AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 1995
REGISTRATION NO. 033-64019
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5065 59-2814714
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
---------------
16115 NORTHWEST 52ND AVENUE
MIAMI, FLORIDA 33014
(305) 621-8282
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
---------------
PAUL GOLDBERG, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ALL AMERICAN SEMICONDUCTOR, INC.
16115 NORTHWEST 52ND AVENUE
MIAMI, FLORIDA 33014
(305) 621-8282
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
COPIES TO:
<TABLE>
<S> <C>
ALAN D. AXELROD, ESQ. RICHARD H. BRUCK, ESQ.
RUBIN BAUM LEVIN CONSTANT FRIEDMAN & BILZIN BRUCK & PERRY
2500 FIRST UNION FINANCIAL CENTER 1301 DOVE STREET
MIAMI, FLORIDA 33131-2336 SUITE 1000
(305) 374-7580 NEWPORT BEACH, CALIFORNIA 92660
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
effective time of the mergers (collectively, the "Mergers") of Added Value
Electronics Distribution, Inc., a California corporation ("Added Value"), with
and into All American Added Value, Inc., a California corporation and
wholly-owned subsidiary of the Registrant ("California Subsidiary"), and of
A.V.E.D.-Rocky Mountain, Inc., a Colorado corporation ("Rocky Mountain"), with
and into All American A.V.E.D., Inc., a Colorado corporation and wholly-owned
subsidiary of the Registrant ("Colorado Subsidiary"), as described in the
enclosed Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value...... 3,192,476(1) N/A $3,011,551(2) $1,039(3)
=============================================================================================================================
</TABLE>
(1) Represents the maximum number of shares (2,348,032 shares) of the
Registrant's Common Stock that could be issued upon the consummation of
the Mergers as described in the Registration Statement based upon the
minimum valuation price of $2.25 per share of Common Stock for purposes
of the Mergers, plus up to a maximum of 844,444 shares of Common Stock
that the Registrant, at its election and in lieu of the payment of
cash, could issue to the extent that, subject to certain events, the
aggregate value of the shares of the Registrant's Common Stock issued
on the closing date in the Mergers has not, by June 30, 1998,
appreciated, in the aggregate, by at least $1,900,000.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(f)(2) and (3). Based upon the aggregate book
value as of June 30, 1995, of the shares of Common Stock of Added Value
($3,568,233) and Rocky Mountain ($2,378,856) to be cancelled in the
Mergers reduced by the amount of total cash ($2,935,538) to be paid by
the Registrant to the stockholders of Added Value and Rocky Mountain
(other than the California Subsidiary) as part of the merger
consideration.
(3) The Registration Fee was previously paid in connection with the initial
filing of this Registration Statement on November 6, 1995.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN THE PROXY STATEMENT/PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 CAPTION OR LOCATION IN
ITEM, NUMBER AND CAPTION PROXY STATEMENT/PROSPECTUS
------------------------ --------------------------
A. INFORMATION ABOUT THE TRANSACTION
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....................... Facing Page of Registration
Statement; Cross Reference Sheet;
Outside Front Cover Page of
Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................................... Inside Front Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information........................................ Summary; Risk Factors; Comparative Per
Share Data
4. Terms of the Transaction..................................... The Purchase Agreement; The Transaction
and Related Matters; Description of
Securities; Comparison of the Rights of
Holders of the Added Value Companies'
Common Stock and the Company's Common
Stock
5. Pro Forma Financial Information.............................. Summary; Unaudited Combined Pro Forma
Consolidated Financial Statements
6. Material Contracts with the Company Being Acquired........... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters................ Not Applicable
8. Interests of Names Experts and Counsel....................... Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities............................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants.................. Not Applicable
11. Incorporation of Certain Information by Reference............ Not Applicable
12. Information with Respect to S-2 or S-3 Registrants........... Not Applicable
13. Incorporation of Certain Information by Reference............ Not Applicable
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants....................................... Summary - The Company, Market Prices
and Dividend Data, Summary Financial
Data and Comparative Per Share Data;
Business and Financial Information
Regarding the Company; Description of
Securities; Selected Information with
Respect to the Company; Index to
Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies.................... Not Applicable
16. Information with Respect to S-2 or S-3 Companies............. Not Applicable
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
FORM S-4 CAPTION OR LOCATION IN
ITEM, NUMBER AND CAPTION PROXY STATEMENT/PROSPECTUS
------------------------ --------------------------
<S> <C>
17. Information with Respect to Companies Other than S-2
or S-3 Companies............................................. Summary - The Added Value Companies,
Market Prices and Dividend Data,
Summary Financial Data and
Comparative Per Share Data; Business
and Financial Information Regarding the
Added Value Companies; Selected
Information with Respect to the Added
Value Companies; Index to Financial
Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited.......................................... Outside Front Cover Page of Proxy
Statement/Prospectus; Summary;
Introduction; The Transaction and
Related Matters - Interests of Certain
Persons in the Transaction; Selected
Information with Respect to the
Company; Selected Information with
Respect to the Added Value Companies
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer................. Not Applicable
</TABLE>
(ii)
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC.
16115 NORTHWEST 52ND AVENUE
MIAMI, FLORIDA 33014
(305) 621-8282
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
All American Semiconductor, Inc., a Delaware corporation (the "Company"), to be
held on _______________, December __, 1995, at 10:00 a.m., Miami, Florida local
time, at Don Shula's Hotel, 15255 Bull Run Road, Miami Lakes, Florida.
At this important meeting you will be asked to consider and vote to
approve a transaction (the "Transaction") pursuant to which the Company and two
newly-formed, wholly-owned subsidiaries, All American Added Value, Inc., a
California corporation ("California Subsidiary"), and All American A.V.E.D.,
Inc., a Colorado corporation ("Colorado Subsidiary", and, together with the
California Subsidiary, collectively, the "Subsidiaries"), will acquire by merger
two affiliated, privately held companies, Added Value Electronics Distribution,
Inc., a California corporation ("Added Value"), and A.V.E.D.-Rocky Mountain,
Inc., a Colorado corporation ("Rocky Mountain", and, together with Added Value,
collectively, the "Added Value Companies"). If the Transaction is consummated,
Added Value will first be merged with and into the California Subsidiary with
the California Subsidiary the surviving corporation and Rocky Mountain will then
immediately be merged with and into the Colorado Subsidiary with the Colorado
Subsidiary the surviving corporation. The stockholders of the Added Value
Companies (the "Target Stockholders") will be receiving cash and Common Stock of
the Company as the consideration being paid by the Company to acquire the Added
Value Companies as described in the accompanying Proxy Statement/Prospectus.
The attached Proxy Statement/Prospectus provides information about the
Company and the Added Value Companies and describes the proposed Transaction.
This document is intended to provide you with the information that you will need
to make an informed decision regarding your vote on the proposed Transaction. It
also serves as a Prospectus for the Company, describing the shares of the
Company's Common Stock that the Target Stockholders will receive if the
Transaction is approved and consummated. I urge you to carefully read this
information before voting on the proposed Transaction.
Your Board of Directors believes that the proposed Transaction is fair and
in the best interests of the Company and its shareholders and unanimously
recommends approval of the Transaction.
Since your Board of Directors has approved the Transaction and approval of
the Transaction by the Company's shareholders is not required under applicable
Delaware law, and subject to a quorum comprised of a majority of the outstanding
shares of Common Stock of the Company being present in person or by proxy at the
Special Meeting, the Transaction must be approved by the affirmative vote of a
majority of the votes cast at the Special Meeting by the holders of shares of
the Company's Common Stock present in person or by proxy. Your vote on this
matter is very important. We urge you to carefully review the enclosed material
and return your proxy promptly.
WHETHER OR NOT YOU ARE ABLE TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE
AS PROMPTLY AS POSSIBLE. IF YOU WISH, YOU MAY REVOKE YOUR PROXY PRIOR TO THE
TIME OF THE SPECIAL MEETING, OR YOU MAY ATTEND THE SPECIAL MEETING AND VOTE YOUR
SHARES IN PERSON. YOUR PROMPT COOPERATION IS GREATLY APPRECIATED.
Very truly yours,
Paul Goldberg
Chairman and Chief Executive Officer
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC.
16115 NORTHWEST 52ND AVENUE
MIAMI, FLORIDA 33014
(305) 621-8282
---------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER ____, 1995
---------------
To the Shareholders of All American Semiconductor, Inc.:
Notice is hereby given that a Special Meeting of the Shareholders of All
American Semiconductor, Inc., a Delaware corporation (the "Company"), will be
held on ___________, December __, 1995, commencing at 10:00 A.M., Miami, Florida
local time, at Don Shula's Hotel, 15255 Bull Run Road, Miami Lakes, Florida, for
the following purposes:
1. To consider and vote to approve a transaction (the "Transaction")
pursuant to which the Company and two newly-formed, wholly-owned
subsidiaries, All American Added Value, Inc., a California corporation
("California Subsidiary"), and All American A.V.E.D., Inc., a Colorado
corporation ("Colorado Subsidiary", and, together with the California
Subsidiary, collectively, the "Subsidiaries), will acquire by merger two
affiliated, privately held companies, Added Value Electronics
Distribution, Inc., a California corporation ("Added Value"), and
A.V.E.D.-Rocky Mountain, Inc., a Colorado corporation ("Rocky Mountain",
and, together with Added Value, collectively, the "Added Value
Companies"). If the Transaction is consummated, Added Value will first be
merged with and into the California Subsidiary with the California
Subsidiary the surviving corporation and Rocky Mountain will then
immediately be merged with and into the Colorado Subsidiary with the
Colorado Subsidiary the surviving corporation. The stockholders of the
Added Value Companies (the "Target Stockholders") will be receiving cash
and Common Stock of the Company as the consideration being paid by the
Company to acquire the Added Value Companies as described in the
accompanying Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
With respect to the proposal to approve the Transaction, the Company's
shareholders do not have any dissenters' rights.
The close of business on Wednesday, November 22, 1995, has been fixed as
the record date for determining the Company's shareholders entitled to receive
notice of, and to vote at, the Special Meeting or any adjournment thereof. The
meeting will be subject to adjournment or postponement as the shareholders
present in person or by proxy may determine.
By Order of the Board of Directors.
Howard L. Flanders
Corporate Secretary
____________, 1995
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES THAT YOU HOLD.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND MAIL THE PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES. IF YOU DO ATTEND, YOU MAY, OF COURSE, VOTE IN
PERSON.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This proxy statement/prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 1995
PROSPECTUS FOR
SHARES OF COMMON STOCK
OF ALL AMERICAN SEMICONDUCTOR, INC.
---------------
PROXY STATEMENT
FOR SPECIAL MEETING
OF SHAREHOLDERS
OF
ALL AMERICAN SEMICONDUCTOR, INC.
TO BE HELD ON DECEMBER ___, 1995
---------------
This Proxy Statement/Prospectus is being furnished to the shareholders of
All American Semiconductor, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at a special meeting of shareholders of the Company (the
"Special Meeting") to be held on _______________, December __, 1995, at 10:00
a.m., Miami, Florida local time, at Don Shula's Hotel, 15255 Bull Run Road,
Miami Lakes, Florida. The Special Meeting has been called to consider and vote
to approve a transaction (the "Transaction") pursuant to which the Company and
two newly-formed, wholly-owned subsidiaries, All American Added Value, Inc., a
California corporation ("California Subsidiary"), and All American A.V.E.D.,
Inc., a Colorado corporation ("Colorado Subsidiary", and, together with the
California Subsidiary, collectively, the "Subsidiaries), will acquire by merger
two affiliated, privately held companies, Added Value Electronics Distribution,
Inc., a California corporation ("Added Value"), and A.V.E.D.-Rocky Mountain,
Inc., a Colorado corporation ("Rocky Mountain", and, together with Added Value,
collectively, the "Added Value Companies"). If the Transaction is consummated,
Added Value will first be merged with and into the California Subsidiary with
the California Subsidiary the surviving corporation (the "Added Value Merger")
and Rocky Mountain will then immediately be merged with and into the Colorado
Subsidiary with the Colorado Subsidiary the surviving corporation (the "Rocky
Mountain Merger"). The stockholders of the Added Value Companies (the "Target
Stockholders") will be receiving cash and Common Stock, $.01 par value, of the
Company (the "Company's Common Stock") as the consideration being paid by the
Company to acquire the Added Value Companies as described in the accompanying
Proxy Statement/Prospectus.
This Proxy Statement/Prospectus also constitutes the Prospectus of the
Company with respect to the shares of the Company's Common Stock to be issued in
the Transaction. The Company has filed a Registration Statement on Form S-4 with
the Securities and Exchange Commission (the "Commission") covering the shares of
the Company's Common Stock to be issued in connection with the Transaction. This
Proxy Statement/Prospectus is first being mailed to the Company's shareholders
on or about December ___, 1995.
All information contained herein with respect to the Company has been
furnished by the management of the Company and all information contained herein
with respect to the Added Value Companies has been furnished by the management
of the Added Value Companies. Although the information concerning the Company
and the Added Value Companies contained herein has been taken from sources
believed to be reliable, neither the Company, on the one hand, nor the Added
Value Companies, on the other hand, can take responsibility for the accuracy or
completeness of the information concerning the other contained herein or for the
disclosure of events, unknown to management of either of them, respectively,
which may have occurred and might affect the significance or adequacy of such
information.
<PAGE>
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHALL BE CONSIDERED WHEN
EVALUATING THE TRANSACTION IN CONNECTION WITH THIS PROXY STATEMENT/PROSPECTUS,
SEE "RISK FACTORS."
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE OFFER OF
THE COMPANY'S COMMON STOCK TO BE ISSUED PURSUANT TO THE TRANSACTION DESCRIBED IN
THIS PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE ADDED VALUE COMPANIES OR ANY OTHER PERSON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO PURCHASE IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR THE
ISSUANCE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
THE SHARES OF THE COMPANY'S COMMON STOCK TO BE ISSUED PURSUANT TO THE
TRANSACTION HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS ___________, 1995.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, statements
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at its offices at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, New York, New York 10048. Also,
copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Company's Common Stock is listed on The Nasdaq Stock
Market, and such reports, statements and other information concerning the
Company may be inspected at the offices of Nasdaq Operations, 1735 K Street,
N.W., Washington, D.C. 20006-1506.
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act of 1933, as amended (the "Act") with respect to the
shares of Common Stock offered hereby. This Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto pursuant to the Act and the rules and regulations
of the Commission thereunder. For further information with respect to the
Company and the Company's Common Stock offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules filed as a part
thereof. The statements contained in this Proxy Statement/Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document annexed hereto or filed as an exhibit to the Registration
Statement, each statement being qualified in any and all respects by such
reference. A copy of the Registration Statement, including exhibits and
schedules, may be inspected without charge at the principal reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained upon payment of fees
prescribed by the Commission from the Public Reference Section of the Commission
at its principal office in Washington, D.C. set forth above.
(i)
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
AVAILABLE INFORMATION...........................................................................................(i)
SUMMARY...........................................................................................................1
General.....................................................................................................1
The Company.................................................................................................2
The Added Value Companies...................................................................................3
The Special Meeting.........................................................................................4
The Transaction.............................................................................................5
Fluctuation in Market Price.................................................................................9
Expenses....................................................................................................9
Interests of Certain Persons in the Transaction.............................................................9
Certain Federal Income Tax Consequences.....................................................................9
Accounting Treatment.......................................................................................10
Operations Following the Transaction.......................................................................10
Market Prices and Dividend Data............................................................................10
Comparison of Rights of the Added Value
Companies' Stockholders and the Company's Shareholders................................................11
Summary Financial Data.....................................................................................11
The Company...........................................................................................12
Added Value...........................................................................................13
Rocky Mountain........................................................................................14
Summary Unaudited Combined Pro Forma Condensed
Consolidated Financial Data............................................................................15
Comparative Per Share Data.................................................................................16
RISK FACTORS.....................................................................................................17
INTRODUCTION.....................................................................................................22
Special Meeting............................................................................................22
Record Date and Voting.....................................................................................24
Proxies....................................................................................................25
Dissenters Rights..........................................................................................25
THE PURCHASE AGREEMENT...........................................................................................25
Transaction................................................................................................25
Other Agreements...........................................................................................27
The Added Value Companies' Lines of Credit.................................................................29
Closing Date of Transaction; Effective Date of the Mergers.................................................30
Conduct of Business of the Added Value
Companies Pending the Closing Date....................................................................30
Conditions to Consummation of the Transaction..............................................................30
Representations and Warranties.............................................................................31
The Nasdaq Stock Market....................................................................................31
Termination and Amendment..................................................................................31
Expenses...................................................................................................32
Resale of the Company's Common Stock.......................................................................32
Regulatory Matters.........................................................................................33
THE TRANSACTION AND RELATED MATTERS..............................................................................33
Background of the Transaction..............................................................................33
Recommendations of the Company's Board of
Directors; The Company's Reasons for the Transaction..................................................33
Interests of Certain Persons in the Transaction............................................................34
Federal Income Tax Consequences............................................................................34
Accounting Treatment.......................................................................................38
Fluctuation in Market Price................................................................................38
Operations Following the Transaction.......................................................................38
UNAUDITED COMBINED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...................................................38
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY.........................................................43
Selected Consolidated Financial Data.......................................................................43
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................................44
Dividend Policy............................................................................................53
Market Information.........................................................................................53
Business...................................................................................................53
Legal Proceedings..........................................................................................65
BUSINESS AND FINANCIAL INFORMATION REGARDING THE ADDED VALUE COMPANIES...........................................65
Added Value Selected Financial Data........................................................................65
Added Value Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................................................67
Rocky Mountain Selected Financial Data.....................................................................70
Rocky Mountain Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................72
Dividend Policy............................................................................................74
Market Information.........................................................................................75
Business...................................................................................................75
Legal Proceedings..........................................................................................79
SELECTED INFORMATION WITH RESPECT TO THE COMPANY.................................................................80
Management.................................................................................................80
Executive Compensation.....................................................................................82
Certain Transactions.......................................................................................90
Security Ownership of Certain
Beneficial Owners and Management......................................................................91
DESCRIPTION OF SECURITIES........................................................................................92
General....................................................................................................92
Common Stock...............................................................................................92
Preferred Stock............................................................................................92
Existing Warrants..........................................................................................93
Existing Options and Other Rights..........................................................................94
Transfer Agent and Registrar...............................................................................94
Certain Provisions of Certificate
of Incorporation and By-laws..........................................................................94
Certain Provisions Relating to Limitation of
Liability and Indemnification of Directors............................................................95
Shares Eligible for Future Sale............................................................................96
COMPARISON OF THE RIGHTS OF HOLDERS OF THE ADDED VALUE
COMPANIES' COMMON STOCK AND THE COMPANY'S COMMON STOCK..........................................................97
SELECTED INFORMATION WITH RESPECT TO THE
ADDED VALUE COMPANIES..........................................................................................104
Ownership of Capital Stock; Directors and Officers........................................................104
INDEPENDENT PUBLIC ACCOUNTANTS..................................................................................107
LEGAL MATTERS...................................................................................................107
EXPERTS.........................................................................................................107
OTHER MATTERS...................................................................................................107
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
APPENDICES
Appendix A: Merger Purchase Agreement (without exhibits or schedules)....................................A-1
</TABLE>
(iii)
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION
WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING NOTES)
APPEARING ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS AND THE APPENDIX HERETO.
THE COMPANY'S SHAREHOLDERS ARE URGED TO READ THE ENTIRE PROXY STATEMENT/
PROSPECTUS INCLUDING THE APPENDIX HERETO. UNLESS THE CONTEXT INDICATES
OTHERWISE, (I) THE "COMPANY" REFERS TO ALL AMERICAN SEMICONDUCTOR, INC., A
DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES, (II) THE "TARGET
STOCKHOLDERS" REFER COLLECTIVELY TO THE CURRENT STOCKHOLDERS OF THE ADDED VALUE
COMPANIES AND DO NOT INCLUDE THE CALIFORNIA SUBSIDIARY AS SUCCESSOR BY MERGER TO
ADDED VALUE, WHICH IS CURRENTLY A STOCKHOLDER OF ROCKY MOUNTAIN, AND (III) THE
SHARES OF THE COMPANY'S COMMON STOCK TO BE ISSUED TO THE CALIFORNIA SUBSIDIARY
IN THE ROCKY MOUNTAIN MERGER ARE NOT DEEMED OUTSTANDING SHARES OF THE COMPANY'S
COMMON STOCK FOR PURPOSES OF THIS PROXY STATEMENT/ PROSPECTUS.
GENERAL
This Proxy Statement/Prospectus relates to the acquisition by merger (the
"Transaction") by the Company of the Added Value Companies by first merging
Added Value with and into the California Subsidiary, with the California
Subsidiary as the surviving corporation, and by then immediately merging Rocky
Mountain with and into the Colorado Subsidiary, with the Colorado Subsidiary as
the surviving corporation (individually a "Merger" and collectively, the
"Mergers"). The Added Value Merger will be effected pursuant to an Agreement of
Merger and the Rocky Mountain Merger will be effected by Articles of Merger. The
terms and provisions related to the Transaction are set forth in a Merger
Purchase Agreement, dated as of October 31, 1995, by and among the Company, the
Subsidiaries and the Added Value Companies (such Merger Purchase Agreement,
together with the exhibits thereto, is hereinafter collectively referred to as
the "Purchase Agreement"). A copy of the Merger Purchase Agreement (without
exhibits or schedules) is attached hereto as Appendix A. The exhibits to the
Purchase Agreement (a list of which is included in the Table of Contents
therein), whether or not referred to herein, are available without charge to any
person, including any beneficial owner, to whom this Proxy Statement/Prospectus
is delivered upon written or oral request to Howard L. Flanders, Corporate
Secretary, at the Corporation's executive offices. See "THE PURCHASE AGREEMENT."
If the Transaction is consummated, the aggregate consideration to be paid
by the Company in the Mergers will be $8,452,914, approximately $6,778,414 of
which is to be paid in the Added Value Merger, and approximately $1,674,500 of
which is to be paid in the Rocky Mountain Merger. However, because Added Value
owns approximately 37.31% of the outstanding capital stock of Rocky Mountain,
(a) $624,814 of the consideration being paid in the Added Value Merger is
intended as payment to the stockholders of Added Value in respect of their
indirect equity ownership interests in Rocky Mountain and (b) since the Added
Value Merger will occur immediately prior to the Rocky Mountain Merger, $624,814
of the consideration payable in the Rocky Mountain Merger will be payable to the
California Subsidiary as successor by merger to Added Value. Accordingly, the
real amount which the Company is paying to acquire the businesses and assets of
the Added Value Companies is $7,828,100, $6,153,600 of which is being allocated
to the value of Added Value's business and assets, and $1,674,500 of which is
being allocated to the value of Rocky Mountain's business and assets. Of the
$8,452,914 of aggregate merger consideration, $3,169,843 is to be paid in cash
at the closing and $5,283,071 is to be paid in shares of the Company's Common
Stock at closing. Each stockholder of Added Value and Rocky Mountain (including
California Subsidiary as a stockholder of Rocky Mountain) will be receiving his,
her or its merger consideration in each of the Mergers in such aggregate cash to
stock proportion (except only that in the Rocky Mountain Merger, although 2
affiliated stockholders of Rocky Mountain (an individual and his family trust)
will in the aggregate receive merger consideration in such aggregate cash to
1
<PAGE>
stock proportion, the trust will receive only cash and the individual will
receive mostly stock). For valuation purposes, in paying the consideration which
consists of the Company's Common Stock, the value of a share of the Company's
Common Stock at closing (the "Market Value") shall be deemed to equal the
average last sale price of a share of the Company's Common Stock on The Nasdaq
Stock Market over the 30-day period ending on the trading day immediately prior
to the closing date of the Transaction, but in no event shall the share value be
deemed lower than $2.25. Accordingly, the highest number of shares of the
Company's Common Stock that could be issued to the Target Stockholders
(exclusive of the California Subsidiary) at closing as part of the merger
consideration is 2,174,473 shares ($5,283,071 / $2.25 reduced by the 173,559
shares that would be issued to the California Subsidiary at such price).
In addition to the $8,452,914 of merger consideration, the individual
stockholders of Added Value and Rocky Mountain, excluding California Subsidiary
(the "Target Stockholders"), could become entitled to receive up to another
$1,900,000 of consideration in the aggregate ("Additional Consideration") as
follows: To the extent that the aggregate value of the shares of the Company's
Common Stock issued to the Target Stockholders in the Mergers has not, by June
30, 1998, appreciated, in the aggregate, by at least $1,900,000, the Company is
obligated to pay the Target Stockholders the shortfall, provided that certain
events do not occur, as summarized in the paragraph titled "The Transaction"
hereinbelow. For these purposes, the value of a share of the Company's Common
Stock on June 30, 1998, shall be the average last sale price of a share of the
Company's Common Stock on The Nasdaq Stock Market over the 30-day period ending
June 30, 1998. The Additional Consideration is payable, at the election of the
Company, in cash or the Company's Common Stock, or a combination of cash and the
Company's Common Stock, provided that it must be paid in the Company's Common
Stock to the extent necessary to cause the aggregate merger consideration
(inclusive of such Additional Consideration) paid in each Merger to consist of
an equal or higher amount (i.e., viewed in dollar value), after giving effect to
imputed interest, of the Company's Common Stock as compared to cash. On the
assumption that the Market Value at closing and the market value on June 30,
1998 were $2.25 per share and none of the Target Stockholders had disposed of
any of his or her shares of the Company's Common Stock issued in the Mergers and
certain other events do not occur, the Company could pay the entire Additional
Consideration by issuing 844,444 additional shares of the Company's Common
Stock. This number of additional shares represents the maximum number of shares
the Company could issue with respect to the Additional Consideration.
In addition to the merger consideration (including the Additional
Consideration), (i) the Target Stockholders are to receive at closing, in the
aggregate, $1,200,000 as payment for their respective covenants restricting
competition for periods ranging from two to five years following the closing
date, (ii) certain of the Target Stockholders who are considered by the Company
to be key or valuable employees and certain other employees who are not Target
Stockholders are to receive, at closing, front-end incentive employment
compensation totalling approximately $1,098,500 and (iii) three employees of
Rocky Mountain who are not Target Stockholders, in consideration of their
agreeing to the cancellation of certain monetary bonuses payable under existing
agreements upon the sale of Rocky Mountain and entering into employment
agreements with the Colorado Subsidiary, will receive ratably over their
respective two-year employment terms an aggregate of approximately $214,500 of
additional compensation, in addition to an aggregate of $93,500 of the front-end
incentive employment compensation set forth above. See "The Transaction"
hereinbelow.
THE COMPANY
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 and other
integrated circuits, as well as passive components, such as capacitors,
resistors, inductors and electromechanical products, including cable,
connectors, filters and sockets.
2
<PAGE>
These components are sold primarily to original equipment manufacturers in a
diverse and growing range of industries, including manufacturers of consumer
goods, satellite and communications products, computers and computer-related
products, robotics and industrial equipment, radar and air traffic control
systems, defense and aerospace equipment and medical instrumentation. The
Company has not in the past derived significant revenues from the sale of
microprocessors. The Company has, however, recently entered into a non-exclusive
agreement with NexGen, Inc. to distribute its line of high-performance processor
products for the personal computer industry, which include Nx586 microprocessors
and complete motherboards, and in connection therewith created a computer
products division. There can be no assurance as to the extent of the revenue and
profit, if any, to be derived in the future by the Company from this new
relationship or its computer products division.
The Company has grown rapidly and, as a result, the Company has been
recognized, based on 1994 revenues, by industry trade publications as the 21st
largest distributor of electronic components in the United States, as well as
the 9th largest distributor of semiconductors in the United States. These
rankings are out of an industry group that numbers more than 1,000 distributors.
The Company offers more than 40,000 different electronic components through
distribution agreements with over 90 suppliers. The products manufactured by
these suppliers allow the Company to offer a broad, well-accepted and
competitive line of components. The Company provides these products and an array
of related services to approximately 10,000 customers. The vast majority of
these customers are middle and emerging market companies which generally are not
the focus of the larger distributors in the industry. The Company currently has
22 offices in 14 states, with two more offices expected to open by the end of
the first quarter of 1996 (including the Company's first office outside of the
United States in Toronto, Canada). The Company retains field sales
representatives to market and distribute products in other territories
throughout the United States, Puerto Rico, Canada and Mexico.
The California Subsidiary is a newly formed California corporation
wholly-owned by the Company, which has no assets and was organized for the sole
purpose of effecting the Added Value Merger.
