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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
--or--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number: 0-16207
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16115 Northwest 52nd Avenue, Miami, Florida 33014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 621-8282
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 9, 2006 3,997,674 shares of the common stock of All American
Semiconductor, Inc. were outstanding.
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
FORM 10-Q - INDEX
Part Item Page
No. No. Description No.
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I FINANCIAL INFORMATION:
1. Financial Statements
Consolidated Condensed Balance Sheets at June 30, 2006
(Unaudited) and December 31, 2005.................................................... 1
Consolidated Condensed Statements of Operations for the Quarters and Six Months
Ended June 30, 2006 and 2005 (Unaudited)............................................. 2
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2006 and 2005 (Unaudited).................................. 3
Notes to Consolidated Condensed Financial Statements (Unaudited)....................... 4
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 9
3. Quantitative and Qualitative Disclosures about Market Risk............................. 15
4. Controls and Procedures................................................................ 15
II OTHER INFORMATION:
1A. Risk Factors........................................................................... 16
2. Unregistered Sales of Equity Securities and Use of Proceeds............................ 16
5. Other Information...................................................................... 16
6. Exhibits............................................................................... 17
SIGNATURES............................................................................. 17
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30 December 31
ASSETS 2006 2005
--------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash .......................................................... $ 1,051,000 $ 2,250,000
Accounts receivable, less allowances for doubtful
accounts of $2,709,000 and $2,364,000 ....................... 89,898,000 82,166,000
Inventories ................................................... 95,188,000 74,581,000
Other current assets .......................................... 4,151,000 3,127,000
------------- -------------
Total current assets ........................................ 190,288,000 162,124,000
Property, plant and equipment - net ............................. 8,456,000 8,187,000
Deposits and other assets ....................................... 3,153,000 3,335,000
------------- -------------
$ 201,897,000 $ 173,646,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt ............................. $ 492,000 $ 701,000
Accounts payable .............................................. 74,630,000 51,603,000
Accrued expenses .............................................. 7,365,000 6,155,000
Other current liabilities ..................................... 361,000 197,000
------------- -------------
Total current liabilities ................................... 82,848,000 58,656,000
Long-term debt:
Notes payable ................................................. 95,189,000 89,511,000
Subordinated debt ............................................. 608,000 645,000
Other long-term debt .......................................... 1,213,000 998,000
------------- -------------
179,858,000 149,810,000
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued ..................................... - -
Common stock, $.01 par value, 40,000,000 shares authorized,
3,997,674 and 3,976,656 shares issued and outstanding ....... 40,000 40,000
Capital in excess of par value ................................ 26,157,000 25,986,000
Accumulated deficit ........................................... (4,158,000) (2,190,000)
------------- -------------
22,039,000 23,836,000
------------- -------------
$ 201,897,000 $ 173,646,000
============= =============
See notes to consolidated condensed financial statements
1
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarters Six Months
PERIODS ENDED JUNE 30 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------
NET SALES ...................... $ 123,999,000 $ 111,214,000 $ 242,311,000 $ 205,523,000
Cost of sales .................. (103,534,000) (92,926,000) (203,649,000) (171,471,000)
------------- ------------- ------------- -------------
Gross profit ................... 20,465,000 18,288,000 38,662,000 34,052,000
Selling, general and
administrative expenses ...... (18,993,000) (16,659,000) (38,302,000) (31,304,000)
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS ......... 1,472,000 1,629,000 360,000 2,748,000
Interest expense ............... (1,876,000) (1,140,000) (3,480,000) (2,153,000)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE
INCOME TAXES ................. (404,000) 489,000 (3,120,000) 595,000
Income tax (provision) benefit.. 149,000 (181,000) 1,152,000 (226,000)
------------- ------------- ------------- -------------
NET INCOME (LOSS) .............. $ (255,000) $ 308,000 $ (1,968,000) $ 369,000
============= ============= ============= =============
EARNINGS (LOSS) PER SHARE:
Basic and diluted .............. $(.06) $.08 $(.49) $.09
===== ==== ===== ====
See notes to consolidated condensed financial statements
2
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30 2006 2005
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Cash Flows Provided By (Used For) Operating Activities ....... $ (6,164,000) $ 3,964,000
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Cash Flows From Investing Activities:
Acquisition of property and equipment ........................ (846,000) (2,332,000)
Decrease in other assets ..................................... 123,000 92,000
------------- -------------
Cash flows used for investing activities ................. (723,000) (2,240,000)
------------- -------------
Cash Flows From Financing Activities:
Borrowings under line of credit agreement .................... 243,139,000 202,268,000
Repayments under line of credit agreement .................... (237,250,000) (203,705,000)
Repayments of notes payable .................................. (456,000) (457,000)
Increase in other long-term debt ............................. 215,000 --
Net proceeds from issuance of equity securities .............. 40,000 107,000
------------- -------------
Cash flows provided by (used for) financing activities ... 5,688,000 (1,787,000)
------------- -------------
Decrease in cash ............................................. (1,199,000) (63,000)
Cash, beginning of period .................................... 2,250,000 645,000
------------- -------------
Cash, end of period .......................................... $ 1,051,000 $ 582,000
============= =============
Supplemental Cash Flow Information:
Interest paid ................................................ $ 2,711,784 $ 1,856,000
============= =============
Income taxes paid (refunded) - net ........................... $ 123,000 $ (1,102,000)
============= =============
See notes to consolidated condensed financial statements
3
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited Consolidated Condensed
Financial Statements include all adjustments (consisting of normal recurring
accruals or adjustments only) necessary to present fairly the financial position
at June 30, 2006, and the results of operations and the cash flows for all
periods presented. The results of operations for the interim periods are not
necessarily indicative of the results to be obtained in any future interim
period or for the entire year.
