Plan") and authorized and approved a dividend distribution of one right (each a "Right" and collectively the "Rights") for each outstanding share of common stock of the Company to shareholders of record at the close of business on June 23, 2000. Each share of common stock of the Company that is issued after June 23, 2000 will also include one Right. Each Right initially entitles the registered holder to purchase from the Company, but only when exercisable under the Rights Plan, one share of common stock at a price of $95.00 per share, subject to certain future adjustments. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's common stock (or 10% of such stock under certain circumstances) or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the 13 common stock (or 10% of such stock under certain circumstances). Upon such occurrence, each Right (other than Rights owned by such person or group) will entitle the holder to purchase from the Company the number of shares of the Company's common stock having a market value equal to twice the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction, or sells more than 50% of its assets or earning power, after a person or group has acquired 15% or more of the Company's outstanding common stock (or 10% of such stock under certain circumstances), each Right (other than Rights owned by such person or group) will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price. Following the acquisition by a person or group of 15% or more of the Company's common stock (or 10% of such stock under certain circumstances) and prior to an acquisition of 50% or more of the common stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group) at an exchange ratio of one share of common stock per Right. Prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Company's common stock (or 10% of such stock under certain circumstances), the Rights are redeemable for $.001 per Right at the option of the Board of Directors. The rights will expire on June 8, 2010. REVERSE STOCK SPLIT On June 1, 1999, the Company's shareholders approved a one-for-five reverse stock split (the "Reverse Stock Split") of the Company's outstanding shares of common stock. The Reverse Stock Split became effective for trading in the Company's new common stock as of June 2, 1999. Immediately following the Reverse Stock Split, there were 3,973,431 shares of common stock outstanding. The $.01 par value of the common stock remained the same after the Reverse Stock Split. All references to shares of common stock, stock options, warrants, exercise prices per share and per share amounts have been restated to reflect the effect of the Reverse Stock Split. As of March 20, 2001, there were approximately 350 holders of record of the Company's common stock, based on the stockholders list maintained by the Company's transfer agent. Many of these record holders hold these securities for the benefit of their customers. The Company believes that, based upon information provided by its transfer agent, it has over 5,900 beneficial holders of its common stock. DIVIDEND POLICY The Company has never declared or paid cash dividends. Future dividend policy will depend on the Company's earnings, capital requirements, financial condition and other relevant factors. It is not anticipated, however, that the Company will pay cash dividends on its common stock in the foreseeable future, inasmuch as it expects to employ all available cash in the continued growth of its business. In addition, the Company's revolving line of credit agreement prohibits the payment of any dividends. See Note 7 to Notes to Consolidated Financial Statements. SALES OF UNREGISTERED SECURITIES The Company has not issued or sold any unregistered securities during the quarter ended December 31, 2000 except as follows: Pursuant to the Company's Employees', Officers', Directors' Stock Option Plan, as previously amended and restated, the Company granted during the quarter ended December 31, 2000 stock options to purchase 6,450 shares of the Company's common stock to 9 individuals at exercise prices ranging from $9.55 to $16.71 per share (based on fair market value at date of grant). The stock options vest over a five-year period and are exercisable over a six-year period. See Note 9 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 of 1933. 14 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the Company for and as of the years 1996 through 2000 has been derived from the audited Consolidated Financial Statements of the Company. Such information should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this report and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." All references to shares of common stock and per share amounts have been restated to reflect the effect of the Reverse Stock Split. For the Company's unaudited quarterly results of operations for the eight quarters ended December 31, 2000, see "Quarterly Results of Operations" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Statement of Operations Data Years Ended December 31 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Net Sales (1) ........................ $ 522,183,000 $ 329,563,000 $ 250,044,000 $ 265,640,000 $ 237,846,000 Cost of Sales (2) .................... (414,292,000) (265,064,000) (194,599,000) (207,173,000) (185,367,000) ------------- ------------- ------------- ------------- ------------- Gross Profit ......................... 107,891,000 64,499,000 55,445,000 58,467,000 52,479,000 Selling, General and Administrative Expenses ............ (79,893,000) (56,357,000) (46,880,000) (48,257,000) (51,675,000) Restructuring and Other Nonrecurring Expenses (3) ....................... -- -- (2,860,000) -- (4,942,000) ------------- ------------- ------------- ------------- ------------- Income (Loss) from Continuing Operations ......................... 27,998,000 8,142,000 5,705,000 10,210,000 (4,138,000) Interest Expense (4) ................. (8,642,000) (4,985,000) (4,313,000) (4,797,000) (7,025,000) ------------- ------------- ------------- ------------- ------------- Income (Loss) from Continuing Operations Before Income Taxes ..... 19,356,000 3,157,000 1,392,000 5,413,000 (11,163,000) Income Tax (Provision) Benefit ....... (8,157,000) (1,358,000) (561,000) (2,163,000) 2,942,000 ------------- ------------- ------------- ------------- ------------- Income (Loss) from Continuing Operations Before Discontinued Operations and Extraordinary Items.. 11,199,000 1,799,000 831,000 3,250,000 (8,221,000) Discontinued Operations (5) .......... -- -- -- -- (1,757,000) Extraordinary Items (6) .............. -- -- -- -- 58,000 ------------- ------------- ------------- ------------- ------------- Net Income (Loss) .................... $ 11,199,000 $ 1,799,000 $ 831,000 $ 3,250,000 $ (9,920,000) ============= ============= ============= ============= ============= Earnings (Loss) Per Share (7): Basic .............................. $2.92 $.46 $.21 $.83 $(2.51) Diluted ............................ $2.70 $.46 $.21 $.82 $(2.47) Balance Sheet Data December 31 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Working Capital....................... $ 159,590,000 $ 91,217,000 $ 68,192,000 $ 63,308,000 $ 69,823,000 Total Assets.......................... 250,228,000 151,501,000 118,957,000 112,286,000 112,921,000 Long-Term Debt, Including Current Portion..................... 128,124,000 71,867,000 50,978,000 46,900,000 58,221,000 Shareholders' Equity.................. 39,598,000 27,852,000 26,509,000 25,674,000 22,396,000 Book Value Per Common Share........... $9.80 $7.01 $6.67 $6.46 $5.65
- ------------------------- (1) Net sales for 1996, including sales generated by the Company's computer products division which was discontinued in the third quarter of 1996, were $244,668,000. (2) 1996 includes non-cash inventory write-offs of $2,000,000 associated with the Company's restructuring of its kitting and turnkey operations. (3) 1998 reflects a nonrecurring charge relating to a failed proposed merger. The nonrecurring charge includes expansion costs incurred in anticipation of supporting the proposed combined entity, employee-related expenses, professional fees and other merger-related out of pocket costs. 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 relocating the Company's 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 certain acquisitions. 15 (4) Interest expense for 1996 includes amortization and a write-down of deferred financing fees of approximately $2,148,000 relating to obtaining the Company's then $100 million credit facility. (5) Reflects a loss from discontinued operations of $(166,000) (net of $125,000 income tax benefit) and a loss on disposal of $(1,591,000) (net of $1,200,000 income tax benefit) relating to management's decision to discontinue its computer products division. (6) 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. (7) Weighted average common shares outstanding after reflecting the Reverse Stock Split for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 were 3,828,978, 3,921,138, 3,937,021, 3,934,512 and 3,948,570, respectively, for basic earnings per share and were 4,140,579, 3,924,166, 3,998,802, 3,956,967 and 4,021,152, respectively, for diluted earnings per share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with "Item 6. Selected Financial Data" and Notes to Consolidated Financial Statements contained in this report. RESULTS OF OPERATIONS Overview The following table sets forth for the years ended December 31, 2000, 1999 and 1998, certain items in the Company's Consolidated Statements of Income expressed as a percentage of net sales. All percentages are based on net sales. Items as a Percentage of Net Sales -------------------------- Years Ended December 31 -------------------------- 2000 1999 1998 ------ ------ ------ Net Sales ..................................... 100.0% 100.0% 100.0% Gross Profit .................................. 20.7 19.6 22.2 Selling, General and Administrative Expenses... (15.3) (17.1) (18.7) Restructuring and Other Nonrecurring Expenses.. -- -- (1.1) Income from Operations ........................ 5.4 2.5 2.3 Interest Expense .............................. (1.7) (1.5) (1.7) Income Before Income Taxes .................... 3.7 1.0 0.6 Net Income .................................... 2.1 0.5 0.3 COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999 Sales For the year ended December 31, 2000, the Company achieved a record sales level at $522.2 million, a $192.6 million or 58.4% increase over net sales of $329.6 million for 1999. The dramatic increase in net sales was attributable to very positive industry conditions and the benefits of the strategies that we have been implementing over the past several years. This increase also reflects contributions from new sales offices and increased market share in most territories. Although sales for the year were strong, sales began to taper off in the fourth quarter due to a general industry slowdown and inventory corrections at the customer base. 16 Gross Profit Gross profit was $107.9 million in 2000 compared to $64.5 million for 1999, representing a 67.3% increase. The substantial increase in gross profit was due to the increase in sales as well as an improvement in gross profit margins as a percentage of net sales. Gross profit margins as a percentage of net sales were 20.7% for 2000, compared to 19.6% for 1999. While the gross profit for the year was higher than the prior year, the gross profit margins began declining toward the end of 2000, reflecting a general industry slowdown and greater availability of product. In addition, we continue to develop long-term strategic relationships with accounts that have required aggressive pricing programs and we expect a greater number of low margin, large volume transactions. Management therefore expects downward pressure on gross profit margins in the future. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") was $79.9 million for 2000, compared to $56.4 million for 1999. The increase was primarily attributable to an increase in variable expenses associated with the increases in sales and gross profit as well as an increase in our infrastructure to support the changing needs and additional requirements of our customers. Furthermore, in an effort to drive expansion and internal growth, we have increased and enhanced our management team and expanded our sales force in almost every location. Due to these factors, we expect that SG&A will increase in future periods. SG&A as a percentage of net sales improved to 15.3% for the year ended December 31, 2000, from 17.1% for the 1999 period. This improvement reflects the significant increase in sales which more than offset the increase in SG&A in absolute dollars. Income from Operations Income from operations was $28.0 million for 2000, a 243.9% increase over income from operations of $8.1 million for 1999. The significant increase in income from operations was due to the increase in net sales and the increase in gross profit margins which more than offset the increase in SG&A. Interest Expense Interest expense was $8.6 million for the year ended December 31, 2000, compared to $5.0 million for 1999. The increase in interest expense resulted primarily from an increase in average borrowings during 2000 to support the growth in sales and the expanded infrastructure, as well as increases in inventory purchases associated with initial stocking packages from new suppliers. Interest expense for 2000 also reflects an increase in interest rates. Net Income Net income increased dramatically to a record $11.2 million, or $2.70 per share (diluted), for the year ended December 31, 2000, a 522.5% increase over net income of $1.8 million, or $.46 per share (diluted), for 1999. The increase in net income reflects the increase in gross profit as well as the improvement in SG&A as a percentage of sales, all of which was partially offset by the increase in interest expense. COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 Sales For the year ended December 31, 1999, the Company achieved sales of $329.6 million, a $79.6 million or 31.8% increase over net sales of $250.0 million for 1998. The increase resulted from improved conditions in the industry as well as from increased sales in most territories and contributions from two new sales offices that were opened during the second quarter of 1999. 17 Gross Profit Gross profit was $64.5 million in 1999 compared to $55.4 million for 1998, representing a 16.3% increase. The increase in gross profit was due to the increase in sales which more than offset a decline in gross profit margins as a percentage of net sales. Gross profit margins as a percentage of net sales were 19.6% for 1999, compared to 22.2% for 1998. The decline in gross profit margins reflected the competitive market and excess supply conditions during the first half of 1999, a greater number of low margin, large volume transactions than in the previous year, as well as continued changes in the Company's product mix. In addition, we continued to experience lower margins relating to the development of long-term strategic relationships with accounts which have required aggressive pricing programs. Selling, General and Administrative Expenses SG&A was $56.4 million for 1999, compared to $46.9 million for 1998. The increase in SG&A was primarily a result of an increase in our infrastructure to support the changing needs and additional requirements of our customers and increased variable expenses associated with the increases in sales and gross profit. Furthermore, in an effort to drive expansion and internal growth, we opened additional sales offices and increased and enhanced our management personnel during 1999. SG&A as a percentage of net sales improved to 17.1% for the year ended December 31, 1999, from 18.7% for the 1998 period. The decrease in SG&A as a percentage of sales reflected the significant increase in sales which more than offset the increase in SG&A in absolute dollars. Income from Operations Income from operations was $8.1 million for 1999, a 42.7% increase over income from operations of $5.7 million for 1998. The increase in income from operations was due to the increase in net sales, which more than offset the impact of the decline in gross profit margins and the increase in SG&A. In addition, 1998 included a nonrecurring charge of $2.9 million relating to a failed proposed merger. Interest Expense Interest expense was $5.0 million for the year ended December 31, 1999, compared to $4.3 million for 1998. The increase in interest expense resulted from an increase in average borrowings during 1999 to support the growth in sales and the expanded infrastructure. Interest expense for 1999 also reflected a decrease in the Company's borrowing rate. Net Income Net income increased dramatically to $1.8 million, or $.46 per share (diluted), for the year ended December 31, 1999, a 116.5% increase over net income of $831,000, or $.21 per share (diluted), for 1998. The increase in net income reflected the increase in gross profit that was partially offset by the increases in SG&A and interest expense. In addition, 1998 included a nonrecurring charge of $1.7 million on an after-tax basis relating to a failed proposed merger. 18 QUARTERLY RESULTS OF OPERATIONS The following table presents unaudited quarterly results of operations for the eight quarters ended December 31, 2000. We believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly such quarterly information. (In thousands, except per share data)
2000 1999 ----------------------------------------- ---------------------------------------- FIRST SECOND THIRD FOURTH First Second Third Fourth QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- Net Sales ....... $107,273 $125,994 $152,526 $136,390 $ 70,649 $ 79,874 $ 88,570 $ 90,470 Gross Profit .... 21,441 26,323 31,954 28,173 13,639 15,272 16,733 18,855 Income from Operations .... 3,782 6,939 10,563 6,714 1,436 1,601 2,157 2,948 Net Income ...... 1,210 2,949 4,741 2,299 194 247 502 856 Diluted Earnings Per Share (1).. $.30 $.71 $1.10 $.55 $.05 $.06 $.13 $.22
(1) As adjusted to reflect Reverse Stock Split effective on June 2, 1999. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 2000 improved significantly to $159.6 million, compared to working capital of $91.2 million at December 31, 1999. The current ratio improved to 2.93:1 at December 31, 2000, compared to 2.75:1 at December 31, 1999. The increases in working capital and in the current ratio were due primarily to increases in accounts receivable and inventory. These changes in accounts receivable and inventory more than offset an increase in accounts payable. Accounts receivable levels at December 31, 2000 were $91.8 million, compared to $53.2 million at December 31, 1999. The increase in accounts receivable reflects the significant level of sales at the end of 2000 compared to the end of 1999. Additionally, the average number of days that accounts receivables were outstanding increased to 53 days as of December 31, 2000 compared to 52 days as of December 31, 1999. Inventory levels were $146.4 million at December 31, 2000 compared to $85.3 million at December 31, 1999. The increase primarily reflects higher inventory levels needed to support a higher level of sales and inventory relating to new suppliers added during 2000. Accounts payable and accrued expenses increased to $81.2 million at December 31, 2000 from $51.6 million at December 31, 1999, primarily as a result of the increase in purchases of inventory at the end of 2000 in connection with initial stocking packages from new suppliers. In September 2000, the Company's agreement with its consortium of banks was amended whereby the line of credit facility was increased from $100 million to $150 million and the term was extended to May 3, 2004. The line of credit facility, which is based on eligible accounts receivable and inventories as defined in the agreement, currently bears interest, at the Company's option, at the prime rate plus .25% or LIBOR plus 2.25%. On a quarterly basis, the applicable interest rate margins for the prime rate and LIBOR options may be adjusted based upon our debt service coverage ratio for the 12 month period ending on the last day of the immediately preceding calendar quarter and our average excess loan availability for the three month period ending on the last day of the immediately preceding calendar quarter. The applicable interest rate margin for the prime rate option may adjust between 0% to .5% and the applicable interest rate margin for the LIBOR option may adjust between 2.0% to 2.5%. Borrowings under the credit facility are secured by all of the Company's assets including accounts receivable, inventories and equipment. Under the 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. The 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. At December 31, 2000, outstanding borrowings under the credit facility aggregated $120.5 million compared to $64.0 million at December 31, 1999. The increase in outstanding borrowings reflects the significant growth in sales and the related increases in inventory and accounts receivable. See Note 7 to Notes to Consolidated Financial Statements. 19 On May 24, 1999, we announced that our Board of Directors authorized the repurchase of up to $2 million in purchase price of the Company's common stock. As of December 31, 2000, the Company repurchased 147,186 shares of its common stock at an average price of $3.29 per share. Any shares of common stock repurchased will be available for reissuance in connection with the Company's stock option plans or for other corporate purposes. The Company presently does not intend to make further stock repurchases at the current market prices. The Company expects that its cash flows from operations and additional borrowings available under the credit facility will be sufficient to meet its current financial requirements over at least the next twelve months. INFLATION AND CURRENCY FLUCTUATIONS The Company does not believe that inflation significantly impacted its business during 2000; however, inflation has had significant effects on the economy in the past and could adversely impact the Company's results in the future. The Company believes that currency fluctuations could have adverse effects on its business if they make components manufactured abroad too expensive, cause limitations in customer productions due to unfavorable export conditions or cause the Company's offshore suppliers to limit exports to the United States. In certain prior years, the Company believes that currency fluctuations have had such adverse effects. FORWARD-LOOKING STATEMENTS; BUSINESS RISKS This report contains statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "believes," "estimates," "plans," "expects," "intends," "anticipates," "contemplates," "may," "will," "shall," "assuming," "prospect," "should," "could," "looking forward" and similar expressions, to the extent used, are intended to identify the forward-looking statements. All forward-looking statements are based on current expectations and beliefs concerning future events that are subject to risks and uncertainties. Actual results may differ materially from the results suggested in this report. In many cases, we cannot predict the risks or uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that may cause or contribute to such differences, and our business risks generally, include, but are not limited to, the items described below, as well as in other sections of this report and in other of our public filings and in our press releases. We are dependent on a limited number of suppliers. If one or more of our largest suppliers chooses not to sell products to us, our operating results could suffer. We rely on a limited number of suppliers for products which generate a significant portion of our sales. Substantially all of our inventory has and will be purchased from suppliers with which we have entered into non-exclusive distributor agreements which are typically cancelable on short notice (generally 30 to 90 days). Products purchased from our three largest suppliers accounted for approximately 34% of our consolidated purchases during the calendar year ended December 31, 2000. No other supplier accounted for more than four percent of our consolidated purchases during this period. While most of the products that we sell are available from other sources, our future success will depend in large part on maintaining relationships with existing suppliers and developing relationships with new ones. We believe that the loss of a key supplier could have an adverse impact on our business in the short term as we attempt to replace the products offered by that supplier with the products of other suppliers. If we were to lose our right to distribute the products of any particular supplier, there can be no assurance that we would be able to replace the products which were available from that particular supplier. The loss of, or significant disruptions in relationships with, any of our largest suppliers or a significant number of other suppliers in a short period of time, could have a material adverse effect on our operating results. 