The Colorado Subsidiary is a newly formed Colorado corporation
wholly-owned by the Company, which has no assets and was organized for the sole
purpose of effecting the Rocky Mountain Merger.
While the Company was reincorporated in Delaware in 1987, it and its
predecessors have operated since 1964. The Company's (including the
Subsidiaries') principal executive office is located at 16115 Northwest 52nd
Avenue, Miami, Florida 33014 and its telephone number is (305) 621-8282. See
"BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY" for a more detailed
discussion of the Company.
THE ADDED VALUE COMPANIES
Each of Added Value and Rocky Mountain is a privately held, regional
distributor of electronic components manufactured by others and a provider of
value-added and manufacturing services. These components and services are sold
primarily to original equipment manufacturers in a diverse and growing range of
industries. Each of the Added Value Companies' customer base includes
manufacturers of consumer goods, satellite and communications products,
computers and computer-related products, robotics and industrial equipment,
defense and aerospace equipment and medical instrumentation. In addition, the
Added Value Companies sell various board level products of their own. These
products are manufactured for them by various contract manufacturers under the
brand name A.V.E.D. The customer base for these products includes manufacturers
of computer and computer-related products, industrial equipment and medical
instrumentation.
Approximately 52% of the Added Value Companies' sales are derived from the
sale of semiconductors (active components), including transistors, diodes,
memory
3
<PAGE>
devices and other integrated circuits. Approximately 3% of the Added Value
Companies' sales are derived from passive products, such as capacitors,
resistors, inductors and electromechanical products, including cable,
connectors, filters and sockets. Approximately 43% of Added Value Companies'
sales are derived from the sale of value-added and manufacturing services
(including memory modules) and 2% from the sale of privately labeled board level
products. The Added Value Companies have not in the past derived significant
revenues from the sale of microprocessors.
The Added Value Companies collectively were recognized by an industry
publication as the 42nd largest distributor of electronic components in the
United States, up from the 47th largest distributor in the previous year.
Added Value was incorporated in California in 1982 and its principal
executive office is located at 14192 Chambers, Tustin, California 92680. Rocky
Mountain was incorporated in 1987 and its principal executive office is located
at 4090 Youngfield Street, Wheat Ridge, Colorado 80033. See "BUSINESS AND
FINANCIAL INFORMATION REGARDING THE ADDED VALUE COMPANIES" for a more detailed
discussion of the Added Value Companies. Added Value and Rocky Mountain, which
are affiliates, each currently has only 9 and 4 stockholders, respectively. See
"SELECTED INFORMATION WITH RESPECT TO THE ADDED VALUE COMPANIES."
THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE. The Special Meeting is scheduled to be held
on _________, December ___, 1995, at 10:00 A.M., Miami, Florida local time, at
Don Shula's Hotel, 15255 Bull Run Road, Miami Lakes, Florida. The purpose of the
Special Meeting is to consider and act upon a proposal to approve the
Transaction.
RECORD DATE; VOTE REQUIRED; QUORUM. Only holders of record of the
Company's Common Stock at the close of business on Wednesday, November 22, 1995
(the "Record Date"), will be entitled to notice of, and to vote at, the Special
Meeting. On such date there were approximately 17,689,791 shares of the
Company's Common Stock outstanding and entitled to vote. Since the Company's
Board of Directors (sometimes hereinafter referred to as the "Board") has
approved the Transaction and approval of the Transaction by the Company's
shareholders is not required under applicable Delaware law, subject to obtaining
a quorum the affirmative vote of a majority of the votes cast at the Special
Meeting by the holders of shares of the Company's Common Stock represented in
person or by proxy is required to approve the Transaction. A majority of the
issued and outstanding shares of the Company's Common Stock, represented in
person or by proxy, shall constitute a quorum at the Special Meeting. For
purposes of the vote and determining whether a quorum is present at the Special
Meeting under the Company's By-laws, an abstention will be counted as a vote
against the Transaction and broker, nominee and fiduciary nonvotes will not be
counted as voted (i.e. will not be considered a vote for or against the
Transaction) nor will such nonvotes be counted toward obtaining a quorum. See
"INTRODUCTION - Record Date and Voting."
As noted above, approval of the Transaction by the Company's shareholders
is not required under applicable Delaware law. It is, however, being sought as a
result of the Company, in order to avoid delaying the vote at its annual
shareholders meeting held on August 15, 1995, to increase the authorized number
of shares of the Company's Common Stock from 20,000,000 to 40,000,000 shares,
undertaking to provide the Company's shareholders with a separate opportunity to
vote upon the Transaction at the time certain information (including, without
limitation, audited financial statements of the Added Value Companies, as well
as proforma financial information) required by the rules promulgated under the
Exchange Act could be provided to the Company's shareholders in a proxy
statement.
Approval of the Transaction by the Added Value Companies' shareholders has
been obtained as part of the execution by all of such shareholders of the
Purchase Agreement.
4
<PAGE>
CERTAIN VOTING INFORMATION. The executive officers and directors of the
Company in the aggregate, beneficially owned 10.3% of the Company's Common Stock
outstanding as of the Record Date. These persons have informed the Company that
all such shares over which they hold voting power will be voted for approval and
adoption of the Transaction. See "INTRODUCTION - Record Date and Voting."
PROXIES; REVOCATION OF PROXIES. The enclosed proxy card permits each
shareholder to specify that shares be voted "FOR" or "AGAINST" (or "ABSTAIN")
the approval of the Transaction. If properly executed and returned, such proxy
will be voted in accordance with the choice specified. Where a signed proxy card
is returned, but no choice specified, the shares will be voted FOR approval of
the Transaction.
A proxy relating to the Special Meeting may, at any time before it is
exercised, be revoked by a shareholder of the Company giving the proxy; however,
mere attendance at the Special Meeting will not itself have the effect of
revoking the proxy. The Company's shareholder may revoke a proxy by notification
in writing sent or given to the Corporate Secretary of the Company or by sending
or giving to the Corporate Secretary of the Company a later-dated proxy. See
"INTRODUCTION - Proxies."
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS; THE COMPANY'S REASONS
FOR THE TRANSACTION. The Board of Directors of the Company believes that the
Transaction is fair to and in the best interest of the Company and its
shareholders, has unanimously approved the Purchase Agreement and the
Transaction and unanimously recommends that shareholders vote FOR the proposal
to approve the Transaction. In making this determination, the Board of Directors
considered, among other things, the businesses, financial conditions, results of
operations and prospects of the Added Value Companies, on both a historical and
prospective basis, including certain information reflecting the two companies on
a pro forma combined basis, and the corporate strategy of the Company to
continue growth and to gain market share by increasing the number of customers
it sells to through, among other ways, making additional acquisitions. As a
result of the Transaction, the Company will obtain offices in certain new
locations (including two additional states) and also expand its product
offerings, manufacturing and service capabilities. See "THE TRANSACTION AND
RELATED MATTERS - Recommendation of the Company's Board of Directors; The
Company's Reasons for the Transaction" and "BUSINESS AND FINANCIAL INFORMATION
REGARDING THE COMPANY - The Business --Corporate Strategy."
THE TRANSACTION
GENERAL. If the Transaction is consummated, Added Value will first be
merged with and into California Subsidiary, with California Subsidiary as the
surviving corporation, and Rocky Mountain will then immediately be merged with
and into Colorado Subsidiary, with Colorado Subsidiary as the surviving
corporation. Each Merger will be a forward subsidiary merger intended to qualify
as a reorganization within the meaning of ss. 368(a) of the Internal Revenue
Code of 1986, as amended. See "Certain Federal Income Tax Consequences" below.
The aggregate consideration being paid by the Company in the Mergers is
$8,452,914, approximately $6,778,414 of which is being paid in the Added Value
Merger, and approximately $1,674,500 of which is being paid in the Rocky
Mountain Merger. However, because Added Value currently owns approximately
37.31% of the outstanding capital stock of Rocky Mountain, (a) $624,814 of the
consideration being paid in the Added Value Merger is intended as payment to the
stockholders of Added Value in respect of their indirect equity ownership
interests in Rocky Mountain and (b) since the Added Value Merger will occur
immediately prior to the Rocky Mountain Merger, $624,814 of the consideration
payable in the Rocky Mountain Merger will be payable to California Subsidiary as
successor by merger to Added Value. Accordingly, the real amount which the
Company is paying to acquire the businesses and assets of the Added Value
Companies is $7,828,100, $6,153,600 of which is being allocated to the value of
Added Value's business and assets, and $1,674,500 of which is being allocated to
the value of Rocky
5
<PAGE>
Mountain's business and assets. Of the $8,452,914 of aggregate merger
consideration, $3,169,843 is to be paid in cash at closing and $5,283,071 is to
be paid in shares of the Company's Common Stock at closing. Each stockholder of
Added Value and Rocky Mountain (including California Subsidiary as a stockholder
of Rocky Mountain) will be receiving his, her or its merger consideration in
each of the Mergers in such aggregate cash to stock proportion (except only that
in the Rocky Mountain Merger, although 2 affiliated stockholders of Rocky
Mountain (an individual and his family trust) will in the aggregate receive
merger consideration in such aggregate cash to stock proportion, the trust will
receive only cash and the individual will receive mostly stock). For valuation
purposes of the Transaction, in paying the consideration which consists of the
Company's Common Stock, the value (the "Market Value") of a share of the
Company's Common Stock at closing shall be deemed to equal the average last sale
price of a share of Common Stock on The Nasdaq Stock Market over the 30-day
period ending on the trading day immediately prior to the closing date, but in
no event shall the share value be deemed lower than $2.25. Accordingly, the
highest number of shares that could be issued to the Target Stockholders
(exclusive of the California Subsidiary) at closing as part of the merger
consideration is 2,174,473 shares ($5,283,071 / $2.25 reduced by the 173,559
shares that would be issued to the California Subsidiary at such price),
representing after their issuance approximately 10.9% of the Company's Common
Stock outstanding. Assuming that the Market Value for purposes of calculating
the number of shares of the Company's Common Stock to be issued as part of the
merger consideration was $2.98 (based on the average last sale price of the
Company's Common Stock over the 30- day period immediately prior to October 31,
1995), 1,641,800 shares of the Company's Common Stock would be issued to the
Target Stockholders (exclusive of the California Subsidiary) on the Closing Date
($5,283,071 / $2.98 reduced by the 131,043 shares that would be issued to the
California Subsidiary at such price), representing after their issuance
approximately 8.5% of the outstanding shares of the Company's Common Stock.
In addition to the $8,452,914 of merger consideration, the Target
Stockholders could become entitled to receive the Additional Consideration as
follows: To the extent that the aggregate value of the shares of the Company's
Common Stock issued to the Target Stockholders in the Mergers has not, by June
30, 1998, appreciated, in the aggregate, by at least $1,900,000, the Company is
obligated to pay the Target Stockholders the shortfall, provided that certain
events do not occur as summarized in the next paragraph. For these purposes, the
value of a share of Common Stock on June 30, 1998, shall be the average last
sale price of a share of Common Stock on The Nasdaq Stock Market over the 30-day
period ending June 30, 1998. The Additional Consideration is payable, at the
election of the Company, in cash or the Company's Common Stock, or a combination
of cash and the Company's Common Stock, provided that it must be paid in the
Company's Common Stock to the extent necessary to cause the aggregate merger
consideration (inclusive of such Additional Consideration) paid in each Merger
to consist of an equal or higher amount (i.e., viewed in dollar value), after
giving effect to imputed interest, of Common Stock as compared to cash. On the
assumption that the Market Value at closing and the market value on June 30,
1998, were $2.25 per share and the limitations described in the next paragraph
did not apply, the Company, at its election and in lieu of paying any cash,
could pay the entire Additional Consideration by issuing 844,444 additional
shares of the Company's Common Stock. This number of additional shares
represents the maximum number of shares the Company could issue with respect to
the Additional Consideration.
To the extent that a Target Stockholder sells or otherwise disposes of
shares of the Company's Common Stock prior to June 30, 1998, such Target
Stockholder is not entitled to be paid, with respect to the shares sold or
otherwise disposed of, any Additional Consideration allocable to such shares.
Further, if the last sale price of a share of Common Stock on The Nasdaq Stock
Market equals or exceeds the price at which the $1,900,000 appreciation target
would be reached for a period of 30 consecutive trading days, and all
contractual restrictions on the sale or other disposition of the Common Stock
issued to the Target Stockholders as described below are permanently waived by
the Company prior to
6
<PAGE>
such 30-day period, the Company's obligation to pay any Additional Consideration
is excused.
In addition to the merger consideration (including the Additional
Consideration), (i) the Target Stockholders are to receive at closing, in the
aggregate, $1,200,000 as payment for their respective covenants restricting
competition for periods ranging from two to five years following closing, (ii)
certain of the Target Stockholders who are considered by the Company to be key
or valuable employees and certain other employees who are not Target
Stockholders who are considered by the Company to be valuable employees are to
receive, at closing, front-end incentive employment compensation totalling
approximately $1,098,500 and (iii) three employees of Rocky Mountain who are not
Target Stockholders, in consideration of their agreeing to the cancellation of
certain monetary bonuses payable under existing agreements upon the sale of
Rocky Mountain and entering into employment agreements with the Colorado
Subsidiary, will receive ratably over their respective two-year employment terms
an aggregate of approximately $214,500 of additional compensation, in addition
to an aggregate of $93,500 of the front-end incentive employment compensation
set forth above. See "Other Agreements" below.
OTHER AGREEMENTS. At closing, all of the Target Stockholders are required
to execute and deliver three additional agreements: (a) a restrictive covenant
in favor of the Company and the Subsidiaries (the "Restrictive Covenant"); (b) a
Stock Pledge Agreement in favor of the Company and the Subsidiaries (the "Pledge
Agreement"); and (c) a voting trust agreement in favor of Paul Goldberg and
Bruce M. Goldberg, as voting trustees (the "Voting Trust Agreement").
Pursuant to the Restrictive Covenant, the Target Stockholders will
covenant not to disclose or use confidential or proprietary information of or
concerning the Added Value Companies or of the Company, and will covenant not to
compete with the Company, including the business of the Added Value Companies,
for periods ranging from two to five years, in exchange for which they will
receive at closing the aggregate $1,200,000 payment described above. In
addition, pursuant to the Restrictive Covenant, the Target Stockholders will be
restricted from selling or disposing of more than 22.5% of the Company's Common
Stock issued to them in the Mergers for a period of two years following closing.
Pursuant to the Pledge Agreement, each of the Target Stockholders will, as
security for their obligations under their guaranty of all of the
representations, warranties, covenants and obligations of the Added Value
Companies set forth in the Purchase Agreement, which is set forth in a separate
guaranty and agreement (the "Guaranty") which was executed concurrently with the
Purchase Agreement, pledge to the Company and the Subsidiaries all of the
Company's Common Stock issued to them in the Mergers for a period of two years.
To the extent that shares of the Company's Common Stock are permitted to be sold
pursuant to the Restrictive Covenant, upon such sale such shares must be
released from the lien of the Pledge Agreement.
Pursuant to the Voting Trust Agreement, record title to all of the Common
Stock issued to the Target Stockholders in the Mergers shall be transferred to
Paul Goldberg and Bruce M. Goldberg, as voting trustees (the Target Stockholders
shall retain beneficial ownership of all such shares, subject to the Pledge
Agreement). The term of the voting trust created under the Voting Trust
Agreement will be six years. Pursuant to the Voting Trust Agreement, the voting
trustees have unconditional discretion to vote all shares subject to the voting
trust in elections of directors of the Company, and all other matters upon which
shareholders of the Company may vote, except for the following: (a) merger; (b)
sale of all or substantially all of the Company's assets; (c) dissolution; and
(d) any amendment to the Company's certificate of incorporation which modifies
or alters the capital structure of the Company. With respect to such four
matters, the voting trustees must vote the shares subject to the voting trust as
directed by the beneficial owners of such shares. To the extent that shares of
Common Stock are permitted to be sold pursuant to the Restrictive Covenant, upon
7
<PAGE>
such sale the voting trustees are obligated to release such shares from the
voting trust.
At the closing, the five most key employees of Added Value and Rocky
Mountain, Robert Lurie, Wayne Vannoy, Gary Miller, Richard McCauley and Kenneth
Plock (all of whom are also Target Stockholders), will each enter into a
two-year employment agreement with one of the Subsidiaries. Twelve other
employees of Added Value or Rocky Mountain considered valuable by the Company
are to sign employment agreements at closing as well. See "THE PURCHASE
AGREEMENT - Transaction."
THE ADDED VALUE COMPANIES' LINES OF CREDIT. The Company currently
contemplates that as part of the Transaction and in order to obtain the consent
of the Company's senior lender, the Company will be required to pay and satisfy
the line of credit facility of each of the Added Value Companies (collectively
the "Bank Debt"). Added Value has a $3.3 million revolving line of credit
facility with Bank of America, N.A. secured by substantially all of its assets,
which as of October 31, 1995 had an outstanding balance of $2,008,000. Rocky
Mountain has a $1.0 million revolving line of credit facility with Colorado
National Bank secured by substantially all of its assets, which as of October
31, 1995 had an outstanding balance of $760,000. The Company currently intends
to use its revolving line of credit to satisfy the Bank Debt on the Closing
Date. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE ADDED VALUE
COMPANIES Added Value Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and "-
Rocky Mountain Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CLOSING DATE OF TRANSACTION; AND EFFECTIVE DATE OF THE MERGERS. It is
presently contemplated that the closing of the Transaction (the "Closing Date")
will take place and the Mergers will become effective (collectively the
"Effective Date") as soon as practicable after the requisite approval of the
shareholders of the Company has been obtained and all of the other conditions to
the Transaction have been satisfied or waived. The Added Value Merger will
become effective upon the filing of the Agreement of Merger with the Secretary
of State of the State of California and the Rocky Mountain Merger will become
effective upon the filing of Articles of Merger with the Secretary of State of
the State of Colorado. For purposes of the Transaction, the Added Value Merger
will become effective immediately prior to the Rocky Mountain Merger.
CONDITIONS TO THE TRANSACTION; TERMINATION. In addition to approval by the
shareholders of the Company of the Transaction, the obligations of the parties
to consummate the Mergers are subject to the satisfaction or, to the extent
legally permitted, waiver of certain conditions. The Purchase Agreement may be
terminated (a) by mutual consent of the parties thereto; (b) by either the
Company, on the one hand, or the Added Value Companies, on the other hand, if
the Transaction has not been consummated on or before January 31, 1996, or the
Company's senior lender, Sunbank/Miami, N.A., does not approve the Transaction
within 30 days following execution and delivery of the Purchase Agreement,
although the Company does not anticipate difficulties in obtaining the approval
of such lender; or (c) in certain other events. See "THE PURCHASE AGREEMENT
Conditions to Consummation of the Transaction" and "-Termination and Amendment."
DISSENTERS RIGHTS. The Target Stockholders have unanimously approved the
Transaction and waived any dissenters' rights under California or Colorado (as
applicable) law by executing the Guaranty. Holders of the Company's Common Stock
are not entitled to dissenters' rights under Delaware law in connection with the
Transaction.
REGULATORY MATTERS. The Transaction is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the rules and regulations thereunder, which provide that certain
transactions may not be consummated until required information and materials
have been furnished to the Antitrust Division of the United States Department
of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") and
certain waiting periods have expired or been terminated. The Company and
the Added Value
8
<PAGE>
Companies filed on November 13, 1995, the required information and materials
with the DOJ and the FTC, and the requisite waiting periods are expected to
terminate prior to the date of the Special Meeting. The Company and the Added
Value Companies are not currently aware of any other material federal or state
regulatory requirements which must be complied with to consummate the
Transaction and the Mergers except for compliance with applicable federal and
state securities laws. See "THE PURCHASE AGREEMENT-Regulatory Matters."
FLUCTUATION IN MARKET PRICE
Because the number of shares of the Company's Common Stock to be received
by the Target Stockholders in connection with the Transaction is based on a
fixed portion of the merger consideration being paid by the Company to acquire
the Added Value Companies, the number of shares of the Company's Common Stock
received by the Target Stockholders will depend on the market price of the
Company's Common Stock on The Nasdaq Stock Market during the 30 day period prior
to the Closing Date. Because the purchase price is fixed, the Market Value of
the Company's Common Stock in excess of $2.25 will reduce the maximum number of
shares (a maximum of 2,174,473 shares, exclusive of those being issued to the
California Subsidiary) to be received by the Target Stockholders on the Closing
Date as a result of the Transaction. In addition, the level of appreciation of
the value of the Company's Common Stock or lack thereof through June 30, 1998,
subject to certain events, could result in the Target Stockholders receiving
additional shares of the Company's Common Stock as payment of the Additional
Consideration. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY
Market Information."
EXPENSES
Except as described below, whether or not the Transaction is consummated,
all out-of-pocket expenses incurred in connection with the Transaction will be
paid by the party incurring such expenses. However, if the Transaction is
consummated as a result of the Mergers, all of the expenses of the Added Value
Companies will be assumed or have in essence been paid by the Subsidiaries as
the surviving corporations in the Mergers, except that fees and expenses
incurred by the Added Value Companies in excess of $185,000 (excluding
accounting fees and expenses payable to Lazar, Levine & Company LLP) will reduce
the Additional Consideration to the extent payable to the Target Stockholders.
The Company will pay all expenses incurred in connection with the printing and
mailing of this Proxy Statement/Prospectus and the Registration Statement of
which it is a part, (b) registration and filing fees which may be required under
federal and state securities laws and with respect to filings required by the
HSR Act and (c) the costs of soliciting proxies. In the event that the
Transaction does not close as a result of a breach or default by Added Value,
Rocky Mountain or any of the Target Stockholders or other refusal on their part
to close or perform their obligations, and within one year from the date of the
Purchase Agreement there is a sale or similar transaction as a result of which
50% or more of the Added Value Companies or the equity thereof is sold or
transferred, the Company would be entitled, in addition to other rights and
remedies under the Purchase Agreement, to 25% of any consideration received in
such transaction in excess of that which the Company is paying in the
Transaction. See "THE PURCHASE AGREEMENT - Expenses."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
For a discussion of the material interests of the directors and executive
officers of the Added Value Companies and the Company in the Transaction, see
"THE TRANSACTION AND RELATED MATTERS - Interests of Certain Persons in the
Transaction."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is a condition to the Transaction that the Company receive an opinion
from Bruck & Perry, counsel to the Added Value Companies, and that the Added
Value
9
<PAGE>
Companies receive an opinion from Rubin Baum Levin Constant Friedman & Bilzin,
counsel to the Company and the Subsidiaries, to the effect that, among other
things, the Mergers will constitute a reorganization within the meaning of
Sections 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
It is anticipated that the Target Stockholders will recognize no gain or loss
upon the receipt of shares of the Company's Common Stock pursuant to the
Mergers, although they may recognize a gain on receipt of the cash portion of
the consideration the Target Stockholders received upon consummation of the
Mergers. Target Stockholders should read carefully the section entitled "THE
TRANSACTION AND RELATED MATTERS - Federal Income Tax Consequences" and should
consult with their own tax advisors.
ACCOUNTING TREATMENT
The Mergers will be treated as a "purchase" for financial reporting
purposes if consummated in accordance with the Purchase Agreement. Under this
method of accounting, the Company will not restate its prior historical
financial statements on a combined basis with those of the Added Value
Companies, but will only include the Subsidiaries (as the surviving corporations
in the Mergers with the Added Value Companies) financial conditions on a
historical cost basis and results of operations as part of the Company's
consolidated financial statements as of and after the Closing Date. See "THE
TRANSACTION AND RELATED MATTERS - Accounting Treatment."
OPERATIONS FOLLOWING THE TRANSACTION
For a discussion of the plans of the Company with respect to the
operations of the Subsidiaries (as successors to the Added Value Companies)
after the consummation of the Transaction, see "THE TRANSACTION AND RELATED
MATTERS - Operations Following the Transaction."
MARKET PRICES AND DIVIDEND DATA
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol "SEMI." All of the shares of capital stock of Added Value are owned of
record by 9 Target Stockholders. All of the shares of capital stock of Rocky
Mountain are owned by 4 Target Stockholders (which includes Added Value and
Wayne Vannoy who also owns shares of capital stock of Added Value). Accordingly,
there is no established public trading market for shares of either of the Added
Value Companies. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE ADDED
VALUE COMPANIES - Market Information."
The Company has not paid any cash dividends since its inception and does
not intend to pay any dividends in the foreseeable future. It is the present
policy of the Company's Board of Directors to retain its earnings to finance the
development and expansion of the Company's business. See "BUSINESS AND FINANCIAL
INFORMATION REGARDING THE COMPANY - Dividend Policy."
Added Value, as a Subchapter S corporation for tax purposes, makes
distributions to its stockholders. See "BUSINESS AND FINANCIAL INFORMATION
REGARDING THE ADDED VALUE COMPANIES - Dividend Policy."
On June 29, 1995, the last full trading day before the public announcement
of the execution of the letter of intent dated as of June 28, 1995 relating to
the Transaction, the last reported sale price for the Company's Common Stock on
The Nasdaq Stock Market was $2 1/4 per share. On November 3, 1995, the last full
trading day before the public announcement of the execution of the Purchase
Agreement, the last reported sale price for the Company's Common Stock on the
Nasdaq Stock Market was $2.94 per share. On ______________, 1995, the most
recent practicable full trading day prior to the date of this Proxy
Statement/Prospectus, the last reported sales price for the Company's Common
Stock on The Nasdaq Stock Market was $____________ per share. Based on the
average last sale price of the Company's Common Stock on The Nasdaq Stock Market
over the 30-day period ending on the trading day immediately prior to October
31,
10
<PAGE>
1995 (which average last sale price equals $2.98 per share), the number of
shares of the Company's Common Stock to be issued on the Closing Date upon the
consummation of the Transaction would be approximately 1,641,800 shares
(exclusive of 131,043 shares that would be issued to the California Subsidiary).
The number of shares of the Company's Common Stock to be issued in the
Transaction will change as and to the extent the trading price of the Company's
Common Stock changes after October 30, 1995, which will, accordingly, effect the
Market Value used in calculating the number of shares to be issued on the
Closing Date.
For certain historical information relating to high and low sale prices of
the Company's Common Stock during the current fiscal year and the past two
fiscal years as reported on The Nasdaq Stock Market, see "BUSINESS AND FINANCIAL
INFORMATION REGARDING THE COMPANY - Market Information." THE COMPANY'S
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR THE COMPANY'S COMMON
STOCK.
COMPARISON OF RIGHTS OF THE ADDED VALUE COMPANIES' STOCKHOLDERS AND THE
COMPANY'S SHAREHOLDERS
The rights of the Added Value Companies' shareholders are currently
governed either by the California General Corporation Law or the Colorado
Business Corporation Act and by the Added Value Companies respective Articles of
Incorporation and By-laws. The Target Stockholders will, upon consummation of
the Transaction and to the extent they receive shares of the Company's Common
Stock, become shareholders of the Company, a Delaware corporation. Accordingly,
their rights as stockholders of the Company will be governed by the General
Corporation Law of the State of Delaware (the "DGCL") and by the Company's
Certificate of Incorporation (as amended, the "Company's Certificate") and
Bylaws (as amended, the "Company's By-laws"). See "COMPARISON OF THE RIGHTS OF
HOLDERS OF THE ADDED VALUE COMPANIES' COMMON STOCK AND THE COMPANY'S COMMON
STOCK."
SUMMARY FINANCIAL DATA
The following tables set forth certain historical financial information of
the Company and each of Added Value and Rocky Mountain. This information should
be read in conjunction with the unaudited combined pro forma consolidated
financial statements and the notes thereto set forth elsewhere herein and with
the separate historical financial statements of the Company and each of Added
Value and Rocky Mountain and the respective notes thereto included elsewhere
herein. See "UNAUDITED COMBINED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS",
"Summary Unaudited Combined Pro Forma Condensed Consolidated Financial Data,"
"Comparative Per Share Data," "BUSINESS AND FINANCIAL INFORMATION REGARDING THE
COMPANY - Selected Consolidated Financial Data" and "BUSINESS AND FINANCIAL
INFORMATION REGARDING THE ADDED VALUE COMPANIES - Added Value Selected Financial
Data" and "-Rocky Mountain Selected Financial Data."