For a summary of significant accounting policies (which have not changed from
December 31, 2005, except for the adoption of Statement of Financial Accounting
Standards ("SFAS") 123 (R) on January 1, 2006 as explained in Note 3 to Notes to
Consolidated Condensed Financial Statements (Unaudited)) and additional
financial information, see Annual Report on Form 10-K of All American
Semiconductor, Inc. (the "Company") for the year ended December 31, 2005,
including the consolidated financial statements and notes thereto which should
be read in conjunction with these financial statements.
The accompanying unaudited interim financial statements have been prepared in
accordance with instructions to Form 10-Q and, therefore, do not include all
information and footnotes required to be in conformity with accounting
principles generally accepted in the United States of America.
2. EARNINGS PER SHARE
The following table sets forth the calculation of earnings (loss) per share on a
basic and diluted basis:
Quarters Six Months
PERIODS ENDED JUNE 30 2006 2005 2006 2005
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BASIC EARNINGS PER SHARE:
-------------------------
Net Income (Loss) ...................... $ (255,000) $ 308,000 $ (1,968,000) $ 369,000
============= ============= ============= =============
Weighted Average Shares Outstanding .... 3,983,561 3,926,791 3,980,127 3,919,620
============= ============= ============= =============
Basic Earnings (Loss) Per Share ........ $(.06) $.08 $(.49) $.09
===== ==== ===== ====
DILUTED EARNINGS PER SHARE:
---------------------------
Net Income (Loss) ...................... $ (255,000) $ 308,000 $ (1,968,000) $ 369,000
============= ============= ============= =============
Weighted Average and Dilutive Shares:
Weighted average shares outstanding .. 3,983,561 3,926,791 3,980,127 3,919,620
Dilutive shares ...................... - 178,480 - 198,767
------------- ------------- ------------- -------------
3,983,561 4,105,271 3,980,127 4,118,387
============= ============= ============= =============
Diluted Earnings (Loss) Per Share ...... $(.06) $.08 $(.49) $.09
===== ==== ===== ====
Basic earnings (loss) per share are determined by dividing the Company's net
income (loss) by the weighted average shares outstanding. Diluted earnings
(loss) per share include any dilutive effects of outstanding stock options.
4
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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Excluded from the calculation of earnings per share are stock options to
purchase 574,000 common shares in the quarter and six months ended June 30, 2006
and 84,390 common shares in the quarter and six months ended June 30, 2005, as
their inclusion would have been antidilutive.
3. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), which replaces SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires
all share-based payments to employees including grants of employee stock
options, be measured at fair value and expensed in the consolidated statement of
operations over the service period (generally the vesting period). Upon
adoption, the Company transitioned to SFAS 123 (R) using the modified
prospective application, whereby compensation cost is only recognized in the
consolidated statements of operations beginning with the first period that SFAS
123 (R) is effective and thereafter, with prior periods' stock-based
compensation still presented on a pro forma basis. Under the modified
prospective approach, the provisions of SFAS 123 (R) are to be applied to new
employee awards and to employee awards modified, repurchased, or cancelled after
the required effective date. Additionally, compensation cost for the portion of
employee awards for which the requisite service has not been rendered that are
outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of employee awards shall be based on the
grant-date fair value of those awards as calculated for either recognition or
pro-forma disclosures under SFAS 123. The Company continues to use the
Black-Scholes option valuation model to value stock options. As a result of the
adoption of SFAS 123 (R), the Company recognized a pre-tax charge of $76,000 and
$131,000 (included in selling, general and administrative expenses), $48,000 and
$83,000 after-tax and $.01 and $.02 per share on a diluted basis in the quarter
and six months ended June 30, 2006 associated with the expensing of stock
options.
Employee stock option compensation expense in 2006 is the estimated fair value
of options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award. No stock options were granted and an
immaterial amount vested during the quarter and six months ended June 30, 2005
and, accordingly, no pro forma information has been presented.
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the assumptions in the table below.
During 2006, the Company took into consideration guidance under SFAS 123 (R) and
SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating
assumptions. The expected volatility is based upon historical volatility of the
Company's stock and other contributing factors. The expected term is based upon
observation of actual time elapsed between date of grant and exercise of options
for all employees. Previously such assumptions were determined based on
historical data.
Periods Ended June 30, 2006 Quarter Six Months
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Expected volatility................................. 84% 39-84%
Risk-free interest rate............................. 5% 5%
Expected lives (years).............................. 4 4
At June 30, 2006 the Company had 508,993 shares of common stock reserved for
future stock option grants under its stock option plans.
5
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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The following is a summary of the changes in outstanding options for the six
months ended June 30, 2006:
Weighted Average
Weighted Average Remaining Aggregate
Shares Exercise Price Contractual Life Intrinsic Value
-------- ---------------- ---------------- ---------------
Outstanding at Dec. 31, 2005 .... 427,770 $ 3.56
Granted ......................... 218,750 3.73
Exercised ....................... (21,018) 1.94
Forfeited or expired ............ (51,314) 7.38
--------
Outstanding at June 30, 2006 .... 574,188 3.35 4.0 $733,000
======== ========
Exercisable at June 30, 2006 .... 307,542 2.78 1.2 $582,472
======== ========
The weighted average grant date fair values of share options granted during the
first six months of 2006 was $.84. The total intrinsic values of share options
exercised was $52,242 during the six months ended June 30, 2006. Cash received
from option exercises during the first six months of 2006 totaled $40,868. These
cash receipts are included in net proceeds from issuance of equity securities.
As of June 30, 2006, there was $263,000 of unrecognized compensation cost
related to non-vested awards granted under the option plans, which is expected
to be recognized over a weighted-average period of two years.