20 We do not have long-term contracts with our customers and, as a result, our customers may be able to cancel, reduce or delay their orders without penalty. We typically do not obtain long-term purchase orders or commitments but instead work with our customers to develop nonbinding forecasts of future orders. Based on such nonbinding forecasts, we make commitments regarding the level of business that we will seek and accept, and the levels and utilization of personnel and other resources. A variety of conditions, both specific to each individual customer and generally affecting each customer's industry, may cause our customers to cancel, reduce or delay orders that were either previously made or anticipated. Generally, our customers may cancel, reduce or delay purchase orders and commitments without penalty or other charges associated with such cancellation, reduction or delay. Significant or numerous cancellations, reductions or delays in orders by customers could have a material adverse effect on our operating results. We are dependent on foreign manufacturers and subject to trade regulations which expose us to political and economic risk. A significant number of components sold by us are manufactured by foreign companies. As a result, our ability to sell certain products at competitive prices could be adversely affected by any of the following: - increases in tariffs or duties; - changes in trade treaties; - strikes or delays in air or sea transportation; - future United States legislation with respect to pricing and/or import quotas on products imported from foreign countries; and - turbulence in offshore economies or financial markets. Our ability to be competitive with respect to sales of imported components could also be affected by other governmental actions and policy changes, including anti-dumping and other international antitrust legislation. In addition, adverse currency fluctuations could have the effect of making components manufactured abroad more expensive, cause limitations in customer productions due to unfavorable export conditions or cause our offshore suppliers to limit exports to the United States. Because we purchase products from United States subsidiaries and affiliates of foreign manufacturers, our purchases are paid for in U.S. dollars, which usually reduces or eliminates the potential adverse effects of currency fluctuations. There can be no assurance that such factors could not have a material adverse effect on our operating results in the future. Our industry is subject to supply shortages. Any delay or inability to obtain components may have an adverse effect on our operating results. At various times there have been shortages of components in the electronics industry and the availability of certain components have been limited by some of our suppliers. Although such shortages and allocations have not had a material adverse effect on our operating results, there can be no assurance that any future shortages or allocations would not have such an effect on us. Our industry is cyclical, which causes our operating results to fluctuate significantly. In the fall of 1999, our industry emerged from a four-year period of excess supply. During the fourth quarter of 2000, a combination of improved product availability, a slowing economy and other factors caused a sudden adverse change in market conditions in our industry. We cannot predict the timing or the severity of the cycles within our industry. The electronic components distribution industry has historically been affected by general economic downturns, which have often had an adverse economic effect upon manufacturers, end-users of electronic components and electronic components distributors. In addition, our industry directly depends on the continued growth of the electronic components industry and indirectly on the level of end-user demand for our customers' products. Due to changing conditions our customer base may experience periods of inventory corrections which could adversely impact our results. Furthermore, the timing of new product developments, the life-cycle of existing electronic products, and 21 the level of acceptance and growth of new products can affect demand for electronic components. In that regard, the Company supports certain new technologies, the failure of which to be fully accepted or grow could have a material adverse effect on our operating results. Overall, these market changes and factors have caused in the past, and will likely cause in the future, our operating results to fluctuate. The prices of our components are subject to volatility. A significant portion of the memory products we sell have historically experienced volatile pricing. If market pricing for these products decreases significantly, we may experience periods when our investment in inventory exceeds the market price of such products. In addition, at times there are price increases from our suppliers that we are unable to pass on to our customers. These market conditions could have a negative impact on our sales and gross profit margins unless and until our suppliers reduce the cost of these products to us. We may not be able to satisfy our funding requirements. We may need to spend significant amounts of cash to: fund increases in expenses; meet our working capital requirements; invest in capital equipment and infrastructure; upgrade our information and communication systems; acquire businesses or open divisions; or respond to unanticipated developments (such as an increase in bad debts), increasing customer demands or competitive pressures. If we do not have enough cash on hand, cash generated from our operations or cash available under our credit facility to meet these cash requirements, we will need to seek alternative sources of financing to carry out our growth and operating strategies. We may not be able to raise needed cash on terms acceptable to us, or at all. Financing may be on terms that are dilutive or potentially dilutive. If alternative sources of financing are required but are insufficient or unavailable, we will be required to modify our growth and operating plans to the extent of available funding. Our industry is highly competitive and competition could harm our ability to sell our products and services and thereby reduce our market share. The electronic components distribution industry is highly competitive. We generally compete with local, regional and national distributors. Some of our competitors have greater name recognition and financial, personnel and other resources than we do. There can be no assurance that we will continue to compete successfully with existing or new competitors and failure to do so could have a material adverse effect on our operating results. Emergence of new competitive business models could have adverse effects on our business. Recently, additional competition has emerged in the electronic components distribution industry. This increased competition resulted from the advent of third party logistics and fulfillment companies, businesses commonly referred to as e-exchanges and e-brokers and several other forms of e-commerce companies which have grown with the expanded use of the Internet. While we are aggressively working on developing and implementing our e-commerce strategies, including our website and multiple portal development, to confront these new competitive business models, there can be no assurance that we will be able to defend our market share against the emergence of these or other new business models. A reversal of the trend for distribution to play an increasing role in the electronic components industry could affect our business. In recent years, there has been a growing trend for original equipment manufacturers and contract electronics manufacturers to outsource their procurement, inventory and materials management processes to third parties, particularly electronic component distributors. Although we do not currently foresee this trend reversing, if it did, our business would be materially adversely affected. 22 We may not be able to manage and sustain future growth. Recently, we have experienced growth. If we are to continue our growth, we will need to manage our expanding operations effectively and successfully integrate into our operations any new businesses or divisions which we may acquire or open. If we are unable to do so, particularly in instances in which we have made significant investments, our failure could have a material adverse effect on our operating results. We may be unsuccessful in sustaining continued growth if we are unable to: - secure adequate supplies of competitive products on a timely basis and on commercially reasonable terms; - expand sales to existing customers and increase our customer base; - turn our inventories and collect our accounts receivable fully (and consistent with historical bad debt levels) and in a timely manner, especially with respect to new customers in emerging markets; - maintain our existing key supplier relationships as well as develop new relationships with leading suppliers of electronic components; - hire and retain additional qualified management, marketing and other personnel to successfully manage our growth, including personnel to monitor our operations, control costs and maintain effective inventory and credit controls; and - invest to maintain and enhance our infrastructure, including distribution center capacity, telecommunications and information systems, and logistics services. A decline in gross profit margins arising from a change in market conditions or aggressive pricing programs could adversely affect our operating results. During certain prior periods, we have experienced an increase in gross profit margins as a result of favorable market conditions in the electronic components distribution industry, including limited supply of certain products. However, there is no assurance that negative changes in the economic environment generally and/or in the electronic components industry in particular will not occur. In fact, some of such negative changes in both the economic environment generally and in the electronic components industry began to occur in the fourth quarter of 2000 and continue to even a greater extent as of the date of this report. Furthermore, we continue to develop long-term strategic relationships with accounts which have required aggressive pricing programs. These factors could result in a decline in our gross profit margins, materially adversely affecting our operating results. We are exposed to interest rate changes which could adversely affect our operating results. We are exposed to interest rate changes with respect to our credit facility, which currently is based upon, at our option, the prime rate or LIBOR. Our operations would be adversely affected if third party carriers were unable to transport or were materially hindered in transporting our products. All of our products are shipped through third party carriers, principally one carrier. If a strike or other event prevented or materially hindered or disrupted that carrier from transporting our products, there is no assurance that other carriers would be available or have the capacity to deliver our products to our customers. If adequate third party sources to ship our products were not available at any time, our operating results would be materially and adversely effected. We depend on the continued services of our executive officers, and their loss could affect our ability to successfully grow our business. We are highly dependent upon the services of our President and Chief Executive Officer. The permanent loss for any reason of our President and Chief Executive Officer, or any one or more of our other key executives, could have a material adverse effect upon our operating results. While we believe that we 23 would be able to locate suitable replacements for our executives if their services were lost, there can be no assurance that we would, in fact, be able to do so. We must attract and retain personnel to help support our future growth, and competition for personnel in our industry is intense. We require the services of a substantial number of qualified personnel. Our future success depends to a significant degree upon the continued contributions of our management, engineering, sales, marketing, information technology, distribution and finance personnel. The recent market for such skilled and experienced personnel is characterized by intense competition and aggressive recruiting, as well as a high degree of employee mobility. This market makes it particularly difficult to attract and retain the qualified personnel we require. The loss of or our inability to continue to attract and retain these key personnel could harm our business. Any acquisitions could be difficult to integrate, disrupt our business and adversely affect our operations. Our growth in the future may depend, in part, on our ability to acquire compatible electronic components distributors or other businesses and to integrate the acquired operations. There can be no assurance that we will be able to locate additional appropriate acquisition candidates, or that we will be successful in acquiring any identified candidates. In addition, we cannot be certain that the operations of any acquired companies will be effectively integrated or prove profitable. The completion of future acquisitions may require the expenditure of sizable amounts of capital and management effort. Moreover, unexpected problems encountered in connection with our acquisitions could have a material adverse effect on our operating results. Our officers and directors have and will continue to have significant control over us. If the Company's Chairman and President and Chief Executive Officer exercised all of their outstanding stock options, they and their respective spouses and children and related trusts would own an aggregate of approximately 659,000 shares, representing approximately 16% of the outstanding shares of common stock. As a result of such stock ownership and their positions as executive officers, as the members of the executive committee of our Board of Directors and as two of the seven directors of All American, they are and will continue to be in a position to control the day-to-day affairs of All American. We may be exposed to product liability claims. We are likely to be named as a defendant in any products liability action brought by an end-user as a result of our value-added services and as a participant in the distribution chain between the manufacturer and end-user. Although to date there have been no material claims asserted against us for products liability, there can be no assurance that such claims will not arise in the future. In the event that any products liability claim is not covered by insurance or we are not indemnified by or cannot recover damages from our supplier of the product or another third party in the chain of distribution, we may be required to fund some or all of a product liability claim, which could have a material adverse effect on us. Our shareholder rights plan, preferred stock and governing documents may discourage potential acquisitions of our business. We have a shareholders rights plan and have authorized preferred stock which is available to be issued with such rights, preferences, privileges and limitations as are determined by the Board of Directors. In addition, our Certificate of Incorporation includes provisions designed to discourage attempts by others to 24 acquire control of us without negotiation with our Board of Directors, and to attempt to ensure that such transactions are on terms favorable to all of our shareholders. These provisions provide, among other things: - that meetings of our shareholders may only be called by the Board of Directors; - that an affirmative vote of two-thirds of our outstanding shares of common stock is required to approve certain business combinations unless 65% of our Board approves such transaction; - for three classes of directors with each class elected for a three year staggered term; - that our Board in evaluating a tender offer or certain business combinations is authorized to give due consideration to all relevant factors; and - that actions of shareholders may not be taken by written consent of shareholders in lieu of a meeting. For various reasons, however, these provisions may not always be in the best interest of our shareholders. These reasons include the fact that the provisions of our Certificate of Incorporation (i) make it difficult to remove directors even if removal would be in the best interest of our shareholders; (ii) make it difficult for our shareholders to approve certain transactions that are not approved by at least 65% of our Board, even if the transactions would be beneficial to our shareholders; and (iii) eliminate the ability of our shareholders to act without a meeting. Our shareholder rights plan, our blank-check preferred stock and our governing documents may have the effect of delaying, deterring or preventing a change in control of All American, could discourage potential investors from bidding for our common stock at a premium over the market price of the common stock and could adversely affect the market price and the voting rights of the holders of the common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's credit facility bears interest based on interest rates tied to the prime or LIBOR rate, either of which may fluctuate over time based on economic conditions. As a result, the Company is subject to market risk for changes in interest rates and could be subjected to increased or decreased interest payments if market interest rates fluctuate. If market interest rates increase, the impact may have a material adverse effect on the Company's financial results. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company and its subsidiaries and supplementary data required by this item are included in Item 14(a)(1) and (2) of this report. In addition, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Quarterly Results of Operations" for presentation of unaudited quarterly results of operations for the eight quarters ended December 31, 2000. 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 definitive proxy statement is incorporated herein by this reference. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT PAGE 1. FINANCIAL STATEMENTS Management's Responsibility for Financial Reporting.............. F-1 Independent Auditors' Report..................................... F-1 Consolidated Balance Sheets...................................... F-2 Consolidated Statements of Income................................ F-3 Consolidated Statements of Changes in Shareholders' Equity....... F-4 Consolidated Statements of Cash Flows............................ F-5 Notes to Consolidated Financial Statements....................... F-6 2. FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts.................. S-1 3. EXHIBITS 3.1 Certificate of Incorporation, as amended (incorporated by reference to Exhibits 3.1 to the Company's Registration Statement on Form S-1, File No. 33-15345-A, and to the Company's Form 10-K for the fiscal year ended December 31, 1991), as further amended by (i) Certificate of Amendment of Certificate of Incorporation dated August 21, 1995 of the Company (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1995) and (ii) Certificate of Amendment of Certificate of Incorporation dated June 1, 1999 of the Company (incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30, 1999). 3.2 By-Laws, as amended July 29, 1994 (incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30, 1994). 4.1 Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended June 30, 1999). 4.2 Fiscal Agency Agreement, dated as of June 8, 1994, between the Company and American Stock Transfer & Trust Co., as fiscal agent, paying agent and securities registrar (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K dated June 14, 1994 and filed with the Securities and Exchange Commission on June 15, 1994). 4.3 2000 Common Stock Purchase Rights Agreement, dated as of June 9, 2000, between the Company and American Stock Transfer & Trust Company (incorporated by reference to Exhibit number 4.1 to the Company's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on June 13, 2000). 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). 10.1 Form of Indemnification Contracts with Directors and Executive Officers (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-2, File No. 33-47512). 10.2 Lease Agreement for Headquarters dated May 1, 1994 between Sam Berman d/b/a Drake Enterprises ("Drake") and the Company (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1994). 10.3 Lease Agreement for west coast corporate office and northern California sales office in San Jose, California dated October 1, 1998 between San Jose Technology Properties, LLC and the Company (incorporated by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 1998). 10.4 Promissory Notes, all dated May 1, 1994 payable to Drake, the Company's landlord in the amounts of $865,000, $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). 26 10.5 Promissory Note, dated May 1, 1995, payable to Drake, the Company's landlord, in the amount of $90,300 (incorporated by reference to Exhibit 10.35 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661). 10.6 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). 10.7 Amended and Restated All American Semiconductor, Inc. Employees', Officers', Directors' Stock Option Plan, as amended through June 1, 1999 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1999).** 10.8 All American Semiconductor, Inc. 2000 Nonemployee Director Stock Option Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement dated May 1, 2000 filed with the Securities and Exchange Commission on May 1, 2000).** 10.9 Deferred Compensation Plan (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-2, File No. 33-47512).** 10.10 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). 