11
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
THE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------------ ---------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net Sales(1)...................... $130,723 $72,839 $101,085 $67,510 $49,015 $45,332 $41,315
Cost of Sales..................... (101,826) (53,351) (74,632) (49,010) (35,083) (32,001) (29,007)
-------- ------- ------ ------ ------ ------ ------
Gross Profit...................... 28,897 19,488 26,453 18,500 13,932 13,331 12,308
Selling, General and
Administrative Expenses......... (23,178) (16,098) (23,335) (14,821) (11,366) (11,577) (11,177)
Nonrecurring Expenses(2).......... - - (548) (61) (114) (124) -
-------- ------ ------ ------ ------ ------ ----
Income from Operations............ 5,719 3,390 2,570 3,618 2,452 1,630 1,131
Interest Expense.................. (2,013) (1,124) (1,772) (1,103) (1,153) (1,407) (1,205)
Other Income (Expense)
-- Net(3)....................... - (114) (39) 281 (18) 47 149
-------- ------- ------ ------ ------ ------ ------
Income Before Income Taxes........ 3,706 2,152 759 2,796 1,281 270 75
Provision for Income Taxes........ (1,519) (861) (407) (1,094) (525) (153) (57)
-------- ------ ------ ------ ------ ------ ------
Net Income........................ $ 2,187 $ 1,291 $ 352 $ 1,702 $ 756 $ 117 $ 18
======== ======= ======= ======= ======= ======= =======
Earnings Per Share(4):
Primary.......................... $ .15 $ .10 $ .03 $ .19 $ .12 $ .03 $ .01
======== ======= ======= ======= ======= ======= =======
Fully Diluted.................... $ .14 $ .10 $ .03 $ .18 $ .12 $ .03 $ .01
======== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30
1995 DECEMBER 31
------------ -------------------------------------------------
(unaudited) 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital.............. $51,736 $39,800 $27,534 $19,427 $15,112 $14,745
Total Assets................. 86,120 57,858 37,968 28,595 24,977 22,806
Long-Term Debt
(including current
portion)................... 30,203 27,775 14,928 13,850 13,405 12,149
Shareholders' Equity......... 27,675 16,950 15,612 8,517 4,633 4,516
Book Value Per Common
Share...................... $1.56 $1.37 $1.30 $1.10 $1.24 $1.21
</TABLE>
- ---------------
(1) On June 14, 1993, January 24, 1994, and September 9, 1994, the Company,
through its wholly-owned subsidiaries, completed the acquisitions of
substantially all of the assets of All American Transistor Corporation
of D.C., Components Incorporated and GCI Corp., respectively. Net
sales includes the net sales for such companies acquired of $6,177,000,
$10,234,000 and $1,390,000 for the nine months ended September 30,
1994, and for the years ended December 31, 1994 and 1993, respectively.
See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY -
Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Acquisitions."
(2) The year ended December 31, 1994, includes a charge for relocation of
plant facilities in the amount of $185,000 and a write-off of the
Company's product development investment of $363,000. See "BUSINESS AND
FINANCIAL INFORMATION REGARDING THE COMPANY - Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) The years ended December 31, 1993 and 1990 include approximately
$237,000 and $180,000, respectively, of income from the settlements of
the Company's business interruption claims.
(4) Weighted average shares (including common share equivalents)
outstanding (i) for the years ended December 31, 1994, 1993, 1992, 1991
and 1990 were 13,029,714, 9,166,908, 6,514,481, 3,806,856 and
3,721,791, respectively, on a primary basis and were 13,029,714,
9,511,500, 6,514,481, 3,962,038 and 3,721,791, respectively, on a fully
diluted basis, and (ii) for the nine months ended September 30, 1995
and 1994 were 15,050,361 and 13,073,309, respectively, on a primary
basis and were 15,822,097 and 13,073,309, respectively, on a fully
diluted basis.
12
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
ADDED VALUE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
-------------------- -----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
INCOME DATA:
Net Sales(1)(2)................... $24,114 $19,510 $27,663 $19,650 $17,231 $15,107 $17,326
Cost of Sales(2).................. (19,172) (15,100) (21,853) (15,077) (13,164) (11,345) (13,688)
------- ------- ------- ------- ------- ------- -------
Gross Profit...................... 4,942 4,410 5,810 4,573 4,067 3,762 3,638
Selling, General and
Administrative Expenses(3)...... (3,921) (3,318) (4,828) (3,594) (3,304) (3,352) (4,363)
------- ------- ------- ------- ------- ------- -------
Income (Loss) from Operations 1,021 1,092 982 979 763 410 (725)
Interest Expense.................. (126) (84) (118) (84) (74) (121) (141)
Other Income (Expense)(3)......... 6 48 97 167 (17) 203 370
Equity in Earnings of
Unconsolidated Subsidiary....... 66 133 105 129 71 127 -
------- ------- ------- ------- ------- ------- -------
Income (Loss) Before
Income Taxes.................... 967 1,189 1,066 1,191 743 619 (496)
Provision for Income Taxes........ (15) (30) (17) (24) (16) (9) -
------- ------- ------- ------- ------- ------- -------
Net Income (Loss)................. $ 952 $ 1,159 $ 1,049 $ 1,167 $ 727 $ 610 $ (496)
======= ======= ======= ======= ======= ======= =======
Earnings (Loss) Per Share(4)...... $ 9.24 $ 11.25 $ 10.19 $ 10.49 $ 5.91 $ 4.96 $ (5.06)
======= ======== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30 ----------------------------------------------
1995 1994 1993 1992 1991 1990
----------- ---- ---- ---- ---- ----
(UNAUDITED) -----(UNAUDITED)------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital.............. $ 2,717 $ 2,366 $ 2,065 $1,599 $ 941 $ 693
Total Assets................. 9,789 7,625 6,695 4,656 4,528 4,650
Long-Term Debt
(including current
portion)................... - - 43 - - 26
Shareholders' Equity......... 3,833 3,424 2,926 2,383 1,647 826
Book Value Per Common
Share...................... $ 39.11 $ 34.94 $ 29.86 $ 24.32 $16.81 $ 8.43
</TABLE>
- ----------------
(1) Includes sales to the Company for the nine months ended September 30,
1995 of $19,000.
(2) Includes purchases from Rocky Mountain of $649,000, $629,000, $727,000,
$619,000, $1,016,000, $954,000 and $329,000 for the nine months ended
September 30, 1995 and 1994 and for the years ended December 31, 1994,
1993, 1992, 1991 and 1990, respectively. In addition, sales to Rocky
Mountain, which are not included in net sales but are instead reflected
as a reduction against the original purchase, were $403,000, $852,000,
$960,000, $938,000, $1,342,000, $987,000 and $648,000 for the nine
months ended September 30, 1995 and 1994 and for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990, respectively. Includes
purchases from the Company for the nine months ended September 30, 1995
of $137,000.
(3) Added Value has entered into an oral agreement to provide accounting
and administrative services to Rocky Mountain. Added Value is
compensated based on 20% of Rocky Mountain's net earnings subject to an
annual $36,000 ceiling. The management fee for the year ended December
31, 1992 was deferred by mutual agreement and subsequently paid in
1993. Included in other income is $72,000 related to this agreement for
the years ended December 31, 1993 and 1992. Added Value also received
reimbursements of $120,000 in 1994, $144,000 in 1993 and $275,375 in
1992 for allocated general and administrative expenses from Rocky
Mountain. For the nine months ended September 30, 1995 and 1994 these
reimbursements aggregated $72,000 and $117,000, respectively. The
reimbursements are presented as reductions of selling, general and
administrative expenses.
(4) Weighted average shares (including common share equivalents)
outstanding for the nine months ended September 30, 1995 and 1994 and
for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 were
103,000, 103,000 103,000, 111,274, 123,000, 123,000 and 98,000,
respectively.
13
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
ROCKY MOUNTAIN
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------------ -----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
INCOME DATA:
Net Sales(1)(2)................... $ 6,574 $ 8,006 $10,200 $10,931 $ 8,105 $ 8,327 $ 6,948
Cost of Sales(2).................. (5,010) (6,121) (7,934) (8,476) (6,151) (6,274) (5,301)
------- ------- ------- ------- ------- ------- -------
Gross Profit...................... 1,564 1,885 2,266 2,455 1,954 2,053 1,647
Selling, General and
Administrative Expenses(3)...... (1,278) (1,295) (1,779) (1,907) (1,643) (1,471) (1,140)
------- ------- ------- ------- ------- ------- -------
Income from Operations............ 286 590 487 548 311 582 507
Interest Expense.................. (3) (18) (22) (7) (9) (34) (36)
Other Income ..................... 8 21 22 29 11 18 14
------- ------- ------- ------- ------- ------- -------
Income Before Income Taxes........ 291 593 487 570 313 566 485
Provision for Income Taxes........ (114) (232) (230) (212) (117) (208) (142)
------- ------- ------- ------- ------- ------- -------
Net Income........................ $ 177 $ 361 $ 257 $ 358 $ 196 $ 358 $ 343
======= ======= ======= ======= ======= ======= =======
Earnings Per Share(4)............. $165.39 $333.84 $238.43 $310.05 $169.91 $310.34 $309.13
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30 --------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------ ---- ---- ---- ---- ----
(UNAUDITED) -------(UNAUDITED)-------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital.............. $ 2,378 $ 2,211 $ 1,997 $1,682 $1,460 $1,113
Total Assets................. 4,280 2,873 3,569 2,731 2,257 2,225
Long-Term Debt
(including current
portion)................... 25 38 - - - -
Shareholders' Equity......... 2,434 2,257 2,068 1,734 1,514 1,171
Book Value Per Common
Share...................... $2,270.53 $2,105.14 $1,866.32 $1,564.63 $1,366.43 $1,056.57
</TABLE>
- ----------------
(1) Includes sales to the Company for the nine months ended September 30,
1995 of $168,000.
(2) Includes purchases from Added Value of $403,000, $852,000, $960,000,
$938,000, $1,342,000, $987,000 and $648,000 for the nine months ended
September 30, 1995 and 1994 and for the years ended December 31, 1994,
1993, 1992, 1991 and 1990, respectively. In addition, sales to Added
Value, which are not included in net sales but are instead reflected as
a reduction against the original purchase, were $649,000, $629,000,
$727,000, $619,000, $1,016,000, $954,000 and $329,000 for the nine
months ended September 30, 1995 and 1994 and for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990, respectively. Includes
purchases from the Company for the nine months ended September 30, 1995
of $134,000.
(3) Included in selling, general and administrative expenses for 1994 and
1993 is $36,000 and $72,000, respectively, related to an oral agreement
between Rocky Mountain and Added Value whereby Added Value provides
accounting and administrative services to Rocky Mountain. The
management fee for the year ended December 31, 1992 was deferred by
mutual agreement and paid in 1993. Rocky Mountain was also charged
$120,000, $144,000 and $275,375 for 1994, 1993 and 1992, respectively,
for allocated general and administrative expenses from Added Value
which is included in selling, general and administrative expenses. For
the nine months ended September 30, 1995 and 1994 these charges
aggregated $72,000 and $117,000, respectively.
(4) Weighted average shares (including common share equivalents)
outstanding for the nine months ended September 30, 1995 and 1994 and
for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 were
1,072, 1,080, 1,078, 1,154, 1,154, 1,154 and 1,108, respectively.
14
<PAGE>
SUMMARY UNAUDITED COMBINED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited combined pro forma
condensed consolidated financial data for the Company after giving effect to the
Transaction as if it had been consummated, with respect to income statement
data, at the beginning of the periods presented, or, with respect to balance
sheet data, as of the date presented, and had been accounted for as a
"purchase". The information presented should be read in conjunction with the
unaudited combined pro forma consolidated financial statements and the notes
thereto appearing elsewhere herein and the separate historical financial
statements and the notes thereto of the Company, Added Value and Rocky Mountain
appearing elsewhere herein. The unaudited combined pro forma condensed
consolidated financial data has been included for comparative purposes only and
does not purport to be indicative of the results or financial position which
would have been obtained if the Transaction had been consummated at the
beginning of the periods or as of the date indicated or of the financial
position or results which may be obtained in the future. See "Summary Financial
Data," "Comparative Per Share Data," "BUSINESS AND FINANCIAL INFORMATION
REGARDING THE COMPANY - Selected Consolidated Financial Data" and "BUSINESS AND
FINANCIAL INFORMATION REGARDING THE ADDED VALUE COMPANIES - Added Value Selected
Financial Data" and "-Rocky Mountain Selected Financial Data."
<TABLE>
<CAPTION>
SUMMARY UNAUDITED COMBINED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
THE COMPANY AND ADDED VALUE COMPANIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
------------------ ----------------------
1995 1994
---- ----
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net Sales......................... $160,953 $138,948
Cost of Sales..................... (125,550) (104,419)
-------- --------
Gross Profit...................... 35,403 34,529
Selling, General and
Administrative Expenses......... (28,739) (30,425)
Non-recurring Expenses............ - (548)
-------- --------
Income from Operations............ 6,664 3,556
Interest Expense.................. (2,455) (2,331)
Other Income - Net................ 14 80
-------- --------
Income Before Income Taxes........ 4,223 1,305
Provision for Income Taxes........ (1,786) (757)
-------- --------
Net Income........................ $ 2,437 $ 548
======== ========
Earnings Per Share:
Primary.......................... $ .15 $ .04
======== ========
Fully Diluted.................... $ .14 $ .04
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30
1995
------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital.............. $ 61,123
Total Assets................. 102,920
Long-Term Debt
(including current
portion)................... 39,382
Shareholders' Equity......... 31,843
Book Value Per Common
Share...................... $ 1.65
</TABLE>
15
<PAGE>
COMPARATIVE PER SHARE DATA
The following table summarizes certain unaudited selected financial
information on a historical, pro forma and pro forma equivalent per share basis
and is derived from and should be read in conjunction with the unaudited
combined pro forma consolidated financial statements of the Company, Added Value
and Rocky Mountain that are included elsewhere herein and the historical
financial statements of the Company, Added Value and Rocky Mountain which are
included elsewhere herein. The pro forma information presented is for
informational purposes only and is not necessarily indicative of future combined
earnings or financial position or the combined earnings or financial position
that would have been reported or as of the dates for which such unaudited pro
forma information is presented.
<TABLE>
<CAPTION>
COMPARISON OF HISTORICAL AND EQUIVALENT STOCK VALUES*
THE COMPANY ADDED VALUE ROCKY MOUNTAIN
------------------- ---------------------- -----------------------
EQUIVALENT EQUIVALENT
HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Book Value per Common Share:
September 30, 1995 $ 1.56 $ 1.65 $ 39.11 $ 23.93 $2,270.53 $ 540.79
Net Income Per Common Share:
Nine Months Ended
September 30, 1995 $ .15 $ .15 $ 9.24 $ 2.18 $ 165.39 $ 49.16
Fiscal Year Ended
December 31, 1994 $ .03 $ .04 $ 10.19 $ .58 $ 238.43 $ 13.11
</TABLE>
- ----------------
* No dividends have been declared or paid by the Company in any of the
periods presented. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE
COMPANY - Dividend Policy." Added Value, which is a Subchapter S
corporation for tax purposes, has made distributions to its stockholders
during the fiscal year ended December 31, 1994, and the nine months ended
September 30, 1995, in the aggregate amounts of $551,026 and $543,203,
respectively. Rocky Mountain has made no distributions to its
stockholders during the 1994 fiscal year or nine months ended September
30, 1995, except for a distribution in the amount of $68,202 (of which
$18,202 was paid in cash and the balance was payable over 36 months) in
connection with a stock repurchase. See "BUSINESS AND FINANCIAL
INFORMATION REGARDING THE ADDED VALUE COMPANIES - Dividend Policy."
16
<PAGE>
RISK FACTORS
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY IS HIGHLY SPECULATIVE AND
INVOLVES A HIGH DEGREE OF RISK. IT IS IMPOSSIBLE TO FORESEE AND DESCRIBE ALL THE
RISKS AND BUSINESS, ECONOMIC AND FINANCIAL FACTORS WHICH MAY AFFECT THE COMPANY.
THE COMPANY'S SHAREHOLDERS IN DETERMINING WHETHER TO APPROVE THE TRANSACTION AND
THE TARGET STOCKHOLDERS IN EVALUATING THEIR INVESTMENT IN THE COMPANY IF THE
TRANSACTION IS CONSUMMATED SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS ALL OTHER MATTERS SET FORTH ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
1. EFFECTS OF THE TRANSACTION. Although the Company's Board of
Directors believes that the Transaction is fair and in the best interests of the
Company's shareholders: (i) there can be no assurance that after the acquisition
of the Added Value Companies the Company will realize the anticipated benefits
of the Transaction; (ii) the voting and equity interests of the holders of the
Company's Common Stock will be diluted as a result of the issuance of the
Company's Common Stock upon consummation of the Transaction [assuming a Market
Value of $2.25 and $2.98 (the average of the last sale price over the 30-day
period ending on the trading day immediately prior to October 31, 1995), the
aggregate number of shares to be issued on the Closing Date to the Target
Stockholders (exclusive of the shares owned by the California Subsidiary) would
represent approximately 10.9% and 8.5%, respectively, of the shares of the
Company's Common Stock outstanding (exclusive of the California Subsidiary)
after the Mergers are effectuated]; (iii) the Company will be incurring
approximately $8 million of additional debt on the Closing Date under its
revolving line of credit in order to finance the cash portion of the merger
consideration and the payment and satisfaction of the Bank Debt of the Added
Value Companies on the Closing Date and, in order to finance the foregoing
obligations, as part of obtaining the required consent of its Senior Lender to
the Transaction, the Company has requested an increase in its line of credit by
approximately $8 million; (iv) while the Company does not believe the loss of
any particular supplier of either or both of the Added Value Companies would
have a material adverse effect on the Company, since the Added Value Companies,
like the Company, have generally entered into non-exclusive distribution
agreements which are cancelable on short-term notice, the loss of several of
such suppliers could reduce the anticipated benefits of the Transaction; and (v)
the loss of the services by death or otherwise of several of the Key Employees
could have a material adverse effect on the Company's ability to realize the
anticipated benefits of the Transaction, however, all of the Key Employees have
entered into two-year employment agreements with one of the Subsidiaries. See
"THE PURCHASE AGREEMENT Transaction" and "THE TRANSACTION AND RELATED MATTERS -
Recommendations of the Company's Board of Directors; The Company's Reasons for
the Transaction."
2. RIGHTS OF TARGET STOCKHOLDERS FOLLOWING THE MERGERS.
Following the Merger, the Target Stockholders will become holders of the
Company's Common Stock. Certain material differences exist between the rights of
stockholders of each of the Added Value Companies under California and Colorado
laws (as the case may be) and their respective Articles of Incorporation and
By-Laws and the rights of shareholders of the Company under Delaware law and the
Company's Certificate and By-Laws. See "COMPARISON OF RIGHTS OF HOLDERS OF THE
ADDED VALUE COMPANIES' COMMON STOCK AND THE COMPANY'S COMMON STOCK."
3. CREDIT FACILITY RESTRICTIONS; FUTURE AVAILABILITY. The Company
currently has available a $30 million revolving line of credit (the "Line") with
an institutional lender (the "Senior Lender"). The Company's revolving credit
agreement dated December 29, 1992, as amended (the "Credit Agreement"),
governing the Line contains covenants that impose limitations on the Company and
requires the Company to be in compliance with certain financial ratios. One of
such limitations requires the Company to obtain the consent of the Senior Lender
to the Transaction, which is a condition to its consummation. As part of
obtaining such consent, the Company has requested that the Senior Lender
increase the Line by approximately $8 million in order for the Company to
finance its cash obligations arising from the Transaction. If the Company fails
to make required payments, or if the Company fails to comply with the various
covenants contained
17
<PAGE>
in the Credit Agreement, the Senior Lender may be able to accelerate the
maturity of such indebtedness. As of September 30, 1995, the Company was in
compliance with the required financial ratios and other covenants and the
Company believes that it is presently in compliance with the financial ratios
and all other covenants under the Credit Agreement. The receivables, inventory
and equipment of the Company (including its subsidiaries), as well as the
capital stock of its subsidiaries, are pledged to the Senior Lender to secure
the Line. The Credit Agreement expires on May 31, 1997. Borrowings under the
Line bear interest at either one-quarter of one percent (1/4%) below the prime
rate or, at the Company's option, two percent (2%) above certain LIBOR rates. As
of September 30, 1995, $22.4 million was outstanding under the Line. To the
extent that there is an increase in interest rates, or present borrowing
arrangements become unavailable, the Company could be adversely impacted. See
"BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY - Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
4. DEPENDENCE ON FINANCING FOR FUTURE EXPANSION. In order to continue
to grow its business and achieve its expansion strategy, the Company may require
additional debt financing in amounts exceeding those that may be available under
the Line or additional equity. There can be no assurance that the Company will
be able to obtain such additional financing to continue its growth if, as and
when required. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY -
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
5. DECLINING GROSS PROFIT MARGINS. During the past four years the
Company has been experiencing declining gross profit margins as a result of the
competitive environment in the electronics distribution industry, a greater
number of large volume transactions at reduced margins and a change in the
Company's overall sales mix. Similarly, the Added Value Companies have also
experienced declining gross profit margins for substantially the same reasons as
the Company. The Company expects that these trends will continue, and possibly
even accelerate, in the future, especially if the Company is successful in
generating significant revenues from the sale of microprocessor and motherboard
products. Furthermore, as the Company endeavors to expand its business with
existing customers, it expects to do so at decreasing gross profit margins. In
order to obtain profitability while gross profit margins are declining, the
Company will need to expand its sales while improving operating efficiencies.
While the Company believes that its investments in plant capacity and computer
and communications equipment and its expansion of its sales offices, corporate
staff and other infrastructure have positioned the Company to achieve
improvements in operating efficiencies, there can be no assurance that this goal
will be achieved. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "- Business -- Products."
6. DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon
the services of its executive officers, including Paul Goldberg, its Chairman
and Chief Executive Officer, and Bruce M. Goldberg, its President and Chief
Operating Officer. The loss of the services of one or more of the Company's key
executives for any reason could have a material adverse effect upon the business
of the Company. While the Company believes that it would be able to locate
suitable replacements for its executives if their services were lost to the
Company, there can be no assurance it would be able to do so. The Company's
future success will also depend in part upon its continuing ability to attract
and retain highly qualified personnel. The Company owns a $1,000,000 term life
insurance policy on Paul Goldberg's life and a $1,000,000 term life insurance
policy on Bruce M. Goldberg's life, with benefits on both policies payable to
the Company. The Company also has employment agreements with its four executive
officers. See "SELECTED INFORMATION WITH RESPECT TO THE COMPANY - Management"
and "- Executive Compensation -- Employment Agreements."
7. RELATIONSHIPS WITH SUPPLIERS. Substantially all of the Company's
inventory has and will be purchased from manufacturers with whom the Company has
18
<PAGE>
entered into non-exclusive distribution agreements, which are typically
cancelable upon 30 to 90 days written notice. While these agreements generally
provide for price protection, stock rotation privileges, obsolescence credit and
return privileges if an agreement is cancelled, there can be no assurance that
the manufacturers will comply with their contractual obligations or that these
agreements will not be cancelled. In 1994 the Company's three largest suppliers
accounted for approximately 14%, 7% and 6% of purchases, respectively. While the
Company does not believe that the loss of any one supplier would have a material
adverse impact upon the Company since most products sold by the Company are
available from multiple sources, the Company's future success will depend in
large part on maintaining relationships with existing suppliers and developing
new relationships. The loss of, or significant disruptions in relationships
with, suppliers could have a material adverse effect on the Company's business
since there can be no assurance that the Company will be able to replace lost
suppliers. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY
Business -- Suppliers."
8. INCREASING EARNINGS BREAK EVEN. In late 1992 the Company embarked
upon an aggressive expansion plan. Since the end of 1992 to date, the Company
has opened 12 new sales offices and experts to open two more before the end of
the first quarter of 1996, relocated all existing sales offices into larger
facilities, acquired three distributors and increased its plant capacity,
computer and communications equipment, staff in most corporate departments and
service capabilities. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE
COMPANY - Business -- Corporate Strategy -- Expansion," "-- Corporate Strategy
- -- Services" and "-- Facilities and Systems." In order to finance its growth,
the Company has also increased its debt significantly in recent years and will
be further increasing its debt upon the consummation of the Transaction. As a
result of its expansion and increased debt service, the level of the Company's
revenues required to achieve a break even in earnings has increased
significantly. While the Company believes that its expansion plans will enable
it to achieve substantial growth in revenues, there can be no assurance that
such growth will be obtained or maintained. See "BUSINESS AND FINANCIAL
INFORMATION REGARDING THE COMPANY - Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "- Business."
9. FOREIGN MANUFACTURING AND TRADE REGULATION. A significant number of
the components sold by the Company are manufactured outside the United States
and purchased by the Company from United States subsidiaries or affiliates of
those foreign manufacturers. As a result, the Company and its ability to sell at
competitive prices could be adversely affected by increases in tariffs or
duties, changes in trade treaties, currency fluctuations, strikes or delays in
air or sea transportation, and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. The
Company's ability to be competitive in or with the sales of imported components
could also be affected by other governmental actions and changes in policies
related to, among other things, anti-dumping legislation and currency
fluctuations. Since the Company purchases from United States subsidiaries or
affiliates of foreign manufacturers, the Company's purchases are paid for in
U.S. dollars which does reduce the potential adverse effect of currency
fluctuations. While the Company does not believe that these factors adversely
impact its business at present, there can be no assurance that such factors will
not materially adversely affect the Company in the future. See "BUSINESS AND
FINANCIAL INFORMATION REGARDING THE COMPANY - Business -- Foreign Manufacturing
and Trade Regulation."
10. COMPETITION. The Company competes with many companies that sell and
distribute semiconductors, passive products and microprocessors. Many of these
companies have greater assets and possess greater financial and personnel
resources than those of the Company. Many of these competitors also carry
product lines which the Company does not carry. There can be no assurance that
the Company will be able to continue to compete successfully with existing or
new competitors and failure to do so could have a material adverse effect on the
Company. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY -
Business -- Competition."
19
<PAGE>
11. INDUSTRY CYCLICALITY. The electronics distribution industry has
been affected historically by general economic downturns, which have had an
adverse economic effect upon manufacturers and end-users of electronic
components and electronic component distributors such as the Company. In
addition, the life- cycle of existing electronic products and the timing of new
product development and introduction can affect demand for electronic
components. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY -
Business -- Products."
12. DEPENDENCE ON THE COMPUTER INDUSTRY. Many of the products the
Company sells are used in the manufacture or configuration of computers. These
products are characterized by rapid technological change, short product life
cycles and intense competition. The computer industry has experienced
significant unit volume growth over the past two years, which has in turn
increased demand for many of the Company's products. A slowdown in the growth of
the computer industry could adversely affect the Company's ability to continue
its recent growth. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY
- - Business -- Products."
13. CONTINUED GROWTH. The Company's growth may depend, in part, upon
its ability to acquire other distributors in the future. No assurances can be
given that any such acquisitions will be achieved. Future acquisitions will
depend, in part, on the Company's ability to find suitable candidates for
acquisition and the availability of sufficient internal funds and/ or debt or
equity financing to consummate any such acquisition. See "BUSINESS AND FINANCIAL
INFORMATION REGARDING THE COMPANY - Business -- Corporate Strategy." There can
be no assurance that the Company will be able to sustain its recent rate of
growth in sales. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
14. POTENTIAL PRODUCT LIABILITY. As a result of its value-added
services and as a participant in the distribution chain between the manufacturer
and the end-user, the Company would likely be named as a defendant in any
products liability action brought by an end-user. In addition, if the
Transaction is consummated, the Added Value Companies' manufacture through
contract manufacturers certain of their own board level products under the brand
name A.V.E.D., which increases the likelihood of claims for products liability.
To date, no material claims have been asserted against the Company for products
liability; there can be no assurance, however, that such material claims will
not arise in the future. In the event that any products liability claim is not
fully funded by insurance or if the Company is unable to be indemnified by or
recover damages from the supplier of the product that caused such injury, the
Company may be required to pay some or all of such claim from its own funds. Any
such payment could have a material adverse impact on the Company. See "BUSINESS
AND FINANCIAL INFORMATION REGARDING THE COMPANY - Legal Proceedings."