Option Plan
-----------
During the quarter ended June 30, 2006, the Company granted an aggregate of
151,250 stock options to 135 individuals pursuant to the Employees', Officers',
Directors' Stock Option Plan, as previously amended and restated (the "Option
Plan"). These options have an exercise price of $3.67 per share (fair market
value at date of grant), vest over a four-year period and are exercisable over a
five-year period. During the quarter ended June 30, 2006, a total of 28,770
stock options previously granted pursuant to the Option Plan were canceled at
exercise prices ranging from $1.92 to $13.02 per share. During the quarter ended
June 30, 2006, 20,193 stock options previously granted pursuant to the Option
Plan were exercised at exercise prices ranging from $1.92 to $4.29 per share.
During the quarter ended March 31, 2006, the Company granted an aggregate of
67,500 stock options to 48 individuals pursuant to the Option Plan. These
options have an exercise price of $3.87 per share (fair market value at date of
grant), vest over a four-year period and are exercisable over a five-year
period. During the quarter ended March 31, 2006, a total of 22,544 stock options
previously granted pursuant to the Option Plan were canceled at exercise prices
ranging from $1.92 to $13.02 per share. During the quarter ended March 31, 2006,
75 stock options previously granted pursuant to the Option Plan were exercised
at an exercise price of $1.92 per share.
Director Option Plan
--------------------
During the six months ended June 30, 2006, no stock options were granted by the
Company pursuant to the 2000 Nonemployee Director Stock Option Plan, as amended.
During the quarter ended June 30, 2006, 750 stock options previously granted
pursuant to the 2000 Nonemployee Director Stock Option Plan were exercised at an
exercise price of $1.96 per share.
4. SEVERANCE COSTS
During the quarter ended March 31, 2006, the Company accrued an aggregate of
$655,000 for severance costs to three individuals including severance to a
former executive officer. The severance to such former executive officer
included $482,000 which will be paid over a two year period following the
termination of the former executive officer's employment. The $655,000 is
included in selling, general and administrative
6
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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expenses in the accompanying Consolidated Condensed Statements of Operations
(Unaudited) for the six months ended June 30, 2006. As of June 30, 2006, a total
of $129,000 has been paid in connection with the $655,000 severance accrual,
$311,000 will be paid within the next twelve months and the balance will be paid
thereafter.
5. LONG-TERM DEBT
Line of Credit
--------------
Borrowings under the Company's $100 million credit facility, as amended (the
"Credit Facility"), bear interest at one of five pricing levels dependent on the
Company's debt service coverage ratio at the quarterly pricing date (as
defined), and are secured by all of the Company's assets including accounts
receivable, inventories and equipment. At the first pricing level, at the
Company's option, the rate will be either (a) .25% below the greater of the
Federal funds rate plus .5% and prime or (b) 1.75% over LIBOR. At the second
level, at the Company's option, the rate will be either (a) the greater of the
Federal funds rate plus .5% and prime or (b) 2.00% over LIBOR. At the third
level, at the Company's option, the rate will be either (a) .25% over the
greater of the Federal funds rate plus .5% and prime or (b) 2.25% over LIBOR. At
the fourth pricing level, at the Company's option, the rate will be either (a)
..5% over the greater of the Federal funds rate plus .5% and prime or (b) 2.50%
over LIBOR. At the fifth pricing level, at the Company's option, the rate will
be either (a) .75% over the greater of the Federal funds rate plus .5% and prime
or (b) 2.75% over LIBOR. The amounts that the Company may borrow under the
Credit Facility are based upon specified percentages of the Company's eligible
accounts receivable and inventories (as defined). The Company is required to
comply with certain affirmative and negative covenants and certain financial
ratios. The covenants, among other things, place limitations and restrictions on
the Company's borrowings, investments, capital expenditures and transactions
with affiliates; prohibit dividends and acquisitions; and prohibit stock
redemptions in excess of an aggregate cost of $2,000,000 during the term of the
Credit Facility. The Credit Facility requires the Company to maintain certain
minimum levels of tangible net worth throughout the term of the credit agreement
as well as a minimum debt service coverage ratio and a minimum inventory
turnover level, each tested on a quarterly basis. In May 2006, the Company's
credit facility was amended subsequent to but effective as of March 31, 2006
whereby the debt service coverage ratio test for the first quarter of 2006 was
eliminated and the minimum tangible net worth level was reduced to $21,000,000.
In August 2006, the Company's credit facility was amended subsequent to but
effective as of the balance sheet date whereby the debt service coverage ratio
test for the second quarter of 2006 was eliminated and certain other financial
covenants and other covenants relating to reporting and information were added.
The new financial covenants include requirements that the Company achieve
reductions in inventory of $7,500,000 from June 30, 2006 to September 30, 2006,
reductions in past due accounts receivables of $750,000 per month for each of
the months August and September 2006 and maintain minimum daily excess
availability of $2,000,000 beginning August 15, 2006; $2,500,000 beginning
September 16, 2006 and $3,000,000 from October 16, 2006 through November 15,
2006. The Company will be permitted to have less than the minimum daily excess
availability requirement for up to seven individual business days during each
period. The Company was in compliance with these amended and all other covenants
under the Credit Facility at June 30, 2006. There is no assurance that the
Company will be able to meet the new requirements. The Company anticipates that
it will need additional amendments in the future. At June 30, 2006, outstanding
borrowings under the Company's credit facility aggregated $94,789,000 compared
to $88,900,000 at December 31, 2005.
7
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
6. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Management believes that the Company is operating in a single business segment,
distribution of electronic components, in accordance with the rules of Statement
of Financial Accounting Standards No. 131 ("Disclosure About Segments of an
Enterprise and Related Information").