10.11 Employment Agreement dated as of May 24, 1995, between the Company and Paul Goldberg (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661), as amended by First Amendment to Employment Agreement dated as of December 31, 1996, between the Company and Paul Goldberg (incorporated by reference to Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 1996), as amended by Second Amendment to Employment Agreement dated as of August 21, 1998, between the Company and Paul Goldberg (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1998), as amended by Third Amendment to Employment Agreement effective as of January 1, 2000 and dated as of April 27, 2000, between the Company and Paul Goldberg (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 2000).** 10.12 Employment Agreement dated as of May 24, 1995, between the Company and Bruce M. Goldberg (incorporated by reference to Exhibit 10.24 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File No. 33-58661), as amended by First Amendment to Employment Agreement dated as of August 21, 1998, between the Company and Bruce M. Goldberg (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 1998), as amended by Second Amendment to Employment Agreement effective as of January 1, 2000 and dated as of April 27, 2000, between the Company and Bruce M. Goldberg (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 2000).** 10.13 Merger 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). 10.14 Loan and Security Agreement (without exhibits or schedules) among Harris Trust and Savings Bank, as a lender and administrative agent, American National Bank and Trust Company of Chicago, as a lender and collateral agent, and the Other Lenders Party thereto and the Company, as borrower (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1996). 10.15 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). 10.16 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). 10.17 Amendment No. 3 to Loan and Security Agreement dated July 31, 1998 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1998). 10.18 Amendment No. 4 to Loan and Security Agreement dated March 23, 1999 (incorporated by reference to Exhibit 10.18 to the Company's Form 10-K for the year ended December 30, 1998). 27 10.19 Amendment No. 5 to Loan and Security Agreement dated August 8, 2000 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 2000). 10.20 Amendment No. 6 to Loan and Security Agreement dated September 29, 2000 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 2000). 10.21 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).** 10.22 Settlement Agreement dated December 17, 1996, by and among the Company, certain of its subsidiaries and certain selling stockholders of the Added Value Companies (incorporated by reference to Exhibit 10.35 to the Company's Form 10-K for the year ended December 31, 1996). 10.23 Settlement Agreement dated January 22, 1997, by and among the Company, certain of its subsidiaries and Thomas Broesamle (incorporated by reference to Exhibit 10.36 to the Company's Form 10-K for the year ended December 31, 1996). 10.24 Form of Salary Continuation Plan (incorporated by reference to Exhibit 10.37 to the Company's Form 10-K for the year ended December 31, 1996).** 10.25 Promissory Note, dated October 1, 1996, payable to Sam Berman, d/b/a Drake Enterprises, in the amount of $161,500 (incorporated by reference to Exhibit 10.38 to the Company's Form 10-K for the year ended December 31, 1996). 10.26 Note dated August 21, 1998, by Bruce Mitchell Goldberg and Jayne Ellen Goldberg in favor of the Company in the principal amount of $125,000 (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q for the quarter ended September 30, 1998). 10.27 Employment Agreement effective as of January 1, 2000 and dated as of April 27, 2000, between the Company and Howard L. Flanders (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter ended March 31, 2000).** 10.28 Employment Agreement effective as of January 1, 2000 and dated as of April 27, 2000, between the Company and Rick Gordon (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q for the quarter ended March 31, 2000).** 10.29 Lease Agreement for Integrated Display Technologies and Aved Display Technologies divisions in Irvine, California dated December 1, 2000 between Buckhead Industrial Properties, Inc. and the Company.* 11.1 Statement Re: Computation of Per Share Earnings.* 21.1 List of subsidiaries of the Registrant.* 23.1 Consent of Lazar Levine & Felix LLP, independent certified public accountants.* - ------------------ * 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 2000. 28 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 Dated: March 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2001. /s/ PAUL GOLDBERG Chairman of the Board, Director - ------------------------------------ Paul Goldberg /s/ BRUCE M. GOLDBERG President and Chief Executive Officer, - ------------------------------------ Director Bruce M. Goldberg (Principal Executive Officer) /s/ HOWARD L. FLANDERS Executive Vice President and Chief - ------------------------------------ Financial Officer, Director Howard L. Flanders (Principal Financial and Accounting Officer) /s/ RICK GORDON Senior Vice President of Sales, - ------------------------------------ Director Rick Gordon /s/ ROBIN L. CRANDELL Director - ------------------------------------ Robin L. Crandell /s/ DANIEL M. ROBBIN Director - ------------------------------------ Daniel M. Robbin /s/ RICHARD E. SIEGEL Director - ------------------------------------ Richard E. Siegel 29 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The Company's management is responsible for the preparation of the Consolidated Financial Statements in accordance with generally accepted accounting principles and for the integrity of all the financial data included in this Form 10-K. In preparing the Consolidated Financial Statements, management makes informed judgements and estimates of the expected effects of events and transactions that are currently being reported. Management maintains a system of internal controls that is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed and recorded in accordance with management's policies for conducting its business. This system includes policies which require adherence to ethical business standards and compliance with all laws to which the Company is subject. The internal controls process is continuously monitored by direct management review. The Board of Directors, through its Audit Committee, is responsible for determining that management fulfils its responsibility with respect to the Company's Consolidated Financial Statements and the system of internal controls. The Audit Committee, comprised solely of directors who are not officers or employees of the Company, meets quarterly with representatives of management and the Company's independent accountants to review and monitor the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company's financial reports. The Company's independent accountants have full and free access to the Audit Committee. /s/ BRUCE M. GOLDBERG /s/ HOWARD L. FLANDERS - ------------------------------- ------------------------------- Bruce M. Goldberg Howard L. Flanders President, Executive Vice President, Chief Executive Officer Chief Financial Officer INDEPENDENT AUDITORS' REPORT To The Board of Directors All American Semiconductor, Inc. Miami, Florida We have audited the accompanying consolidated balance sheets of All American Semiconductor, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in Part IV, Item 14(a) of this Form 10-K. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of All American Semiconductor, Inc. and subsidiaries at December 31, 2000 and 1999 and the results of their operations and their cash flows for the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ LAZAR LEVINE & FELIX LLP - ------------------------------- LAZAR LEVINE & FELIX LLP New York, New York March 2, 2001 F-1 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS DECEMBER 31 2000 1999 - ----------------------------------------------------------------------------------------------- Current assets: Cash ....................................................... $ 335,000 $ 173,000 Accounts receivable, less allowances for doubtful accounts of $3,283,000 and $1,987,000 .................... 91,812,000 53,202,000 Inventories ................................................ 146,444,000 85,260,000 Other current assets ....................................... 3,745,000 4,637,000 ------------- ------------- Total current assets ..................................... 242,336,000 143,272,000 Property, plant and equipment - net .......................... 4,255,000 4,482,000 Deposits and other assets .................................... 2,687,000 2,741,000 Excess of cost over fair value of net assets acquired - net... 950,000 1,006,000 ------------- ------------- $ 250,228,000 $ 151,501,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------- Current liabilities: Current portion of long-term debt .......................... $ 240,000 $ 273,000 Accounts payable and accrued expenses ...................... 81,234,000 51,584,000 Income taxes payable ....................................... 968,000 -- Other current liabilities .................................. 304,000 198,000 ------------- ------------- Total current liabilities ................................ 82,746,000 52,055,000 Long-term debt: Notes payable .............................................. 120,643,000 64,298,000 Subordinated debt .......................................... 6,043,000 6,089,000 Other long-term debt ....................................... 1,198,000 1,207,000 ------------- ------------- 210,630,000 123,649,000 ------------- ------------- 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, 4,039,620 and 3,973,431 shares issued and outstanding .......................................... 40,000 40,000 Capital in excess of par value ............................. 26,326,000 25,751,000 Retained earnings .......................................... 14,167,000 2,968,000 Treasury stock, at cost, 183,246 and 174,646 shares ........ (935,000) (907,000) ------------- ------------- 39,598,000 27,852,000 ------------- ------------- $ 250,228,000 $ 151,501,000 ============= =============
See notes to consolidated financial statements F-2 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 2000 1999 1998 - -------------------------------------------------------------------------------------- NET SALES .......................... $ 522,183,000 $ 329,563,000 $ 250,044,000 Cost of sales ...................... (414,292,000) (265,064,000) (194,599,000) ------------- ------------- ------------- Gross profit ....................... 107,891,000 64,499,000 55,445,000 Selling, general and administrative expenses .......... (79,893,000) (56,357,000) (46,880,000) Restructuring and other nonrecurring expenses ......................... -- -- (2,860,000) ------------- ------------- ------------- INCOME FROM OPERATIONS ............. 27,998,000 8,142,000 5,705,000 Interest expense ................... (8,642,000) (4,985,000) (4,313,000) ------------- ------------- ------------- INCOME BEFORE INCOME TAXES ......... 19,356,000 3,157,000 1,392,000 Income tax provision ............... (8,157,000) (1,358,000) (561,000) ------------- ------------- ------------- NET INCOME ......................... $ 11,199,000 $ 1,799,000 $ 831,000 ============= ============= ============= EARNINGS PER SHARE: Basic ............................ $ 2.92 $ .46 $ .21 ====== ====== ====== Diluted .......................... $ 2.70 $ .46 $ .21 ====== ====== ======
See notes to consolidated financial statements F-3 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CAPITAL IN TOTAL COMMON EXCESS OF RETAINED TREASURY SHAREHOLDERS' SHARES STOCK PAR VALUE EARNINGS STOCK EQUITY - ------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997...... 3,972,828 $ 40,000 $ 25,747,000 $ 338,000 $ (451,000) $ 25,674,000 Exercise of stock options....... 603 -- 4,000 -- -- 4,000 Net income...................... -- -- -- 831,000 -- 831,000 ---------- ---------- ------------ ------------ ------------ -------------- Balance, December 31, 1998...... 3,973,431 40,000 25,751,000 1,169,000 (451,000) 26,509,000 Purchase of treasury shares..... -- -- -- -- (456,000) (456,000) Net income...................... -- -- -- 1,799,000 -- 1,799,000 ---------- ---------- ------------ ------------ ------------ -------------- Balance, December 31, 1999...... 3,973,431 40,000 25,751,000 2,968,000 (907,000) 27,852,000 EXERCISE OF STOCK OPTIONS....... 66,189 -- 394,000 -- -- 394,000 INCOME TAX BENEFIT FROM STOCK OPTIONS EXERCISED......... -- -- 181,000 -- -- 181,000 PURCHASE OF TREASURY SHARES..... -- -- -- -- (28,000) (28,000) NET INCOME...................... -- -- -- 11,199,000 -- 11,199,000 ---------- ---------- ------------ ------------ ------------ -------------- BALANCE, DECEMBER 31, 2000...... 4,039,620 $ 40,000 $ 26,326,000 $ 14,167,000 $ (935,000) $ 39,598,000 ========== ========== ============ ============ ============ ==============
See notes to consolidated financial statements F-4 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................ $ 11,199,000 $ 1,799,000 $ 831,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................... 1,354,000 1,230,000 1,236,000 Loss on disposal of assets .......................... 78,000 -- -- Non-cash interest expense ........................... 381,000 294,000 352,000 Changes in assets and liabilities: Increase in accounts receivable ................... (38,610,000) (15,381,000) (4,924,000) Increase in inventories ........................... (61,184,000) (16,197,000) (1,154,000) Decrease (increase) in other current assets ....... 892,000 (2,063,000) (500,000) Increase in accounts payable and accrued expenses.. 29,690,000 10,383,000 2,075,000 Increase (decrease) in other current liabilities... 1,074,000 (43,000) (317,000) ------------ ------------ ------------ Net cash used for operating activities .......... (55,126,000) (19,978,000) (2,401,000) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment ................. (1,058,000) (582,000) (564,000) Decrease (increase) in other assets ................... (442,000) 299,000 (944,000) ------------ ------------ ------------ Net cash used for investing activities .......... (1,500,000) (283,000) (1,508,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement ......... 56,515,000 20,711,000 4,263,000 Increase in notes payable ............................. -- -- 10,000 Repayments of notes payable ........................... (274,000) (294,000) (339,000) Purchase of treasury shares ........................... (28,000) (456,000) -- Net proceeds from issuance of equity securities ....... 575,000 -- 4,000 ------------ ------------ ------------ Net cash provided by financing activities ....... 56,788,000 19,961,000 3,938,000 ------------ ------------ ------------ Increase (decrease) in cash ........................... 162,000 (300,000) 29,000 Cash, beginning of year ............................... 173,000 473,000 444,000 ------------ ------------ ------------ Cash, end of year ..................................... $ 335,000 $ 173,000 $ 473,000 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid ......................................... $ 7,810,000 $ 4,410,000 $ 4,223,000 ============ ============ ============ Income taxes paid ..................................... $ 7,369,000 $ 1,399,000 $ 1,756,000 ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During 1999 the Company entered into a capital lease in the amount of $495,000 for certain programming and telecommunications equipment. 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 distributes a full range of semiconductors (active components), including transistors, diodes, memory devices, microprocessors, microcontrollers and other integrated circuits, as well as passive components, such as capacitors, resistors, inductors and electromechanical products, including cable, switches, connectors, filters and sockets. The Company's products are sold primarily to original equipment manufacturers in a diverse and growing range of industries, including manufacturers of computers and computer-related products; home office and portable equipment; networking; satellite, wireless and other communications products; Internet infrastructure equipment and appliances; automobiles; consumer goods; robotics and industrial equipment; defense and aerospace equipment; and medical instrumentation. The Company also sells products to contract electronics manufacturers or electronics manufacturing services providers who manufacture products for companies in all electronics industry segments. The Company also designs and has manufactured certain board level products including memory modules and flat panel display driver boards, both of which are sold to original equipment manufacturers. 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 Canadian and Mexican subsidiaries which conduct substantially all of their business in U.S. dollars. All references to shares of common stock, $.01 par value, stock options, warrants, exercise prices per share and per share amounts have been restated to reflect the effect of the Reverse Stock Split (as hereinafter defined). See Note 4 to Notes to Consolidated Financial Statements. Prior years' financial statements have been reclassified to conform with the current year's presentation. CONCENTRATION OF CREDIT RISK/FAIR VALUES Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company, from time to time, maintains cash balances which exceed the federal depository insurance coverage limit. The Company performs periodic reviews of the relative credit rating of its bank to lower its risk. The Company believes that concentration with regards to accounts receivable is limited due to its large customer base. Fair values of cash, accounts receivable, accounts payable and long-term debt reflected in the December 31, 2000 and 1999 Consolidated Balance Sheets approximate carrying value at these dates. MARKET RISK The Company's credit facility bears interest based on interest rates tied to the prime or LIBOR rate, either of which may fluctuate over time based on economic conditions. As a result, the Company is subject to market risk for changes in interest rates and could be subjected to increased or decreased interest payments if market interest rates fluctuate. If market interest rates increase, the impact may have a material adverse effect on the Company's financial results. F-6 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- INVENTORIES Inventories are stated at the lower of cost (determined on an average cost basis) or market. FIXED ASSETS Fixed assets are reflected at cost. Depreciation of office furniture and equipment and computer equipment is provided on straight-line and accelerated methods over the estimated useful lives of the respective assets. Amortization of leasehold improvements is provided using the straight-line method over the term of the related lease or the life of the respective asset, whichever is shorter. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL) 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. REVENUE RECOGNITION The Company recognizes revenues at the point of passage of title, which is generally at the time of shipment. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Account Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Subsequently, SAB Nos. 101A and 101B were issued delaying the implementation of SAB No. 101 to the fourth quarter of 2001. The SAB requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board ("APB") Opinion 20, "Accounting Changes". We are currently evaluating the impact, if any, SAB No. 101 will have on the Company's financial position or results of operations. INCOME TAXES The Company has elected to file a consolidated federal income tax return with its subsidiaries. Deferred income taxes are provided on transactions which are reported in the financial statements in different periods than for income tax purposes. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 8 to Notes to Consolidated Financial Statements. EARNINGS PER SHARE Earnings per common share is computed by dividing net income by the weighted average, during each period, of the number of common shares outstanding and for diluted earnings per share also common equivalent shares outstanding. F-7 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following average shares were used for the computation of basic and diluted earnings per share: YEARS ENDED DECEMBER 31 2000 1999 1998 - -------------------------------------------------------------------------------- Basic .................... 3,828,978 3,921,138 3,937,021 Diluted .................. 4,140,579 3,924,166 3,998,802 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. COMPREHENSIVE INCOME In 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income", which prescribes standards for reporting comprehensive income and its components. The Company had no items of other comprehensive income in any period presented and accordingly is not required to report comprehensive income. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In 1998, the Company adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for reporting about operating segments. The Company has determined that no operating segment outside of its core business met the quantitative thresholds for separate reporting. Accordingly, no separate information has been reported. PENSIONS AND OTHER POSTRETIREMENT BENEFITS In 1998, the Company adopted Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The effect of the adoption of this statement was not material. STOCK BASED COMPENSATION In 2000, the Company adopted Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25, "Stock Issued to Employees". Interpretation No. 44 clarifies: the application of APB No. 25 for the definition of an employee for purposes of applying APB No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. The effect of the adoption of this interpretation was not material. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT DECEMBER 31 2000 1999 - ------------------------------------------------------------------------------- Office furniture and equipment ............... $ 3,365,000 $ 4,758,000 Computer equipment ........................... 4,352,000 4,374,000 Leasehold improvements ....................... 