15. CONTINUED CONTROL BY PRESENT SHAREHOLDERS AND MANAGEMENT. Paul
Goldberg, Bruce M. Goldberg and members of their family and trusts therefor
(collectively, the "Goldberg Group") own 2,051,440 shares of the outstanding
Common Stock, approximating 11.6% of the outstanding shares (and to 10.3%
assuming the consummation of the Transaction and the issuance of the maximum
number of shares of the Company's Common Stock to the Target Stockholders on the
Closing Date) and, in the event of the exercise of all outstanding stock options
and warrants, the Goldberg Group would own approximately 14.7% (and 13.3%
assuming consummation of the Transaction and the issuance of the maximum number
of shares of the Company's Common Stock to the Target Stockholders on the
Closing Date). In addition, pursuant to the Voting Trust Agreement being entered
into in connection with the Transaction, Paul Goldberg and Bruce Goldberg, as
trustees, will have the right to vote the shares of the Company's Common Stock
issued on the Closing Date for up to a period of six years with respect to the
election of directors of the Company. As a result, the Goldberg Group may be in
a position to effectively control the Company. In addition, the executive
officers of the Company comprise four of the six directors of the Company.
20
<PAGE>
Accordingly, they are in a position to control the day to day affairs of the
Company without the oversight and controls of a Board of Directors comprised of
a greater percentage of independent (non-employee) directors. See "THE PURCHASE
AGREEMENT - Other Agreements," "SELECTED INFORMATION WITH RESPECT TO THE COMPANY
- - Security Ownership of Certain Beneficial Owners and Management" "- Management"
and "Executive Compensation -- Employment Agreements -- The Goldberg
Agreements."
16. POSSIBLE ISSUANCE OF ADDITIONAL SHARES. To the extent available for
issuance, the Company's Board has the power to issue any or all authorized and
unissued shares without shareholder approval, including the shares of authorized
preferred stock, which shares can be issued with such rights, preferences and
limitations as are determined by the Board. Any securities issuances may result
in a reduction in the book value or market price of the outstanding shares. If
the Company issues any additional securities, such issuance may reduce the
proportionate ownership and voting power of each existing shareholder. Further,
any new issuances of securities could be used for anti-takeover purposes or
might result in a change of control of the Company. See "DESCRIPTION OF
SECURITIES."
17. NO DIVIDENDS ANTICIPATED. The Company has not paid any cash
dividends on its Common Stock and does not anticipate paying dividends on its
shares in the foreseeable future inasmuch as it expects to employ all available
cash in the continued growth of its business. Further, the Credit Agreement
prohibits the payment of dividends. See "BUSINESS AND FINANCIAL INFORMATION
REGARDING THE COMPANY" - "Dividend Policy."
18. CERTAIN PROVISIONS IN THE CERTIFICATE; ANTI-TAKEOVER PROVISIONS.
The Company's Certificate includes provisions designed to discourage attempts by
others to acquire control of the Company without negotiation with the Board, and
to attempt to ensure that such transactions are on terms favorable to all of the
Company's shareholders. These provisions provide, among other things, that
meetings of shareholders' may only be called by the Board; that an affirmative
vote of two-thirds of the outstanding shares of Common Stock is required to
approve certain business combinations unless 65% of the Board approves such
transaction; for three classes of directors with each class elected for a three
year staggered term; that the 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 the Company or its
shareholders. These reasons include the fact that the provisions of the
Certificate (i) make it difficult to remove directors even if removal would be
in the best interest of the Company and its shareholders; (ii) make it more
difficult for shareholders to approve certain transactions that are not approved
by at least 65% of the Board, even if the transactions would be beneficial to
the Company; and (iii) eliminate the ability of the shareholders to act without
a meeting. Further, the Company's Certificate and the Company's By-laws include
provisions that are intended to provide for limitation of liabilities of
officers and directors in certain circumstances and for indemnification of
officers and directors against certain liabilities. See "DESCRIPTION OF
SECURITIES - Certain Provisions of Certificate of Incorporation and By-laws" and
"- Certain Provisions Relating to Limitation of Liability and Indemnification of
Directors."
19. POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common
Stock could be subject to significant fluctuations in response to such factors
as, among others, variations in the anticipated or actual results of operations
of the Company or of other distributors in the electronics industry and changes
in general conditions in the economy, the financial markets or the electronics
distribution industry. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE
COMPANY - Market Information."
21
<PAGE>
20. SHARES AVAILABLE FOR FUTURE RESALE. Of the 17,689,791 shares of
Common Stock presently outstanding, approximately 2,081,440 are "restricted
securities" within the meaning of the Act and the rules and regulations
promulgated thereunder and, generally, may be sold only in compliance with Rule
144 under the Act, pursuant to registration under the Act or pursuant to another
exemption therefrom. Generally, under Rule 144, a person who has held
"restricted securities" for a period of at least two years (including the
holding period of any prior owner except an affiliate) may sell a limited number
of such shares in the public market. Generally, a person is entitled to sell,
within any three month period, in ordinary brokerage transactions a number of
those shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the date on which the Rule 144
notice of the sale is filed with the Commission. Persons who are not affiliates
of the Company, who have not been affiliated with the Company at any time during
the 90-day period prior to the sale and who have satisfied a three year holding
period (including the holding period of any prior owner except an affiliate) may
sell without regard to such limitations. Substantially all restricted shares of
the outstanding Common Stock are presently eligible for sale under Rule 144.
Sales made pursuant to Rule 144 by the Company's existing shareholders may have
a depressive effect on the price of the shares in the public market. Such sales
also could adversely affect the Company's ability to raise capital at that time
through the sale of its equity securities. Only 30,000 shares of the "restricted
securities" have registration rights. See "DESCRIPTION OF SECURITIES - Shares
Eligible for Future Sale."
21. MARKET OVERHANG OF EXISTING RIGHTS. The Company had outstanding as
of the date of this Proxy Statement/Prospectus options, warrants and other
potential rights to acquire up to 3,749,899 shares of the Company's Common Stock
(the "Existing Rights"). All of the shares of Common Stock underlying the
Existing Rights (other than 1,000 shares of Common Stock) either are covered by
registration rights or are or will be covered by the Company's registration
statement on Form S-8 filed with the Commission in order to register shares of
Common Stock issuable upon the exercise of stock options granted under the
Option Plan and/or held by employees of the Company. It is anticipated that the
holders of the Existing Rights, from time to time, will exercise their Existing
Rights to acquire shares of the Company's Common Stock and will offer their
shares in the public market place, which could interfere with the Company's
ability to obtain future financing and could adversely affect the market price
of the Common Stock. See "DESCRIPTION OF SECURITIES - Shares Eligible for Future
Sale."
INTRODUCTION
SPECIAL MEETING
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
Special Meeting to be held on ________________, December __, 1995, at 10:00
A.M., Miami, Florida local time, at Don Shula's Hotel, 15255 Bull Run Road,
Miami Lakes, Florida. This Proxy Statement/Prospectus also constitutes the
prospectus of the Company with respect to the shares of the Company's Common
Stock to be issued in connection with the Transaction.
The Special Meeting has been called for the purpose of considering and
voting upon a proposal to approve the Transaction whereby Added Value will first
be merged with and into the California Subsidiary and immediately thereafter
Rocky Mountain will be merged with and into Colorado Subsidiary. If the
Transaction is consummated, the aggregate consideration to be paid by the
Company in the Mergers will be $8,452,914, approximately $6,778,414 of which is
to be paid in the Added Value Merger, and approximately $1,674,500 of which is
to be paid in the Rocky Mountain Merger. However, because Added Value owns
22
<PAGE>
approximately 37.31% of the outstanding capital stock of Rocky Mountain, (a)
$624,814 of the consideration being paid in the Added Value Merger is intended
as payment to the stockholders of Added Value in respect of their indirect
equity ownership interests in Rocky Mountain and (b) since the Added Value
Merger will occur immediately prior to the Rocky Mountain Merger, $624,814 of
the consideration payable in the Rocky Mountain Merger will be payable to
California Subsidiary as successor by merger to Added Value. Accordingly, the
real amount which the Company is paying to acquire the businesses and assets of
the Added Value Companies is $7,828,100, $6,153,600 of which is being allocated
to the value of Added Value's business and assets, and $1,674,500 of which is
being allocated to the value of Rocky Mountain's business and assets. Of the
$8,452,914 of aggregate merger consideration, $3,169,843 is to be paid in cash
on the Closing Date and $5,283,071 is to be paid in shares of the Company's
Common Stock on the Closing Date. Each stockholder of Added Value and Rocky
Mountain (including California Subsidiary as a stockholder of Rocky Mountain)
will be receiving his, her or its merger consideration in each of the Mergers in
such aggregate cash to stock proportion (except only that in the Rocky Mountain
Merger, although 2 affiliated stockholders of Rocky Mountain (an individual and
his family trust) will in the aggregate receive merger consideration in such
aggregate cash to stock proportion, the trust will receive only cash and the
individual will receive mostly stock). For valuation purposes, in paying the
consideration which consists of Common Stock, the value (the "Market Value") of
a share of the Company's Common Stock at closing shall be deemed to equal the
average last sale price of a share of the Company's Common Stock on The Nasdaq
Stock Market over the 30-day period ending on the trading day immediately prior
to the Closing Date, but in no event shall the share value be deemed lower than
$2.25. Accordingly, the highest number of shares of the Company's Common Stock
that could be issued to the Target Stockholders (exclusive of the California
Subsidiary) on the Closing Date as part of the merger consideration is 2,174,473
shares ($5,283,071 / $2.25 reduced by the 173,559 shares that would be issued to
the California Subsidiary at such price).
In addition to the $8,452,914 of merger consideration, the individual
stockholders of Added Value and Rocky Mountain, excluding California Subsidiary
(the "Target Stockholders"), could become entitled to receive up to another
$1,900,000 Additional Consideration as follows: To the extent that the aggregate
value of the shares of the Company's Common Stock issued to the Target
Stockholders in the Mergers has not, by June 30, 1998, appreciated, in the
aggregate, by at least $1,900,000, the Company is obligated to pay the Target
Stockholders the shortfall, provided that certain events do not occur as
summarized in ''The PURCHASE AGREEMENT - Transaction". For these purposes, the
value of a share of Common Stock on June 30, 1998, shall be the average last
sale price of a share of Common Stock on The Nasdaq Stock Market over the 30-day
period ending June 30, 1998. The Additional Consideration is payable, at the
election of the Company, in cash or the Company's Common Stock, or a combination
of cash and the Company's Common Stock, provided that it must be paid in the
Company's Common Stock to the extent necessary to cause the aggregate merger
consideration (inclusive of such Additional Consideration) paid in each Merger
to consist of an equal or higher amount (i.e., viewed in dollar value), after
giving effect to imputed interest, of the Company's Common Stock as compared to
cash.
In addition to the merger consideration (including the Additional
Consideration), the Target Stockholders are to receive at closing, in the
aggregate, $1,200,000 as payment for their respective covenants restricting
competition for periods ranging from two to five years following closing, and
certain of the Target Stockholders who are considered by the Company to be key
or valuable employees and certain other employees who are not Target
Stockholders who are considered by the Company to be valuable employees are to
receive, at closing, front-end incentive employment compensation totalling
approximately $1,098,500. See "THE PURCHASE AGREEMENT - Transaction." All of the
terms and provisions related to the Transaction are set forth in the Purchase
Agreement,
23
<PAGE>
dated as of October 31, 1995, among the Company, the Subsidiaries and the Added
Value Companies attached hereto as Appendix A and the other exhibits attached to
the Purchase Agreement (which exhibits are included as an exhibit to the
Registration Statement on Form S-4 as to which this Proxy Statement/Prospectus
is a part).
The Board of Directors of the Company has unanimously approved the
Transaction and the issuance of shares of the Company's Common Stock as part of
the merger consideration. See "THE TRANSACTION AND RELATED MATTERS -
Recommendations of the Company's Board of Directors; The Company's Reasons for
the Transaction." Approval of the Transaction by the Company's shareholders is
not required under applicable Delaware law. It is being sought as a result of
the Company, in order not to delay the vote at its annual shareholders meeting
held on August 15, 1995, to increase the authorized number of shares of the
Company's Common Stock from 20,000,000 to 40,000,000 shares, undertaking at such
time to provide the Company's shareholders with a separate opportunity to vote
upon the Transaction at the time certain information (including, without
limitation, audited financial statements of the Added Value Companies, as well
as proforma financial information) required under the Exchange Act could be
provided to the Company's shareholders in a proxy statement.
Approval of the Transaction by the Added Value Companies' shareholders
has been obtained as part of and concurrently with the execution of the Purchase
Agreement.
The Company as the sole shareholder of each of the Subsidiaries has
approved the Mergers.
This Proxy Statement/Prospectus is first being mailed to the Company's
shareholders on or about December __, 1995.
RECORD DATE AND VOTING
Only holders of record of the Company's Common Stock as of the close of
business on Wednesday, November 22, 1995, are entitled to notice of, and to vote
at, the Special Meeting. On the Record Date, there were 17,689,791 outstanding
shares of the Company's Common Stock held by approximately 525 holders of
record.
Each share of the Company's Common Stock is entitled to one vote on all
matters that properly come before the Special Meeting. The presence, in person
or by proxy, of not less than a majority of the total number of outstanding
shares of the Company's Common Stock is necessary to constitute a quorum at the
Special Meeting. Since the Company's Board of Directors has unanimously approve
the Transaction and the shareholders of the Company are not required to approve
the Transaction under applicable Delaware law, the affirmative vote of a
majority of the votes cast by holders of the shares of the Company's Common
Stock represented in person or by proxy at the Special Meeting is required to
approve the Transaction. For purposes of the vote and determining whether a
quorum is present at the Special Meeting, under the Company's By-laws an
abstention will be counted as a vote against the Transaction and broker, nominee
and fiduciary nonvotes will not be counted as voted (i.e. will not be considered
a vote for or against the Transaction) nor will such nonvotes be counted toward
obtaining a quorum.
On the Record Date, 1,822,242 shares of the Company's Common Stock
(approximately 10.3% of the voting stock outstanding) were beneficially owned by
directors and executive officers of the Company. All of such directors and
executive officers have indicated to the Company that they intend to vote all
shares of the Company's Common Stock over which they have voting power in favor
of the approval of the Transaction.
24
<PAGE>
PROXIES
Shares of the Company's Common Stock represented by properly executed
proxies received by the Company prior to or at the Special Meeting will be voted
in accordance with the instructions contained therein. If no instructions are
given, such shares will be voted FOR approval of the Transaction.
Shareholders of the Company are requested to promptly complete, sign,
date and return the enclosed proxy in the postage prepaid envelope provided for
this purpose in order to assure that their shares are voted. Any shareholder who
has given a proxy may revoke it at any time prior to the exercise of the
authority granted thereunder. Revocation may be accomplished by the granting of
a later proxy with respect to the same shares or by written notice to the
Corporate Secretary of the Company, All American Semiconductor, Inc., 16115 N.W.
52nd Avenue, Miami, Florida 33014, at any time prior to the vote on the
Transaction. Mere attendance at the Special Meeting will not in itself revoke a
proxy.
If the Special Meeting is adjourned for any purpose, at any subsequent
reconvening of such meeting, to the extent permitted by law, all proxies will be
voted in the same manner as such proxies would have been voted at the original
meeting (except for any proxies which have theretofore effectively been revoked
or withdrawn).
The Company's Board of Directors knows of no matters to be presented at
the Special Meeting other than the vote to approve the Transaction as described
in this Proxy Statement/Prospectus. Should other matters properly come before
the Special Meeting, the person or persons voting the proxies will have
discretionary authority to vote the shares to which such proxies relate on such
matters in accordance with their best judgment.
The cost of printing and mailing this Proxy Statement/Prospectus and
the expense of this solicitation will be borne by the Company. In addition to
solicitation by mail, arrangements may be made with brokers and other
custodians, nominees and fiduciaries to send proxy materials to their principals
and the Company will, upon request, reimburse them for reasonable expenses in
doing so. The Company has made arrangements with Shareholder Communications
Corporation, a proxy solicitation firm, to assist the Company in soliciting
proxies from shareholders. The cost to the Company with respect to such
arrangement is estimated to be approximately $12,500. Solicitation of proxies
from some shareholders may also be made by the Company's officers and regular
employees by telephone, telegram, or in person after the initial solicitation,
without additional compensation or remuneration therefor.
DISSENTERS RIGHTS
Holders of the Company's Common Stock are not entitled to dissenters'
rights under Delaware law in connection with the Transaction. The Target
Stockholders have unanimously approved the Transaction and waived any
dissenters' rights under California or Colorado applicable law by executing the
Guaranty.
THE PURCHASE AGREEMENT
The terms and conditions of the Transaction are set forth in the
Purchase Agreement attached to this Proxy Statement/Prospectus as Appendix A and
incorporated hereby by reference.
TRANSACTION
The structure of the acquisition is as follows: On the Closing Date,
which is anticipated to occur before the end of this calendar year, Added Value
will first be merged with and into California Subsidiary, with California
Subsidiary
25
<PAGE>
as the surviving corporation, and Rocky Mountain will then be merged with and
into Colorado Subsidiary, with Colorado Subsidiary as the surviving corporation.
Each Merger will be a forward subsidiary merger intended to qualify as a
reorganization within the meaning of ss. 368(a) of the Internal Revenue Code of
1986, as amended.
Added Value currently owns approximately 37.31% of the outstanding
capital stock of Rocky Mountain. The aggregate consideration being paid by the
Company in the Mergers is $8,452,914, approximately $6,778,414 of which is being
paid in the Added Value Merger, and approximately $1,674,500 of which is being
paid in the Rocky Mountain Merger. However, because of Added Value's 37.31%
ownership interest in Rocky Mountain, (a) $624,814 of the consideration being
paid in the Added Value Merger is intended as payment to the stockholders of
Added Value in respect of their indirect equity ownership interests in Rocky
Mountain and (b) since the Added Value Merger will occur immediately prior to
the Rocky Mountain Merger, $624,814 of the consideration payable in the Rocky
Mountain Merger will be payable to California Subsidiary as successor by merger
to Added Value. Accordingly, the real amount which the Company is paying to
acquire the businesses and assets of the Added Value Companies is $7,828,100,
$6,153,600 of which is being allocated to the value of Added Value's business
and assets, and $1,674,500 of which is being allocated to the value of Rocky
Mountain's business and assets. Of the $8,452,914 of aggregate merger
consideration, $3,169,843 is to be paid in cash at closing and $5,283,071 is to
be paid in shares of the Company's Common Stock at closing. Each stockholder of
Added Value and Rocky Mountain (including California Subsidiary as a stockholder
of Rocky Mountain) will be receiving his, her or its merger consideration in
each of the Mergers in such aggregate cash to stock proportion (except only that
in the Rocky Mountain Merger, although 2 affiliated stockholders of Rocky
Mountain (an individual and his family trust) will in the aggregate receive
merger consideration in such aggregate cash to stock proportion, the trust will
receive only cash and the individual will receive mostly stock). For valuation
purposes, in paying the consideration which consists of the Company's Common
Stock, the value (the "Market Value") of a share of the Company's Common Stock
at closing shall be deemed to equal the average last sale price of a share of
Common Stock on The Nasdaq Stock Market over the 30-day period ending on the
trading day immediately prior to the Closing Date, but in no event shall the
share value be deemed lower than $2.25. Accordingly, the highest number of
shares that could be issued to the Target Stockholders (exclusive of the
California Subsidiary) on the Closing Date as part of the merger consideration
is 2,174,473 shares ($5,283,071 / $2.25 reduced by the 173,559 shares that would
be issued to the California Subsidiary at such price), representing after their
issuance approximately 10.9% of the Company's Common Stock outstanding. Assuming
that the Market Value for purposes of calculating the number of shares of the
Company's Common Stock to be issued as part of the merger consideration was
$2.98 (based on the average last sale price of the Company's Common Stock over
the 30-day period immediately prior to October 31, 1995), 1,641,800 shares of
the Company's Common Stock would be issued to the Target Stockholders (exclusive
of the California Subsidiary) on the Closing Date ($5,283,071 / $2.98 reduced by
the 131,043 shares that would be issued to the California Subsidiary at such
price), representing after their issuance approximately 8.5% of the outstanding
shares of the Company's Common Stock.
In addition to the $8,452,914 of merger consideration, the individual
stockholders of Added Value and Rocky Mountain, excluding California Subsidiary
(the "Target Stockholders"), could become entitled to receive up to another
$1,900,000 of consideration in the aggregate ("Additional Consideration") as
follows: To the extent that the aggregate value of the shares of the Company's
Common Stock issued to the Target Stockholders in the Mergers has not, by June
30, 1998, appreciated, in the aggregate, by at least $1,900,000, the Company is
obligated to pay the Target Stockholders the shortfall, provided that certain
events do not occur as summarized in the next paragraph. For these purposes, the
26
<PAGE>
value of a share of Common Stock on June 30, 1998, shall be the average last
sale price of a share of Common Stock on The Nasdaq Stock Market over the 30-day
period ending June 30, 1998. The Additional Consideration is payable, at the
election of the Company, in cash or the Company's Common Stock, or a combination
of cash and the Company's Common Stock, provided that it must be paid in the
Company's Common Stock to the extent necessary to cause the aggregate merger
consideration (inclusive of such Additional Consideration) paid in each Merger
to consist of an equal or higher amount (i.e., viewed in dollar value), after
giving effect to imputed interest, of the Company's Common Stock as compared to
cash. On the assumption that the Market Value at closing and the market value on
June 30, 1998, were $2.25 per share and the limitations described in the next
paragraph do not apply, the Company, at its election and in lieu of paying any
cash, could pay the entire Additional Consideration by issuing 844,444
additional shares of the Company's Common Stock. This number of additional
shares represents the maximum number of shares under any circumstance that the
Company could issue with respect to the Additional Consideration.
To the extent that a Target Stockholder sells or otherwise disposes of
shares of the Company's Common Stock prior to June 30, 1998, such Target
Stockholder is not entitled to be paid, with respect to the shares sold or
otherwise disposed of, any Additional Consideration allocable to such shares.
Further, if the last sale price of a share of the Company's Common Stock on The
Nasdaq Stock Market equals or exceeds the price at which the $1,900,000
appreciation target would be reached for a period of 30 consecutive trading
days, and all contractual restrictions on the sale or other disposition of the
Company's Common Stock issued to the Target Stockholders (described below) are
permanently waived by the Company prior to such 30-day period, the Company's
obligation to pay any Additional Consideration is excused.
In addition to the merger consideration (including the Additional
Consideration), (i) the Target Stockholders are to receive on the Closing Date,
in the aggregate, $1,200,000 as payment for their respective covenants
restricting competition for periods ranging from two to five years following
closing, (ii) certain of the Target Stockholders who are considered by the
Company to be key or valuable employees and certain other employees who are not
Target Stockholders who are considered by the Company to be valuable employees
are to receive, at closing, front-end incentive employment compensation
totalling approximately $1,098,500 and (iii) three employees of Rocky Mountain
who are not Target Stockholders, in consideration of their agreeing to the
cancellation of certain monetary bonuses payable under existing agreements upon
the sale of Rocky Mountain and entering into employment agreements with the
Colorado Subsidiary, will receive ratably over their respective two-year
employment terms an aggregate of approximately $214,500 of additional
compensation, in addition to an aggregate of $93,500 of the front-end incentive
employment compensation set forth above. See "Other Agreements."
All of the Target Stockholders have jointly and severally guaranteed,
subject to the limitations described below, all of the representations,
warranties, covenants and obligations of the Added Value Companies set forth in
the Purchase Agreement pursuant to a separate Guaranty and Agreement (the
"Guaranty") which was executed concurrently with the Purchase Agreement.
Pursuant to the Guaranty, no Target Stockholder may have recovered against him
or her an amount in excess of the aggregate amount of consideration and
compensation payable to such Target Stockholder at closing and as Additional
Consideration pursuant to the Purchase Agreement and the other agreements to be
executed pursuant thereto. Further, except for the principal Target Stockholders
who, in the aggregate, will be receiving in excess of 80% of the total merger
and other consideration and compensation being paid to the Target Stockholders
at closing, no Target Stockholder's liability under the Guaranty shall be
recourse personally to such Target Stockholder, but shall be recourse only to
the shares of the Company's Common Stock owned by such Target Stockholder which
are and remain subject to the Pledge Agreement described below.
OTHER AGREEMENTS
At closing, all of the Target Stockholders are required to execute and
deliver three additional agreements: (a) a restrictive covenant in favor of the
27
<PAGE>
Company and the Subsidiaries (the "Restrictive Covenant"); (b) a stock pledge
agreement in favor of the Company and the Subsidiaries (the "Pledge Agreement");
and (c) a voting trust agreement in favor of Paul Goldberg and Bruce M.
Goldberg, as voting trustees (the "Voting Trust Agreement").
Pursuant to the Restrictive Covenant, the Target Stockholders will
covenant not to disclose or use confidential or proprietary information of or
concerning the Added Value Companies or of the Company, and will covenant not to
compete with the Company, including the businesses of the Added Value Companies,
for periods ranging from two to five years, in exchange for which they will
receive at closing in the aggregate the $1,200,000 payment described above. In
addition, pursuant to the Restrictive Covenant, the Target Stockholders
collectively will be restricted from selling or disposing of more than 22.5% of
the Company's Common Stock issued to all of them in the Mergers (collectively
the "Sale Shares") for a period of two years following the Closing Date, with
each Target Stockholder limited to selling or disposing of no more than his pro
rata share (the "Individual Percentage") of the Sale Shares based on the
percentage of the total merger consideration received by such Target Stockholder
in the Mergers. In addition, during such two-year period, the Target
Stockholders may not, in the aggregate, sell or dispose of more than 50,000
shares of the Company's Common Stock during any 14-day period or more than
10,000 shares of the Company's Common Stock in any one day, and each Target
Stockholder shall be limited to his or her Individual Percentage of such number.
After such two-year period, the Target Stockholders may not, in the aggregate,
sell or dispose of more than 200,000 shares of the Company's Common Stock during
any 14-day period or more than 50,000 shares of the Company's Common Stock in
any one day, and each Target Stockholder shall be limited to his or her
Individual Percentage of such number. A Target Stockholder may relinquish all or
a portion of his or her pro rata right(s) to sell or dispose of shares of the
Company's Common Stock described hereinabove to another Target Stockholder by
giving the Company written notice to such effect, which relinquishment will be
irrevocable. The restrictions set forth hereinabove shall not apply on any
trading day when the last sale price of a share of the Company's Common Stock
for the immediately preceding trading day equalled or exceeded $5.00. The
foregoing restrictions are in addition to any restrictions which might be
imposed by securities laws or under any other agreement related to the
Transaction.
Pursuant to the Pledge Agreement, each of the Target Stockholders will,
as security for their obligations under the Guaranty, pledge to the Company and
the Subsidiaries all of the Company's Common Stock issued to them in the Mergers
for a period of two years. The Target Stockholders may substitute for the
Company's Common Stock collateral of equivalent value, if they wish, provided
that the Company is satisfied as to the value (and the stability thereof) of
such substituted collateral. While the Added Value Companies and all of the
Target Stockholders have represented to the Company that they have, and at
closing will have, no intention of selling or otherwise disposing of the
Company's Common Stock they will be receiving in the Mergers, in order to afford
the Target Stockholders some flexibility, the Company is obligated to release
from the pledge any shares which the Target Stockholders sell during such
two-year period up to the aggregate maximum number of shares which may be sold
during such two-year period (i.e., up to 22.5% of the total number issued on the
Closing Date in the Mergers) as permitted under the Restrictive Covenant.
Pursuant to the Voting Trust Agreement, record title to all of the
Company's Common Stock issued to the Target Stockholders in the Mergers shall be
transferred to Paul Goldberg and Bruce M. Goldberg, as voting trustees (the
Target Stockholders shall retain beneficial ownership of all such shares,
subject to the Pledge Agreement). The term of the voting trust created under the
Voting Trust Agreement will be six years. Pursuant to the Voting Trust
Agreement, the voting trustees have unconditional discretion to vote all shares
subject to the voting trust in elections of directors of the Company, and all
other matters upon
28
<PAGE>
which shareholders of the Company may vote, except for the following: (a)
merger; (b) sale of all or substantially all of the Company's assets; (c)
dissolution; and (d) any amendment to the Company's certificate of incorporation
which modifies or alters the capital structure of the Company. With respect to
such four matters, the voting trustees must vote the shares subject to the
voting trust as directed by the beneficial owners of such shares. To the extent
that shares of the Company's Common Stock are permitted to be sold pursuant to
the Restrictive Covenant, upon such sale the voting trustees are obligated to
release such shares from the voting trust.