Sales by geographic areas are as follows:
Quarters Six Months
Periods Ended June 30 2006 2005 2006 2005
------------------------------------------------------------------------------------------------
Americas (1)................... $ 109,196,000 $ 99,796,000 $ 216,575,000 $ 185,436,000
Europe......................... 5,354,000 4,418,000 8,666,000 8,907,000
Asia/Pacific................... 9,449,000 7,000,000 17,070,000 11,180,000
------------- ------------- ------------- -------------
$ 123,999,000 $ 111,214,000 $ 242,311,000 $ 205,523,000
============= ============= ============= =============
(1) Includes sales in the United States and Puerto Rico of $101,855,000 and
$90,890,000 for the quarters ended June 30, 2006 and 2005 and $203,169,000
and $172,240,000 for the six months ended June 30, 2006 and 2005.
Long-lived assets (property, plant and equipment - net) are located
substantially in the Americas and include long-lived assets in the United States
of $8,448,000 and $8,176,000 at June 30, 2006 and December 31, 2005.
8
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a distributor of
electronic components manufactured by others. The Company distributes a full
range of semiconductors (active components), including transistors, diodes,
memory devices, microprocessors, microcontrollers, other integrated circuits,
active matrix displays and various board-level products, as well as
passive/electromechanical components. Passive products include capacitors,
resistors and inductors. Electromechanical products include power supplies,
cable, switches, connectors, filters and sockets. These products are sold
primarily to original equipment manufacturers in a diverse and growing range of
industries, including manufacturers of computers and computer-related products;
office and home office equipment; cellular and portable products; wireless
products; networking, satellite and other communications products; Internet
infrastructure equipment and appliances; automobiles and automotive subsystems;
consumer goods; voting and gaming machines; point-of-sale equipment; robotics
and industrial equipment; defense and aerospace equipment; home entertainment;
security and surveillance equipment; and medical instrumentation. The Company
also sells products to contract electronics manufacturers, or electronics
manufacturing services, or EMS, providers who manufacture products for companies
in all electronics industry segments. Through the Aved Memory Products division
of its subsidiary, Aved Industries, Inc., the Company also designs and has
manufactured by third parties under the label of its subsidiary's division,
certain memory modules which are sold to original equipment manufacturers.
Overview
--------
Industry conditions have been improving since the first quarter of 2005 and have
continued to improve through the second quarter of 2006. We expect that the
improved conditions may continue throughout 2006 although we have experienced a
softening in July. Our backlog of customer orders, which was $69 million at
December 31, 2004, had increased significantly to $89 million by December 31,
2005 and to $106 million at June 30, 2006. As of July 31, 2006, our backlog
decreased slightly to $105 million. While our inventory levels have grown to
support this significant increase in backlog, it is difficult to determine how
strong the balance of 2006 will be as booking activity slowed in July.
Sales for the second quarter of 2006 represented our fifth consecutive quarterly
increase in sales and represented the highest quarterly sales level since the
first quarter of 2001. While we expect that the future growth in global markets
will include growth in the Americas, the Company believes that growth rates will
be higher in Asian markets and possibly European markets as well. The Company
has operations in Korea, Malaysia and China to support Asian markets. The
Company also has operations in the United Kingdom and Hungary to support
European markets. There can be no assurance that the Company will achieve any
growth in any particular market in the future.
The implementation of a new enterprise resource planning (ERP) system which was
placed into service in February of 2006 had a material adverse impact on our
operations and our results during the first half of 2006. Also having a
significant impact on the results for the first half of 2006 was a non-recurring
accrual for severance pay and certain bad debt adjustments and write-offs that
occurred in the first quarter. Results for the first half of 2006 were also
impacted by a significant increase in interest expense associated with increases
in interest rates and increased borrowings to support the growth in inventory
and receivables resulting from sales and backlog growth as well as ERP issues.
Critical Accounting Policies and Estimates
------------------------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the unaudited Consolidated Condensed Financial Statements and
accompanying notes. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts, inventories, income taxes, stock-based
compensation, a postretirement benefit obligation and loss contingencies.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results could differ from these estimates under different assumptions or
conditions.
The Company believes there have been no significant changes, during the quarter
ended June 30, 2006, to the items disclosed as critical accounting policies and
estimates in Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005 except as follows:
9
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), which replaces SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires
all share-based payments to employees including grants of employee stock
options, be measured at fair value and expensed in the consolidated statement of
operations over the service period (generally the vesting period). Upon
adoption, the Company transitioned to SFAS 123 (R) using the modified
prospective application, whereby compensation cost is only recognized in the
consolidated statements of operations beginning with the first period that SFAS
123 (R) is effective and thereafter, with prior periods' stock-based
compensation still presented on a pro forma basis. The Company continues to use
the Black-Scholes option valuation model to value stock options. See Note 3 to
Notes to Consolidated Condensed Financial Statements (Unaudited) for required
disclosures under SFAS 123 (R).
Results of Operations
---------------------
Net sales for the quarter and six months ended June 30, 2006 were $124.0 million
and $242.3 million representing an 11.5% and 17.9% increase from net sales of
$111.2 million and $205.5 million for the same periods of 2005. Sales for the
second quarter of 2006 increased 4.8% sequentially from sales for the first
quarter of 2006 and reflected the Company's highest quarterly sales level since
the first quarter of 2001. The increases in sales reflect improvements in
industry conditions which began during the second quarter of 2005 and continued
into the second quarter of 2006, opportunities created from the ongoing
consolidation in our industry and gains resulting from the Company's growth
strategies. While the Company experienced a reduction in sales and bookings in
July, management believes that industry conditions may remain positive
throughout 2006. Management is concerned, however, that continuing issues
relating to the conversion onto a new enterprise resource planning (ERP) system
implemented in February 2006 may inhibit the Company's ability to participate in
the industry growth for the next few quarters.