2,243,000 2,104,000 ------------ ------------ 9,960,000 11,236,000 Accumulated depreciation and amortization .... (5,705,000) (6,754,000) ------------ ------------ $ 4,255,000 $ 4,482,000 ============ ============ F-8 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - STOCK REPURCHASE PROGRAM During 1999, the Company's Board of Directors authorized the repurchase of up to $2 million in purchase price of the Company's common stock. The stock repurchases may, at the discretion of the Company's management, be made from time to time at prevailing prices in the open market or through privately negotiated transactions. The Company's management will base its decision on market conditions, the price of the common stock and other factors. Any shares of common stock repurchased will be available for reissuance in connection with the Employees', Officers', Directors' Stock Option Plan, as previously amended and restated (the "Option Plan"), or for other corporate purposes. For the years ended December 31, 2000 and 1999, the Company repurchased 8,600 and 138,586 shares of its common stock at average prices of $3.18 and $3.30 per share, respectively. The aggregate cost of the repurchased shares is reflected as treasury stock on the Consolidated Balance Sheets. The Company presently does not intend to make further stock repurchases at the current market prices. NOTE 4 - REVERSE STOCK SPLIT On June 1, 1999, the Company's shareholders approved a one-for-five reverse stock split (the "Reverse Stock Split") of the Company's outstanding shares of common stock. The Reverse Stock Split became effective for trading in the Company's new common stock as of June 2, 1999. Immediately following the Reverse Stock Split, there were 3,973,431 shares of common stock outstanding. The $.01 par value of the common stock remained the same after the Reverse Stock Split. All references to shares of common stock, stock options, warrants, exercise prices per share and per share amounts have been restated to reflect the effect of the Reverse Stock Split. NOTE 5 - STOCK PURCHASE RIGHTS In June 2000, the Board of Directors of the Company adopted a Common Stock Purchase Rights Plan (the "Rights Plan") and authorized and approved a dividend distribution of one right (each a "Right" and collectively the "Rights") for each outstanding share of common stock of the Company to shareholders of record at the close of business on June 23, 2000. Each share of common stock of the Company that is issued after June 23, 2000 will also include one Right. Each Right initially entitles the registered holder to purchase from the Company, but only when exercisable under the Rights Plan, one share of common stock at a price of $95.00 per share, subject to certain future adjustments. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's common stock (or 10% of such stock under certain circumstances) or announces a tender offer the consummation of which would result in ownership by a person or group of 15% or more of the common stock (or 10% or such stock under certain circumstances). Upon such occurrence, each Right (other than Rights owned by such person or group) will entitle the holder to purchase from the Company the number of shares of the Company's common stock having a market value equal to twice the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction, or sells more than 50% of its assets or earning power, after a person or group has acquired 15% or more of the Company's outstanding common stock (or 10% of such stock under certain circumstances), each Right (other than Rights owned by such person or group) will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price. Following the acquisition by a person or group of 15% or more of the Company's common stock (or 10% of such stock under certain circumstances) and prior to an acquisition of 50% or more of the common stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group) at an exchange ratio of one share of common stock per Right. F-9 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Company's common stock (or 10% of such stock under certain circumstances), the Rights are redeemable for $.001 per Right at the option of the Board of Directors. The Rights will expire on June 8, 2010. NOTE 6 - RESTRUCTURING AND OTHER NONRECURRING EXPENSES During 1998, the Company was involved in merger discussions which led to a letter of intent being signed in June 1998. Throughout 1998 the Company was actively involved in the evaluation of and preparations for the integration of operations in connection with the proposed merger. In October 1998, the merger negotiations were terminated. As a result, the Company recorded a nonrecurring charge in 1998, which included expansion costs incurred in anticipation of supporting the proposed combined entity, certain employee-related expenses, professional fees and other merger-related out of pocket costs, all of which aggregated $2,860,000. NOTE 7 - LONG-TERM DEBT LINE OF CREDIT In September 2000, the Company's agreement with its consortium of banks was amended whereby the line of credit facility was increased from $100 million to $150 million and the term was extended to May 3, 2004. The line of credit facility, which is based on eligible accounts receivable and inventories as defined in the agreement, currently bears interest, at the Company's option, at the prime rate plus .25% or LIBOR plus 2.25%. On a quarterly basis, the applicable interest rate margins for the prime rate and LIBOR options may be adjusted based upon the Company's debt service coverage ratio for the 12 month period ending on the last day of the immediately preceding calendar quarter and the Company's average excess loan availability for the three month period ending on the last day of the immediately preceding calendar quarter. The applicable interest rate margin for the prime rate option may adjust between 0% to .5% and the applicable interest rate margin for the LIBOR option may adjust between 2.0% to 2.5%. Outstanding borrowings under the credit facility, which are secured by all of the Company's assets including accounts receivable, inventories and equipment, amounted to $120,489,000 at December 31, 2000 compared to $63,974,000 at December 31, 1999. Under the 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. The 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. SUBORDINATED DEBT In June 1994, the Company completed a private placement (the "1994 Private Placement") of 51.5 units, with each unit consisting of a 9% non-convertible subordinated debenture due 2004 in the principal amount of $100,000 issuable at par, together with 1,500 common stock purchase warrants exercisable at $15.75 per share. The 51.5 units issued represent debentures aggregating $5,150,000 together with an aggregate of 77,250 warrants. The debentures are payable in semi-annual installments of interest only commencing December 1, 1994, with the principal amount maturing in full on June 13, 2004. The Company is not required to make any mandatory redemptions or sinking fund payments. The debentures are subordinated to the Company's senior indebtedness including the Company's credit facility and notes issued to the Company's landlord. The 77,250 warrants were valued at $2.50 per warrant as of the date of the 1994 Private Placement and, accordingly, the Company recorded the discount in the aggregate amount of $193,125 as additional paid-in capital. This discount is being amortized over the ten-year term of the debentures and approximately $19,000 was expensed in 2000, 1999 and 1998. All of these warrants expired during 1999. F-10 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In May 1994, the Company executed a twenty-year promissory note in the amount of $865,000 in favor of the Company's landlord to finance substantially all of the tenant improvements necessary for the Company's Miami facility. This $865,000 note has a repayment schedule with varying monthly payments of principal after the second year. 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 credit facility, bear interest at 8% per annum and are payable monthly. Certain additional improvements to the Company's Miami corporate facility aggregating approximately $90,300 were financed as of May 1, 1995 by the landlord. This $90,300 obligation is evidenced by a promissory note payable in 240 consecutive, equal self-amortizing monthly installments of principal and interest. This note, which is also subordinate to the Company's credit facility, accrues interest at a fixed rate of 8% per annum. In October 1996, the Company executed a promissory note in the amount of $161,500 with the Company's landlord to finance certain additional improvements to the Company's Miami corporate facility. This note, which is also subordinate to the credit facility, is payable monthly with interest at 8.5% per annum and matures in October 2011. Long-term debt of the Company as of December 31, 2000, other than the Company's credit facility and obligations under capital leases, matures as follows: 2001 ................................................ $ 73,000 2002 ................................................ 86,000 2003 ................................................ 68,000 2004 ................................................ 59,000 2005 ................................................ 64,000 Thereafter .......................................... 6,968,000 ---------- $7,318,000 ========== OBLIGATIONS UNDER CAPITAL LEASES The Company is the lessee of programming and telecommunications equipment under a capital lease expiring in 2002. The assets, aggregating $495,000, and liability under this 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, 2000, accumulated depreciation of these assets aggregated approximately $106,000. The depreciation of assets under this capital lease is included in depreciation expense. Minimum future lease payments under this capital lease as of December 31, 2000 and for each of the remaining years and in the aggregate are approximately as follows: 2001 ....................................................... $ 188,000 2002 ....................................................... 156,000 --------- Total minimum lease payments ............................... 344,000 Less amount representing interest .......................... (27,000) --------- Total obligations under capital leases ..................... 317,000 Current portion ............................................ (167,000) --------- $ 150,000 ========= The interest rate on this capital lease is 8.5% 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. This capital lease provides for a purchase option. F-11 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 - INCOME TAXES The tax effects of the temporary differences that give rise to the deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows: 2000 1999 Deferred tax assets: ---------- ---------- Accounts receivable .................... $1,332,000 $ 738,000 Inventory .............................. 638,000 387,000 Accrued expenses ....................... 887,000 574,000 Postretirement benefits ................ 600,000 541,000 Other .................................. 486,000 546,000 ---------- ---------- 3,943,000 2,786,000 Deferred tax liabilities: Fixed assets ........................... 388,000 368,000 ---------- ---------- Net deferred tax asset ................... $3,555,000 $2,418,000 ========== ========== At December 31, 2000, $2,856,000 of the net deferred tax asset was included in "Other current assets" and $699,000 was included in "Deposits and other assets" in the accompanying Consolidated Balance Sheet. The components of income tax expense are as follows: YEARS ENDED DECEMBER 31 2000 1999 1998 - ------------------------------------------------------------------------------- CURRENT Federal ............... $ 7,425,000 $ 466,000 $ 1,210,000 State ................. 1,869,000 90,000 210,000 ----------- ----------- ----------- 9,294,000 556,000 1,420,000 ----------- ----------- ----------- DEFERRED Federal ............... (697,000) 698,000 (749,000) State ................. (440,000) 104,000 (110,000) ----------- ----------- ----------- (1,137,000) 802,000 (859,000) ----------- ----------- ----------- $ 8,157,000 $ 1,358,000 $ 561,000 =========== =========== =========== 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 2000 1999 1998 - ------------------------------------------------------------------------------- U.S. Federal income tax statutory rate ................. 35.0% 34.0% 34.0% State income tax, net of federal income tax benefit .... 5.9 3.3 4.2 Goodwill amortization and other - including non-deductible items ................................. 1.2 5.7 2.1 ---- ---- ---- Effective tax rate ..................................... 42.1% 43.0% 40.3% ==== ==== ==== The tax benefit associated with the disqualifying disposition of stock acquired with incentive stock options under the Option Plan reduced taxes payable by $181,000 as of December 31, 2000 and is reflected as a credit to capital in excess of par value in the accompanying Consolidated Balance Sheet. F-12 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9 - CAPITAL STOCK, OPTIONS AND WARRANTS In December 1995, in connection with certain acquisitions, the Company issued an aggregate of 434,821 shares of common stock, including 32,141 shares, valued at approximately $391,000, which were issued to the Company's wholly-owned subsidiary. In addition, in connection with such acquisitions, certain selling stockholders were granted an aggregate of 10,000 stock options (6,000 stock options of which have since been canceled) to acquire the Company's common stock at an exercise price of $11.565 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 19,000 shares of the Company's common stock was canceled and certain selling stockholders were granted stock options to purchase an aggregate of 10,000 shares of the Company's common stock at an exercise price of $7.50 per share exercisable through December 30, 2001. At December 31, 2000, 5,000 of these options remained unexercised, 2,500 were exercised and 2,500 were canceled. In July 1995, the Company issued to a consulting firm a warrant to acquire 9,000 shares of the Company's common stock at an exercise price of $12.50 per share exercisable through June 30, 2000, and was subsequently extended through December 31, 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, 2000, this warrant was unexercised and expired. In connection with employment agreements between the Company and each of its four executive officers entered into in May 1995, an aggregate of 200,000 stock options were granted on June 8, 1995 to such four executive officers pursuant to the Option Plan. These options have an exercise price of $9.375 per share and are exercisable through June 7, 2005. As a result of the Company reaching certain earnings per share levels during 2000, these options became fully vested. At December 31, 2000 these options remained unexercised. In connection with the public offering in 1995, the Company issued to the underwriter common stock purchase warrants covering an aggregate of 104,650 shares of common stock (including warrants issued in connection with the underwriter's exercise of the over-allotment option). These warrants were exercisable at a price of $13.125 per share for a period of four years commencing June 8, 1996. During 2000, all of these warrants were redeemed by the Company for $13,000. In June 2000, the Company established the 2000 Nonemployee Director Stock Option Plan. The 2000 Nonemployee Director Stock Option Plan provides for awards of options to purchase shares of common stock, $.01 par value per share, of the Company to nonemployee directors of the Company. An aggregate of 75,000 shares of the Company's common stock has been reserved for issuance under the 2000 Nonemployee Director Stock Option Plan. During 2000, the Company granted an aggregate of 4,500 stock options to 3 individuals pursuant to the 2000 Nonemployee Director Stock Option Plan. These options have an exercise price of $10.53 per share (based on fair market value at date of grant) and vest over a two-year period and are exercisable over a ten-year period. The Company has reserved 900,000 shares of common stock for issuance under the Employees', Officers', Directors' Stock Option Plan, as previously amended and restated. F-13 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- A summary of options granted under the option plans and related information for the years ended December 31, 1998, 1999 and 2000 follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------- -------------- Outstanding, December 31, 1997 545,664 $ 7.30 Granted 39,000 7.20 Exercised (603) 5.60 Canceled (17,750) 6.95 ------- Outstanding, December 31, 1998 566,311 7.30 Weighted average fair value of options granted during 1998 1.35 Granted 204,400 3.52 Exercised -- -- Canceled (55,863) 6.61 ------- Outstanding, December 31, 1999 714,848 6.29 Weighted average fair value of options granted during 1999 1.15 Granted 137,000 13.00 Exercised (66,189) 5.96 Canceled (35,625) 5.77 ------- Outstanding, December 31, 2000 750,034 7.57 ======= Weighted average fair value of options granted during 2000 4.36 Options exercisable: December 31, 1998 166,416 6.10 December 31, 1999 184,416 5.96 December 31, 2000 386,939 7.51
Exercise prices for options outstanding as of December 31, 2000 ranged from $3.27 to $16.71. The weighted-average remaining contractual life of these options is approximately 5 years. Outstanding options at December 31, 2000 were held by 168 individuals. The Company applies APB 25 and related Interpretations in accounting for the option plans. Accordingly, no compensation cost has been recognized for the option plans. Had compensation cost for the option plans been determined using the fair value based method, as defined in Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below: YEARS ENDED DECEMBER 31 2000 1999 1998 - -------------------------------------------------------------------------- Net earnings: As reported $ 11,199,000 $ 1,799,000 $ 831,000 Pro forma 10,853,000 1,665,000 800,000 Basic earnings per share: As reported $ 2.92 $ .46 $ .21 Pro forma 2.83 .42 .20 Diluted earnings per share: As reported $ 2.70 $ .46 $ .21 Pro forma 2.62 .42 .20 F-14 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 2000, 1999 and 1998, respectively: expected volatility of 47%, 40% and 60%; risk-free interest rate of 6.3%, 5.9% and 5.7%; 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. NOTE 10 - COMMITMENTS/RELATED PARTY TRANSACTIONS In May 1994, the Company entered into a new lease with its then existing landlord to lease a 110,800 square foot facility for its corporate headquarters and Miami distribution center. The lease has a term expiring in 2014 (subject to the Company's right to terminate at any time after the fifth year of the term upon twenty-four months prior written notice and the payment of all outstanding debt owed to the landlord). The lease gives the Company three six-year options to renew at the fair market value rental rates. The lease is currently in its seventh year and provides for annual fixed rental payments totaling approximately $307,800 in year seven; and in each year thereafter during the term, the rent shall increase once per year in an amount equal to the annual percentage increase in the consumer price index not to exceed 4% in any one year. The Company also leases approximately 20,000 square feet of space for its west coast distribution and semiconductor programming center located in Fremont, California (near San Jose). In Denver, Colorado the Company leases a 7,600 square foot facility which is dedicated to certain value-added services and a regional distribution center. In Tustin, California the Company leases a 13,900 square foot facility which presently contains all operations for the separate divisions of Aved Display Technologies and Aved Memory Products. In December 2000, the Company leased 26,700 square feet of space in Irvine, California which will house the operations of the Company's newly created Integrated Display Technologies division. The Company also intends to relocate to the Irvine location the operations of Aved Display Technologies when construction of the facility is completed. This will permit the expansion of the operations of Aved Memory Products which will then occupy all of the existing facility in Tustin. During 1998, the Company entered into a new lease for approximately 20,000 square feet of space in San Jose, California to house its expanded west coast corporate offices and the headquarters of the Company's sales and marketing functions, as well as its northern California sales operation. Approximately 8,000 square feet of the space is being used for corporate offices including the office of the President and Chief Executive Officer of the Company and 8,000 square feet of the space is being utilized for the sales operation. The remaining area of approximately 4,000 square feet is presently being sublet. The Company leases space for its other sales offices, which range in size from approximately 1,000 square feet to 8,000 square feet. The leases for these offices expire at various dates and include various escalation clauses and renewal options. F-15 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Approximate minimum future lease payments required under operating leases for office leases as well as equipment leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2000, are as follows: YEAR ENDING DECEMBER 31 - ----------------------- 2001 ................................................ $3,700,000 2002 ................................................ 3,000,000 2003 ................................................ 2,600,000 2004 ................................................ 1,700,000 2005 ................................................ 1,300,000 Thereafter .......................................... 5,300,000 Total rent expense for office leases, including real estate taxes and net of sublease income, amounted to approximately $2,703,000, $2,451,000, and $2,165,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In 1998, the Board of Directors approved a loan to the President and Chief Executive Officer of the Company in the amount of $125,000 in connection with his relocation to Silicon Valley. This loan, which was evidenced by a promissory note and bore interest at 5% per annum, was forgiven effective December 31, 2000. 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 2000, 1999 and 1998, 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 $30,000 per annum. At December 31, 2000, 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 $170,000. During 1996, the Company established a second deferred compensation plan (the "Salary Continuation Plan") for executives of the Company. The executives eligible to participate in the Salary Continuation Plan are chosen at the sole discretion of the Board of Directors upon a recommendation from the Board of Directors' Compensation Committee. The Company may make contributions each year in its sole discretion and is under no obligation to make a contribution in any given year. For 2000, 1999, and 1998 the Company committed to contribute $235,000, $115,000, and $192,000 respectively, under this plan. Participants in the plan will vest in their plan benefits over a ten-year period. If the participant's employment is terminated due to death, disability or due to a change in control of management, they will vest 100% in all benefits under the plan. Retirement benefits will be paid, as selected by the participant, based on the sum of the net contributions made and the net investment activity. During 2000, employment agreements with two of the Company's executive officers were amended whereby the term, among other things, was extended through December 31, 2005. In addition, during 2000 the Company entered into new agreements that continue until December 31, 2003 with two other executive officers on similar terms as were contained in their previous employment agreements with the F-16 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Company. At December 31, 2000, in addition to incentive compensation, these agreements provide for aggregate base salary of approximately $5,366,000 over the remaining term of the agreements. In connection with an employment agreement with an executive officer an unfunded postretirement benefit obligation of $1,171,000 is included in the Consolidated Balance Sheets at December 31, 2000 and 1999. 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 $10,500 in 2000. The Company's 401(k) Plan presently provides for standard matching contributions by the Company in the amount of 25% on the first 6% contributed of each participating employee's salary. The Company expensed $691,000, $599,000, and $521,000 for matching contributions for the years ended December 31, 2000, 1999 and 1998, respectively. NOTE 11 - 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, the Company offers a warranty with respect to products manufactured or assembled for Aved Display Technologies and Aved Memory Products for a period of one year against defects in workmanship and materials under normal use and service and in their original, unmodified condition. NOTE 12 - ECONOMIC DEPENDENCY For each of the years ended December 31, 2000, 1999 and 1998, purchases from one supplier were in excess of 10% of the Company's total annual purchases and aggregated approximately $104,420,000, $62,950,000 and $39,893,000, respectively. The net outstanding accounts payable to this supplier at December 31, 2000, 1999 and 1998 amounted to approximately $11,286,000, $7,545,000 and $5,832,000, respectively. F-17 ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING OF COSTS AND OTHER AT END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ---------------------- ------------ ---------- ---------- ---------- ---------- Allowance for Doubtful Accounts 2000 $1,987,000 $1,899,000 $ -- $ (603,000) $3,283,000 1999 $1,412,000 $ 824,000 $ -- $ (249,000) $1,987,000 1998 $1,166,000 $ 791,000 $ -- $ (545,000) $1,412,000