At the closing, the five most key employees of Added Value and Rocky
Mountain, who are also Target Stockholders, Robert Lurie, Wayne Vannoy, Gary
Miller, Richard McCauley and Kenneth Plock (the "Key Employees"), will each
enter into a two-year employment agreement with one of the Subsidiaries. The
employment agreements provide for annual salaries of $150,000, $135,000,
$150,000, $130,000 and $130,000, respectively, exclusive of the front-end
incentive employment compensation payable to the Key Employees discussed above
which are in the amounts of $180,000, $200,000, $180,000, $105,000 and $100,000,
respectively. Aside from such front-end incentive employment compensation and
normal fringe benefits, no bonus or other compensation is payable under such
employment agreements except that (a) each of the Key Employees will be granted
on the Closing Date incentive stock options to acquire 10,000 shares of the
Company's Common Stock pursuant to the Company's Option Plan as described in
"SELECTED INFORMATION WITH RESPECT TO THE COMPANY - Executive Compensation
- --Employees', Officers, Directors' Stock Option Plan", and (b) Richard McCauley
is entitled to receive additional annual compensation equal to 2% of the gross
profit derived by the Company from the sale of memory modules. The exercise
price of such incentive stock options will be at fair market value on the date
of grant and they shall vest over six years from the date of grant, one-sixth at
the end of each such year, and will be exercisable within the seven-year period
following the date of grant; provided, however, that such incentive stock
options will terminate earlier under certain circumstances. Twelve other
employees of Added Value or Rocky Mountain considered valuable by the Company
are to enter into employment agreements at the closing as well. Four of such
other employment agreements, all of which will be with other Target Stockholders
(three Added Value stockholders and one Rocky Mountain stockholder), will also
provide for front-end incentive employment bonuses ranging from $25,000 to
$100,000, but otherwise contain no unusual benefits, and contain terms favorable
to the Subsidiaries. Five of such other employment agreements (which all relate
to Added Value employees who are not Target Stockholders) will provide for
annual compensation at rates comparable to what is now paid to such other
employees, and will contain no unusual benefits, except that two of such
employees will also each receive a $25,000 incentive employment compensation
payment at or promptly following the Closing Date if not previously paid by
Added Value. The three remaining of such other employment agreements (which all
relate to Rocky Mountain employees who are not Target Stockholders) will contain
provisions pursuant to which such employees will receive, in the aggregate,
approximately $93,500 of front-end incentive employment compensation and
$214,500 of additional employment compensation ratably over a two-year
employment period. Such additional ratable employment compensation will be paid
ratably over the two-year term, and is in addition to the compensation such
employees would normally receive; however, if any such employee resigns or if
his or her employment is terminated with cause, such employee is not entitled to
the balance of his or her additional ratable employment compensation. The
additional employment compensation (including the front-end incentive
compensation) is being paid to such three employees in lieu of certain monetary
bonuses payable to such employees under existing agreements upon the sale of
Rocky Mountain.
THE ADDED VALUE COMPANIES' LINES OF CREDIT
The Company currently contemplates that as part of the Transaction and
in order to obtain the consent of the Company's senior lender, the Company will
be required to pay and satisfy the line of credit facility of each of the Added
29
<PAGE>
Value Companies (collectively the "Bank Debt"). Added Value has a $3.3 million
revolving line of credit facility with Bank of America, N.A. secured by
substantially all of its assets, which as of October 31, 1995 had an outstanding
balance of $2,008,000. Rocky Mountain has a $1.0 million revolving line of
credit facility with Colorado National Bank secured by substantially all of its
assets, which as of October 31, 1995 had an outstanding balance of $760,000. The
Company currently intends to use the Line to satisfy the Bank Debt on the
Closing Date. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE ADDED VALUE
COMPANIES - Added Value Management Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and "-
Rocky Mountain Management Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CLOSING DATE OF TRANSACTION; EFFECTIVE DATE OF THE MERGERS
It is presently contemplated that the closing of the Transaction (the
"Closing Date") pursuant to the Purchase Agreement will take place and the
Mergers will become effective as soon as practicable after the requisite
approval of the shareholders of the Company has been obtained and all of the
other conditions to the Transaction have been satisfied or waived. The Added
Value Merger will first become effective upon the filing of the Agreement of
Merger with the Secretary of State of the State of California and, after the
Added Value Merger becomes effective, the Rocky Mountain Merger will become
effective upon the filing of Articles of Merger with the Secretary of State of
the State of Colorado.
CONDUCT OF BUSINESS OF THE ADDED VALUE COMPANIES PENDING THE CLOSING DATE
The Added Value Companies have agreed that prior to the consummation of
the Transaction, each of them will, among other things, conduct its business
only in the ordinary course and consistent with past practice, use reasonable
efforts to preserve intact its business organization, and give prompt notice to
the Company of the receipt by either of them of any notice of a default of any
material agreement. Without limiting the generality of the above, each of the
Added Value Companies has agreed that, without the prior written consent of the
Company, it will not, among other things, amend its Articles of Incorporation or
By-laws; incur or become subject to any material liability or obligation other
than in the ordinary course of business; engage in any material activities or
transactions which are out of the ordinary course of business; make any changes
in its authorized capital stock; issue or accrue any stock options, stock awards
or warrants; purchase, acquire or redeem any outstanding shares of its capital
stock; declare or pay any dividend; amend any material agreement; or increase
compensation to directors, officers or executive employees or adopt or amend
employee benefit arrangements, except increases or changes which are not
material and are consistent with past practices.
CONDITIONS TO CONSUMMATION OF THE TRANSACTION
The respective obligations of the Company, the Subsidiaries and the
Added Value Companies are subject to the conditions that (a) none of them be
subject to any order, decree or injunction of a court which prevents the
consummation of the Transaction or, as to the obligations of the Company and
Subsidiaries, would impose any material limitation on the ability of the Company
to effectively exercise full rights of ownership of the Added Value Companies;
(b) the shareholders of the Company shall have properly approved the
Transaction; (c) as to the obligations of the Added Value Companies, the
registration statement containing this Proxy Statement/Prospectus shall have
become effective under the Securities Act and shall not be subject to any "stop
order"; (d) the Company's Senior Lender shall have approved and consented to the
Transaction and, as part of such approval and consent, shall have agreed to
increase the Line by approximately $8 million to finance the cash closing
obligations of the Company arising from the Transaction, which approval and
consent the Company does not anticipate having difficulty obtaining; (e) all
applicable waiting periods with respect to the Transaction pursuant to the HSR
Act shall have expired; and (f) all other conditions set forth in the Purchase
Agreement have been satisfied or, if legally permitted, waived.
30
<PAGE>
The obligations of the Added Value Companies are subject to further
conditions, including that (a) representations and warranties of the Company and
the Subsidiaries contained in the Purchase Agreement must be true and correct in
all material respects as of the Closing Date; and (b) the Company and the
Subsidiaries must have performed in all material respects all of the agreements,
obligations and conditions required to be performed by them under the Purchase
Agreement on or prior to the Closing Date.
In addition, the obligations of the Company and the Subsidiaries are
subject to certain other conditions, including that (a) the representations and
warranties of the Added Value Companies contained in the Purchase Agreement must
be true and correct in all material respects as of the Closing Date; and (b) the
Added Value Companies must have performed in all material respects all of the
agreements, obligations and conditions required to be performed by each of them
under the Purchase Agreement on or prior to the Closing Date.
REPRESENTATIONS AND WARRANTIES
The Purchase Agreement contains various representations and warranties
relating to, among other things, (i) the parties, their organization and similar
corporate matters, (ii) the capital structure and ownership of each of the
parties, (iii) the authorization, execution, delivery, performance and
enforceability of the Purchase Agreement and exhibits thereto and related
matters, (iv) the accuracy of each of the Company's and the Added Value
Companies' recent financial statements, (v) the absence of certain liabilities,
(vi) the absence of certain changes of events, (vii) legal proceedings, (viii)
the absence of certain labor controversies, (ix) taxes, (x) retirement and other
employee plans and matters relating to the Employee Retirement Income Security
Act of 1974, as amended, (xi) violations of law; (xii) sufficiency of assets,
(xii) the documents and reports filed by the Company with the Commission and the
accuracy of the information contained therein, and (xiv) certain accounting
matters.
THE NASDAQ STOCK MARKET
The Company's Common Stock is currently listed on The Nasdaq Stock
Market. The Company will use its best efforts to obtain, prior to the Closing
Date and upon official notice of issuance, approval for the listing on The
Nasdaq Stock Market of additional shares of the Company's Common Stock to be
issued in connection with the Transaction.
TERMINATION AND AMENDMENT
The Purchase Agreement may be terminated at any time prior to the
Closing Date, whether before or after approval by the shareholders of the
Company, (a) by mutual consent of the parties thereto; (b) by either the
Company, on one hand, or the Added Value Companies, on the other hand, if the
Transaction has not been consummated on or before January 31, 1996, without a
breach by the terminating party; (c) by the Company or the Added Value Companies
if the Company's senior lender, Sunbank/Miami, N.A., does not approve the
Transaction within 30 days following execution and delivery of the Purchase
Agreement, although the Company does not anticipate difficulties in obtaining
the consent of such lender; (d) by the Company or the Added Value Companies if
there has been a material breach on the part of the non-terminating party of any
material covenant or representation or warranty set forth in the Purchase
Agreement and if such breach has not been waived; or (e) by the Company or the
Added Value Companies if the Company's shareholders shall have voted on and
failed to approve the Transaction.
In the event of any such termination (other than termination due to the
breach or default of a party) the Purchase Agreement will be cancelled without
any liability on the part of any party.
Any of the provisions of the Purchase Agreement may be amended by or
waived by the respective parties at any time before or after the approval of the
Transaction by the Company's shareholders.
31
<PAGE>
EXPENSES
Except as described below, whether or not the Transaction is
consummated, all out-of-pocket expenses incurred in connection with the
Transaction will be paid by the party incurring such expenses. However, if the
Transaction is consummated, as a result of the Mergers all of the expenses of
the Added Value Companies will be assumed or have in essence been paid by the
Subsidiaries as the surviving corporations in the Mergers except that fees and
expenses incurred by the Added Value Companies in excess of $185,000 (excluding
accounting fees and expenses payable to Lazar, Levine & Company LLP) will reduce
the Additional Consideration to the extent payable to the Target Stockholders.
The Company will pay all expenses incurred in connection with the printing and
mailing of this Proxy Statement/Prospectus and the Registration Statement of
which it is a part, (b) registration and filing fees which may be required under
federal and state securities laws and with respect to the HSR Act, and (c) the
costs of soliciting proxies.
In the event that Added Value, Rocky Mountain or any of the Target
Stockholders wrongfully or unjustifiably refuses or fails to perform its
obligations with respect to the closing of the Transaction, or to proceed to
closing or to close the Transaction, or the Company terminates the Purchase
Agreement as a result of the breach or default thereunder or under the Guaranty
of either of the Added Value Companies or any of the Target Stockholders, or due
to the failure to occur of certain of the conditions precedent set forth in
Article 7 of the Purchase Agreement, and, within one year following the date of
the Purchase Agreement, a substantial portion of the assets of the Added Value
Companies, or more than 50% of the issued and outstanding capital stock or
beneficial ownership of either of the Added Value Companies is directly or
indirectly acquired, or any merger, business combination or other transaction is
effected which directly or indirectly has the effect of transferring a
substantial portion of the assets of the Added Value Companies or more than 50%
of the issued and outstanding capital stock or beneficial ownership of the Added
Value Companies (viewed on a consolidated basis), or any contract or letter of
intent or expression of interest is executed or delivered for or with respect to
any of the foregoing (as the case may be, a "Post-Termination Sale"), then,
without limitation of any of the Company's other rights or remedies, the Added
Value Companies and certain of the Target Stockholders shall be jointly and
severally obligated to pay to the Company, immediately upon the consummation
(whenever consummated) of the Post-Termination Sale, or, if to be consummated in
a series of related transactions, upon the consummation of the first part
thereof, an amount in cash equal to 25% of the amount, if any, by which the
total consideration, compensation and remuneration paid and payable to the Added
Value Companies, the Target Stockholders and any of their respective Affiliates
pursuant to or in connection with the Post-Termination Sale exceeds the total
merger consideration and other consideration and compensation payable at closing
pursuant to the Purchase Agreement.
RESALE OF THE COMPANY'S COMMON STOCK
The Company's Common Stock to be issued in connection with the
Transaction has been registered under the Securities Act and will be freely
transferable, except for shares received by persons deemed to be "affiliates" of
the Added Value Companies immediately prior to the Closing Date and subject to
the Restrictive Covenant and Pledge Agreement. In addition to the restrictions
set forth in the Restrictive Covenant, affiliates of the Added Value Companies
may not sell their shares of the Company's Common Stock acquired in connection
with the Transaction except pursuant to an effective registration statement
under the Act covering such shares, or in compliance with Rule 145 promulgated
under the Act (or Rule 144 in the case of such persons who become affiliates of
the Company) or other applicable exemption from the registration requirements of
the Act. The Added Value Companies are required by the Purchase Agreement to
identify to the Company all persons who as of the Closing Date may be considered
affiliates of the Added Value Companies for purposes of Rule 145. Each of the
Target Stockholders pursuant to the Guaranty has previously agreed that such
person will not offer to sell, sell, or otherwise dispose of any shares of the
Company's Common Stock received in the Transaction in violation of the Act or
the rules or regulations promulgated thereunder (including Rules 144 and 145).
32
<PAGE>
REGULATORY MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules and regulations thereunder provide that certain
transactions may not be consummated until required information and materials
have been furnished to the Antitrust Division of the United States Department of
Justice (the "DOJ") and the Federal Trade Commission ("FTC") and certain waiting
periods have expired or been terminated. The respective obligations of the
Company (including the Subsidiaries) and the Added Value Companies to consummate
the Mergers are conditioned upon all waiting periods (and any extension thereof)
applicable to the consummation of the Mergers under the HSR Act having expired
or been terminated. The Company and the Added Value Companies filed on November
13, 1995, the information and materials required under the HSR Act with the FTC
and the DOJ with respect to the Mergers. It is expected that the requisite
waiting period will have terminated prior to the Special Meeting.
Notwithstanding the termination of the HSR Act waiting period, at any
time before or after the consummation of the Mergers, either the DOJ or the FTC
could take such action under the antitrust laws as either deems necessary or
desirable in the public interest, or certain other persons could take action
under the antitrust laws, including seeking to enjoin consummation of the
Mergers.
The Company and the Added Value Companies are not currently aware of
any other material federal or state regulatory requirements which must be
complied with to consummate the Transaction and the Mergers, except for
compliance with applicable federal and state securities laws.
THE TRANSACTION AND RELATED MATTERS
BACKGROUND OF THE TRANSACTION
In early 1994, Robert Lurie, the President of Added Value, and Bruce M.
Goldberg, the President of the Company, met to discuss the concept of the
Company acquiring the Added Value Companies. The discussions proceeded but no
understanding or agreement was reached. In early 1995, the feasibility of the
concept of such an acquisition was again broached. The discussions proceeded
among Mr. Goldberg, Robert Lurie and other executive officers of the Added Value
Companies, culminating on June 28, 1995, in a letter of intent outlining the
then understanding of the parties regarding the Transaction being executed by
the parties.
Following the preparation and negotiation of the Purchase Agreement and
after approval of the Transaction and the Purchase Agreement by the Company's
Board of Directors and the Board of Directors of each of the Added Value
Companies, the Purchase Agreement was executed and delivered by the Company, the
Subsidiaries and the Added Value Companies and all of their respective
shareholders effective as of October 31, 1995.
RECOMMENDATIONS OF THE COMPANY'S BOARD OF DIRECTORS; THE COMPANY'S REASONS FOR
THE TRANSACTION
The Board of Directors of the Company believes that the Transaction is
fair to and in the best interests of the Company and its shareholders. On
October 30, 1995 the Board of Directors of the Company unanimously approved the
Purchase Agreement and the Transaction and related Mergers. The members of the
Board of Directors also unanimously recommended that the Company's shareholders
vote FOR approval of the Transaction.
The Board of Directors of the Company believes the Transaction fits
with the Company's growth strategy. In making this determination, the Board of
Directors considered, among other things, the business, financial condition,
results of operations and prospects of the Added Value Companies, on both a
historical and prospective basis, including certain information reflecting the
two companies on a pro forma combined basis, and financial information available
regarding a number of comparable public companies. The Board believes that the
Transaction is consistent with the corporate strategy of the Company to continue
33
<PAGE>
growth and to gain market share by increasing the number of customers it sells
to and the number of product lines it offers through, among other ways, making
additional acquisitions. As a result of the Transaction, the Company will obtain
offices in certain new locations and also expand its product offerings and
manufacturing and service capabilities. The acquisition of the Added Value
Companies is expected to expand the Company's national distribution presence in
two additional states (Colorado and Arizona) and its geographic reach and market
share in two other states (California and Utah). The Board also considered the
strength of the personnel of the Added Value Companies and how such personnel
would fit into the Company's management structure. The Board believes that such
personnel will not only be valuable in the operations of the Subsidiaries, but
also in other areas of the Company. The Board of Directors of the Company also
believes it important that each of the Added Value Companies has a record of
successful participation and growth in the electronic components distribution
industry, which factors should enhance long-term values for the Company's
shareholders. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY
Business -- Corporate Strategy."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Although neither of the Added Value Companies nor any of their
respective directors or executive officers own or has agreed to purchase any
shares of the Company's Common Stock other than in connection with the
Transaction, all of the directors and executive officers of each of the Added
Value Companies (other than one of the officers of Rocky Mountain) are also part
of the group of Target Stockholders or a spouse, relative or other affiliate of
a Target Stockholder. Such executive officers and directors and their affiliates
as a group will be receiving approximately 75.0% of the entire merger
consideration payable by the Company. In addition, most of the executive
officers and directors will be entering into employment agreements with one of
the Subsidiaries and, in connection therewith, will be receiving a front-end
incentive employment bonus. The executive officers and directors and their
affiliates as a group will also be receiving approximately 63.3% of the payments
with respect to the covenants restricting competition. See "THE PURCHASE
AGREEMENT - Transaction" and "SELECTED INFORMATION WITH RESPECT TO THE ADDED
VALUE COMPANIES."
In connection with the Voting Trust Agreement to be entered into by the
Target Stockholders, Paul Goldberg and Bruce M. Goldberg, directors and
executive officers of the Company, have been designated by the Company's Board
of Directors to hold as trustees record title to all of the Company's Common
Stock issued to the Target Stockholders in the Mergers. During the six-year term
of the Voting Trust Agreement, the voting trustees have unconditional discretion
to vote all shares then subject to the Voting Trust Agreement in elections of
directors of the Company and potentially certain other matters. Under the
Company's Voting Trust Agreement, the Company's Board of Directors has the right
to fill vacancies caused by the death, disability or resignation of a voting
trustee. See "THE PURCHASE AGREEMENT - Transaction."
FEDERAL INCOME TAX CONSEQUENCES
This discussion summarizes certain federal income tax consequences of
the Mergers to the Target Stockholders. The discussion does not address all
aspects of federal income taxation that may be relevant to particular Target
Stockholders and may not be applicable to Target Stockholders who are not
citizens or residents of the United States, or who will acquire the Company's
Common Stock or any other consideration pursuant to the exercise or termination
of employee stock options or otherwise as compensation, nor does the discussion
address the effect of any applicable foreign, state, local or other tax laws.
EACH TARGET STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGERS, INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
Subject to the limitations, qualifications, and exceptions described
herein, and assuming each Merger qualifies as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), the
following federal income tax consequences generally should result.
34
<PAGE>
(a) The gain, if any, realized by a Target Stockholder upon
receipt of the Company's Common Stock and cash at closing in exchange for Added
Value or Rocky Mountain stock, as the case may be, will be the excess of the
fair market value of the Company's Common Stock received plus the amount of cash
received, including cash received in lieu of fractional shares, if any, by such
Target Stockholders, over the cost or other basis of the stock surrendered in
such exchange. Such gain will be recognized, but in an amount not in excess of
the amount of cash received by each Target Stockholder as provided in Section
356(a)(1) of the Code. In accordance with Section 356(a)(2) of the Code, if the
exchange has the effect of the distribution of a dividend (determined with the
application of Section 318(a) of the Code), then the amount of recognized gain
that is not in excess of the Target Stockholder's ratable share of undistributed
earnings and profits will be treated as a dividend; the remainder of the
recognized gain (or all of such gain if the exchange does not have the effect of
the distribution of a dividend) is treated as gain from the exchange of
property, generally resulting in capital gain, unless the Target Stockholder is
a dealer in securities. No loss will be recognized by the Target Stockholders.
(b) The basis of the Company's Common Stock received by each
Target Stockholder of Added Value and Rocky Mountain will equal the tax basis of
such Target Stockholder's shares of Added Value or Rocky Mountain common stock,
as the case may be, decreased by the cash received and increased by the amount
of any gain (including any portion of such gain which was treated as a dividend)
such Target Stockholder recognized on the exchange. The Internal Revenue Service
(the "IRS") has announced that where a stockholder may receive additional stock
of the acquiring corporation pursuant to a contingent stock arrangement, the
target stockholders must allocate their historic basis in their exchanged stock
to the maximum number of shares of the acquiring corporation that may be
received in the transaction, including all those shares which could be received
under the contingent stock arrangement, but excluding any shares which may be
treated as imputed interest.
(c) The holding period for the shares of the Company's Common
Stock received by each Target Stockholder should include the holding period for
the shares of Added Value common stock and Rocky Mountain common stock exchanged
in the Mergers, provided that the common stock to be exchanged by the Target
Stockholders is held as a capital asset at the time of the Mergers.
A stockholder that exercises dissenters' rights with respect to and
receives a cash payment for his or her shares generally will recognize capital
gain or loss for federal income tax purposes (if such shares were held as a
capital asset at the time of the Mergers) measured by the difference between the
holder's basis in such shares and the amount of cash received, provided,
however, the payment is neither essentially equivalent to a dividend within the
meaning of Section 302 of the Code nor has the effect of a distribution of a
dividend within the meaning of Section 356(a)(2) of the Code (collectively, a
"Dividend Equivalent Transaction"). A sale of shares pursuant to an exercise of
dissenters' rights generally will not be a Dividend Equivalent Transaction if,
as a result of such exercise, the stockholder exercising dissenters' rights owns
no shares of the Company's Common Stock (either actually or constructively
within the meaning of Section 318 of the Code) immediately after the Mergers.
The parties do not intend to request a ruling from the IRS regarding
the federal income tax consequences of the Mergers and, in fact, the IRS has
suspended its prior practice of giving advance rulings in connection with
reorganizations involving statutory mergers. As a condition to the parties'
respective obligations to consummate the Mergers, the Company, on the one hand,
and Added Value and Rocky Mountain, on the other hand, will each receive an
opinion from the other parties' legal counsel to the effect that each Merger
will qualify as a "reorganization" within the meaning of Section 368(a) of the
Code. These opinions (the "Tax Opinions") will neither bind the IRS nor preclude
the IRS from successfully asserting a contrary position. In addition, the Tax
Opinions will be subject to certain assumptions and qualifications and will be
based on the truth and accuracy of representations made by the Company and the
Subsidiaries, the Added Value Companies and the Target Stockholders. Of
particular importance will be assumptions and representations relating to the
requirement (the "continuity of interest" requirement as discussed further
below)
35
<PAGE>
that the Target Stockholders retain, through ownership of the Company's Common
Stock, a significant equity interest in the Added Value Companies' respective
business enterprises after the Mergers.
A successful IRS challenge to the reorganization status of a Merger (in
consequence of a failure to satisfy the "continuity of interest" requirement or
otherwise) would result in each Target Stockholder recognizing gain or loss with
respect to each share of common stock equal to the difference between the
stockholder's basis in such share and the aggregate amount of consideration
(including the fair market value of the Company's Common Stock and cash)
received in exchange therefor. A Target Stockholder's aggregate basis in the
Company's Common Stock so received would equal its fair market value and the
Target Stockholder's holding period for such stock would begin the day after the
Merger.
The discussion which follows addresses the impact of the Pledge
Agreement and the receipt of the Additional Consideration on the "continuity of
interest" requirement.
The Purchase Agreement requires the Target Stockholders to enter into a
Pledge Agreement under which the Target Stockholders will pledge all the
Company's Common Stock received in connection with the reorganization for a
period of two (2) years and deliver such stock to the voting trustees of a
voting trust (the "Voting Trust") for a period of six (6) years. The pledge of
the Company's Common Stock by the Target Stockholders is being given to secure
the representations, warranties and covenants given by the Added Value Companies
and the Target Stockholders set forth in the Purchase Agreement, none of which
relate to future performance or profitability of the Added Value Companies, but
are customary representations, warranties and covenants given by a seller in
transactions of this nature. Such pledge and Voting Trust raise the issue of
whether the Target Stockholders are receiving sufficient rights in the Company's
Common Stock for such stock to be considered owned by the Target Stockholders
for continuity of interest purposes. The IRS has announced that it will not
issue favorable advance rulings with respect to escrow and contingent stock
arrangements unless they comply with certain requirements. One of such
requirements is that the maximum number of acquiring company shares that may be
issued under a escrow arrangement cannot be more than fifty (50%) percent of the
maximum number of shares of acquiring company common stock issued in the
reorganization. As all of the Company's Common Stock issued in the
reorganization will be subject to the Stock Pledge Agreement and Voting Trust,
the pledge arrangement does not comply with all the requirements announced by
the IRS for the issuance of a favorable advance ruling.
Although the Mergers do not satisfy the IRS requirements for an advance
ruling, other precedents indicate that based on (i) the Target Stockholders
ability to receive current dividend distributions (ii) their right under the
Voting Trust to direct the vote of the voting trustee in connection with the
merger of the Company, the sale of substantially all of the Company's assets,
the Company's dissolution and amendments to the Company's capital structure,
(iii) their right to substitute collateral for the pledged stock, and (iv) the
fact that the pledged stock will be issued and outstanding on the books of the
Company, the Target Stockholders should be considered the owners of the
Company's Common Stock from its date of issuance and such pledged stock should
be considered stock received in the reorganization for purposes of determining
whether there is sufficient continuity of interest.
The IRS has taken the position that if a target stockholder can
substitute other collateral for escrowed stock of acquiror, as in (iii) above,
the target stockholder will recognize gain or loss on the return of any of such
shares to the acquiror (due to, for example, the inaccuracy of a representation)
equal to the difference between the fair market value of the acquiring
corporations shares which are returned and the target stockholders basis in such
shares.
The Purchase Agreement (pursuant to a stock price guarantee provision)
provides for the contingent payment of Additional Consideration of up to
$1,900,000 in the aggregate to be received by the Target Stockholders. Such
Additional Consideration may consist, in the discretion of the Company, of all
the Company's Common Stock, all cash, or a combination of the Company's Common
36
<PAGE>
Stock and cash. The Purchase Agreement requires the Company to pay such
Additional Consideration in the Company's Common Stock to the extent necessary
to cause the total Merger consideration and Additional Consideration received by
the Target Stockholders with respect to each Merger to consist of at least fifty
percent (50%) of shares (viewed in dollar value) of the Company's Common Stock.
The rights of the Target Stockholders to receive Additional Consideration are
not assignable. The IRS has ruled that a nonassignable (non-negotiable)
contingent right to receive future distributions of stock pursuant to a
reorganization agreement ordinarily cannot be considered property as of the time
of the initial reorganization exchange. As a consequence, at closing, only the
stock or other assets actually distributed and not the nonassignable contingent
right to receive stock should be taken into account in determining whether the
transaction for continuity of interest purposes qualifies as a reorganization as
defined in Section 368(a) of the Code. However, since the Additional
Consideration potentially consists of cash as well as common stock, and assuming
in this circumstance the determination of whether there is sufficient continuity
of interest properly would remain open and be retested when the Additional
Consideration is received, it is uncertain as to whether the entire contingent
arrangement would constitute nonqualified property for continuity of interest
purposes (i.e., boot), or whether the non-stock portion alone would constitute
boot. If only the non-stock element is treated as boot, then the stock initially
received and the stock given as Additional Consideration should both count
towards continuity of interest. However, if the entire contingent right is
deemed to be boot, the total value of the right would have to be compared to the
total stock and other boot distributed initially to determine whether sufficient
continuity of interest exists. Assuming still that the Additional Consideration
is not treated as property at the time of the initial reorganization exchange, a
further issue arises as to which stock values should be utilized in testing for
continuity of interest, the value of the right to the Additional Consideration
at the time of the original exchange or the value of the right to the Additional
Consideration at the time such Additional Consideration is paid. If all such
Additional Consideration was deemed to be boot (excluding imputed interest) and
even if the value at the time the Additional Consideration is paid is
determinative, which should be in excess of its value on the date of the
original exchange, the percentage of stock received in each of the Mergers would
be in excess of fifty percent (50%). The IRS has announced that fifty percent
(50%) continuity is necessary for advance ruling purposes, however, it appears
well established that requisite continuity of interest is present if at least
thirty-eight percent (38%) of the consideration received by the Target
Stockholders is in common stock.