Gross profit was $20.5 million and $38.7 million for the second quarter and
first six months of 2006 compared to $18.3 million and $34.1 million for the
same periods of 2005. The increases in gross profit were primarily due to the
increases in sales. Gross profit margins as a percentage of net sales were 16.5%
and 16.0% for the second quarter and first six months of 2006 compared to 16.4%
and 16.6% for the second quarter and first six months of 2005. The decrease in
gross profit margin for the first six months of 2006 compared to the same period
of 2005 reflects issues relating to the conversion onto a new enterprise
resource planning (ERP) system as well as the continued impact from sales to
accounts that require aggressive pricing.
Selling, general and administrative expenses ("SG&A") was $19.0 million for the
second quarter of 2006 compared to $16.7 million for the second quarter of 2005.
SG&A was $38.3 million for the first half of 2006 compared to $31.3 million for
the first six months of 2005. SG&A for the second quarter and first six months
of 2006 reflects increases in variable expenses of $300,000 and $1.0 million
compared to the 2005 periods. These increases in variable expenses primarily
reflect increases in gross profit dollars and increases in commission rates
resulting from pressure in labor markets. In addition to the increases in
variable expenses, fixed expenses increased $2.0 million for the second quarter
of 2006 and $6.0 million for the first six months of 2006 compared to the 2005
periods. The increase in fixed expenses relates primarily to bad debt
adjustments and write-offs in the first quarter of 2006, and increases in
compensation expense, consulting fees and maintenance and repairs during the
first half of 2006 as compared to the same periods of 2005. As a result of
industry consolidation and improved conditions within the industry, during 2005
and the first half of 2006 the Company strategically increased its personnel in
North America, Europe and Asia. The Company may expand further, including
personnel additions, to enhance its position in order to take advantage of
industry consolidation and the continuing trends for business to transfer
outside of North America. As a result of severe productivity losses caused by
the new ERP system, the Company expects to continue to add people across all
departments to
10
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
manage both operations and data flow. Management believes that these
productivity losses are temporary and productivity gains will occur as
improvements to the new ERP system are obtained. For the first half of 2006, the
increase in fixed expenses was partially offset by a reduction in other expenses
including occupancy costs. In addition, in connection with the new ERP system,
SG&A for the second quarter and first half of 2006 increased by $115,000 and
$205,000 representing the non-cash depreciation and amortization of the cost of
the new ERP system over a seven year period. Additionally, SG&A increased
$334,000 and $832,000 for the second quarter and first half of 2006 as a result
of consulting fees associated with the ERP conversion. Furthermore, SG&A for the
six months ended June 30, 2006 reflects an accrual in the first quarter of 2006
of $655,000 for severance pay and an expense of $806,000 for bad-debt
adjustments and write-offs. The Company anticipates additional expenses for
maintenance and further development required in connection with the new ERP
system. In 2007, quarterly SG&A will reflect $226,000 per quarter representing
non-cash depreciation and amortization of the cost of the new ERP system over a
seven year period. Due to all of the foregoing, the Company expects that SG&A
will increase in future periods.
SG&A as a percentage of net sales was 15.3% and 15.8% for the quarter and six
months ended June 30, 2006 compared to 15.0% and 15.2% for the same periods of
2005. The increases were due to the increases in SG&A in absolute dollars
described above which increases more than offset the impact from the increases
in sales.
Income from operations was $1.5 million and $360,000 for the quarter and six
months ended June 30, 2006 compared to $1.6 million and $2.7 million for the
same periods of 2005. The decrease in income from operations for the first half
of 2006 was primarily due to the issues relating to the implementation of the
new ERP system, including the impact on gross profit margins and additional
consulting fees, significant accruals for severance pay, bad debt adjustments
and write-offs and the other increases in SG&A as discussed previously.
Interest expense increased to $1.9 million and $3.5 million for the second
quarter and first six months of 2006 compared to $1.1 million and $2.2 million
for the second quarter and first six months of 2005. The increases in interest
expense resulted from increases in average borrowings and increases in overall
interest rates. Our average borrowings increased by $27.7 million and $25.0
million for the second quarter and first six months of 2006 compared to the same
periods of 2005 primarily as a result of increases in our accounts receivable
and inventory levels. Accounts receivable increased in connection with the
significant increases in sales as well as a slow down in our collections
resulting from invoicing problems created by our new ERP system. Accounts
receivable also increased in connection with competitive pressures to provide
extended payment terms to strategic customers. Inventory increased significantly
to $95.2 million at the end of the first half of 2006 compared to $66.4 million
at the end of the first half of 2005. Our inventory increased significantly to
support the increased levels of sales beginning during the second quarter of
2005 and accelerating in the first half of 2006, and the significant increase in
customer backlog during the first half of 2006. An increase in supplier delivery
times (or lead-times) has also caused the Company to increase inventory levels
in order to be able to meet customer requirements. Furthermore, the new ERP
system has had an adverse impact on the Company's ability to optimize its
inventory levels. As a result of increases in the prime and LIBOR interest
rates, the Company's overall interest rates increased despite the positive
impact from the improved pricing structure under its credit facility. The
Company's rate improved from the then first pricing level under its credit
facility during the first quarter of 2005 to the third pricing level under the
current pricing structure. This improvement, which aggregated 50 basis points,
resulted from the change in the pricing structure under the August 8, 2005
amendment to the credit facility. The positive impact on interest expense from
the improvement in the rate associated with the change in pricing structure was
more than offset by the adverse effect from interest rate increases by the
Federal Reserve Board. As and to the extent the Federal Reserve increases
interest rates, the Company's interest expense will increase. Additionally, it
is anticipated that the pricing level achieved by the Company in 2005 will not
be attainable in the near future which may contribute to the increase in the
Company's cost of borrowing. To the extent that the Company continues or
increases its current level of borrowing, interest expense will increase in
future periods. Interest expense for the second quarter and first six months of
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ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
2006 included non-cash amortization of deferred financing fees of $37,000 and
$59,000. Interest expense will reflect an additional $466,000 of deferred
financing fees over the remaining term of the amended credit facility which is
currently set to expire on May 31, 2009. See "Liquidity and Capital Resources"
below and Note 5 to Notes to Consolidated Condensed Financial Statements
(Unaudited).