S-1 EX-10.29 2 file003.txt EXHIBIT 10.29 Exhibit 10.29 INDUSTRIAL REAL ESTATE LEASE (MULTI-TENANT FACILITY) ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this Industrial Real Estate Lease (this "Lease") between Landlord and Tenant named below. Other Articles, Sections and Paragraphs of this Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. SECTION 1.01. DATE OF LEASE: December 1, 2000 SECTION 1.02. LANDLORD (include legal entity): BUCKHEAD INDUSTRIAL PROPERTIES, INC., a Maryland corporation Address of Landlord: c/o Lend Lease Real Estate Investments, Inc., 19800 MacArthur Boulevard, Suite 1000, Irvine, CA 92812 SECTION 1.03. TENANT (include legal entity): ALL AMERICAN IDT, INC., a California corporation Address of Tenant: 1 Marconi, Suite F, Irvine, California, 92618, Attention: local manager , with a copy to: All American Semiconductor, Inc., 16115 N.W. 52nd Avenue, Miami, Florida 33014; Attention: Howard Flanders SECTION 1.04. TENANT'S GUARANTOR: (If none, so state) ALL AMERICAN SEMICONDUCTOR, INC. SECTION 1.05. PROPERTY: The Property is part of Landlord's multi-tenant real property development known as the Phoenix Business Center and described or depicted on Exhibit "A" (the "Project"). The Project includes the land, the buildings and all other improvements located on the land, and the common areas described in Paragraph 4.05(a). The Property is an approximately Twenty-Six Thousand Seven Hundred (26,700) square foot portion of that certain industrial building commonly known as 1 Marconi, Suite F, Irvine, California, as depicted on the site plan attached hereto as Exhibit "A". SECTION 1.06. PERMITTED USE: (See Article Five) The manufacturing, assembly, testing, warehousing and distribution of flat panel electronics and other similar products produced by Tenant or Guarantor and general office use related thereto and for no other use or purpose. SECTION 1.07. LEASE TERM: Ten (10) years zero (0) months beginning on December 15, 2000 or such other date as is specified in Section 2.01 of this Lease (the "Commencement Date"), and ending on December 14, 2010. SECTION 1.08. RENT AND OTHER CHARGES PAYABLE BY TENANT: (a) BASE RENT: Seventeen Thousand Three Hundred Fifty-Five Dollars ($17,355) per month for the first thirty (30) months, as provided in Section 3.01, and shall be increased on the first day of the thirty-first (31st) month after the Commencement Date, as provided in Section 3.02. (b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02, 4.08); (ii) Utilities (See Section 4.03; (iii) Insurance Premiums (See Section 4.04, 4.08); (iv) Tenant's initial Pro Rata Share of Common Area Expenses 7.49% (See Section 4.05); (v) Impounds for Insurance Premiums and Property Taxes (See Section 4.08); and (vi) Maintenance, Repairs and Alterations (See Article Six). SECTION 1.09. BROKERS: (See Article Fourteen) (If none, so state) Landlord's Broker: CB Richard Ellis, Inc. Tenant's Broker: The Elden Company SECTION 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $23,099.51 SECTION 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section 4.05) In common with other tenants of the Project (approximately 53 unreserved parking spaces). SECTION 1.12. COMMISSION PAYABLE TO LANDLORD'S BROKER AND TENANT'S BROKER: (See Article Fourteen) Per Separate Agreement. SECTION 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See Section 9.05) Fifty percent (50%) of the Profit (the "Landlord's Share"). SECTION 1.14. RIDERS AND EXHIBITS: The following Riders and Exhibits are attached to and made a part of this Lease: (If none, so state) Exhibit "A" - Site Plan Exhibit "B" - Hazardous Materials Questionnaire Exhibit "C" - Tenant's Moveout Responsibilities Exhibit "D" - Memorandum of Term Commencement Tenant shall comply at all times with all terms and provisions of all Riders and Exhibits to this Lease attached hereto and incorporated herein by this reference. ARTICLE TWO: LEASE TERM SECTION 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.07 above and shall begin and end on the dates 1 specified in Section 1.07 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The Commencement Date shall be the date specified in Section 1.07 above for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. Within fifteen (15) days after the Commencement Date, Landlord and Tenant shall execute a Memorandum of Term Commencement in the form attached hereto as Exhibit "D". SECTION 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Property to Tenant on the Commencement Date. Landlord's non-delivery of the Property to Tenant on that date shall not affect this Lease or the obligations of Tenant under this Lease except that the Commencement Date shall be delayed until Landlord delivers possession of the Property to Tenant and the Lease Term shall be extended for a period equal to the delay in delivery of possession of the Property to Tenant, plus the number of days necessary to end the Lease Term on the last day of a month. If Landlord does not deliver possession of the Property to Tenant within ninety (90) days after the Commencement Date, Tenant may elect to cancel this Lease by giving written notice to Landlord within ten (10) days after the ninety (90) day period ends. If Tenant gives such notice, this Lease shall be cancelled and neither Landlord nor Tenant shall have any further obligations to the other. If Tenant does not give such notice, Tenant's right to cancel this Lease shall expire and the Lease Term shall commence upon the delivery of possession of the Property to Tenant. If delivery of possession of the Property to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to this Lease setting forth the actual Commencement Date and expiration date of this Lease. Failure to execute such amendment shall not affect the actual Commencement Date and expiration date of this Lease. SECTION 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to the Commencement Date, Tenant's occupancy of the Property shall be subject to all of the provisions of this Lease, except as otherwise set forth in this Section 2.03. Early occupancy of the Property shall not advance the expiration date of this Lease. Tenant shall be entitled to early occupancy of the Property commencing upon full execution of this Lease and continuing until the Commencement Date, solely for the purpose of installing Tenant's furniture, fixtures and equipment and otherwise preparing the Property for Tenant's occupancy but in no event for conducting Tenant's business; provided that (a) Tenant shall not interfere with Landlord's work or activities, if any, in preparing the Property for Tenant's occupancy, and (b) Tenant shall provide Landlord with evidence of Liability Insurance coverage pursuant to Section 4.04(a) hereof. Tenant shall not pay Base Rent or any other charges specified in this Lease during the early occupancy period. Base Rent shall commence on the Commencement Date. SECTION 2.04. EARLY TERMINATION. Tenant, at its option, may terminate this Lease, which termination shall be effective on the last day of the sixtieth (60th) month after the Commencement Date (such date being referred to herein as the "Termination Date") by giving Landlord notice of Tenant's election to terminate this Lease not less than six (6) months prior to the Termination Date (the "Termination Notice"). In connection with any such termination, Tenant shall pay to Landlord, along with the Termination Notice, in addition to all rent due through the later of the date that is six (6) months after the date Landlord receives the Termination Notice or the date Tenant actually vacates the Property, an amount equal to two (2) months of the then applicable Base Rent, plus the unamortized portion of the Tenant Improvement Allowance (as hereinafter defined) and all leasing commissions incurred by Landlord in connection with this Lease amortized on a straight line basis over the Lease Term with interest at eleven percent (11%) per annum. Upon such termination and Landlord's receipt of the aforementioned sum, this Lease shall be of no further force or effect except with respect to any obligations under this Lease that expressly survive such termination, including without limitation, Tenant's indemnity obligations and Tenant's obligations in connection with its move from the Property. SECTION 2.05. HOLDING OVER. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant's delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of this Lease and Landlord thereafter accepts rents from Tenant, Tenant's occupancy of the Property shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by fifty percent (50%) during the period of holdover. ARTICLE THREE: BASE RENT SECTION 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.08(a) above for the first month of the Lease Term. On the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable without notice or demand at Landlord's address or at such other place as Landlord may designate in writing. SECTION 3.02. On the first day of the thirty-first month following the Commencement Date, Base Rent shall be increased to Nineteen Thousand Ninety and 50/100 Dollars ($19,090.50) per month and such amount shall be the Base Rent due under this Lease through and including the sixtieth (60th) month following the Commencement Date; and on the first day of the sixty-first (61st) month following the Commencement Date, Base Rent shall be increased to Twenty Thousand Nine Hundred Ninety-Nine and 55/100 Dollars ($20,999.55) per month and such amount shall be the Base Rent due under this Lease through and including the ninetieth (90th) month following the Commencement Date; and on the first day of the ninety-first (91st) month following the Commencement Date, Base Rent shall be increased to Twenty-Three Thousand Ninety-Nine and 51/100 Dollars ($23,099.51) per month and such amount shall be the Base Rent due under this Lease through the one hundred twentieth (120th) month following the Commencement Date. SECTION 3.03. SECURITY DEPOSIT (a) Upon the execution of this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount set forth in Section 1.10 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a material default under this Lease. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. (b) Intentionally Deleted. 2 SECTION 3.04. TERMINATION; ADVANCE PAYMENTS. Not more than thirty (30) days after the termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the unused portion of the Security Deposit, any advance rent or other advance payments made by Tenant to Landlord, and any amounts paid for real property taxes and other reserves which apply to any time periods after termination of this Lease. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT SECTION 4.01. ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are referred to herein as "Additional Rent." Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. SECTION 4.02. PROPERTY TAXES. (a) Definition of "Real Property Tax." "Real Property Tax" means: (i) any fee, license tax, business license fee, commercial rental levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax on the Landlord's right to receive, or the receipt of, rent or income from the Property or against Landlord's business of leasing the Property; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Property by any governmental agency, (iv) any tax imposed upon this transaction or based upon a re-assessment of the Property due to a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord's interest in the Property; and (v) any charge or fee replacing any tax previously included within the definition of Real Property Tax. "Real Property Tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. (b) Real Property Taxes. Tenant shall pay all Real Property Taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvements installed on the Property by or for the benefit of Tenant) during the Lease Term in accordance with Section 4.05(e) and, if applicable, Section 4.08 below. Landlord shall reimburse Tenant for any Real Property Taxes paid by Tenant covering any period of time prior to or after the Lease Term. If Tenant fails to pay the Real Property Taxes when due, in accordance with Section 4.05(e), Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payment as Additional Rent. (c) Joint Assessment. If the Property is not separately assessed, Landlord shall reasonably determine Tenant's share of Real Property Taxes payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or other reasonably available information. Tenant shall pay such share to Landlord in accordance with Section 4.05(e) below. (d) Personal Property Taxes. (i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall use its best efforts to have personal property taxed separately from the Property. (ii) If any of Tenant's personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes. SECTION 4.03. UTILITIES. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal (if not paid by Landlord and charged back to Tenant as a Common Area Expense) and other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement. SECTION 4.04. INSURANCE POLICIES. (a) Liability Insurance. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Landlord and Landlord's agents, whose names shall be provided to Tenant by Landlord, shall be named as an additional insured under such policy. The initial amount of such insurance shall be Two Million and No/100 Dollars ($2,000,000.00) per occurrence and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord's professional insurance advisers and other relevant factors; provided that such periodic increases shall be consistent with the amounts of insurance then being required of tenants comparable to Tenant by landlords comparable to Landlord in projects comparable to the Project. The liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary and noncontributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant's performance under Section 5.05 resulting from the negligence of Tenant. The amount and coverage of such insurance shall not limit Tenant's liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance. Tenant shall secure an appropriate clause in, or an endorsement upon, each insurance policy required by this Lease, pursuant to which the insurance company waives subrogation or permits the insured, prior to any loss, to agree with a third party to waive any claim it might have against said third party without invalidating the coverage under the insurance policy. Such waiver of subrogation or permission for waiver of any claim shall extend to the agents and employees of Landlord and Tenant, respectively. Tenant shall not be required to carry any hazardous materials insurance. (b) Property and Rental Income Insurance. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to obtain flood and earthquake insurance, and may, upon Tenant's request, obtain insurance on building improvements installed on the Property. Landlord shall not obtain insurance for Tenant's fixtures or equipment. During the Lease 3 Term, Landlord shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to one year's Base Rent, plus estimated real property taxes and insurance premiums. Tenant shall not do or permit anything to be done which invalidates any such insurance policies. Tenant shall be liable for the payment of any deductible amount under Landlord's or Tenant's insurance policies maintained pursuant to this Section 4.04. Notwithstanding anything to the contrary contained in this Lease, in the event that the Property is the only portion of the Project that is damaged or that suffers a loss, Tenant shall be liable for the payment of the entire deductible amount under Landlord's insurance policies maintained pursuant to this Lease. In the event that the entire building in which the Property is located (the "Building") is damaged or suffers a loss, Tenant shall be liable only for Tenant's pro rata share ("Tenant's Pro Rata Share of the Building") of any deductible amount under Landlord's insurance policies maintained pursuant to this Lease. Tenant's Pro Rata Share of the Building shall be calculated by dividing the square foot area of the Property, as set forth in Section 1.04 of this Lease, by the aggregate square foot area of the Building. In the event that a portion of the Project that is greater than the Building is damaged or suffers a loss, Tenant shall be liable only for Tenant's pro rata share ("Tenant's Pro Rata Share of the Project") of any deductible amount under Landlord's insurance policies maintained pursuant to this Lease. For the purposes of this Section 4.04(b), Tenant's Pro Rata Share of the Project shall be calculated by dividing the square foot area of the Property that is damaged by the aggregate square foot area of the portion of the Project that is damaged. (c) Payment of Premiums. Subject to Section 4.08, Tenant shall pay all premiums for the insurance policies described in Paragraphs 4.04(a) and (b) (whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's receipt of a copy of the premium statement or other evidence of the amount due. For insurance policies maintained by Landlord which cover improvements on the entire project, Tenant shall pay Tenant's prorated share of the premiums, in accordance with the formula in Paragraph 4.05(e) for determining Tenant's Pro Rata Share of Common Area Expenses. In addition, any premiums paid by Landlord for commercial general liability insurance, including umbrella or excess liability relating to the Project and/or the Property, shall be included as a Common Area Expense, and Tenant shall pay its Pro Rata Share of any such premiums. If insurance policies maintained by Landlord cover improvements on real property other than the Project, Landlord shall deliver to Tenant a statement of the premium applicable to the Property showing in reasonable detail how Tenant's share of the premium was computed. If the Lease Term expires before the expiration of an insurance policy maintained by Landlord, Tenant shall be liable for Tenant's prorated share of the insurance premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.04. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 4.04 is in full force and effect and containing such other information as Landlord reasonably requires. (d) General Insurance Provisions. (i) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days' written notice prior to any cancellation or modification of such coverage, however, if cancellation is due to non-payment of a premium only ten (10) days' prior written notice to Landlord shall be required. (ii) If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is cancelled or modified during the Lease Term without Landlord's consent, Landlord may obtain such insurance, in which case Tenant shall reimburse Landlord for the cost of such insurance within fifteen (15) days after receipt of a statement that indicates the cost of such insurance. (iii) Tenant shall maintain all insurance required under this Lease with companies holding a "General Policy Rating" of A-12 or better, as set forth in the most current issue of "Best Key Rating Guide". Landlord and Tenant acknowledge the insurance markets are rapidly changing and that insurance in the form and amounts described in this Section 4.04 may not be available in the future. Tenant acknowledges that the insurance described in this Section is for the primary benefit of Landlord. If at any time during the Lease Term, any portion of the insurance required to be maintained by Tenant under this Lease is not available in the jurisdiction in which the Property is located, Tenant shall nevertheless maintain insurance coverage which Landlord deems customary and commercially reasonable in the insurance industry for Tenant's type of business. Landlord makes no representation as to the adequacy of such insurance to protect Landlord's or Tenant's interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant; provided, that if Tenant maintains any insurance in addition to the insurance required under this Section 4.04, Landlord shall be named as an additional insured thereon, and with respect to any property insurance, Tenant shall make the proceeds thereof available for restoration of the Property after any casualty. (iv) Unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waives any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation. SECTION 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS. (a) Common Areas. As used in this Lease, "Common Areas" shall mean all areas within the Project which are available for the common use of tenants of the Project and which are not leased or held for the exclusive use of Tenant or other tenants, including, but not limited to, parking areas, driveways, sidewalks, loading areas, access roads, corridors, landscaping and planted areas. Landlord, from time to time, may change the size, location, nature and use of any of the Common Areas, convert Common Areas into leasable areas, construct additional parking facilities (including parking structures) in the Common Areas, and increase or decrease Common Area land and/or facilities. Tenant acknowledges that although such activities and changes may result in inconvenience to Tenant, Tenant consents to such activities and changes and agrees that the same shall not constitute a breach of this Lease or an eviction of Tenant, constructive or otherwise. (b) Use of Common Areas. Tenant shall have the nonexclusive right (in common with other tenants and all others to whom Landlord has granted or may grant such rights) to use the Common Areas for the purposes intended, subject to such reasonable rules and regulations as Landlord may establish from time to time. Tenant shall abide by such rules and regulations and shall use its best 4 efforts to cause others who use the Common Areas with Tenant's express or implied permission to abide by Landlord's rules and regulations. At any time, Landlord may close any Common Areas to perform any acts in the Common Areas as, in Landlord's judgment, are desirable to improve the Project and Tenant agrees that the same shall not constitute a breach of this Lease or an eviction of Tenant, constructive or otherwise. Tenant shall not interfere with the rights of Landlord, other tenants or any other person entitled to use the Common Areas. (c) Specific Provision re: Vehicle Parking. Tenant shall be entitled to use the number of vehicle parking spaces in the Project allocated to Tenant in Section 1.11 of this Lease, if any, and the three (3) loading docks adjacent to the Property without