Assuming that each Merger qualifies as a reorganization under Section
368(a) of the Code, the tax consequences of the receipt, after Closing, of
Additional Consideration consisting of both stock and cash pursuant to the
contingent right are unclear. It is possible Section 354(a)(1) of the Code
should apply and no gain or loss would be recognized by the Target Stockholders
with respect to receipt of additional stock (except to the extent of imputed
interest). However, the IRS may assert that the Additional Consideration,
including both stock and cash, is all boot, taxable under Section 356(a)(2) of
the Code. In all events, the cash received should be treated as boot, taxable
under Section 356(a)(2) of the Code.
A portion of the deferred payments made under such contingent
consideration arrangement will be treated as unstated interest (i.e. imputed
interest) since such payments are not accompanied by adequate stated interest.
Such imputed interest will be ordinary taxable income to the Target Stockholders
and entitle the Company to a deduction. The amount of such imputed interest is
the excess of the amount of the Additional Consideration received over the
present value of such amount at closing discounted at the applicable federal
rate in effect at the time of closing. The portion of the contingent payment
representing imputed interest should be ignored for continuity purposes, whether
payable in stock or cash. Such stock or cash (deemed to be imputed interest) is
viewed by the IRS as being outside the reorganization.
37
<PAGE>
ACCOUNTING TREATMENT
The Mergers will be treated as a "purchase" for financial reporting
purposes if consummated in accordance with the Purchase Agreement. Under this
method of accounting, the Company will not restate its prior historical
financial statements on a combined basis with those of the Added Value
Companies, but will only include on a cost basis the Subsidiaries' (as the
Surviving Corporations in the Mergers with the Added Value Companies) financial
conditions and results of operations as part of the Company's consolidated
financial statements as of and after the Closing Date.
FLUCTUATION IN MARKET PRICE
Because the number of shares of the Company's Common Stock to be
received by the Target Stockholders in connection the Transaction is based on a
fixed portion of the merger consideration being paid by the Company to acquire
the Added Value Companies, the number of shares of the Company's Common Stock
received by the Target Stockholders will depend on the market price of the
Company's Common Stock on the Nasdaq Stock Market during the 30 day period prior
to the Closing Date. Because the purchase price is fixed, the Market Value of
the Company's Common Stock in excess of $2.25 will reduce the maximum number of
shares (a maximum of 2,174,473 shares, exclusive of the 173,359 shares that
could be issued to the California Subsidiary) that could be received by the
Target Stockholders on the Closing Date as a result of the Transaction. In
addition, the level of appreciation of the value of the Company's Common Stock
or lack thereof through June 30, 1998, subject to certain other conditions and
limitations, could result in the Target Stockholders receiving additional shares
of the Company's Common Stock to pay all or a portion of any shortfall in the
Additional Consideration. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE
COMPANY - Market Information."
OPERATIONS FOLLOWING THE TRANSACTION
The Company contemplates that after the consummation of the Transaction
it will merge certain of the smaller sales operations of the Added Value
Companies into the sales operation of the Company. Since the Company does not
have an office in Denver or Phoenix, the Company expects to maintain and expand
the Added Value Companies' sales operations in these markets, as well as the
warehouse operation presently in place in Rocky Mountains' Denver office. The
Company expects to maintain Added Value's sales office and warehouse in Tustin,
California. Additionally, the Company expects to segregate and expand Added
Value's kitting and turnkey manufacturing, memory assemblies and its operations
relating to flat panel displays and driver board manufacturing. The Company
expects that by segregating these operations it will create a greater focus for
the people involved, which will enable the new divisions to expand their
customer base and establish greater growth.
UNAUDITED COMBINED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Combined Pro Forma Consolidated Balance Sheet
at September 30, 1995, and Unaudited Combined Pro Forma Consolidated Statements
of Income for each of the nine months ended September 30, 1995, and the year
ended December 31, 1994, give effect to the proposed Transaction as if it had
occurred at the beginning of the earliest period presented. The pro forma
statements give effect to the Transactions as a "purchase" for accounting and
financial reporting purposes. These statements should be read in conjunction
with the historical financial statements and the related notes of the respective
companies, which are included elsewhere in this Proxy Statement/Prospectus.
The pro forma data are presented for informational purposes only and
are not necessarily indicative of the operating results or financial position
that would have occurred had the Transaction been consummated at the dates
indicated, nor are they necessarily indicative of future operating results or
financial position.
38
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
COMBINED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1994
ROCKY ELIMINATIONS/
ALL AMERICAN ADDED VALUE MOUNTAIN ADJUSTMENTS COMBINED
------------ ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
NET SALES $101,085 $ 27,663 $ 10,200 $ - $138,948
Cost of sales (74,632) (21,853) (7,934) - (104,419)
-------- -------- -------- -------- --------
Gross profit 26,453 5,810 2,266 - 34,529
Selling, general &
administrative expenses (23,335) (4,828) (1,779) (483)(c)(d) (30,425)
Nonrecurring expenses (548) - - - (548)
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS 2,570 982 487 (483) 3,556
Interest expense (1,772) (118) (22) (419)(e) (2,331)
Other income (expense) - net (39) 97 22 - 80
Equity in earnings of
unconsolidated subsidiary - 105 - (105)(b) -
-------- -------- -------- -------- -------
Income before income taxes 759 1,066 487 (1,007) 1,305
Provision for income taxes (407) (17) (230) (103)(g) (757)
-------- -------- -------- -------- -------
NET INCOME $ 352 $ 1,049 $ 257 $ (1,110) $ 548
======== ======== ======== ======== =======
EARNINGS PER SHARE (i)
Primary $.03 $10.19 $238.43 $.04
==== ====== ======= ====
Fully diluted $.03 $10.19 $238.43 $.04
==== ====== ======= ====
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 13,029,714 103,000 1,078 14,671,514
Fully diluted 13,029,714 103,000 1,078 14,671,514
</TABLE>
See notes to combined proforma consolidated financial statements.
39
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
COMBINED PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
ROCKY ELIMINATIONS/
ALL AMERICAN ADDED VALUE MOUNTAIN ADJUSTMENTS COMBINED
------------ ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
NET SALES $130,723 $ 24,114 $ 6,574 $ (458)(b) $160,953
Cost of sales (101,826) (19,172) (5,010) 458 (b) (125,550)
-------- -------- -------- ------- --------
Gross profit 28,897 4,942 1,564 - 35,403
Selling, general &
administrative expenses (23,178) (3,921) (1,278) (362)(c)(d) (28,739)
-------- -------- -------- ------- --------
INCOME FROM OPERATIONS 5,719 1,021 286 (362) 6,664
Interest expense (2,013) (126) (3) (313)(e) (2,455)
Other income - net - 6 8 - 14
Equity in earnings of
unconsolidated subsidiary - 66 - (66)(b) -
-------- -------- -------- ------- --------
Income before income taxes 3,706 967 291 (741) 4,223
Provision for income taxes (1,519) (15) (114) (138)(g) (1,786)
-------- -------- -------- ------- --------
NET INCOME $ 2,187 $ 952 $ 177 $ (879) $ 2,437
======== ======== ======== ======= ========
EARNINGS PER SHARE (i)
Primary $.15 $ 9.24 $165.39 $.15
==== ====== ======= ====
Fully diluted $.14 $ 9.24 $165.39 $.14
==== ====== ======= ====
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Primary 15,050,361 103,000 1,072 16,692,161
Fully diluted 15,822,097 103,000 1,072 17,483,897
</TABLE>
See notes to combined proforma consolidated financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
COMBINED PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
AS OF SEPTEMBER 30, 1995
ROCKY ELIMINATIONS/
ASSETS ALL AMERICAN ADDED VALUE MOUNTAIN ADJUSTMENTS COMBINED
- ------ ------------ ----------- -------- ------------- --------
Current assets:
<S> <C> <C> <C> <C> <C>
Cash $ 215 $ 44 $ 31 $ - $ 290
Accounts receivable - net 27,439 4,443 1,228 - 33,110
Inventories 51,986 4,066 2,864 - 58,916
Due from affiliate - 31 - (31)(b) -
Deferred income taxes - - 78 - 78
Other current assets 1,135 89 7 - 1,231
-------- -------- -------- -------- --------
Total current assets 80,775 8,673 4,208 (31) 93,625
Investment in affiliated company - 912 - (912)(b) -
Property, plant and equipment - net 3,552 166 65 - 3,783
Deposits and other assets 1,249 38 7 1,200 (c) 2,494
Excess of cost over fair value of
net assets acquired - net 544 - - 2,474 (d) 3,018
-------- -------- -------- -------- --------
$ 86,120 $ 9,789 $ 4,280 $ 2,731 $102,920
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable - bank $ - $ 3,144 $ 775 $ (3,919)(e) $ -
Current portion of long-term debt 797 - 16 - 813
Accounts payable and
accrued expenses 27,680 2,797 1,009 - 31,486
Due to affiliate - - 31 (31)(b) -
Income taxes payable 450 15 - (374)(f) 91
Other current liabilities 112 - - - 112
-------- -------- -------- -------- --------
Total current liabilities 29,039 5,956 1,831 (4,324) 32,502
Deferred income taxes - - 6 - 6
Long-term debt:
Notes payable 22,655 - 9 9,154 (e) 31,818
Subordinated debt 6,540 - - - 6,540
Other long-term debt 211 - - - 211
-------- -------- -------- -------- --------
58,445 5,956 1,846 4,830 71,077
-------- -------- -------- -------- --------
Shareholders' equity:
Preferred stock - - - - -
Common stock 177 55 11 (50)(b)(h) 193
Capital in excess of par value 20,249 - - 4,877 (h) 25,126
Retained earnings 7,309 3,778 2,423 (6,926)(b)(f) 6,584
Treasury stock (60) - - - (60)
-------- -------- -------- -------- --------
27,675 3,833 2,434 (2,099) 31,843
-------- -------- -------- -------- --------
$ 86,120 $ 9,789 $ 4,280 $ 2,731 $102,920
======== ======== ======== ======== ========
</TABLE>
See notes to combined proforma consolidated financial statements.
41
<PAGE>
NOTES TO COMBINED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a) Does not reflect the consideration of $624,814 paid to the California
Subsidiary, which is a wholly-owned subsidiary of the Company as a result of the
Rocky Mountain Merger being effectuated after the Added Value Merger. See
"PURCHASE AGREEMENT - Transaction."
b) Reflects the elimination of intercompany items between the entities involved
in the Transaction.
c) Reflects the non-compete agreements entered into with the Target
Stockholders.
d) Reflects the excess purchase price over the estimated fair value of net
assets acquired. The allocation of the purchase price to the fair value of net
assets acquired is based upon current estimates and may be subsequently
adjusted.
e) Reflects the increase in the Company's line of credit and the related
increase in interest expense associated with the cash portion of the purchase
price ($2,936,000), front-end incentive employment compensation ($1,099,000),
non-compete agreements ($1,200,000) as well as the payment of the bank debt of
the Added Value Companies ($3,919,000).
f) Reflects the tax effect ($374,000) of nonrecurring front-end incentive
employment compensation of $1,099,000 ($725,000 net of taxes) using the
statutory rate. The pro forma consolidated statements of income do not include
the nonrecurring front-end incentive employment compensation to be paid in
connection with the Transaction.
g) Reflects the tax effect of pro forma adjustments, including approximately
$306,000 and $327,000 for the nine months ended September 30, 1995, and the year
ended December 31, 1994, respectively, relating to the effect of terminating
Added Value's Subchapter S election as if it were terminated at the beginning of
the periods presented. All adjustments subject to taxation were computed using
the statutory rate.
h) Reflects the estimated amount of the Company's Common Stock issued as part of
the purchase price at a value of $4,893,000.
i) Earnings per share for All American, Added Value and Rocky Mountain are based
upon the historical primary and fully diluted weighted average number of common
shares outstanding for each company during the periods. Pro forma earnings per
share computations include the estimated shares issued as part of the purchase
price (1,641,800 shares).
42
<PAGE>
BUSINESS AND FINANCIAL INFORMATION
REGARDING THE COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data for the Company (i)
for and as of the end of each of the years 1990 through 1994 have been derived
from the consolidated financial statements of the Company, which have been
audited by Lazar, Levine and Company LLP, Certified Public Accountants, and (ii)
for the nine months ended September 30, 1994 and 1995 and as of the nine months
ended September 30, 1995 have been derived from the unaudited consolidated
financial statements of the Company and, in the opinion of the Company's
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly such information. Such information
should be read in conjunction with the Consolidated Financial Statements of the
Company and related notes included elsewhere in this Proxy Statement/Prospectus.
See "INDEX TO FINANCIAL STATEMENTS" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" hereafter.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------------ -------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net Sales(1)...................... $130,723 $72,839 $101,085 $67,510 $49,015 $45,332 $41,315
Cost of Sales..................... (101,826) (53,351) (74,632) (49,010) (35,083) (32,001) (29,007)
-------- ------- -------- ------- ------- ------- -------
Gross Profit...................... 28,897 19,488 26,453 18,500 13,932 13,331 12,308
Selling, General and
Administrative Expenses......... (23,178) (16,098) (23,335) (14,821) (11,366) (11,577) (11,177)
Nonrecurring Expenses(2).......... - - (548) (61) (114) (124) -
-------- ------- -------- ------- ------- ------- -------
Income from Operations............ 5,719 3,390 2,570 3,618 2,452 1,630 1,131
Interest Expense.................. (2,013) (1,124) (1,772) (1,103) (1,153) (1,407) (1,205)
Other Income (Expense) --
Net(3).......................... - (114) (39) 281 (18) 47 149
-------- ------- -------- ------- ------- ------- -------
Income Before Income Taxes........ 3,706 2,152 759 2,796 1,281 270 75
Provision for Income Taxes........ (1,519) (861) (407) (1,094) (525) (153) (57)
-------- ------- -------- ------- ------- ------- -------
Net Income........................ $ 2,187 $ 1,291 $ 352 $ 1,702 $ 756 $ 117 $ 18
======== ======= ======== ======= ======= ======= =======
Earnings Per Share(4):
Primary.......................... $.15 $.10 $.03 $.19 $.12 $.03 $.01
==== ==== ==== ==== ==== ==== ====
Fully Diluted.................... $.14 $.10 $.03 $.18 $.12 $.03 $.01
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30 -------------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working Capital................... $51,736 $39,800 $27,534 $19,427 $15,112 $14,745
Total Assets...................... 86,120 57,858 37,968 28,595 24,977 22,806
Long-Term Debt (including
current portion)................ 30,203 27,775 14,928 13,850 13,405 12,149
Shareholders' Equity.............. 27,675 16,950 15,612 8,517 4,633 4,516
Book Value Per Common Share....... $1.56 $1.37 $1.30 $1.10 $1.24 $1.21
<FN>
- -------------------
(1) On June 14, 1993, January 24, 1994, and September 9, 1994, the Company, through its
wholly-owned subsidiaries, completed the acquisitions of substantially all of the
assets of All American Transistor Corporation of D.C., Components Incorporated and
GCI Corp., respectively. Net sales includes the net sales for such companies
acquired of $6,177,000, $10,234,000 and $1,390,000 for the nine months ended
September 30, 1994, and for the years ended December 31, 1994 and 1993,
respectively. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Acquisitions."
(2) The year ended December 31, 1994 includes a charge for relocation of plant
facilities in the amount of $185,000 and a write-off of the Company's product
development investment of $363,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) The years ended December 31, 1993 and 1990 include approximately $237,000 and
$180,000, respectively, of income from the settlements of the Company's business
interruption claims.
(4) Weighted average shares (including common share equivalents) outstanding for
(i) the years ended December 31, 1994, 1993, 1992, 1991 and 1990 were 13,029,714,
9,166,908, 6,514,481, 3,806,856 and 3,721,791, respectively, on a primary basis and
43
<PAGE>
were 13,029,714, 9,511,500, 6,514,481, 3,962,038 and 3,721,791, respectively, on
a fully diluted basis, and (ii) for the nine months ended September 30, 1995
and 1994 were 15,050,361 and 13,073,309, respectively, on a primary basis and
were 15,822,097 and 13,073,309, respectively, on a fully diluted basis.
</FN>
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth for the years ended December 31, 1994,
1993 and 1992 and for the nine months ended September 30, 1995 and 1994 (i)
certain items in the Company's consolidated statements of income expressed as a
percentage of net sales and (ii) the percentage change in dollar amounts of such
items as compared to the indicated prior fiscal year or fiscal quarter.
<TABLE>
<CAPTION>
ITEMS AS A PERCENTAGE PERIOD TO PERIOD PERCENTAGE
OF NET SALES INCREASE (DECREASE)
-------------------------------------- --------------------------------
NINE MONTHS NINE MONTHS
ENDED YEARS ENDED ENDED YEARS ENDED
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30 DECEMBER 31
------------ -------------------- ------------ ----------------
1995 1994 1994 1993 1992 1995-94 1994-93 1993-92
---- ---- ---- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0% 79.5% 49.7% 37.7%
Gross Profit................................... 22.1 26.8 26.2 27.4 28.4 48.3 43.0 32.8
Selling, General
and Administrative
Expenses..................................... 17.7 22.1 23.1 22.0 23.2 44.0 57.4 30.4
Nonrecurring Expenses.......................... - - .5 .1 .2 - 798.4 (46.5)
Income from Operations......................... 4.4 4.7 2.5 5.4 5.0 68.7 (29.0) 47.6
Interest Expense............................... 1.5 1.5 1.8 1.6 2.4 79.1 60.7 (4.3)
Income Before Income Taxes..................... 2.8 3.0 .8 4.1 2.6 72.2 (72.9) 118.3
Net Income..................................... 1.7 1.8 .3 2.5 1.5 69.4 (79.3) 125.1
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
RESULTS OF OPERATIONS
For the nine months ended September 30, 1995, the Company achieved
record breaking sales by reaching net sales of $130.7 million, a 79.5% increase
over net sales of $72.8 million for the same period of 1994. This dramatic
increase in sales reflect the general increase in demand for electronic
products, an increase in sales in substantially all territories, revenues
generated by new sales offices and revenues generated by a company acquired in
September 1994.
Gross profit for the first nine months of 1995 was $28.9 million
compared to $19.5 million for the same period of 1994 representing a 48.3%
increase. The increase was due to the significant growth in sales. Gross profit
margins as a percentage of net sales were 22.1% for the first nine months of
1995 compared to 26.8% for the comparable 1994 period. The decline reflects a
greater number of large volume transactions at reduced margins, the competitive
environment in the electronic distribution marketplace, as well as a change in
the Company's overall sales mix. The downward trend in gross profit margins has
been more than offset by increases in sales and improved operating efficiencies
and, while this downward trend is expected to continue, the Company believes
that any future decline in gross profit margins should be more than offset by
increases in sales and improved operating efficiencies.
Selling, general and administrative expenses ("SG&A") for the first
nine months of 1995 was $23.2 million compared to $16.1 million for the same
period of 1994. The increase was primarily the result of the Company's rapid
growth and aggressive expansion. As sales grew dramatically, selling expenses,
including sales commissions and telephone expenses, also increased. In addition,
as a result of the relocation of the Company's corporate headquarters and
distribution facility in May 1994, the expansion of the computer and
communications systems, the opening of new sales offices and the relocating of
existing sales offices into larger facilities, rent (both for realty and
44
<PAGE>
personalty), occupancy expenses and depreciation and amortization costs
increased. Furthermore, the Company expanded its sales personnel, created and
staffed a northeast credit department and increased staffing in almost all
corporate departments. Additionally, in the third quarter of 1995 the Company
created a computer products division ("CPD") to distribute microprocessors,
motherboards and other computer products and opened its new programming center.
In the first quarter of 1995 the Company had created a cable assembly division.
As a result, SG&A for the first nine months of 1995 reflects increased
advertising and promotion expenses, training costs and increased salaries,
payroll taxes and employee benefit costs.
SG&A as a percentage of net sales improved to 17.7% for the nine months
ended September 30, 1995, from 22.1% for the same period of 1994. The
significant improvement in SG&A as a percentage of sales reflects the
anticipated improvement in operating efficiencies and benefits from economies of
scale.
The Company expects to further expand its service capabilities and
increase staffing to support its recently opened programming center and its
newly created CPD as well as its cable assembly division. Additionally, during
the fourth quarter of 1995 the Company has opened one new sales office, expects
to relocate its west coast programming and distribution center into a
significantly larger facility and complete the Transaction. As a result of the
foregoing, SG&A, in absolute dollars and as a percentage of sales, may increase
in the near term. While these expansions and increases will have a negative
impact on profitability in the short term, the Company believes that these
investments will enable the Company to obtain a greater competitive advantage
which will improve its performance in the future.
For the first nine months of 1995, income from operations was $5.7
million, up 68.7% from income from operations of $3.4 million for the first nine
months of 1994. The increase was attributable to the significant increase in
sales and improved operating efficiencies which more than offset the decline in
gross profit margins and the additional expenses associated with the Company's
expansion.
Interest expense increased to $2.0 million for the first nine months of
1995 as compared to $1.1 million for the same period of 1994. The increase
reflects an increase in both the prime rate as well as the average borrowings
outstanding under the Company's line of credit required to fund the Company's
continued growth. Additionally, interest expense also increased as a result of
the subordinated debt issued during June 1994, debt issued in connection with
tenant improvements relating to the relocation of the Company's corporate
headquarters and distribution center in May 1994 and debt associated with
capital leases.
Earnings per share were $.15 ($.14 fully diluted) in 1995 compared to
$.10 in 1994. The increase in earnings per share was achieved despite a 15%
increase in the average number of shares outstanding for the first nine months
of 1995. The increase in net income for the 1995 period resulted primarily from
the significant increase in sales as well as from increased operating
efficiencies and benefits from economies of scale as discussed above. This
increase in earnings and earnings per share was achieved notwithstanding the
negative impact on earnings associated with start-up costs in connection with
the creation of the CPD and cable assembly division and the opening of the
programming center.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
SALES
Net sales for 1994 increased $33.6 million to $101.1 million, a 49.7%
increase over net sales of $67.5 million for 1993. The sales increase was
attributable to a general increase in demand for electronic products, an
increase in sales in substantially all territories, revenues generated by new
sales offices and revenues generated by acquired companies which represented
approximately $10 million of sales in 1994. In addition, the Company continued
to benefit from consolidations within the industry as customers continued to
seek
45
<PAGE>
additional sources of supply in order to minimize supplier dependency and to
achieve a higher level of service. Substantially all of the increase in net
sales is attributable to volume increases and the introduction of new products
as compared to price increases. See "Business -- Corporate Strategy."
GROSS PROFIT
Gross profit was $26.5 million in 1994, an $8.0 million or 43.0%
increase over gross profit of $18.5 million in 1993. The increase was due
predominantly to the growth in sales discussed above. Gross profit margins as a
percentage of net sales were 26.2% in 1994 compared to 27.4% in 1993. The
downward trend reflects a decline associated with a greater number of large
volume transactions at reduced margins, the competitive environment in the
electronic distribution marketplace, as well as a change in the Company's
overall sales mix. The overall sales mix has changed as sales of newer
technology products are now playing a greater role in the sales of the Company
than in prior years. Many of the newer technology products result in lower
profit margins than sales of more mature product lines on which the Company has
historically focused and which tend to have less risk inherent in large volume
purchases. By making large volume purchases, the Company decreases its per-unit
cost, thus increasing its potential for higher profit margins upon resale of
these mature products. See "Business -- Products" and "-- Competition." This
downward trend is expected to continue, and has accelerated, in 1995. See "RISK
FACTORS -- Declining Gross Profit Margins."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased $8.5 million to $23.3 million in 1994 compared to $14.8
million in 1993. The increase was primarily the result of the Company's rapid
growth and aggressive expansion. As sales grew by $33.6 million, selling
expenses increased substantially including sales commissions, telephone expenses
and the cost of supplies.
In May 1994 the Company relocated its corporate headquarters and
distribution facility for the second time since 1990. The 1994 move into a
Company designed state-of-the-art facility will accommodate significant future
growth and will enable the Company to expand its service capabilities, enhance
its quality control programs and improve its productivity. Additionally, the
Company expanded its computer and communications systems and equipment. During
1994, the Company also opened seven new sales offices, relocated four existing
sales offices into larger facilities, opened a west coast corporate office and
acquired two electronic components distributors. This resulted in increased SG&A
including increased rent (both for realty and personalty) and related occupancy
expenses, depreciation expenses and amortization costs and the incurrence of
moving and start-up costs and design, consulting and integration expenses.
In order to effectively drive and manage its aggressive expansion, the
Company expanded its sales staff and sales management team, created and staffed
a corporate operations department and a west coast credit department and
increased staffing in almost all corporate departments. The Company also
expanded its service capabilities by staffing its technical sales program,
creating a kitting department and establishing its American Assemblies division
to improve its value-added services. The Company's quality control programs and
traceability procedures were enhanced resulting in the Company obtaining the
international quality standard of ISO 9002. As a result, the Company incurred
consulting expenses and start-up costs and had increased salaries, payroll taxes
and employee benefit costs. See "Business -- Corporate Strategy -- Expansion",
"-- Facilities and Systems" and "-- Corporate Strategy -- Services" and
"--Quality Controls and ISO Certification."
SG&A as a percentage of sales increased to 23.1% in 1994 as compared to
22.0% in 1993 due to the increase in expenses discussed above. As a result of
its expansion, the Company believes it now has plant capacity, systems and staff
in place to facilitate substantial increases in revenues without significant
additional fixed costs and expects to realize benefits from improved operating
efficiencies and economies of scale which should result in a decrease in SG&A as
a percentage of sales in the future.
46
<PAGE>
INCOME FROM OPERATIONS
As a result of the additional SG&A as detailed above and the recording
of nonrecurring expenses consisting of a charge for relocation of plant
facilities in the amount of $185,000 and a write-off of a product development
investment in the amount of $363,000, compared to nonrecurring expenses of
$61,000 incurred in 1993, income from operations was impacted and decreased to
$2.6 million in 1994 compared to $3.6 million in 1993. See "Business --
Facilities and Systems" and "-- Licensed Technology" and Notes 5 and 9 to Notes
to Consolidated Financial Statements of the Company. The Company expects that
the aggressive expansion discussed above positions the Company to process
dramatic increases in revenues without significant additional fixed costs.
INTEREST EXPENSE
Interest expense increased to $1.8 million in 1994 compared to $1.1
million in 1993. The increase was due primarily to an increase in borrowings
required to fund the Company's continued growth, including the issuance of
subordinated debentures in the amount of $5,150,000 in a private placement
completed in the second quarter of 1994, additional debt incurred in connection
with the Company's acquisitions in the approximate amount of $3.4 million and
subordinated debt aggregating approximately $2 million relating to purchase
money financing of acquisitions and the financing of tenant improvements and
personal property in connection with the Company's new corporate headquarters
and distribution center. Additionally, an increase in interest rates more than
offset savings associated with the decrease in the rate charged the Company by
the Senior Lender. See "-- Liquidity and Capital Resources" and "--
Acquisitions" and Note 6 to Notes to Consolidated Financial Statements of the
Company.
NET INCOME
For the year ended December 31, 1994, net income was $352,000 ($.03 per
share), as compared to net income of $1.7 million ($.19 per share, $.18 fully
diluted) in 1993. This decrease was primarily attributable to the increase in
SG&A, the increased interest expense and the nonrecurring expenses discussed
above.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992
NET SALES
Net sales for 1993 increased $18.5 million to $67.5 million, a 37.7%
increase over net sales of $49.0 million for 1992. The sales increase was
attributable to a general increase in demand for electronic products, an
increase in sales in substantially all territories, revenues generated by new
sales offices and revenues generated by an acquired company which represented
$1.4 million of sales in 1993. In addition, the Company continued to benefit
from consolidations within the industry.