The Company had a net loss of $255,000 for the second quarter of 2006 (or $(.06)
per share (diluted)), compared to net income of $308,000 (or $.08 per share
(diluted)) for the second quarter of 2005. For the first six months of 2006, the
Company had a net loss of $2.0 million (or $(.49) per share (diluted)) compared
to net income of $369,000 (or $.09 per share (diluted)) for the 2005 period.
Liquidity and Capital Resources
-------------------------------
Working capital at June 30, 2006 increased to $107.4 million from working
capital of $103.5 million at December 31, 2005. The current ratio was 2.30:1 at
June 30, 2006 compared to 2.76:1 at December 31, 2005. The increase in working
capital was primarily due to increases in accounts receivable and inventory
which were partially offset by an increase in accounts payable. Accounts
receivable was $89.9 million at June 30, 2006 compared to $82.2 million at
December 31, 2005. The increase in accounts receivable reflects an increased
level of sales towards the latter part of the second quarter of 2006 compared to
the latter part of the fourth quarter of 2005. Accounts receivable also
increased in connection with competitive pressures to provide extended payment
terms to strategic customers and a slow down in our collections resulting from
issues relating to the implementation of our new ERP system. Inventory levels
were $95.2 million at June 30, 2006 compared to $74.6 million at December 31,
2005. Inventory increased to support the increased levels of sales beginning
during the second quarter of 2005 and accelerating in the first half of 2006, as
well as the significant increase in customer backlog during the first half of
2006. An increase in supplier delivery times (or lead-times) has also caused the
Company to increase inventory levels in order to be able to meet customer
requirements. Furthermore, the new ERP system has had an adverse impact on the
Company's ability to optimize its inventory levels. Accounts payable increased
to $74.6 million at June 30, 2006 from $51.6 million at December 31, 2005 in
connection with an increase in the level of purchases made during the latter
part of the second quarter of 2006 over the same period of the fourth quarter of
2005.
At June 30, 2006, the Company had subordinated debt with various maturities
through 2015 which aggregated $681,000, including the current portion of such
debt, and had an unfunded postretirement benefit obligation of $998,000. See the
table below.
Borrowings under the Company's $100 million credit facility, as amended (the
"Credit Facility"), bear interest at one of five pricing levels dependent on the
Company's debt service coverage ratio at the quarterly pricing date (as
defined), and are secured by all of the Company's assets including accounts
receivable, inventories and equipment. At the first pricing level, at the
Company's option, the rate will be either (a) .25% below the greater of the
Federal funds rate plus .5% and prime or (b) 1.75% over LIBOR. At the second
level, at the Company's option, the rate will be either (a) the greater of the
Federal funds rate plus .5% and prime or (b) 2.00% over LIBOR. At the third
level, at the Company's option, the rate will be either (a) .25% over the
greater of the Federal funds rate plus .5% and prime or (b) 2.25% over LIBOR. At
the fourth pricing level, at the Company's option, the rate will be either (a)
..5% over the greater of the Federal funds rate plus .5% and prime or (b) 2.50%
over LIBOR. At the fifth pricing level, at the Company's option, the rate will
be either (a) .75% over the greater of the Federal funds rate plus .5% and prime
or (b) 2.75% over LIBOR. The amounts that the Company may borrow under the
Credit Facility are based upon specified percentages of the Company's eligible
accounts receivable and inventories (as defined). The Company is required to
comply with certain affirmative and negative covenants and certain financial
ratios. The covenants, among other things, place limitations and restrictions on
the Company's borrowings, investments, capital expenditures and transactions
with affiliates; prohibit dividends and acquisitions; and prohibit stock
redemptions in excess of an aggregate cost of $2.0 million during the term of
the Credit Facility. The Credit Facility requires the Company to maintain
certain minimum levels of tangible net worth throughout the term of the credit
agreement as well as a minimum debt service coverage ratio and a minimum
inventory turnover level, each tested on a quarterly basis. In May 2006, the
12
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Company's credit facility was amended subsequent to but effective as of March
31, 2006 whereby the debt service coverage ratio test for the first quarter of
2006 was eliminated and the minimum tangible net worth level was reduced to
$21.0 million. In August 2006, the Company's credit facility was amended
subsequent to but effective as of the balance sheet date whereby the debt
service coverage ratio test for the second quarter of 2006 was eliminated and
certain other financial and other covenants relating to reporting and
information were added. The new financial covenants include requirements that
the Company achieve reductions in inventory of $7.5 million from June 30, 2006
to September 30, 2006, reductions in past due accounts receivables of $750,000
per month for each of the months August and September 2006 and maintain minimum
daily excess availability of $2.0 million beginning August 15, 2006; $2.5
million beginning September 16, 2006 and $3.0 million from October 16, 2006
through November 15, 2006. The Company will be permitted to have less than the
minimum daily excess availability requirement for up to seven individual
business days during each period. The Company was in compliance with these
amended and all other covenants under the Credit Facility at June 30, 2006.