paying any additional rent. Tenant's parking shall not be reserved and shall be limited to vehicles no larger than standard size automobiles or pickup utility vehicles. Tenant shall not cause large trucks or other large vehicles to be parked within the Project or on the adjacent public streets. Temporary parking of large delivery vehicles in the Project may only be permitted by the rules and regulations established by Landlord. Vehicles shall be parked only in striped parking spaces and not in driveways, loading areas or other locations not specifically designated for parking. Handicapped spaces shall only be used by those legally permitted to use them. If Tenant parks more vehicles in the parking area than the number set forth in Section 1.11 of this Lease, such conduct shall be a material breach of this Lease. In addition to Landlord's other remedies under this Lease, Tenant shall pay a daily charge determined by Landlord for each such additional vehicle. (d) Maintenance of Common Areas. Landlord shall maintain the Common Areas in good order, condition and repair and shall operate the Project, in Landlord's sole discretion, as a first-class industrial/commercial real property development. Tenant shall pay Tenant's Pro Rata Share (as determined below) of all costs incurred by Landlord for the operation and maintenance of the Common Areas ("Common Area Expenses"). Common Area Expenses include, but are not limited to, costs and expenses for the following: gardening and landscaping; utilities, water and sewage charges; maintenance of signs (other than tenants' signs); premiums for liability, property damage, fire insurance and other types of casualty insurance on the Common Areas and worker's compensation insurance; all property taxes levied on or attributable to personal property used in connection with the Common Areas; straight-line depreciation on personal property owned by Landlord which is consumed in the operation or maintenance of the Common Areas; rental or lease payments paid by Landlord for rented or leased personal property used in the operation or maintenance of the Common Areas; fees for required licenses and permits; repairing, resurfacing, repaving, maintaining, painting, lighting, cleaning, refuse removal, security and similar items; reserves for roof replacement and exterior painting and other appropriate reserves; and a reasonable allowance to Landlord for Landlord's supervision of the Common Areas (not to exceed five percent (5%) of the gross rents of the Project for the calendar year). Landlord may cause any or all of such services to be provided by third parties and the cost of such services shall be included in Common Area Expenses. Common Area Expenses shall not include depreciation of real property which forms part of the Common Areas. (e) Tenant's Share and Payment. Tenant shall pay Tenant's annual Pro Rata Share of all Common Area Expenses (prorated for any fractional month) upon written notice from Landlord that such costs are due and payable, and in any event prior to delinquency. Tenant's Pro Rata Share shall be calculated by dividing the square foot area of the Property, as set forth in Section 1.05 of this Lease, by the aggregate square foot area of the Project which is leased or held for lease by tenants, as of the date on which the computation is made. Tenant's initial Pro Rata Share is set out in Paragraph 1.08(b). Any changes in the Common Area Expenses and/or the aggregate area of the Project leased or held for lease during the Lease Term shall be effective on the first day of the month after such change occurs. Landlord may, at Landlord's election, estimate in advance and charge to Tenant monthly, all Real Property Taxes for which Tenant is liable under Section 4.02 of this Lease, all insurance premiums for which Tenant is liable under Section 4.04 of this Lease, all maintenance and repair costs for which Tenant is liable under Section 6.04 of this Lease, and all other Common Area Expenses payable by Tenant hereunder. Tenant shall pay such estimated amounts monthly along with Tenant's payment of Base Rent. Landlord may adjust such estimates at any time based upon Landlord's experience and anticipation of costs. Such adjustments shall be effective as of the next rent payment date after notice to Tenant. At Landlord's election, such estimated Common Area Expenses shall be paid quarterly or monthly. Within ninety (90) days after the end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a statement setting forth, in reasonable detail, the Common Area Expenses paid or incurred by Landlord during the preceding calendar year and Tenant's Pro Rata Share. Upon receipt of such statement, there shall be an adjustment between Landlord and Tenant, with payment to or credit given by Landlord (as the case may be) so that Landlord shall receive the entire amount of Tenant's share of such costs and expenses for such period. Notwithstanding anything to the contrary contained herein, Landlord shall have the right, from time to time, to equitably allocate some or all of the Common Area Expenses for the Project among different portions or tenants of the Project ("Cost Pools"), in Landlord's reasonable discretion. The Common Area Expenses within each such Cost Pool shall be allocated and charged to the tenants within such Cost Pool in an equitable manner. SECTION 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if more than once during the Lease Term, Landlord does not receive any rent payment within three (3) days after it becomes due, Tenant shall pay Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. SECTION 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid within ten (10) days after the date due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate shall be decreased to the maximum legal interest rate permitted by law. SECTION 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. In addition to and without limiting Tenant's obligations with respect to payment of Landlord's estimate pursuant to Section 4.05(e) above, if requested by any ground lessor or lender to whom Landlord has granted a security interest in the Property, or if Tenant is more than ten (10) days late in the payment of rent more than once in any consecutive twelve (12) month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and Landlord's insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. Landlord shall hold such payments in a non-interest bearing impound account. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums when due. Tenant shall pay any deficiency of funds in the impound account to Landlord upon written request. If Tenant defaults under this Lease, Landlord may apply any funds in the impound account to any obligation then due under this Lease. 5 ARTICLE FIVE: USE OF PROPERTY SECTION 5.01. PERMITTED USE. Tenant may use the Property only for the Permitted Use set forth in Section 1.06 above. SECTION 5.02. MANNER OF USE. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of tenants of the Project, or which constitutes a nuisance or waste. Notwithstanding anything contained in this Lease to the contrary, Tenant shall at its sole cost and expense, faithfully observe and promptly comply and cause the Property to comply with all local, state or federal laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in force including, but not limited to, the Occupational Safety and Health Act, laws or regulations relating to the accessibility or useability of the Property by disabled persons, and the requirements of any board of fire underwriters or other similar bodies now or hereafter constituted relating to or affecting the condition, use or occupancy of the Property, regardless of (a) the relationship of the cost of compliance to the Base Rent reserved in this Lease; (b) the length of the Lease Term; (c) the degree to which compliance would benefit Landlord or Tenant; (d) whether compliance relates or pertains to structural or non-structural matters; (e) the degree to which Tenant's use and enjoyment of the Property will be interfered with while work to comply is taking place; and, (f) whether the parties contemplated application of the particular applicable law in question. Tenant acknowledges that Landlord makes no representation or warranty in this Lease that the Property or any portion thereof is in compliance with any governmental statutes, ordinances, rules or regulations relating to the accessibility or useability of the Property or any portion thereof by disabled persons. Tenant shall obtain and pay for all licenses and permits, including a Certificate of Occupancy, required for Tenant's occupancy or use of the Property. Notwithstanding the foregoing, if any alteration or modification to the structure (including the bearing and demising walls and the roof) of the Property or its systems ("Structural/System Modification") is required under any law, statute, code, rule or regulation ("Laws"), (i) with respect to Laws in effect prior to the Commencement Date, including but not limited to the Americans With Disabilities Act, Landlord shall, at Landlord's sole cost and expense, and not as an Common Area Expense, make such Structural/System Modification to the Property and Common Areas if and when required by any governmental agency, pursuant to such Laws; provided, however, that if such Structural/System Modification is triggered by or required as a result of Tenant's specific use of or improvements to the Property, Tenant shall solely bear the cost of such Structural/System Modification, and (ii) with respect to new Laws taking effect after the Commencement Date (for this purpose, a change in the interpretation of or a change in the procedures for enforcing an existing Law will be the equivalent of a new Law), Landlord shall, subject to reimbursement by Tenant as a Common Area Expense in accordance with Section 4.05(e) of this Lease, make such Structural/System Modification to the Property and Common Areas, if and when required by any governmental agency, pursuant to such new Laws; provided, however, that the cost of such Structural/System Modification shall be amortized over the useful life of such items; and provided further, that if such Structural/System Modification is triggered by or required as a result of Tenant's specific use of or improvements to the Property, Tenant shall solely bear the cost of such Structural/System Modification. Notwithstanding the foregoing, in connection with Tenant's initial Tenant Improvements to the Property, Landlord shall, at Landlord's sole cost and expense, make any modifications to the Property required by any governmental agency pursuant to the Americans With Disabilities Act of 1990 ("ADA") in order to bring into compliance any portion of the Property not in compliance with the ADA on the date of delivery of the Property to Tenant; provided that, to the extent the Tenant Improvements do not constitute ordinary industrial/office space improvements, Tenant shall bear the cost of any modifications to the Property required by any governmental agency pursuant to the ADA as a result of such non-standard Tenant Improvements. SECTION 5.03. EXTRAORDINARY USE. In the event Tenant's use of the Property causes extraordinary wear and tear on the Property or on all or any portion of the Common Area or requires maintenance in excess of that ordinarily required for tenants of the Project, as reasonably determined by Landlord, Landlord may, at Landlord's election, charge to Tenant any reasonable costs relating to or arising out of such extraordinary use, including, but not limited to, additional maintenance and repair costs and Tenant shall reimburse Landlord on demand therefor. SECTION 5.04. HAZARDOUS MATERIALS. (a) DEFINITION. As used in this Lease, the term "Hazardous Materials" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "infectious wastes", "hazardous materials" or "toxic substances" now or subsequently regulated under any federal, state or local laws, regulations or ordinances including, without limitation, oil, petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. (b) GENERAL PROHIBITION. Tenant shall not cause or permit any Hazardous Materials to be generated, produced, brought upon, used, stored, treated, discharged, released, spilled or disposed of on, in, under or about the Property by Tenant, its affiliates, agents, employees, contractors, sublessees, assignees or invitees (collectively, "Tenant Parties") without the prior written consent of Landlord, which consent shall be granted or denied in Landlord's good faith business judgment; provided, however, Landlord's consent shall not be required to use or store (i) small quantities of standard office supplies standard for offices of the size of the office space contained in the Property or (ii) small quantities of common household cleaning supplies standard for the size of the Property (such supplies, together with any other hazardous materials for which Landlord's written consent is given, are hereinafter referred to as the "Permitted Materials"). In no event, however, shall Landlord be required to consent to the use of asbestos-containing materials, PCBs or the installation or use of any storage tanks in, on or under the Property. Tenant shall indemnify, defend and hold Landlord, and each of Landlord's partners, shareholders, officers, directors, employees, agents, attorneys, investment advisors, portfolio managers, property managers, trustees, ancillary trustees, beneficiaries and their affiliates (including, without limitation, Equitable Real Estate Investment Management, Inc.), harmless from and against any and all actions (including, without limitation, remedial or enforcement actions of any kind, administrative or judicial proceedings, and orders or judgments arising out of or resulting therefrom), costs, claims, damages (including, without limitation, punitive damages), expenses (including, without limitation, attorneys', consultants' and experts' fees, court costs and amounts paid in settlement of any claims or actions), fines, forfeitures or other civil, administrative or criminal penalties, injunctive or other relief (whether or not based upon personal injury, property damage, or contamination of, or adverse effects upon, the environment, water tables or natural 6 resources), liabilities or losses ("Environmental Claims") arising from (a) a breach of this prohibition by Tenant or any of the Tenant Parties or (b) the presence, generation, production, use, storage, treatment, discharge, release, spill or disposal of the Permitted Materials by Tenant or any of the Tenant Parties. (c) In the event that Hazardous Materials are discovered upon, in, or under the Property, or any governmental agency or entity having jurisdiction over the Property requires the removal of such Hazardous Materials, Tenant shall be responsible for removing those Hazardous Materials arising out of or related to the use or occupancy of the Property by Tenant or any of the Tenant Parties; Tenant shall not be responsible for removing Hazardous Materials arising out of or related to the use or occupancy of the Property by prior tenants or owners of the Property except to the extent that Tenant or any of the Tenant Parties have exacerbated such preexisting condition. Notwithstanding the foregoing, Tenant shall not take any remedial action in or about the Property, nor enter into any settlement agreement, consent decree or other compromise with respect to any claims relating to any Hazardous Materials in any way connected with the Property without first notifying Landlord of Tenant's intention to do so and affording Landlord the opportunity to appear, intervene or otherwise appropriately assert and protect Landlord's interest with respect thereto. Tenant immediately shall notify Landlord in writing of: (i) any spill, release, discharge or disposal of any Hazardous Material in, on or under the Property, or any portion thereof of which Tenant has knowledge, (ii) any enforcement, cleanup, removal or other governmental or regulatory action instituted, contemplated, or threatened (if Tenant has notice thereof) pursuant to any Hazardous Materials Laws of which Tenant has knowledge; (iii) any claim made or threatened by any person against Tenant, any of the Tenant Parties or the Property, relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials of which Tenant has knowledge; and (iv) any reports made to any governmental agency or entity arising out of or in connection with any Hazardous Materials in, on, under or about or removed from the Property of which Tenant has knowledge, including any complaints, notices, warnings, reports or asserted violations in connection therewith. Tenant also shall supply to Landlord as promptly as possible, and in any event within five (5) business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the Property or the use or occupancy thereof by Tenant or any of the Tenant Parties. (d) The respective rights and obligations of Landlord and Tenant under this Section 5.04 shall survive the expiration or earlier termination of this Lease. (e) Attached hereto as Exhibit "B" is a true and correct copy of the Industrial Lease Hazardous Material Questionnaire completed by Tenant and submitted to Landlord as a material inducement relied upon by Landlord in entering into this Lease. SECTION 5.05. SIGNS AND AUCTIONS. Tenant shall be permitted, at Tenant's sole cost and expense, to install identification signage on the exterior of the Property. Such signage shall conform to Landlord's sign criteria and plans approved by Landlord, which approval shall not be unreasonably withheld or delayed, and comply with all applicable laws, statutes, regulations, ordinances and restrictions, including but not limited to, any permit requirements. Tenant shall install and maintain said signage in good condition and repair at its sole cost and expense during the entire Lease Term, as the same may be extended for any Option Term in accordance herewith. Except as hereinabove mentioned, Tenant shall not place, erect or maintain or cause to be placed, erected or maintained on or to the roof or any exterior door, wall or window of the Property or any other location in the Project. Any modifications to Tenant's signage, including without limitation, the location, quality, design, style, lighting and size of such sign, shall be consistent with applicable laws, rules and permits and shall be subject to Landlord's prior written approval, in its reasonable discretion, and at Tenant's sole cost and expense. Upon the expiration or earlier termination of this Lease, Tenant shall be responsible, at its sole cost and expense, for the removal of such signage and the repair of all damage to the Property caused by such removal. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been individually approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Tenant shall not place any signs on the Property without Landlord's prior written consent. Tenant shall not conduct or permit any auctions or sheriff's sales at the Property. SECTION 5.06. INDEMNITY. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Property, including any contamination of the Property or any other property resulting from the presence or use of Hazardous Materials caused or permitted by Tenant; (c) any breach or default in the performance of Tenant's obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any reasonable legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord's negligence or willful misconduct. As used in this Section, the term "Tenant" shall include Tenant's employees, agents, contractors and invitees, if applicable. SECTION 5.07. LANDLORD'S ACCESS. Landlord or its agents may enter the Property at all reasonable times to show the Property to potential buyers, investors or Tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant's compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Materials; or for any other purpose Landlord deems necessary. Landlord shall give Tenant one (1) business day prior notice of such entry, except in the case of an emergency. Landlord may place customary "For Sale" or "For Lease" signs on the Property. SECTION 5.08. QUIET POSSESSION. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS SECTION 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its condition as of the execution of this Lease, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Except as provided herein, Tenant acknowledges that neither Landlord nor any agent or employee of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Tenant represents and warrants that Tenant has made its own inspection of and inquiry regarding the condition of the Property and is not relying on any representations of Landlord, its agents or employees, or any Broker with respect thereto. If Landlord or Landlord's Broker has provided a Property Information Sheet or other Disclosure Statement 7 regarding the Property, a copy is attached as an exhibit to this Lease. Notwithstanding anything herein contained to the contrary, Landlord represents to Tenant that the HVAC, electrical and plumbing systems, including the electrical panel room and truck well sump, are in good working order as of the date the Lease Term commences. In the event it is determined that this representation has been violated, then, after written notice from Tenant, Landlord shall promptly, at Landlord's sole cost and expense, rectify any such violation. In the event Tenant does not give to Landlord written notice of the violation of the foregoing representations within thirty (30) days from the date that the Lease Term commences, the correction of same shall be the obligation of the Tenant at Tenant's sole cost and expense (provided, that any work in connection with such correction shall be done at the direction and with the approval of Landlord). SECTION 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property or upon other portions of the Project, or from other sources or places; or (d) any act or omission of any other tenant of the Project. Landlord shall not be liable for any such damage of injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's negligence of willful misconduct. SECTION 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of Article Seven (Damage or Destruction) and Article Eight (Condemnation), and except for damage caused by any act or omission of Tenant, or Tenant's employees, agent, contractors or invitees, Landlord, at its cost, shall be responsible repairs to the foundation, roof, exterior windows and structural portions of the improvements on the Property; provided, that Tenant agrees to reimburse Landlord, within thirty (30) days after request, for all costs paid by Landlord for roof maintenance as a Common Area Expense as provided for in Section 4.05 above provided that Landlord may utilize any reserves collected from Tenant under Section 4.05 and specifically allocated to such costs. Landlord shall not be obligated to make any repairs under this Section 6.03 until a reasonable time after receipt of a written notice from Tenant of the need for such repairs. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord's expense or to terminate this Lease because of the condition of the Property or Landlord's failure to keep the Property in good order, condition or repair. SECTION 6.04. TENANT'S OBLIGATIONS. (a) Except as provided in Section 6.03, Article Seven (Damage or Destruction) and Article Eight (Condemnation), Tenant, at its sole cost, shall keep all portions of the Property (including nonstructural, interior, and, if not otherwise maintained by Landlord at its election, any and all components of electrical, mechanical, plumbing, heating, ventilating and air conditioning systems and facilities (individually, a "System", collectively, the "Systems") located on the Property and serving the Property only) in good order, condition and repair (including interior repainting and refinishing, as needed). If Landlord elects to maintain the Systems at the Property, Tenant shall pay or reimburse Landlord for all costs Landlord incurs in connection with such maintenance as Common Area Expenses as provided for in Section 4.05 above provided that Landlord may utilize any reserves collected from Tenant under Section 4.05 and specifically allocated to such costs. If any portion of the Property or any System or equipment in the Property which Tenant is obligated to maintain (or reimburse Landlord for the cost of maintenance in accordance herewith) cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or System or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term; but if the benefit or useful life of such replacement, as determined by generally accepted accounting principles, extends beyond the Lease Term (as the same may be extended in accordance herewith) the cost of such replacement shall be paid for by Landlord and prorated over such useful life, and Tenant shall be liable and reimburse Landlord on a monthly basis only for that portion of the cost which is applicable to the Lease Term (as the same may be extended). If requested by Landlord, Tenant shall maintain a preventive maintenance contract acceptable to Landlord providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. Upon Landlord's request, Tenant shall provide Landlord with a copy of the preventive maintenance contract, if applicable. If any part of the Property or the Project is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay Landlord the cost of maintaining or repairing or replacing such property. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in a clean, attractive and fully operative condition. (b) Tenant shall fulfill all of Tenant's obligations under this Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.04, Landlord may, upon ten (10) days' prior notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand. SECTION 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. (a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent, except for non-structural alterations which do not exceed Twenty Thousand and No/100 Dollars ($20,000.00) in cost cumulatively over the Lease Term and which are not visible from the outside of and which do not affect any System in the building of which the Property is a part. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. (b) Tenant shall pay when due all claims for labor and materials furnished to the Property. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Property, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property. SECTION 6.06. CONDITION UPON TERMINATION. Upon the termination of this Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord 8 is required to repair under Article Seven (Damage or Destruction). In addition, Tenant shall complete the moveout responsibilities ("Tenant's Moveout Responsibilities") set forth on Exhibit "C" attached hereto, and Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the expiration of this Lease and to restore the Property to its prior condition, all at Tenant's expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or earlier termination of this Lease, except that Tenant may remove any of Tenant's trade fixtures, personal property, machinery or equipment which can be removed without damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such trade fixtures, personal property, machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord's property) without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. If Tenant requests in writing that Landlord do so, Landlord shall notify Tenant at the time Landlord approves any alteration, addition or improvement whether or not Tenant shall be required to remove the same upon termination and such notice shall be binding upon the parties. ARTICLE SEVEN: DAMAGE OR DESTRUCTION SECTION 7.01. PARTIAL DAMAGE TO PROPERTY. (a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged (i.e., less than fifty percent (50%) of the Property is untenantable as a result of such damage or less than fifty percent (50%) of Tenant's operations are materially impaired) and if the proceeds received by Landlord from the insurance policies described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect (but is not required) to repair any damage to Tenant's fixtures, equipment, or improvements (unless Landlord obtained insurance for such improvements pursuant to Section 4.04(b) above and sufficient proceeds are available therefrom for such repair), and Tenant shall pay Landlord the "deductible" amount under Landlord's insurance policies as provided in Section 4.04(b). (b) If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect either to (i) repair the damage as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate this Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the "deductible amount" (if any) under Landlord's insurance policies as provided in Section 4.04(b) and, if the damage was due to an act or omission of Tenant, or Tenant's employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate this Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Property and any building in which the Property is located. Tenant shall pay the cost of such repairs, except that, subject to the terms of any deed of trust encumbering the Property, upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. (c) If the damage to the Property occurs during the last six (6) months of this Lease Term and such damage will require more than thirty (30) days to repair, either Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The party electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after Tenant's notice to Landlord of the occurrence of the damage. SECTION 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is substantially or totally destroyed by any cause whatsoever (i.e., the damage to the Property is greater than partial damage as described in Section 7.01), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the preceding sentence, if the Property can be rebuilt within twelve (12) months after the date of destruction, Landlord may elect to rebuild the Property at Landlord's own expense, in which case this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within thirty (30) days after Tenant's notice of the occurrence of total or substantial destruction. If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense, except that if the destruction was caused by an act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received by Landlord, including the "deductible" amount (if any) under Landlord's insurance policies as provided in Section 4.04(b). SECTION 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Property is impaired. Except for such possible reduction in rent, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property. SECTION 7.04. WAIVER. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction of the Property. ARTICLE EIGHT: CONDEMNATION If all or any portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Property is located, or which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). 9 If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent and Additional Rent shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award of payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a dead of trust encumbering the Property, the amount of its interest in the Property; (b) second, to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property; and (c) third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage to the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. Landlord and Tenant waive the protection of California Code of Civil Procedure Section 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Property by Condemnation. ARTICLE NINE: ASSIGNMENT AND SUBLETTING SECTION 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.02 below. Landlord has the right to grant or withhold its consent as provided in Section 9.05 below. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. If Tenant is a partnership or limited liability company, any cumulative transfer of more than twenty percent (20%) of the partnership or membership interests shall require Landlord's consent. If Tenant is a corporation, any change in the ownership of a controlling interest of the voting stock of the corporation shall require Landlord's consent. SECTION 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease the Property, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant, provided that the successor entity's then applicable net worth is equal to or greater than that of Tenant as of the date one day prior to the assignment or sublease ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease. SECTION 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease. SECTION 9.04. OFFER TO TERMINATE. If Tenant desires to assign this Lease or sublease the Property, Tenant shall have the right to offer, in writing, to terminate this Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, this Lease shall terminate as of the date specified and all the terms and provisions of this Lease governing termination shall apply. If Landlord does not so elect, this Lease shall continue in effect until otherwise terminated and the provisions of Section 9.05 with respect to any proposed transfer shall continue to apply. SECTION 9.05. LANDLORD'S CONSENT. (a) Tenant's request for consent to any such sublease, assignment or other transfer shall set forth in writing the details of the proposed sublease, assignment or other transfer, including the name, business and financial condition of the prospective transferee (including copies of current financial statements of the prospective transferee), financial details of the proposed transaction (e.g., the term of and the rent, security deposit and any other consideration payable under such proposed assignment, sublease or transfer), and any other information Landlord reasonably may request. Tenant shall reimburse Landlord for all out of pocket expenses, including reasonable attorneys' fees in accordance with Section 12.02 below, incurred in connection with any proposed assignment or subletting hereunder, not to exceed $1,500. Landlord shall not unreasonably withhold its consent to Tenant's request for consent to any sublease, assignment of other transfer. Landlord and Tenant hereby agree that, in determining whether to grant or withhold consent to such proposed sublease, assignment or other transfer, Landlord may consider, without limitation, the following factors, which Landlord and Tenant acknowledge and agree are reasonable: (i) the business of the proposed assignee, sublessee or transferee and the proposed use of the Property; (ii) the financial strength and the business reputation of the proposed assignee, sublessee or transferee; (iii) the proposed use, storage, treatment, generation or production of any Hazardous Materials by the proposed assignee, sublessee or transferee; and (iv) Tenant's compliance with all of its obligations under this Lease. Notwithstanding any provisions of this Lease, or any present or future statute, law, rule or ordinance, to the contrary, Landlord and Tenant hereby expressly agree that if a court of competent jurisdiction determines that Landlord unreasonably withheld consent to a proposed sublease, assignment or other transfer by Tenant, then Tenant's sole and exclusive remedy for such breach by Landlord shall be limited to termination of this Lease as of the date of such court determination, and Tenant hereby expressly waives the right to recover any monetary damages of whatever kind for such breach. (b) If Tenant assigns or subleases, the following shall apply: (i) Tenant shall pay to Landlord as Additional Rent under this Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined below) on such transaction as and when received by Tenant, unless Landlord gives written notice to Tenant and the assignee or subtenant that Landlord's Share shall be paid by the assignee or subtenant to Landlord directly. The "Profit" means (A) all amounts paid to Tenant for such assignment or sublease, including "key" money, monthly rent in excess of the monthly rent payable under this Lease, and all fees and other consideration paid for the assignment or sublease, including fees under any collateral agreements, less (B) reasonable costs and expenses directly incurred by Tenant in connection with the execution and performance of such assignment or sublease for real estate broker's commissions and renovation or construction of tenant improvements required under such assignment or sublease. Tenant is entitled to recover such reasonable costs and expenses before Tenant is obligated to pay the Landlord's Share to Landlord. The Profit in the case of a sublease of less than all the Property is the rent allocable to the subleased space as a percentage on a square footage basis. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to pay to Landlord any portion of any Profit received by Tenant in connection with an assignment or sublease to Tenant's Affiliate. 10 (ii) Tenant shall provide Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property within thirty (30) days after the transaction documentation is signed, and Landlord may inspect Tenant's books and records to verify the accuracy of such statement. On written request, Tenant shall promptly furnish to Landlord copies of all the transaction documentation, all of which shall be certified by Tenant to be complete, true and correct. Landlord's receipt of Landlord's Share shall not be a consent to any further assignment or subletting. The breach of Tenant's obligations under this Paragraph 9.05(b) shall be a material default of this Lease. SECTION 9.06. NO MERGER. No merger shall result from Tenant's sublease of the Property under this Article Nine, Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies. ARTICLE TEN: DEFAULTS; REMEDIES SECTION 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. SECTION 10.02. DEFAULTS. Tenant shall be in material default under this Lease: (a) If Tenant abandons the Property and fails to pay rent or any other amount due under this Lease or perform any of Tenant's non-monetary obligations under this Lease or if Tenant's vacation of the Property results in the cancellation of any insurance described in Section 4.04; (b) If Tenant fails to pay rent or any other charge within three (3) days after the date due; (c) If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than ten (10) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the ten (10) day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (d) (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within sixty (60) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease and possession is not restored to Tenant within sixty (60) days; or (iv) if substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease. (e) If any guarantor of this Lease revokes or otherwise terminates, or purports to revoke or otherwise terminate, any guaranty of all or any portion of Tenant's obligations under this Lease. Unless otherwise expressly provided, no guaranty of this Lease is revocable. SECTION 10.03. REMEDIES. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) Terminate Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which Landlord had earned at the time of the termination, (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Tenant would have paid for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount reasonably necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property. Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b); (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due; (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. 11 SECTION 10.04. INTENTIONALLY DELETED. SECTION 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or provision hereof to the contrary, this Lease shall terminate on the occurrence of any act which affirms the Landlord's intention to terminate this Lease as provided in Section 10.03 hereof, including the filing of an unlawful detainer action against Tenant. On such termination, Landlord's damages for default shall include all costs and fees, including reasonable attorneys' fees that Landlord incurs in connection with the filing, commencement, pursuing and/or defending of any action in any bankruptcy court or other court with respect to this Lease, the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant; or the pursuing of any action with respect to Landlord's right to possession of the Property. All such damages suffered (apart from Base Rent and other rent payable hereunder) shall constitute pecuniary damages which must be reimbursed to Landlord prior to assumption of this Lease by Tenant or any successor to Tenant in any bankruptcy or other proceeding. SECTION 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. ARTICLE ELEVEN: PROTECTION OF LENDERS SECTION 11.01. SUBORDINATION. This Lease shall be subordinate to any existing ground lease, deed of trust or mortgage, and Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage hereafter encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or this Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant's obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant's right to quiet possession of the Property during the Lease Term shall not be disturbed by any future beneficiary under a deed of trust or mortgagee under a mortgage if Tenant pays the rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof. SECTION 11.02. ATTORNMENT. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, then at such person's or entity's election, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest. SECTION 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. SECTION 11.04. ESTOPPEL CERTIFICATES. (a) Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been cancelled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that, to Tenant's knowledge, Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other information with respect to Tenant or this Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord's written request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such ten (10) day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been cancelled or terminated except as otherwise represented by Landlord; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under this Lease. In such event, Tenant shall be estopped from denying the truth of such facts. Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord the most recent 10K and 10Q statements of Tenant and Guarantor to verify the net worth of Tenant or Guarantor or such financial statements as Landlord may reasonably require to verify the net work of any assignee or subtenant of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord Tenant's most recent 10K and 10Q statements to facilitate the financing or refinancing of the Property. All financial statements shall be confidential and shall be used only for the purposes set forth in this Lease. ARTICLE TWELVE: LEGAL COSTS SECTION 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach or default under this Lease, such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any reasonable costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or 12 action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any reasonable legal fees or costs Landlord incurs in any such claim or action. SECTION 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting) (not to exceed $1,500), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS SECTION 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person of group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring occupancy, tenure or use of the Property or any portion thereof. SECTION 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES. (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or Project or the leasehold estate under a ground lease of the Property or Project at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease. (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (c) Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord's interest in the Property and the Project, and neither the Landlord nor its partners, shareholders, officers or other principals shall have any personal liability under this Lease. SECTION 13.03. SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. SECTION 13.04. INTERPRETATION. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Property with Tenant's expressed or implied permission. SECTION 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. SECTION 13.06. NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered, sent by a nationally recognized overnight delivery service such as Federal Express, or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party. SECTION 13 07. WAIVERS. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. SECTION 13.08. NO RECORDATION. Tenant shall not record this Lease without prior written consent from Landlord. If Landlord consents to such recording, Tenant shall pay all taxes and recording fees in connection therewith. SECTION 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease. SECTION 13.10. CORPORATE AUTHORITY; PARTNERSHIP OR LIMITED LIABILITY COMPANY AUTHORITY. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he or she has full authority to do so and that this Lease binds the corporation. Upon Landlord's request, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is 13 a partnership or limited liability company, each person or entity signing this Lease for Tenant represents and warrants that he, she or it is a general partner of the partnership or member of the limited liability company, as applicable, that he, she or it has full authority to sign for the partnership or limited liability company, as applicable, and that this Lease binds the partnership and all general partners of the partnership or limited liability company, as applicable. Tenant shall given written notice to Landlord of any general partner's or member's withdrawal or addition. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partnership or articles of organization, as applicable. SECTION 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. SECTION 13.12. FORCE MAJEURE. If Landlord or Tenant cannot perform any of their obligations due to events beyond their control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events; provided, however, that nothing in this Section shall excuse Tenant from the payment of rent and any other charges required to be paid hereunder, except as otherwise expressly provided in this Lease. Events beyond their control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. SECTION 13.13. EXECUTION OF LEASE. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties. SECTION 13.14. SURVIVAL. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease. ARTICLE FOURTEEN: BROKERS Except with respect to the brokers named in Section 1.09 of this Lease, Tenant hereby represents and warrants to Landlord that it has not entered into any agreement or incurred any obligation which might result in the obligation to pay any brokerage commission, finder's fee or other compensation with respect to this Lease, and Tenant agrees to indemnify and hold Landlord harmless from and against any losses, damages, costs or expenses (including, without limitation, attorney's fees) incurred by the other by reason of any breach or inaccuracy of such representation or warranty. ARTICLE FIFTEEN: OTHER PROVISIONS SECTION 15.01. CONFIDENTIALITY. Tenant agrees that except as required by law, it shall keep confidential, and shall not disclose to any third party (with the exception of disclosure, on a confidential basis, to Tenant's attorneys, accountants, and insurance advisors, potential assignees, sublessees, investors, lenders and purchasers and their respective attorneys, accountants and insurance advisors), the terms, provisions and contents of this Lease, or any information relating to this Lease. SECTION 15.02. LANDLORD'S LIABILITY. Notwithstanding anything to the contrary contained in the Lease, Tenant agrees that its sole and exclusive remedy shall be against Landlord's interest in the Project and that the obligations of Landlord under the Lease do not constitute personal obligations of the individual partners, whether general or limited, directors, officers, shareholders or trustees of Landlord, and Tenant shall not seek recourse against the individual partners, directors, officers, shareholders or trustees of Landlord or any of their personal assets for satisfaction of any liability with respect to the Lease. Notwithstanding anything to the contrary contained in this Lease, in no event shall Landlord be liable under any circumstances for any consequential damages, including without limitation, lost profits. ARTICLE SIXTEEN: TENANT IMPROVEMENTS Subject to the terms and conditions set forth in this Article Sixteen, Landlord will provide Tenant with an improvement allowance (the "Tenant Improvement Allowance") of up to Two and 50/100 Dollars ($2.50) per square foot of the Property, for the costs relating to the initial design and construction of permanently affixed improvements (the "Tenant Improvements") to the Property desired to be made by Tenant. The Tenant Improvement Allowance may be used for any costs relating to the initial design and construction of the Tenant Improvements, including without limitation, architectural and engineering fees for preparation of preliminary space plans and architectural, electrical, mechanical and engineering working drawings and the contractor's fees. Tenant shall pay to Landlord a construction supervision fee, all or part of which may be paid out of the Tenant Improvement Allowance, in an amount equal to one percent (1%) of the Tenant Improvement Allowance amount. Prior to commencement of the Tenant Improvements, Tenant will furnish Landlord with all plans and specifications for the Tenant Improvements (collectively, the "Plans and Specifications") for Landlord's approval (which approval shall not be unreasonably withheld or delayed). Within fourteen (14) days after receipt of the Plans and Specifications, Landlord shall notify Tenant whether or not Landlord shall require Tenant to remove the initial Tenant Improvements to the Property at the expiration the Lease Term and restore the Property to the same condition as received. The Tenant Improvements shall be constructed in accordance with the approved Plans and Specifications by a contractor selected by Tenant and reasonably approved by Landlord, provided such contractor satisfies Landlord's insurance requirements. The Tenant Improvements shall be performed and completed in compliance with all applicable laws, codes, rules and regulations, including any permit requirements, without any unpaid claims for material, labor or supplies. Tenant shall furnish to Landlord executed construction permits and such invoices, affidavits, releases, and other documentation as Landlord may reasonably request, to be assured, to Landlord's satisfaction, that the Tenant Improvements have been completed in accordance with the Plans and Specifications approved by Landlord and have been paid for by Tenant. Provided Tenant complies with all of the terms and conditions of this Lease, including but not limited to, proof of payment of all bills and delivery to Landlord of unconditional lien releases from all contractors, subcontractors and material suppliers, Landlord shall make progress payments to Tenant in accordance with Landlord's disbursement procedures for Tenant's costs incurred in connection with the Tenant Improvements up to an amount not to exceed the amount of the Tenant Improvement Allowance. Tenant will be responsible for paying all costs of the Tenant Improvements in excess of the Tenant Improvement Allowance. If the cost of the Tenant Improvements is less than the Tenant Improvement Allowance, Tenant shall not be entitled to any remaining portion of the Tenant Improvement Allowance or any credit, deduction or offset against rent or any other amounts due under this Lease. 14 ARTICLE SEVENTEEN: OPTION TO EXTEND SECTION 17.01. Landlord hereby grants to Tenant one (1) option (the "Option") to extend the term of this Lease for five (5) years (the "Extension Period"), on the same terms and conditions as set forth in this Lease (except that there shall be no additional Tenant Improvement Allowance or additional option to extend the Extension Period) but at an increased rent as set forth in Section 17.03 below. The Option shall be exercised only by written notice delivered to Landlord no later than two hundred and seventy (270) days prior to the expiration of the Lease Term. If Tenant fails to deliver to Landlord written notice of the exercise of the Option on or before such date, the Option shall lapse, and there shall be no further right to extend the term of this Lease. The Option shall be exercisable by Tenant only on the express condition that (i) at the time of the exercise, and at all times prior to the commencement of the Extension Period, Tenant shall not be in material default under any of the provisions of this Lease, and (ii) Tenant shall not have been ten (10) or more days late in the payment of Base Rent more than twice during any twelve (12) consecutive month period during the Lease Term. SECTION 17.02. If Tenant subleases any portion of the Property or assigns or otherwise transfers any interest under this Lease to an entity other than a Tenant Affiliate prior to the exercise of the Option, the Option shall lapse. If Tenant subleases any portion of the Property or assigns or otherwise transfers any interest of Tenant under this Lease to any person or entity after the exercise of the Option but prior to the commencement of the Extension Period (whether with or without Landlord's consent), the Option shall lapse and the term of this Lease shall expire as if such Option was not exercised. Notwithstanding anything to the contrary set forth in this Section 17.02, the Option shall not lapse if any such sublease, assignment or other transfer is to an entity which controls, is controlled by or is under common control with Tenant. SECTION 17.03. Base Rent for the Property shall be increased on the first day of the Extension Period to an amount equal to the "fair rental value" of the Property as of the first day of the Extension Period (which fair rental value determination may include increases in rent during the Extension Period), which fair rental value shall be determined by Landlord in its sole but reasonable discretion, after evaluating, among other things, the rents at similar buildings in the same general geographic area, but in no event shall the Base Rent be less than the then current Base Rent being paid by Tenant. Landlord shall notify Tenant in writing of such determination of fair rental value within thirty (30) days after Landlord's receipt of Tenant's notice exercising the Option. If Tenant shall dispute Landlord's determination of fair rental value for the Property, then Landlord and Tenant shall cooperate in good faith to arrive at a mutually agreeable Base Rent within thirty (30) days after receipt of Landlord's notice of fair rental value. If the Parties cannot agree, Tenant shall have the right to either (a) submit the issue of Landlord's reasonableness (but not the fair rental value) for neutral binding arbitration (and not by court action) to the American Arbitration Association in accordance with the rules of such Association then in effect, or (b) rescind Tenant's exercise of the applicable Option by delivery of written notice to Landlord within ten (10) days after said thirty (30) day negotiation period, in which event, this Lease shall terminate upon the expiration of the Lease Term or the first Extension Period, as applicable (unless sooner terminated in accordance herewith), and Tenant shall have no further right of option to extend the Lease Term. Tenant shall exercise such right of arbitration by delivering written notice of such election within thirty (30) days after receipt of Landlord's notice of fair rental value. If the arbitrators shall decide that Landlord's determination of fair rental value was reasonable, then fair rental value shall be the amount previously determined by Landlord. If the arbitrators shall determine that Landlord acted unreasonably, then Landlord shall redetermine the fair rental value in its sole but reasonable discretion, provided that Tenant shall again have the right to challenge Landlord's reasonableness in the manner set forth above. In no event shall the arbitrators be permitted to determine rental value under this Lease. The decision of the arbitrators shall be binding upon both parties. Each party shall share equally the cost of the arbitration process. ARTICLE EIGHTEEN: RIGHT OF FIRST OFFER Provided that Tenant is not in material default under the terms of this Lease, Tenant shall have a one-time right ("First Offer Right") to lease approximately 9,600 square feet of space contiguous to the Property commonly known as Unit E-2 (the "First Right Space") if the First Right Space comes available for lease during the Lease Term, as the same may be extended. Landlord shall give Tenant a one-time written notice ("Offer Notice") of the availability of the First Right Space, which Offer Notice shall include a summary of the economic terms for which Landlord is willing to enter into a lease of the First Right Space. The parties acknowledge and agree that except with respect to such economic terms, all of the terms and provisions of this Lease shall apply to any lease by Tenant of the First Offer Space. Upon receipt by Tenant of the Offer Notice, if Tenant desires to lease the First Right Space but objects to the economic terms set forth in the Offer Notice, Landlord and Tenant shall negotiate in good faith in an attempt to reach an agreement with respect to the terms for Tenant's lease of the First Right Space. If Landlord and Tenant are unable to agree on the terms of a lease of the First Right Space within ten (10) business days after Landlord's delivery of the Offer Notice, Landlord shall thereafter be free to lease such space to any third party on such terms and conditions that Landlord deems appropriate in its sole and absolute discretion and Tenant shall have no further option to lease or right to receive any notice of any proposed lease with respect to such First Right Space. ARTICLE NINETEEN: EXPANSION Landlord shall use commercially reasonable efforts to accommodate Tenant's expansion needs. 15 Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialed all Riders which are attached to or incorporated by reference in this Lease. "LANDLORD" Signed on , 2000 BUCKHEAD INDUSTRIAL PROPERTIES, INC., -------------- a Maryland corporation By: /s/ John Powell --------------------------------------- JOHN POWELL Its: INVESTMENT OFFICER ------------------------------------- By: ------------------------------------- Its: ------------------------------------ "TENANT" Signed on , 2000 ALL AMERICAN IDT, INC., -------------- a California corporation By: /s/ Howard L. Flanders -------------------------------------- Howard Flanders, Executive Vice President and Secretary IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE TANKS. 16 ADDENDUM TO LEASE THIS ADDENDUM TO LEASE ("Addendum") is attached to and made a part of that certain Lease ("Lease"), dated as of December 1, 2000, by and between BUCKHEAD INDUSTRIAL PROPERTIES, INC., a Maryland corporation ("Landlord"), and ALL AMERICAN IDT, INC., a California corporation ("Tenant"). Capitalized terms not otherwise defined herein shall have the meaning assigned to such term in the Lease. In the event of any conflict between the terms of this Addendum and the terms of the Lease, the terms of this Addendum shall control. 1. The following language is added to Section 1.05 of the Lease: "If Tenant disputes the square footage of the Property as stated in this Section 1.05, then within thirty (30) days after the date Landlord delivers possession of the Property to Tenant for early occupancy, Tenant's architect shall be permitted to verify the measurement of the Property and any dispute as to the actual square footage of the Premises shall be resolved by an independent architect mutually agreeable to Landlord and Tenant, the cost of whose service shall be shared equally by Landlord and Tenant. If Tenant fails to notify Landlord of any objections to the square footage of the Property within thirty (30) days of delivery of the Property to Tenant, the Property shall be conclusively deemed to be the square footage set forth in this Section 1.05. If the actual square footage is determined to be more than 3% more or less than the square footage stated in this Section 1.05, then the Base Rent amounts and Tenant's Pro Rata Share set forth herein shall be re-computed on the basis of the adjusted square footage. In determining the square footage for the Property, the same shall be measured from the exterior of exterior walls and to the center of interior or dividing walls without any reduction, whatsoever for any columns, stairs, shafts, or other equipment within the Property." 2. The following is added to the end of Section 4.05(a): "Such activities and changes shall not unreasonably interfere with Tenant's use of or access to the Property." 3. The following language is added to the end of Section 4.05(d): "Any contrary provision contained in this Section 4.05 or elsewhere in this Lease notwithstanding, for purposes of calculating Common Area Expenses, in no event shall such Common Area Expenses include (i) any item which would be deemed a "capital expenditure" under generally acceptable accounting principles except for capital expenditures (A) which are intended to effect economies in the operation or maintenance of the Project, or any portion thereof, to the extent of the reduction in the Common Area Expenses reasonably anticipated by Landlord at the time of such expenditure to be incurred in connection therewith, and (B) that are required under any governmental law or regulation not in effect and being enforced as of the Commencement Date, provided, however, that the cost of any such capital expenditure shall be amortized (including interest on the unamortized cost) over its useful life as Landlord shall reasonably determine and , (ii) costs of alternations or improvements, including maintenance items to the property or premises of other tenants which only serves those tenants, (iii) salaries, wages and all benefits paid to or for a persons above the level of building manager, (iv) costs of correcting latent defects in the construction of the Building, (vi) legal fees, space planners' fees, and advertising and promotional expenses incurred in connection with and incidental to the development or leasing of the Building, and (vii) any legal fees and costs of Landlord (including, but not limited to, those incurred in connection with any litigation or other proceedings between Landlord and any other tenant unless related to the use or maintenance of the Common Areas) except those legal fees and costs incurred in the normal course of Landlord's business. 4. The following language is added to the end of Section 6.01: "Landlord shall, at Landlord's sole cost and expense, and not as an Common Area Expense, make the following repairs to the Property as soon commercially practicable after execution of this Lease: (a) replace any missing guide wires on the 2x4 lights in order to keep the lights attached to the ceiling; (b) repair miscellaneous damaged and inoperable door hardware; (c) repair or replace broken Exit signs and missing lenses; (d) repair GFCI in staff lounge area; (e) replace missing light lens covers; (f) repair loose warehouse foil insulation; (g) repair the loose quad box at the ladder above the warehouse restroom; (h) repair or replace missing and damaged outlet cover plates throughout the Property; (i) repair open and exposed wires and uncovered J boxes; (j) repair disconnected roof drain at exterior of the Building; (k) repair warehouse mop sink faucet leak; (l) repair damaged HVAC ducting, connect unconnected HVAC ducting and correctly strap HVAC ducting; (m) correctly strap sprinkler head in upstairs restroom; (n) install additional Exit signage if required by any governmental agency or authority in order to comply with applicable codes or regulations; and (o) repair damaged headers at location of loading dock doors. Additionally, Landlord shall, at Landlord's sole cost and expense, replace the roof on the Property during the month of December 2000 or January 2001." 5. The following language is added to the end of Section 6.04(a): "Any contrary provision contained in this Section 6.04 or elsewhere in this Lease notwithstanding, Tenant shall have the benefit of any applicable warranty in effect as of the Commencement Date. 6. The following language is added to the end of Section 6.06: "Any contrary provision contained in this Section 6.06 or elsewhere in this Lease notwithstanding, in no event shall Tenant be required to remove Tenant's initial Tenant Improvements upon the expiration or earlier termination of this Lease." 7. The following language is added to the end of Article Seven: "Any contrary provision in this Lease notwithstanding, Tenant shall have the option to terminate this Lease if any such damage or destruction is not actually repaired and restored within fifteen (15) months after the date such damage or destruction occurs, by giving notice to Landlord of Tenant's election of it's option at any time after such fifteen (15) month period but before such damage or destruction is actually restored" 8. The following language is added to the end of Article Eight: "Any contrary provision contained in this Article Eight notwithstanding, Tenant, shall have the absolute right to terminate this Lease at any time within thirty (30) days, if this Lease is not terminated by Landlord and the restoration of the Property required by Landlord under this Article Eight has not occurred within ninety (90) days after the date of the taking." 8. The following language is added as Articles Nineteen, Twenty and Twenty-One: "Article Nineteen: Subordination of Landlord's Lien. Upon Tenant's request Landlord shall subordinate its "landlord's lien" or any other statutory lien, contractual lien or security interest given by law or this Lease to Landlord in any property (including, but not limited to equipment, furniture, fixtures, inventory and supplies) of Tenant now or hereafter placed in or upon the Property. Landlord agrees to execute Landlord's standard form of Landlord's Subordination and Consent Agreement to evidence this waiver of its landlord's lien or other statutory lien or contractual and to acknowledge that Tenant shall have the right to obtain financing on any or all of its property (including, but not limited to, equipment, furniture, fixtures, inventory and supplies) which it brings upon the Property and to grant a first security or other priority security interest and lien in and to such property in connection therewith." "Article Twenty: Landlord's Representations. Landlord represents and warrants to Tenant that Landlord has full power and authority, and has taken all necessary action, to execute, deliver and perform under this Lease. "Article Twenty-One: Access. Tenant shall have access to the Property 24 hours per day, 7 days per week, without additional charge by Landlord." LANDLORD: TENANT: BUCKHEAD INDUSTRIAL PROPERTIES, INC., ALL AMERICAN IDT, INC., a Maryland corporation a California corporation By: /s/ John Powell By: /s/ Howard L. Flanders ---------------------------------- --------------------------------- JOHN POWELL Howard Flanders, Executive Vice President and Secretary Its: INVESTMENT OFFICER --------------------------------- EX-11 3 file004.txt EXHIBIT 11
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS YEARS ENDED DECEMBER 31 2000 1999 1998 --------------------------------------- BASIC EARNINGS PER SHARE: Net Income .............................. $11,199,000 $ 1,799,000 $ 831,000 =========== =========== =========== Weighted Average Shares Outstanding (1).. 3,828,978 3,921,138 3,937,021 =========== =========== =========== Basic Earnings Per Share (1) ............ $ 2.92 $ .46 $ .21 =========== =========== =========== DILUTED EARNINGS PER SHARE: Net Income .............................. $11,199,000 $ 1,799,000 $ 831,000 =========== =========== =========== Weighted Average and Dilutive Shares (1): Weighted average shares outstanding ... 3,828,978 3,921,138 3,937,021 Dilutive shares ....................... 311,601 3,028 61,781 ----------- ----------- ----------- 4,140,579 3,924,166 3,998,802 =========== =========== =========== Diluted Earnings Per Share (1) .......... $2.70 $.46 $.21 ===== ==== ====
(1) Restated to reflect a one-for-five reverse stock split which became effective June 2, 1999. EX-21.1 4 file005.txt EXHIBIT 21.1
ALL AMERICAN SEMICONDUCTOR, INC. EXHIBIT 21.1 LIST OF SUBSIDIARIES NAME JURISDICTION OF INCORPORATION Access Micro Products, Inc. Delaware All American Added Value, Inc. California All American A.V.E.D., Inc. Colorado All American IDT, Inc. California All American Semiconductor of Atlanta, Inc. Georgia All American Semiconductor of Canada, Inc. Canada All American Semiconductor of Chicago, Inc. Illinois All American Semiconductor of Florida, Inc. Florida All American Semiconductor of Huntsville, Inc. Alabama All American Semiconductor of Massachusetts, Inc. Massachusetts All American Semiconductor of Michigan, Inc. Michigan All American Semiconductor of Minnesota, Inc. Minnesota All American Semiconductor of New York, Inc. New York All American Semiconductor of Ohio, Inc. Ohio All American Semiconductor of Philadelphia, Inc. New Jersey All American Semiconductor of Phoenix, Inc. Arizona All American Semiconductor of Portland, Inc. Oregon All American Semiconductor of Rhode Island, Inc. Rhode Island All American Semiconductor of Rockville, Inc. Maryland All American Semiconductor of Salt Lake, Inc. Utah All American Semiconductor of Texas, Inc. Texas All American Semiconductor of Washington, Inc. Washington All American Semiconductor of Wisconsin, Inc. Wisconsin All American Semiconductor-Northern California, Inc. California All American Technologies, Inc. Florida All American Transistor of California, Inc. California Aved Industries, Inc. California Palm Electronics Manufacturing Corp. Florida
EX-23.1 5 file006.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.1 All American Semiconductor, Inc. We hereby consent to the incorporation in the Company's previously filed Registration Statement on Form S-8 of our report dated March 2, 2001, relating to the consolidated financial statements of All American Semiconductor, Inc. and Subsidiaries included in this Form 10-K for the fiscal year ended December 31, 2000 and to the reference to our firm under the caption "Experts" in such Registration Statement. /s/ LAZAR LEVINE & FELIX LLP - -------------------------------------------- LAZAR LEVINE & FELIX LLP New York, New York March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----