GROSS PROFIT
Gross profit was $18.5 million in 1993, a $4.6 million or 32.8%
increase over gross profit of $13.9 million in 1992. The increase was due
predominantly to the growth in sales discussed above. Gross profit margins as a
percentage of net sales were 27.4% in 1993 compared to 28.4% in 1992. The
downward trend reflects a decline associated with a greater number of large
volume transactions at reduced margins, the competitive environment in the
electronic distribution marketplace, as well as a change in the Company's
overall sales mix. See "Business -- Products" and "-- Competition."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased $3.5 million, or 30.4%, to $14.8 million in 1993
compared to $11.4 million in 1992. The increase was the result of the Company's
rapid growth and aggressive expansion. As sales grew by $18.5 million, selling
expenses increased dramatically, including commissions, telephone expenses and
supplies. During 1993, SG&A was impacted by three new sales offices (one opened
47
<PAGE>
at the end of 1992 and two opened during 1993) and the relocation of one
existing office into a larger facility. See "Business -- Corporate Strategy --
Expansion" and "-- Sales and Marketing -- Sales Office Locations". This resulted
in increased rent, increased depreciation expenses and moving and start-up
costs. The Company also acquired the assets of an affiliated company resulting
in integration expenses and an increase in all operating expense line items. See
"Acquisitions." Additionally, the increase reflects expenses incurred in
connection with implementing the Company's profit sharing 401(k) plan in June
1993, to which matching contributions were made for all of 1993 and additional
depreciation expenses associated with new computer and communications equipment.
SG&A as a percentage of sales decreased in 1993 to 22.0% down from
23.2% in 1992. The improvement reflects the Company's efforts to improve
operating efficiencies as well as the benefits of economies of scale associated
with increased sales levels. The improved operating efficiencies as well as the
benefits of economies of scale realized during 1993, more than offset the
increased expenses discussed above.
INCOME FROM OPERATIONS
Income from operations increased 47.6% in 1993 to $3.6 million compared
to $2.5 million in 1992. This increase, which was achieved despite declining
gross profit margins, resulted from increased sales, improvements in operating
efficiencies, cost savings associated with a 1991 warehouse consolidation, and
the benefits of economies of scale resulting in a decrease in SG&A as a
percentage of sales. Income from operations in 1992 was impacted by a
nonrecurring expense in the amount of $114,000 attributable to employee benefits
incurred from the elimination of duplicate tasks associated with the relocation
and consolidation of the Company's warehouse.
INTEREST EXPENSE
Interest expense decreased in 1993 to $1.1 million from $1.2 million in
1992. This decrease was primarily a result of the decline in the prime interest
rate during the period as well as a reduction in the percentage over prime
charged by the Company's lender. At the end of 1992, the Company entered into a
new Credit Agreement with the Senior Lender which provided for the lower
percentage over prime. The improvement in the interest rate more than offset the
interest expense associated with increased borrowings required to fund the
Company's growth and the acquisition of its affiliate completed in June 1993.
See "Acquisitions."
NET INCOME
For the year ended December 31, 1993, net income was $1.7 million ($.19
per share, $.18 fully diluted), an increase of 125.1% from net income of
$756,000 ($.12 per share) for 1992. The increase in 1993 reflects the growth in
sales, increased operating efficiencies, reduction in SG&A as a percentage of
sales and the reduction in interest expense. The increase in net income in 1993
also included income of $237,000 ($144,000 on an after-tax basis) resulting from
the settlement of a business interruption insurance claim which occurred during
the third quarter of 1992. See Note 10 to Notes to Consolidated Financial
Statements of the Company. Net income in 1992 also reflected a gain on the
extinguishment of debt in the amount of $36,000 ($21,000 on an after-tax basis)
and nonrecurring expenses in the amount of $114,000 ($67,000 on an after-tax
basis) discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1995, increased to approximately $51.7
million from working capital of approximately $39.8 million and $27.5 million at
December 31, 1994 and 1993, respectively. The current ratio was 2.78:1 at
September 30, 1995, as compared to 3.94:1 and 4.43:1 at December 31, 1994 and
1993, respectively. Accounts receivable levels at September 30, 1995, were $27.4
million, up from accounts receivable levels of $16.6 million and $11.5 million
at December 31, 1994 and 1993, respectively.
48
<PAGE>
The increases in accounts receivable reflect the record quarterly and annual
levels of sales for the third quarter of 1995 and for the 1994 fiscal year,
respectively. Inventory increased to $52.0 million at September 30, 1995, from
inventory of $35.0 million and $23.3 million at December 31, 1994 and 1993,
respectively. The increase in inventory in the first nine months of 1995 was
primarily to support recent increases in sales, budgeted future growth as well
as an initial stocking package relating to the recent addition of microprocessor
and motherboard products. The increase in inventory in fiscal 1994 from fiscal
1993 was also primarily to support the increases in both semiconductor and
passive product sales as well as from acquisitions of Chicago and
Philadelphia-based distributors in 1994. See "Acquisitions." In addition, the
increase in inventory from 1993 to 1994 reflects the initial stocking packages
associated with new product lines obtained during 1994 and increases made to
support 1995 sales budgets. Inventory turns, however, improved to 2.6 times in
1994 compared to 2.4 times in 1993. The increase in accounts payable and accrued
expenses by $14.7 million to $27.7 million at September 30, 1995, as compared to
$13.0 million at December 31, 1994, and by $5.8 million to $13.0 million in 1994
as compared to $7.2 million in 1993, was primarily as a result of the increase
in inventory in the third quarter of 1995 over the end of 1994 and in 1994 over
1993, respectively.
During 1994, as a result of the acquisitions of the assets of two
companies, assets and liabilities increased and the Company's borrowings under
the Line increased to repay certain assumed liabilities. See "Acquisitions" and
Note 4 to Notes to Consolidated Financial Statements of the Company. The
Company's assets and liabilities further increased in 1994 in connection with
tenant improvements and related capital expenditures associated with the move of
the Company's headquarters and distribution facility. As of May 1, 1994, the
Company executed a promissory note in the amount of $865,000 in favor of the
landlord for the Company's new headquarters and distribution facility to finance
substantially all of the tenant improvements necessary for the new facility.
This $865,000 note has no payments in the first year (interest accrues and is
added to the principal amount), is payable interest only in the second year and
has a repayment schedule with varying monthly payments over the remaining 18
years. At the same time, the Company entered into another promissory note with
such landlord for $150,000 to finance certain personal property for the new
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. In addition certain additional improvements to the new facility
aggregating approximately $90,300 were financed as of May 1, 1995 by the
landlord. This $90,300 is evidenced by a promissory note payable in 240
consecutive, equal self-amortizing monthly installments of principal and
interest. These notes, which are subordinate to the Company's Line, accrue
interest at a fixed rate of 8% per annum and are payable monthly to the extent
payments are required. See "Business -- Facilities and Systems" and Note 6 to
Notes to Consolidated Financial Statements of the Company.
During the last two and three-quarter fiscal years, the Company's
shareholders' equity more than tripled from $8.5 million at the end of 1992 to
$27.7 million at September 30, 1995. This increase resulted primarily from the
net income during such period, the exercise during 1993 of the Class A and Class
B Warrants issued in connection with the sale by the Company of equity
securities in June 1992 (the "1992 Public Offering") and the Company's
completion of a public offering in June 1995. Upon the exercise of the warrants
issued in the 1992 Public Offering, which were called by the Company during
1993, the Company received net proceeds of approximately $5.4 million. In
addition, during 1994, the Company received net proceeds of approximately
$465,000 from the exercise of underwriters' warrants issued in connection with
the 1992 Public Offering. Lastly, in June 1995, the Company completed a public
offering (the "1995 Public Offering") of 4,550,000 shares of the Company's
Common Stock. In addition, in July 1995, the Company sold an additional 682,500
shares of the Common Stock as a result of the exercise by the underwriter of its
over-allotment option. The aggregate net proceeds from the 1995 Public Offering
(including the exercise of the over-allotment option), after deducting all
associated costs, aggregated approximately $8.5 million. The aggregate net
proceeds initially were used to reduce the amount outstanding under the
Company's line of credit, pending the use of the line of credit for continued
growth and expansion, including opening new sales offices, acquisition and
inventory diversification such as the recent addition of microprocessor and
motherboard products, and general working
49
<PAGE>
capital purposes. See Notes 2 and 6 to Notes to Consolidated Condensed Financial
Statements of the Company.
In 1994, the Credit Agreement was amended to increase the Line from
$20 million to $25 million. In addition, as a result of the increase in the
Company's equity and subordinated debt through 1994, the interest rate on the
Line was reduced to, at the Company's option, either one-quarter of one percent
(1/4%) below prime or two percent (2%) above certain LIBOR rates. Under the
terms of the 1994 amendment, the Company will pay a nonusage fee of one-tenth of
one percent (1/10%) calculated on the unused portion of the Line, payable
quarterly in arrears, and the termination date of the Line was extended to May
31, 1997. On March 28, 1995, the Credit Agreement was again amended whereby the
Line was increased from $25 million to $30 million. The 1995 amendment to the
Credit Agreement permits the Company to request standby letters of credit to be
issued by the Senior Lender on the Company's behalf, with a sublimit of $5
million available for letters of credit under the Line and such letters of
credit being chargeable as advances against the Line. The Company will pay the
Senior Lender an issuance fee equal to three-quarters of one percent (.75%) per
annum of the aggregate amount of outstanding letters of credit. See Note 6 to
Notes to Consolidated Financial Statements of the Company.
The Credit Agreement requires the Company to be in compliance with
certain financial ratios including a minimum amount of tangible net worth and a
current asset support ratio based upon specified percentages of eligible
accounts receivable and inventories. The Company also is required to comply with
certain affirmative and negative covenants. These covenants place limitations on
the Company's future borrowings, dividend payments, redemption of certain
securities, transactions with affiliates on other than an arm's-length basis,
investments, acquisitions, mergers, capital expenditures and changes in control
and management. The Company is required to obtain the approval of the Senior
Lender to the Transaction, which the Company does not currently foresee any
difficulty in obtaining. As of September 30, 1995, the Company was in compliance
with the required financial ratios and other covenants and the Company believes
that it is presently in compliance with the financial ratios and other covenants
under the Credit Agreement. Outstanding borrowings under the Line, which are
secured by accounts receivable, inventories and equipment and a pledge of the
capital stock of the Company's subsidiaries, amounted to $19,991,000 at December
31, 1994, and $22,402,000 on September 30, 1995. The increase in outstanding
borrowings over December 31, 1994 reflects the increase in borrowings associated
with the increase in working capital to support the significant growth of the
Company.
In June 1994, the Company completed a private placement (the "1994
Private Placement") of 51.5 units, with each unit consisting of a 9%
non-convertible subordinated debenture due 2004 in the principal amount of
$100,000 issuable at par, together with 7,500 common stock purchase warrants
exercisable at $3.15 per share. The 51.5 units issued represent debentures
aggregating $5,150,000 together with an aggregate of 386,250 warrants. 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 Line and the notes described above issued to the Company's
landlord. Each warrant issued can be exercised to purchase one share of the
Company's Common Stock at any time between December 14, 1994 and June 13, 1999
at an exercise price equal to $3.15 per share. See "DESCRIPTION OF SECURITIES --
Existing Warrants" and Note 6 to Notes to Consolidated Financial Statements of
the Company.
The Company expects that its cash flows from operations and additional
borrowings available under the Credit Agreement (subject to the Senior Lender
increasing the Line by approximately $8 million in connection with the Company's
request to approve the Transaction) will be sufficient to meet its current
financial requirements over the next twelve months, including those associated
with the Transaction. The Company continues, however, to explore available
financing alternatives to fund the Company's long term growth. See "RISK
FACTORS."
50
<PAGE>
INFLATION AND CURRENCY FLUCTUATIONS
The Company does not believe that inflation or currency fluctuations
significantly impacted its business during 1994 or the first nine months of
1995; however, inflation, changing interest rates and currency fluctuations have
had significant effects on the economy in the past and could adversely impact
the Company's results in the future. See "RISK FACTORS -- Foreign Manufacturing
and Trade Regulations."
ACQUISITIONS
On June 14, 1993, the Company, through a then newly-formed subsidiary
(the "Rockville Subsidiary"), completed the acquisition of substantially all of
the assets of All American Transistor Corporation of D.C. ("DC"), formerly a 45%
owned affiliate of the Company, based in Rockville, Maryland. The consideration
for the acquisition of such assets was the assumption of all of DC's disclosed
liabilities. As a result, the Company's consolidated assets and liabilities each
increased by approximately $1,000,000. At closing, the Company paid off a note
payable to a bank of approximately $503,000 (including accrued interest), which
was part of the $1,000,000 increase in liabilities. As part of such acquisition,
the majority shareholder of the seller entered into a one year employment
agreement with the Rockville Subsidiary at a base salary of $75,000 per annum
plus a bonus based on sales made by such person, which agreement has since
expired.
On January 24, 1994, the Company, through a then newly-formed
subsidiary (the "Illinois Subsidiary"), completed the acquisition of
substantially all of the assets of Components Incorporated, a regional
distributor of electronic components and related products based near Chicago,
Illinois ("Components"). As consideration for this acquisition, the Company paid
$599,000 in cash and issued a promissory note of approximately $399,000. The
promissory note bears interest at 8% per annum and is payable in quarterly
installments of interest only for a term of two years, with the entire principal
amount payable in full on January 24, 1996. In addition to the purchase price,
the Illinois Subsidiary agreed to assume and discharge when due, all of
Components' disclosed liabilities, which were approximately $700,000. As part of
such assumption, Components' bank line in the amount of $400,000 was paid in
full at the closing.
The president and principal stockholder of Components (the "Components
Principal") was hired by the Illinois Subsidiary to conduct the day-to-day
operations of the Illinois Subsidiary pursuant to an employment agreement dated
January 24, 1994. Although the Components Principal was transferred to a staff
marketing position during 1994, the terms of his employment agreement remain the
same. Pursuant to the employment agreement, which may be renewed annually by the
Illinois Subsidiary for up to a maximum term of four years, the Components
Principal will receive annual base compensation of $105,000, plus separate
bonuses based on the net earnings and gross sales of the Illinois Subsidiary. In
addition to the base compensation and bonuses, the Components Principal received
$350,000 of consideration for a covenant not to compete that restricts any
competition with the Illinois Subsidiary and the Company for a period extending
to the later of the third anniversary of the Components Principal's termination
as an employee or January 24, 1999. The $350,000 consideration was in the form
of a grant of 98,160 stock options to the Components Principal to acquire Common
Stock at a price of $1.65 per share (valued at $100,000 as of January 24, 1994),
and the delivery to the Components Principal of a promissory note of the
Illinois Subsidiary in the principal amount of $250,000. The $1.65 options are
exercisable, in whole or in part, at any time during the period commencing July
1, 1994, and ending January 23, 1999, subject to earlier termination on death or
disability. The Company, pursuant to its agreement to register the Common Stock
underlying such options by July 31, 1994, registered such shares in February
1994. The $250,000 promissory note bears interest at 8% per annum, payable
quarterly, with $100,000 of principal due March 10, 1995, $50,000 of principal
due April 24, 1996, and the remaining $100,000 payable in eight equal quarterly
principal installments in the amount of $12,500 over the fourth and fifth years
of such note. In the event the Illinois Subsidiary's net income equals or
exceeds $650,000 in any fiscal year, it must prepay one-half of the then
outstanding principal balance of such note and, in the event the
51
<PAGE>
Illinois Subsidiary's net income again equals or exceeds $650,000 in a
subsequent fiscal year, the Company must prepay the entire then outstanding
principal balance of such note. If the Components Principal resigns or is
terminated for cause on or prior to January 24, 1996, the Components Principal
will be obligated to pay to the Company the sum of $100,000 as liquidated
damages, payable at his election either in cash or by reduction of the then
outstanding principal balance of the $250,000 promissory note. The Company has
also agreed to grant to the Components Principal employee incentive stock
options at fair market value on the date of grant (5,000 on January 24, 1995;
10,000 on January 24, 1996; and 15,000 on January 24, 1997), each of such three
sets of options to be exercisable for a period of five years, subject to earlier
termination in the event of termination of employment, death or disability. The
Company has guaranteed all of the obligations of the Illinois Subsidiary owed to
Components and the Components Principal in connection with this transaction.
On September 9, 1994, the Company, through a then newly-formed
subsidiary (the "New Jersey Subsidiary"), completed the acquisition of
substantially all of the assets of GCI Corp., a Philadelphia-area distributor of
electronic components based in southern New Jersey. As consideration for this
acquisition, the Company paid $485,000 in cash, issued a promissory note in the
approximate amount of $306,000 and granted stock options covering 117,551 shares
of Common Stock at an exercise price of $1.65 per share (valued at $144,000 as
of September 9, 1994) exercisable between September 9, 1995 and September 8,
1999. The New Jersey Subsidiary also assumed substantially all of the disclosed
liabilities of approximately $1,930,000, including a $1,400,000 bank note
payable which has been repaid. The $306,000 promissory note is payable interest
only on a quarterly basis for the first two years from closing with the
principal amount (together with accrued interest thereon) payable in equal
quarterly installments over the next three years. One-half of the then
outstanding principal balance of the promissory note is required to be paid if
certain net earnings (as defined) of the New Jersey Subsidiary are attained for
1995 or 1996. GCI Corp. may earn up to an additional $760,000 of contingent
purchase price over the three-year period ending December 31, 1997 if certain
gross profit targets are met.
The three principal stockholders and key employees of GCI Corp. (the
"GCI Principals") each received an employment agreement from the New Jersey
Subsidiary commencing on September 10, 1994, and expiring on December 31, 1997,
and providing for base salary of $122,000, $113,000, and $110,000 per annum,
respectively. In addition to base salary, each of the GCI Principals may earn a
bonus based upon the percentage of the net earnings generated in the sales
territory, as defined. In addition to the net earnings bonus, two of the GCI
Principals may earn an annual bonus based upon the gross profit of the Company
with respect to all sales made in Maryland, Virginia and Delaware, if certain
minimum gross profit levels are obtained. The Company has also agreed to grant
to each of the GCI Principals employee incentive stock options at fair market
value on the date of grant (10,000 to each on January 30, 1996; 10,000 to each
on January 30, 1997; and 10,000 to each on January 30, 1998), but each such
grant is conditional upon sales in the sales territory, as defined, attaining a
minimum gross profit for the year most recently ended and, if granted, vests
ratably over a six year period. One other key employee of GCI Corp. accepted
employment with the New Jersey Subsidiary and was granted 10,000 employee
incentive stock options at an exercise price of $2.63 per share (the fair market
value on the date of grant) vesting ratably over a six year period, the ability
to receive up to 15,000 additional employee incentive stock options (5,000 per
year in respect of 1995, 1996 and 1997) if a certain minimum gross profit for
sales in the sales territory, as defined, are attained during each such year,
and shall be issued 1,000 shares of Common Stock upon completing his 18th month
of service with the New Jersey Subsidiary. The Company has guaranteed all of the
obligations of the New Jersey Subsidiary to GCI Corp. and the GCI Principals.
The operating results of each of the acquired companies are included in
the consolidated results of operations of the Company from the date of their
respective acquisition. See Notes 4 and 6 to Notes to Consolidated Financial
Statements of the Company.
52
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends. In 1989 the
Board declared a 25% stock split effected in the form of a stock dividend.
Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other relevant factors. It is not
anticipated, however, that the Company will pay cash dividends on its Common
Stock in the foreseeable future, inasmuch as it expects to employ all available
cash in the continued growth of its business. In addition, the Credit Agreement
prohibits the payment of any dividends without the prior written consent of the
Senior Lender. See Note 6 to Notes to Consolidated Financial Statements of the
Company.
MARKET INFORMATION
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol "SEMI." The Company effected its initial public offering of Common
Stock in 1987. The following table sets forth the range of high and low sale
prices for the Common Stock as reported on The Nasdaq Stock Market during each
of the quarters presented.
<TABLE>
<CAPTION>
QUARTER OF FISCAL YEAR HIGH LOW
- ---------------------- ---- ---
1993
<S> <C> <C>
First Quarter........................................................................ $1 25/32 $1 5/16
Second Quarter....................................................................... 1 9/16 1 5/32
Third Quarter........................................................................ 2 3/4 1 3/8
Fourth Quarter....................................................................... 2 25/32 2
1994
First Quarter........................................................................ 3 7/8 2 7/16
Second Quarter....................................................................... 3 13/16 2 1/2
Third Quarter........................................................................ 3 1/4 2 1/8
Fourth Quarter....................................................................... 2 3/8 1 1/2
1995
First Quarter........................................................................ 2 1/8 1 15/32
Second Quarter....................................................................... 2 7/16 1 5/8
Third Quarter........................................................................ 3 11/16 2 1/8
Fourth Quarter (through October 30, 1995)............................................ 3 5/16 2 11/16
</TABLE>
As of October 30, 1995, there were approximately 525 holders of record
of the Common Stock based on the stockholders list maintained by the Company's
transfer agent. Many of these record holders hold these securities for the
benefit of their customers. The Company believes that it has over 4,700
beneficial holders of its Common Stock.
On October 30, 1995, the last sale price, as reported by The Nasdaq
Stock Market, for the Common Stock was $24 per share.
BUSINESS
OVERVIEW
Over the last 30 years, the electronics industry has grown to be one of
the largest and today is one of the faster growing industries in the United
States. An industry association forecasts total U.S. factory sales of electronic
products to exceed $373 billion in 1995 compared to $276 billion in 1991. The
growth of this industry has been driven by increased demand for new products
incorporating sophisticated electronic components, such as laptop computers and
satellite and communications equipment, as well as the increased utilization of
electronic components in a wide range of industrial, consumer and military
products. The three product groups included in the electronic components
industry are semiconductors, which account for approximately 40% of the
electronic components distribution marketplace, passive/electromechanical
components accounting for approximately 40%, systems or computer products (such
as disk drives, terminals and computer peripherals), accounting for
approximately 20%. The Company, as a distributor of both semiconductors and
passive/electromechanical products, sells two of the three major categories of
products generally sold through distribution. In June 1995 the Company created a
new computer products division. This division presently only carries one product
line, however, the Company
53
<PAGE>
intends to expand its computer products offerings in the future. No assurance,
however, can be given as to the success of this new division. See "Products -
Computer Products."
Distributors are an integral part of the electronics industry. During
1995, an estimated $18 billion of electronic components are projected to be sold
through distribution in the United States up from $9 billion in 1991. Electronic
component manufacturers sell directly to only a small number of the potential
customers. This small segment of the customer base accounts for a large portion
of the total available revenues. It is not economical for the component
manufacturers to provide a broad range of sales support services to handle the
large amount of customers that account for the balance of the available
revenues. Thus, the manufacturers rely on distributors to augment their sales,
marketing and service operations. By offering a broad range of products, it is
more efficient for the distributor to service the large customer base not
addressed directly by the component manufacturers. Furthermore, distributors
offer their customers a broad and growing range of services including the
convenience of immediate or scheduled deliveries to support just-in-time
requirements. Distributors also provide assistance in filling complete order
requirements and a higher level of customer service than that available directly
from component manufacturers. Through the use of distributors, both the
customers and suppliers are able to reduce personnel and other costs associated
with maintaining component inventories. During recent years there has been a
growing trend for distribution to play an increasing role in the customers'
procurement process. The Company believes that users of electronic components
will continue to increase their service and quality requirements and that this
trend will result in both customers and suppliers becoming more dependent on
distributors. This will result in increasing opportunities for those
distributors that have expanded their service capabilities.
THE COMPANY
The Company is a national distributor of electronic components
manufactured by others. These components are sold primarily to original
equipment manufacturers in a diverse and growing range of industries. The
Company's customer base includes manufacturers of consumer goods, satellite and
communications products, computers and computer-related products, robotics and
industrial equipment, radar and air traffic control systems, defense and
aerospace equipment and medical instrumentation.
Approximately 75% of the Company's sales are currently derived from the
sale of semiconductors (active components), including transistors, diodes,
memory devices and other integrated circuits. The remaining 25% of the Company's
sales are derived from passive products, such as capacitors, resistors,
inductors and electromechanical products, including cable, connectors, filters
and sockets. The Company has not in the past derived significant revenues from
the sale of microprocessors. The Company has, however, recently entered into a
non-exclusive agreement with NexGen, Inc. to distribute its line of
high-performance processor products for the personal computer industry, which
include Nx586 microprocessors and complete motherboards. There can be no
assurance as to the extent of the revenue and profit, if any, to be derived in
the future by the Company from this new relationship.
While the Company was reincorporated in Delaware in 1987, it and its
predecessor have operated since 1964. The Company is one of the faster growing
distributors in the industry and, based on 1994 revenues, the Company was
recognized by industry publications as the 21st largest distributor of
electronic components in the United States, up from the 24th largest distributor
in the previous year, as well as the 9th largest distributor of semiconductors
in the United States.
CORPORATE STRATEGY
The Company's strategy is to continue its growth and to gain market
share by increasing the number of customers it sells to through a combination of
expanding existing sales offices, opening new sales offices and making
additional acquisitions. Furthermore, the Company intends to increase sales to
its existing
54
<PAGE>
customers. As part of its growth strategies, the Company also intends to expand
its product offerings and service capabilities. While the Company's aggressive
growth plans caused an adverse effect on profitability in 1994 and continued to
lessen earnings in 1995, the Company believes that the investment in future
expansion was necessary to position the Company to participate in the dynamics
of its rapidly growing and changing industry and to achieve greater
profitability.
EXPANSION
The Company has undergone significant expansion over the last few
years. Since the end of 1992 to date, the Company has opened 11 new sales
offices, relocated and expanded all existing offices, acquired three electronic
component distributors in order to increase its presence in the national market
and, on October 31, 1995 the Company entered into the Purchase Agreement to
acquire the Added Value Companies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisitions", "Sales and
Marketing -- Sales Office Locations" and "THE PURCHASE AGREEMENT". The Company
is seeking to further expand and enhance its geographic coverage by opening or
acquiring additional sales offices over the next eighteen months, including one
in the fourth quarter of 1995 and possibly two more by the end of the first
quarter of 1996. Although no further agreement has been reached as of the date
of this Proxy Statement/Prospectus, the Company is currently in discussions with
additional acquisition candidates.
In order to effectively drive and manage its aggressive expansion, the
Company restructured, enhanced and expanded its sales staff and sales management
team. The Company also expanded its quality control programs, created and
staffed a corporate operations department and increased staffing in almost all
corporate departments. To better service the large customer base in the western
part of the United States, in 1994 the Company also opened a west coast
corporate office which houses a regional distribution center, a regional credit
department, sales and marketing executives and the Company's new programming
center.
To create additional opportunities for growth, the Company in June 1995
created a computer products division which presently carries only one product
line, however, the Company intends to expand its computer products offerings in
the future. No assurance, however, can be given as to the success of this new
division. Furthermore, as a result of the limited product offerings at present
and the substantial start-up costs, this new division is expected to have a
negative impact on earnings in 1995 and through the middle of 1996. See
"Products - Computer Products."
In order to process rapid growth in sales, the Company moved into new
corporate offices and a state-of-the-art distribution center which dramatically
expanded the Company's capacity to service sales. Additionally, in October 1995,
the Company entered into a lease for a new West Coast distribution and
semiconductor programming center to be located in Freemont (near San Jose),
California, containing approximately 20,000 square feet of space (the "West
Coast DC"). See "Facilities and Systems." This capacity, combined with the
growth expected to be attained in the future as a result of the aggressive
expansion discussed above, is expected to enable the Company to realize the
benefits of improved operating efficiencies and increasing economies of scale in
future periods.
CAPITALIZING ON INDUSTRY TRENDS
The Company believes that there are several significant trends
occurring simultaneously within the electronics industry. The first trend is
that customers are reducing their approved vendor base in an effort to place a
greater percentage of their purchases with fewer, more capable distributors. At
the same time, there has been substantial consolidation within the distribution
chain resulting in customers seeking additional sources of supply to minimize
dependency on a single supplier. Additionally, the Company believes that the
larger distributors resulting from consolidations will concentrate on larger
customers causing a growing need for distribution service at the middle and
emerging market customer base as such customers seek to maintain a high level of
55
<PAGE>
service. These trends have put pressure on customers to achieve the proper
balance between relying on fewer distributors while at the same time not
becoming dependent on a single supplier. In an attempt to take advantage of
these trends, the Company has been strategically expanding its product offerings
and service capabilities in order to increase its ability to support more
customer needs. The Company believes that its flexibility and service
capabilities, coupled with its pricing structure and broad product offering,
will enable the Company to continue to take advantage of these growth
opportunities.
INCREASING PRODUCT OFFERINGS
The Company intends to continue its effort to increase the number and
breadth of its product offerings, thereby allowing it to attract new customers
and to represent a larger percentage of the purchases being made by its existing
customers. As part of its efforts to attract new suppliers and expand its
product offerings, the Company has opened new sales offices in order to achieve
the geographic coverage necessary to be recognized as a national distributor.