There is no assurance that the Company will be able to meet the new
requirements. The Company anticipates that it will need additional amendments in
the future. At June 30, 2006, outstanding borrowings under the Company's credit
facility aggregated $94.8 million compared to $88.9 million at December 31,
2005. See Note 5 to Notes to Consolidated Condensed Financial Statements
(Unaudited).
Long-term debt, operating leases and other long-term obligations as of June 30,
2006 mature as follows:
Payments Due by Period
------------------------------------------------------
Less than More than
Obligations Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------------------------------------------
Long-term debt (1).................. $ 95,470,000 $ 72,000 $ 95,035,000 $ 184,000 $ 179,000
Capital leases...................... 819,000 420,000 399,000 - -
Operating leases.................... 12,500,000 3,000,000 6,400,000 2,100,000 1,000,000
Other long-term obligations (2)..... 1,213,000 - 215,000 - 998,000
------------ ------------ ------------ ------------ ------------
Total obligations................... $110,002,000 $ 3,492,000 $102,049,000 $ 2,284,000 $ 2,177,000
============ ============ ============ ============ ============
---------
(1) Reflected on the Company's Consolidated Condensed Balance Sheet (Unaudited)
as of June 30, 2006 and includes $94,789,000 under the Company's Credit
Facility which matures on May 31, 2009.
(2) Reflected on the Company's Consolidated Condensed Balance Sheet (Unaudited)
as of June 30, 2006 and includes a postretirement benefit obligation of
$998,000.
In February 2006, the Company implemented a new enterprise resource planning
(ERP) system. The aggregate cost of this new ERP system, including costs of
training and implementation but excluding capitalized payroll costs, is
approximately $8.5 million. At June 30, 2006, $5.9 million associated with this
ERP system was reflected in property, plant and equipment - net on the
Consolidated Condensed Balance Sheet. In July 2004, the Company financed $1.1
million of its ERP costs with a third party finance company under an installment
payment arrangement. The effective interest rate under this agreement was 1.9%
per annum. The Company also financed an additional $1.8 million of the aggregate
cost of the ERP system with another third party finance company, which financing
arrangement has maturities through November 2008 and has effective interest
rates ranging from 1.6% to 2.2% per annum. Of this $1.8 million financing,
$565,000 is classified as operating leases and $1.3 million is classified as
capital leases. At June 30, 2006, the outstanding obligation under these capital
leases aggregating $1.3 million was $819,000.
13
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
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The Company currently expects that its cash flows from operations and additional
borrowings available under its Credit Facility will be sufficient to meet the
Company's current financial requirements over the next twelve months, including
obligations related to the current portion of long-term debt and capital and
operating leases. However, the Company continues to explore additional sources
of financing in order to support its growth.
Off-Balance Sheet Arrangements
------------------------------
At June 30, 2006, the Company did not have any off-balance sheet arrangements
that are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to investors.
Forward-Looking Statements; Business Risks and Uncertainties
------------------------------------------------------------
This Form 10-Q contains forward-looking statements (within the meaning of
Section 21E. of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations, beliefs and intentions relating to the
Company's or industry's future performance, market conditions, its future
operating results, investments in the growth of its business, bookings,
backlogs, sales, products, services and markets (including expansion of
operations in Asia and Europe), liquidity and available cash flow, trends or
developments including relating to industry conditions or industry consolidation
or future growth in global markets, expected capital expenditures (including for
the new ERP system) and/or future events relating to or affecting the Company
and its business and operations. If and when used in this Form 10-Q, the words
"believes," "estimates," "plans," "expects," "attempts," "intends,"
"anticipates," "could," "may," "explore" and similar expressions as they relate
to the Company, its management or its industry are intended to identify
forward-looking statements. The actual performance, results or achievements of
the Company could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties. Factors that could
adversely affect the Company's future results, performance or achievements
include, without limitation: the level of strength of industry and market
conditions and business activity being less than we believe or weakening; a
tightening by customers of their inventory levels; a slowdown in sales; the
continuance of a trend for electronics manufacturing to move offshore; the level
of effectiveness of the Company's business, investment and marketing strategies,
including those outside the Americas and particularly in Asia; insufficient
funds from operations, from the Company's Credit Facility and from other sources
(debt and/or equity) to support the Company's operations or the inability of the
Company to obtain required amendments to the terms and provisions of the Credit
Facility and/or additional financing when needed or on terms acceptable to the
Company; an increase in interest rates, including as a result of an increase in
pricing levels under its Credit Facility, interest rate increases by the Federal
Reserve Board and/or an increase in the Company's average outstanding
borrowings; a reduction in the level of demand for products of its customers
including the level of growth of some of the new technologies supported by the
Company; deterioration in the relationships with existing suppliers,
particularly one of our largest suppliers; decreases in gross profit margins,
including decreasing margins resulting from the Company being required to have
aggressive pricing programs, an increasing number of low-margin, large volume
transactions, inventory oversupply conditions and/or increases in the costs of
goods; continuing to be required to extend or even further extend payment terms
of certain customers, problems with telecommunication, computer and information
systems, including related to the completion of the installation of the new ERP
system and the effectiveness of the operation thereof, as well as the ultimate
total cost of installing and implementing the ERP system being materially
greater than expected; the inability of the Company to expand its product
offerings or obtain product during periods of allocation; the impact from
changes in accounting rules; adverse currency fluctuations; the adverse impact
of terrorism or the threat of terrorism on the economy; and the other risks and
factors detailed in this Form 10-Q and in the Company's Form 10-K for the fiscal
year ended December 31, 2005 and other filings with the Securities and Exchange
Commission and in its press releases. These risks and uncertainties are beyond
the ability of the Company to control. In many cases, the
14
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
Company cannot predict the risks and uncertainties that could cause actual
results to differ materially from those indicated by the forward-looking
statements. The Company undertakes no obligation to update publicly or revise
any forward-looking statements, business risks and/or uncertainties.
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company's Credit Facility bears interest based on interest rates tied to the
Federal funds rate, prime or LIBOR rate, any of which may fluctuate over time
based on economic conditions. As a result, the Company is subject to market risk
for changes in interest rates and could be subjected to increased or decreased
interest payments if market interest rates fluctuate. If market interest rates
increase, the impact may have a material adverse effect on the Company's
financial results. For each 100 basis point fluctuation in the interest rates
charged on the Company's borrowings under its Credit Facility, interest expense
will increase or decrease by approximately $237,000 per quarter based on
outstanding borrowings at June 30, 2006. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
Controls and Procedures
-----------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this report was carried out
under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based
on this evaluation, our management, including our CEO and CFO, have concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed in our reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms and are also effective to ensure that information required to be disclosed
in the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO as appropriate to
allow timely decisions regarding required disclosure and that our financial
condition, results of operations and cash flows are fairly presented in all
material respects.
Changes In Internal Controls Over Financial Reporting
-----------------------------------------------------
There have been no changes in our internal controls over financial reporting
that occurred during the last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
15
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors
-------- ------------
There have been no material changes to our risk factors from those disclosed in
our Form 10-K for the year ended December 31, 2005, except as follows:
We may not be able to satisfy our funding requirements.
We currently anticipate needing to spend significant amounts of cash to: meet
our working capital requirements (including to support increases in levels of
inventory, as well as customer backlog, and accounts receivable as our level of
sales increases); invest in and finance capital equipment and infrastructure;
upgrade our information and communication systems, including our new enterprise
resource planning (ERP) system; expand our foreign operations and/or acquire
businesses or open divisions; and/or respond to increases in expenses and costs,
unanticipated developments, increasing customer demands and/or competitive
pressures. If we do not have enough cash on hand, cash generated from our
operations and/or cash available under our credit facility to meet these cash
requirements, we will need to seek alternative sources of financing to carry out
our growth and operating strategies, particularly if our credit facility is not
available to do so because of certain new financial covenants or otherwise
and/or we cannot obtain any required amendment to its terms and provisions. We
may not be able to obtain amendments to our credit facility terms and provisions
to avoid defaults and/or raise needed cash on terms acceptable to us, or at all.
Financing may be on terms that are dilutive or potentially dilutive. If
alternative sources of financing are required but are insufficient or
unavailable, we will be required to modify our operating plans to the extent of
available funding, if and assuming such modifications and/or other actions can
be made or taken at all.
Our new enterprise resource planning (ERP) system could continue to interfere
with our operations.
Although we are seeing some improvement recently, service to and relationships
with our customers and suppliers have been adversely impacted by the
implementation of our new ERP system. The strain on the Company's employees, as
well as on its financial resources, in connection with the implementation of
this new ERP system has been significant. We can offer no assurance that the
implementation will be successful or that it will not cause additional
interruption in operations and services. Failure of the new ERP system to
improve or perform as expected would have a further material adverse impact on
our operating results.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
(c) Sales of Unregistered Securities
--------------------------------
During the quarter ended June 30, 2006, the Company did not issue or sell
any unregistered securities, although, pursuant to the Company's
Employees', Officers', Directors' Stock Option Plan, as previously amended
and restated, the Company granted stock options to 135 individuals to
purchase an aggregate of 151,250 shares of the Company's common stock at an
exercise price of $3.67 per share. The stock options vest over a four-year
period and are exercisable over a five-year period. The stock options were
granted by the Company in reliance upon the exemption from registration
available under Section 4(2) of the Securities Act of 1933, as amended. See
Note 3 to Notes to Consolidated Condensed Financial Statements (Unaudited).
ITEM 5. Other Information
------- -----------------
In August 2006, the Company's credit facility was amended subsequent to but
effective as of the balance sheet date whereby the debt service coverage ratio
test for the second quarter of 2006 was eliminated and certain other financial
covenants and other covenants relating to reporting and information were
16
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
================================================================================
added. The new financial covenants include requirements that the Company achieve
reductions in inventory of $7,500,000 from June 30, 2006 to September 30, 2006,
reductions in past due accounts receivables of $750,000 per month for each of
the months August and September 2006 and maintain minimum daily excess
availability of $2,000,000 beginning August 15, 2006; $2,500,000 beginning
September 16, 2006 and $3,000,000 from October 16, 2006 through November 15,
2006. The Company will be permitted to have less than the minimum daily excess
availability requirement for up to seven individual business days during each
period. There is no assurance that the Company will be able to meet the new
requirements. The Company anticipates that it will need additional amendments in
the future.
ITEM 6. Exhibits
------- --------
Exhibits
--------
10.1 Fifth Amendment to Credit Agreement, dated as of August 14,
2006 among the Company, as borrower, and Harris N.A.,
successor by merger to Harris Trust and Savings Bank, as a
lender and administrative agent, U.S. Bank National
Association, as a lender and co-agent, and the other lenders
party thereto.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a
- 14(a) or Rule 15d - 14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a
- 14(a) or Rule 15d - 14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
ss. 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
ss. 1350.
------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
All American Semiconductor, Inc.
--------------------------------------------
(Registrant)
Date: August 14, 2006 /s/ BRUCE M. GOLDBERG
--------------------------------------------
Bruce M. Goldberg, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2006 /s/ HOWARD L. FLANDERS
--------------------------------------------
Howard L. Flanders, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
17