The Company has increased the number of suppliers whose products it offers from
approximately 20 in 1980 to over 90 by 1995. See "Suppliers -- Authorized
Distributorships."
SERVICES
As stated above, customers are 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 larger distributors in the industry and which 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 the middle and emerging market
customers, which represent the vast majority of the Company's customers. See
"Competition." Thus, one of the ways the Company differentiates itself from its
competition is to make state-of-the-art distribution technology available to
both large and small 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. Within the past 30 months, the Company has dramatically
expanded its services capabilities to include just-in-time deliveries, bar
coding capabilities, bonded and consigned inventory programs, in-plant stores,
in-plant terminals and automatic inventory replenishment programs. In the past
18 months, the Company has also implemented electronic data interchange ("EDI")
programs. EDI programs permit the electronic exchange of information between the
Company and its customers or suppliers and facilitate transactions between them
by reducing paperwork and employee time.
The Company has also expanded its technical capabilities by creating a
technical sales program. As part of this program the Company has hired
electrical engineers at various sales offices across the country and expects to
continue to increase the number of engineers in the future. The program is
intended to generate more sales by providing customers with increased service at
the design and development stages. The program is also intended to enhance the
technical capabilities of the Company's entire sales force through regular
training sessions.
In an effort to reduce the number of distributors they deal with, and
ultimately reduce their procurement costs, many customers have been selecting
distributors that, in addition to providing their standard components, are also
able to provide products that are not part of the distributors' regular product
offering. This service is referred to as "kitting." In order to expand its
56
<PAGE>
service offerings to address this growing customer requirement, the Company
created a kitting department toward the end of 1994.
Another rapidly growing segment of electronics distribution is the sale
of programmable semiconductor products. Programmable semiconductors enable
customers to reduce the number of components they use by highly customizing one
semiconductor to perform a function that otherwise would require several
components to accomplish. This saves space and enables customers to reduce the
size and cost of their products. In order to effectively sell programmable
products, most major distributors have established their own semiconductor
programming centers. To enable it to participate in this growing segment of the
industry, the Company has opened its own semiconductor programming center during
the third quarter of 1995 in its new west coast corporate facility. 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. In December 1995, the Company expects to
move its semiconductor programming center to the West Coast DC.
QUALITY CONTROLS AND ISO CERTIFICATION
In order to properly manage its rapid growth and achieve compliance
with the increasingly stringent quality standards of its customer base, during
1994 the Company created an operations department and embarked upon a Total
Quality Management ("TQM") program. The TQM program creates continuous process
improvement teams empowered to design and direct the ongoing re-engineering of
the Company. The intention of the TQM program is to improve service and, over
time, increase efficiency and productivity and 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 has successfully completed a procedure and
quality audit resulting in its certification under the international quality
standard of ISO 9002. This quality standard was established by the International
Standards Organization created by the European Economic Community ("EEC"). Such
organization created uniform standards of measuring a company's processes,
traceability procedures and quality control in order to assist and facilitate
trading and business among the EEC. The Company believes that this certification
has currently been obtained by only a few distributors and is becoming a
requirement of an increasing portion of the customer base in the United States.
PRODUCTS
ACTIVE AND PASSIVE COMPONENTS
The Company markets both semiconductors and passive products.
Semiconductors, which are active products, respond to or activate upon receipt
of electronic current. Active products include transistors, diodes, memory
devices and other integrated circuits. Passive components, on the other hand,
are designed to facilitate completion of electronic functions. Passive products
include capacitors, resistors, inductors and electromechanical products, such as
cable, connectors, filters and sockets. The Company has not in the past derived
significant revenues from the sale of microprocessors. In June 1995, the Company
entered into a non-exclusive agreement with NexGen, Inc. to distribute its line
of high-performance processor products for the personal computer industry, which
include Nx586 microprocessors and complete motherboards. There can be no
assurance as to the extent of the revenue and profit, if any, to be derived in
the future by the Company from this new relationship. See "Computer Products"
hereinbelow. Virtually all of the Company's customers purchase both active and
passive products.
While the Company offers many of the latest technology products, its
focus has historically been on mature products that have a more predictable
demand, more stable pricing and more constant sourcing. The Company believes
that the greater predictability in the demand for these products and the fact
that component manufacturers are not likely to invest capital in order to
increase production of older technologies combine to reduce the risks inherent
in large volume purchases of mature product. By making large volume purchases,
the Company decreases its per-unit cost, thus increasing its potential for
higher
57
<PAGE>
profit margins upon resale of these mature products. Although the Company
continues to position itself as a leader in the more mature product lines, as
part of its growth strategy, sales of the newer technology products and possibly
microprocessor products, are expected to play a greater role in the overall
sales mix of the Company and may play an even greater role in the overall sales
mix as the Company expands its product offerings. Many of the newer technology
products, particularly microprocessor products, result in lower profit margins
than sales of more mature product lines.
The Company does not offer express warranties with respect to any of
its products, instead passing on only such warranties, if any, as are granted by
its suppliers.
COMPUTER PRODUCTS
To create additional opportunities for growth, the Company in June 1995
created a computer products division which presently only carries one product
line, however, the Company intends to expand its computer products offerings in
the near future. This new division will have a different customer base than the
traditional original equipment manufacturers ("OEMs") to which the Company
markets its products, including value added resellers (or VARs), systems
integrators and distributors, catalog companies and computer superstores.
Furthermore, sales from this new division will generate substantially lower
profit margins than are generated by the Company's other products, for which the
Company expects to compensate by having a lower cost structure for its
operations. No assurance, however, can be given as to the success of this new
division. See "Corporate Strategy - Expansion."
ELECTROMECHANICAL VALUE-ADDED SERVICES
In an effort to reduce overhead, a growing number of customers have
been outsourcing certain processes and relying more upon distributors to handle
certain assemblies and modification work. These include connector and cable
assemblies, cable harnessing, terminal block modifications and other services.
These electromechanical value-added services offer distributors an opportunity
to sell their components at significantly higher margins when these components
become integrated into an assembly.
The Company began offering electromechanical value-added services in
1989 as a result of its acquisition of a regional passive component distributor
which offered such services. To date, the Company has had only minimal revenues
from such value-added services. Part of the strategy for the acquisition by the
Company of the Chicago, Illinois based distributor (see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Acquisitions")
in January 1994 was to expand the Company's electromechanical value-added
capabilities as the acquired company derived a substantially higher percentage
of its revenues from these value-added services. In order to further drive the
sales of value-added services, in the second half of 1994 the Company created a
division called American Assemblies & Design operating at its newly acquired
Chicago location. American Assemblies & Design is expected to dramatically
expand the Company's value-added capabilities with respect to electromechanical
products. While there can be no assurance as to the success of this division,
the Company expects American Assemblies & Design will contribute revenues and
profits in the second half of 1995.
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 40,000
different products representing more than 90 different component manufacturers.
In addition, the Company employs a decentralized management philosophy whereby
branch managers are given latitude to run their operations based on their
experience within their particular regions and the needs of their particular
customer base. This decentralization results in greater flexibility and a higher
level of customer
58
<PAGE>
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 level usually
associated only with regional or local distributors. Additionally, the Company
brings to the middle and emerging market customers a level of service
capabilities that the smaller distributor cannot provide.
The Company's marketing strategy is to have the geographic coverage,
service capabilities and flexibility and the quality assurance to enable it to
be an expanded source of supply for all middle and emerging market customers by
providing a broad range of products and services to these customers; and to now
become a significant supplier for the top tier customers with a niche of
products supported by the high level of quality, service and technical
capabilities required to do business with these accounts.
MARKETING TECHNIQUES
The Company uses various techniques in marketing its products. These
include direct marketing through personal visits to customers by management,
salespeople and sales representatives, supported by a staff of inside sales
personnel who handle the accepting, processing and administration of sales
orders; ongoing advertising in various national industry publications and trade
journals as well as general advertising, sales referrals and marketing support
from component manufacturers. The Company also uses its expanded service
capabilities, new technical sales program and its status as an authorized
distributor for certain manufacturers as marketing tools. See "Corporate
Strategy -- Services" and "Suppliers -- Authorized Distributorships."
SALES PERSONNEL
As of October 31, 1995, the Company employed on a full-time basis 95
inside and 111 outside salespeople with approximately 21 more management
employees involved in sales. The Company also had 10 sales representatives
covering various territories where the Company does not have sales offices. In
addition, the Company currently employs 8 electrical engineers in its technical
sales program. Salespeople are generally compensated by a combination of salary
and commissions based upon the 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. In order to minimize management layers, each area and
regional manager acts as the general manager of the branch where they are
located. 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 upon achieving various goals including profits from
the sales offices in their respective areas or regions.
SALES OFFICE LOCATIONS
The Company currently operates 22 sales offices. The table below shows
the general location (and specific town or city, if different) of each office
and the year it was established.
<TABLE>
<CAPTION>
YEAR
OFFICE ESTABLISHED
- ------ -----------
<S> <C>
ALABAMA
Huntsville..................................................................... 1993
CALIFORNIA
Orange County (Cypress)(1)..................................................... 1994
San Diego...................................................................... 1993
San Fernando Valley (Calabasas)(2)............................................. 1994
San Jose....................................................................... 1985
CONNECTICUT
Danbury........................................................................ 1994
FLORIDA
Fort Lauderdale (Deerfield/Sunrise)(3)......................................... 1990
Miami.......................................................................... 1973
Tampa/St. Petersburg (Clearwater).............................................. 1995
59
<PAGE>
GEORGIA
Atlanta (Norcross)............................................................. 1995
ILLINOIS
Chicago (Schaumburg) (4)....................................................... 1994
MARYLAND
Rockville...................................................................... 1993
MASSACHUSETTS
Boston (Bedford)............................................................... 1988
MINNESOTA
Minneapolis (Eden Prairie)..................................................... 1986
NEW YORK
Hauppauge...................................................................... 1984
Rochester...................................................................... 1995
OREGON
Portland (Beaverton)........................................................... 1994
PENNSYLVANIA
Philadelphia (West Berlin, New Jersey) (5)..................................... 1993
TEXAS
Austin......................................................................... 1994
Dallas (Richardson)............................................................ 1988
Houston........................................................................ 1994
UTAH
Salt Lake City................................................................. 1992
</TABLE>
(1) This office was relocated from Irvine to a larger facility in Cypress
in the second quarter of 1995.
(2) This office was relocated from Simi to a larger facility in Calabasas
in the second quarter of 1995.
(3) This office was moved from Sunrise to Deerfield in 1994.
(4) This office was moved from Lisle to Schaumburg in 1995.
(5) The original Philadelphia area office was located in Cherry Hill, New
Jersey and was closed in conjunction with the completion of the
acquisition by the Company of a Philadelphia area distributor in
September 1994.
During the second quarter of 1995 the Company relocated its San
Fernando Valley and Orange County, California offices into two much larger
facilities in Calabasas and Cypress, California. As part of such relocations,
the Company closed its office in Torrance, California which was originally
opened in 1981. During 1995, the Company has already opened three new offices in
Tampa\St. Petersburg, Florida, Rochester, New York, and Atlanta, Georgia, which
Atlanta office opened during the fourth quarter of 1995. In addition, the
Company expects to open two more offices by the end of the first quarter of
1996, including the Company's first office outside of the United States in
Toronto, Canada. The Company also retains field sales representatives to market
other territories throughout the United States, Canada and Mexico. The Company
may consider opening branches in these other territories if the representatives
achieve acceptable sales levels. If the Transaction is consummated, the Company,
will acquire sales offices in Tustin, San Diego, San Fernando Valley and
Visalia, California; Scottsdale, Arizona; Denver, Colorado; and Salt Lake City,
Utah. Over time, the Company may consolidate certain of these offices into the
operations of the Company in those cities where the Company presently has sales
offices. The Company may in the future consider acquiring more distributors.
Although no further agreements have been reached as of the date of this Proxy
Statement/Prospectus, the Company is currently in discussions with acquisition
candidates.
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.
60
<PAGE>
SEASONALITY
The Company's sales have not historically been materially greater in
any particular season or part of the year.
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 consumer goods, computers and
computer-related products, defense and aerospace equipment, radar and air
traffic control systems, satellite and communications products, robotics and
industrial equipment and medical instrumentation. Additionally, as a result of
procuring motherboard products, the Company has begun expanding its customer
base to include retailers, value added resellers and distributors of computer
products. The Company's customer list includes over 10,000 accounts. During
1994, no customer accounted for more than 3% of the Company's sales and the
Company does not believe that the loss of any one customer would have a material
adverse impact on its business.
Although sales of products to commercial users account for the vast
majority of the Company's sales, approximately 5% of the Company's sales in 1994
were comprised of high reliability products generally sold to companies
servicing the military. High reliability products are required to meet military
specifications and result in additional paperwork and administrative costs to
the Company.
As a result of the creation of the new computer products division, the
Company recently began to service and expanded its customer base beyond its
traditional customer base of OEMs. See "Products - Computer Products."
BACKLOG
As is typical of distributors, the Company has a backlog of customer
orders. While these customer orders are cancelable, the Company believes its
backlog is a reliable indicator of future sales. At December 31, 1994, the
Company had a backlog in excess of $31 million, 29% higher than the backlog of
$24 million at December 31, 1993. By June 30, 1995, the Company's backlog had
risen to approximately $48 million. The Company believes that a substantial
portion of its backlog represents products due to be delivered within the next
three months. Approximately 50% 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.
SUPPLIERS
AUTHORIZED DISTRIBUTORSHIPS
The Company generally purchases products from components manufacturers
pursuant to non-exclusive distribution agreements. Such suppliers generally
limit the number of distributors they will authorize in a given territory. As an
authorized distributor, the Company obtains sales referrals, as well as sales,
marketing and engineering support, from components manufacturers. These
referrals and support assist the Company in closing sales and obtaining new
customers. The Company's status as an authorized distributor is also a valuable
marketing tool as the end customers receive greater support from the components
manufacturers.
The Company believes that an important factor which suppliers consider
in determining whether to grant or to continue to provide distribution rights to
a certain distributor is such distributor's geographic representation. In
meeting its goal of being recognized as a national distributor, the Company has
opened sales offices in a number of markets throughout the United States (see
"Corporate Strategy -- Expansion" and "Sales and Marketing -- Sales Office
Locations") and
61
<PAGE>
has advertised in national industry publications to demonstrate its distribution
capabilities to current and potential customers and suppliers.
All distribution agreements are cancelable by either party, typically
upon 30 to 90 days' notice. The Company believes its exposure to inventory loss
is significantly reduced by the following provisions typically found in its
distribution agreements: price protection, stock rotation privileges,
obsolescence credit and return privileges. Price protection is typically in the
form of a credit to the Company for any inventory the Company has of products
for which the manufacturer reduces its prices. The stock rotation privileges
typically allow the Company to exchange inventory in an amount up to 5% of a
prior period's purchases. The obsolescence credit allows the Company to return
any products which the manufacturer discontinues. Upon termination of a
distribution agreement, the return privileges typically require the manufacturer
to repurchase the Company's inventory at the Company's adjusted purchase price.
If the Company terminates the distribution agreement, there is typically a 10%
to 15% restocking charge. There can be no assurance that all manufacturers will
comply with their contractual obligations.
Substantially all 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.
SUPPLIER BASE
Over the past 10 years the Company has expanded its supplier base
significantly. Presently, the Company has non-exclusive distribution agreements
with over 90 different suppliers and considers itself to be a broad-line
distributor. The Company does not regard any one supplier as essential to its
operations, since most of the products the Company sells are available from
other sources at competitive prices. In 1994, the Company's three largest
suppliers accounted for approximately 14%, 7% and 6% of consolidated purchases,
respectively. While the Company does not believe that the loss of any one
supplier would have a material adverse impact on its business, the loss of a
significant number of suppliers in a short period of time could have such an
impact. If the Company were to lose its rights to distribute the products of any
one particular supplier, there can be no assurance that the Company would be
able to replace the products which were available from that particular supplier.
The Company, from time to time, eliminates companies and adds new companies to
its list of authorized suppliers in an attempt to provide its customers with a
better product mix. As a result of its rapid growth, the Company has recently
begun developing a strategy to disengage with several smaller suppliers that do
not fit into the Company's long-term growth strategy. See "RISK FACTORS --
Relationships with Suppliers" and Note 12 to Notes to Consolidated Financial
Statements of the Company.
FACILITIES AND SYSTEMS
FACILITIES
As a result of its continued growth, the Company has relocated its
corporate headquarters and distribution facility twice since 1990. In order to
support substantial future growth without another relocation, the Company
entered into a new lease for a 110,800 square foot facility in Miami, Florida to
contain new corporate offices and a state-of-the-art distribution center
designed by the Company. The Company moved into this new facility in May of
1994. The Company presently occupies approximately 75% of the facility, with the
balance being sublet to an unrelated third party. The new lease has a term
expiring in 2014 with three 6-year renewal options. The Company has the right to
terminate this lease 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 provides for annual fixed rental payments
totaling approximately $264,000 in the first year, $267,000 in the second year,
$279,000 in each of the third, fourth and fifth years, $300,600 in the sixth
year, $307,800 in the seventh year, and in each year thereafter during the term
the rent shall increase once per year
62
<PAGE>
in an amount equal to the annual percentage increase in the consumer price index
not to exceed 4% in any one year. The renewal options are at fair market value
rental rates. In June 1994, the Company entered into a sublease with an
unrelated third party for approximately 25% of the new facility for a term of
three years ending on July 14, 1997, with no renewal options and the Company
having the right to recapture approximately 13,000 square feet of the sublet
space from and after the eighteenth month of the three year term. The sublease
provides for base rent of $5,000 per month increasing 5% per year and additional
rent representing the subtenant's pro rata share of landlord pass through
expenses and other expenses pertaining to the sublet premises. Although
continued growth is not assured, the Company estimates that this new facility
(including the space currently sublet) has capacity to handle over $400 million
in annual revenues.
Prior to May 1994, the Company's main corporate offices and warehouse
were also located in Miami, Florida, and consisted of approximately 37,000
square feet, of which approximately 10,000 square feet was office space and
approximately 27,000 square feet was warehouse space.
Additionally, in October 1995, the Company entered into a lease for a
new west coast distribution and semiconductor programming center to be located
in Freemont (near San Jose), California, containing approximately 20,000 square
feet of space (the "West Coast DC"). The Company currently expects to move into
such facility in December 1995.
As a result of the January 1994 acquisition, the Company leases a 9,700
square foot facility located near Chicago, Illinois, which houses a warehouse
and the value-added operations of the Company's American Assemblies division.
The Chicago sales operations has recently relocated from this facility to a
separate office in the Chicago area. Furthermore, the Company occupies
approximately 11,000 square feet in Northern California, approximately 5,000
square feet of which is used for sales, 3,500 square feet of which is used for
corporate offices. The balance of this Northern California facility is being
used as a regional distribution facility and the Company's new semiconductor
programming center, which is expected to be moved to the West Coast DC in
December 1995. At such time, the Company will use the available space at the
Northern California facility to expand its sales operations. In addition, the
Company leases space for its 20 other sales offices (excluding Miami which is
located in the Company's corporate headquarters), which range in size from
approximately 1,000 square feet to 6,000 square feet. See "Sales and Marketing
- -- Sales Office Locations."
SYSTEMS
In 1990, the Company created a management information systems ("MIS")
department and, in 1991, new computer and communications systems were placed
into service. As a result of its rapid expansion and in order to assure that the
Company can continue to grow and provide state-of-the-art distribution
technology in the future, the Company expanded these systems during 1994 and
expects to continue to develop and expand its systems capabilities further. The
Company believes that these systems will assist in increasing sales and in
improving efficiency and the potential for greater profitability in the future
through increased employee productivity, enhanced asset management, improved
quality control capabilities and expanded customer service capabilities. See
"Corporate Strategy -- Services."
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
Company's distribution facility for shipping and invoicing. The combination of
the centralized warehouse 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, its systems provide the
Company with more timely and reliable information, allowing the Company to
enhance asset management. The Company's communications equipment enables
63
<PAGE>
personnel to communicate from office to office over existing data lines, thereby
controlling telephone expenses. Further, 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 and consigned
inventory programs, in-plant stores and in-plant terminals.
While the development of the MIS department, the acquisition of new
computer and communications equipment, the development of software for its
systems and the 1991 consolidation of the Company's warehouse operations reduced
the Company's profitability in 1989 through 1992, the Company began to benefit
from these investments in 1993. The Company believes that, with its new
distribution centers in Miami, Florida and Freemont (San Jose), California
combined with the expansion of its systems and infrastructure which began in
1994 and will continue in 1995, the Company will be positioned to sustain
significant sales growth without significant additional investment in fixed
overhead, thereby improving operating margins in the future. As a result, in the
first two quarters of 1995, the Company was able to achieve record growth in
sales and record net income.
FOREIGN MANUFACTURING AND TRADE REGULATION
A significant number of the components sold by the Company are
manufactured outside the United States and purchased by the Company from United
States subsidiaries or affiliates of those foreign manufacturers. As a result,
the Company and its ability to sell at competitive prices could be adversely
affected by increases in tariffs or duties, changes in trade treaties, currency
fluctuations, strikes or delays in air or sea transportation, and possible
future United States legislation with respect to pricing and import quotas on
products from foreign countries. The Company's ability to be competitive in or
with the sales of imported components could also be affected by other
governmental actions and changes in policies related to, among other things,
anti-dumping legislation and currency fluctuations. Since the Company purchases
from United States subsidiaries or affiliates of foreign manufacturers, the
Company's purchases are paid for in U.S. dollars which does reduce the potential
adverse effect of currency fluctuations. While the Company does not believe that
these factors adversely impact its business at present, there can be no
assurance that such factors will not materially adversely affect the Company in
the future.
EMPLOYEES
As of October 31, 1995, the Company employed 422 persons: 38 are
involved in management; 46 are involved in marketing; 206 are involved in sales;
46 are involved in warehouse and shipping; 31 are involved in operations and
kitting; 46 are involved in bookkeeping and clerical; and 9 are involved in MIS.
None of the Company's employees are covered by collective bargaining agreements.
The Company believes that its 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 $4 billion
worldwide. These distributors can be divided into global distributors who have
operations around the world, national distributors who have offices throughout
the United States, regional distributors and local distributors. With 23 offices
in 15 states, the Company competes as a national distributor. The Company, which
was recently recognized by an industry publication as the 21st largest
distributor of electronic components in the United States, believes its primary
competition comes from the top 50 distributors in the industry.
The Company competes with many companies that distribute electronic
components and, to a lesser extent, companies that manufacture such products and
sell them directly. Many of these companies have greater assets and possess
greater financial and personnel resources than does the Company. The competition
in the electronics distribution industry can also be segregated by target
customers: major accounts; middle market accounts; and emerging growth accounts.
64
<PAGE>
Competition to be the primary supplier for the major customers is dominated by
the top 10 distributors as a result of the product offerings, pricing and
distribution technology offered by these distributors. The Company competes for
these major industry customers by seeking to provide the very best service and
quality and focusing on fill-in or niche products. The Company believes that it
is able to earn satisfactory margins on this business without competing head-on
with the industry giants. The Company believes competition from the top 10
distributors for the middle and emerging market customer base is not as strong
since the largest distributors focus their efforts on the major account base.
For this reason, the Company has focused its 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 more sophisticated distribution technology than comparably sized
distributors and by seeking to offer to such middle and emerging market
companies a higher service level than are offered to them by the major national
distributors. With its expanded service capabilities and quality assurance
procedures in place, the Company believes that it can now compete for a bigger
portion of the business at the top tier customer base, although there can be no
assurance it will be successful in doing so.
LICENSED TECHNOLOGY
As a result of the rapid growth of the Company's electronic components
distribution business, the Company has decided to no longer pursue its
development of certain licensed technology intended to protect various
electronic equipment and machines from surges and sags in power which can damage
the components within the equipment. See Note 5 to Notes to Consolidated
Financial Statements of the Company.
LEGAL PROCEEDINGS
The Company is from time to time involved in litigation relating to
claims arising out of its operations in the ordinary course of business. Such
claims are generally covered by insurance or, if they relate to products 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. See "RISK FACTORS --
Potential Product Liability"
BUSINESS AND FINANCIAL INFORMATION
REGARDING THE ADDED VALUE COMPANIES
ADDED VALUE SELECTED FINANCIAL DATA
The following selected financial data for Added Value (i) for each of
the years 1992 through 1994 and as of the end of each of the years 1993 and 1994
has been derived from the financial statements of Added Value, which have been
audited by Lazar, Levine and Company LLP, Certified Public Accountants, and (ii)
as of the end of 1992, for and as of the end of each of the years 1990 and 1991,
for the nine months ended September 30, 1994 and 1995 and as of the nine months
ended September 30, 1995 have been derived from the unaudited financial
statements of Added Value. Such information should be read in conjunction with
Added Value's Financial Statements and related notes included elsewhere in this
Proxy Statement/Prospectus. See "INDEX TO FINANCIAL STATEMENTS" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" hereafter.
65
<PAGE>
<TABLE>
<CAPTION>
ADDED VALUE
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
---------------- ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
INCOME DATA:
Net Sales(1)(2)................... $24,114 $19,510 $27,663 $19,650 $17,231 $15,107 $17,326
Cost of Sales(2).................. (19,172) (15,100) (21,853) (15,077) (13,164) (11,345) (13,688)
------- ------- ------- ------- ------- ------- -------
Gross Profit...................... 4,942 4,410 5,810 4,573 4,067 3,762 3,638
Selling, General and
Administrative Expenses(3)...... (3,921) (3,318) (4,828) (3,594) (3,304) (3,352) (4,363)
------- ------- ------- ------- ------- ------- -------
Income (Loss) from Operations 1,021 1,092 982 979 763 410 (725)
Interest Expense.................. (126) (84) (118) (84) (74) (121) (141)
Other Income (Expense)(3)......... 6 48 97 167 (17) 203 370
Equity in Earnings of
Unconsolidated Subsidiary....... 66 133 105 129 71 127 -
------- ------- ------- ------- ------- ------- -------
Income (Loss) Before
Income Taxes.................... 967 1,189 1,066 1,191 743 619 (496)
Provision for Income Taxes........ (15) (30) (17) (24) (16) (9) -
------- ------- ------- ------- ------- ------- -------
Net Income (Loss)................. $ 952 $ 1,159 $ 1,049 $ 1,167 $ 727 $ 610 $ (496)
======= ======= ======= ======= ======= ======= =======
Earnings (Loss) Per Share(4)...... $ 9.24 $ 11.25 $ 10.19 $ 10.49 $ 5.91 $ 4.96 $ (5.06)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30 -----------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
(UNAUDITED) -----(UNAUDITED)-----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital.............. $ 2,717 $ 2,366 $ 2,065 $ 1,599 $ 941 $ 693
Total Assets................. 9,789 7,625 6,695 4,656 4,528 4.650
Long-Term Debt
(including current
portion)................... - - 43 - - 26
Shareholders' Equity......... 3,833 3,424 2,926 2,383 1,647 826
Book Value Per Common
Share...................... $ 39.11 $ 34.94 $ 29.86 $ 24.32 $16.81 $ 8.43
<FN>
- ----------------
(1) Includes sales to the Company for the nine months ended September 30,
1995 of $19,000.
(2) Includes purchases from Rocky Mountain of $649,000, $629,000, $727,000,
$619,000, $1,016,000, $954,000 and $329,000 for the nine months ended
September 30, 1995 and 1994 and for the years ended December 31, 1994,
1993, 1992, 1991 and 1990, respectively. In addition, sales to Rocky
Mountain, which are not included in net sales but are instead reflected
as a reduction against the original purchase, were $403,000, $852,000,
$960,000, $938,000, $1,342,000, $987,000 and $648,000 for the nine
months ended September 30, 1995 and 1994 and for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990, respectively. Includes
purchases from the Company for the nine months ended September 30, 1995
of $137,000.
(3) Added Value has entered into an oral agreement to provide accounting
and administrative services to Rocky Mountain. Added Value is
compensated based on 20% of Rocky Mountain's net earnings subject to an
annual $36,000 ceiling. The management fee for the year ended December
31, 1992 was deferred by mutual agreement and subsequently paid in
1993. Included in other income is $72,000 related to this agreement for
the years ended December 31, 1993 and 1992. Added Value also received
reimbursements of $120,000 in 1994, $144,000 in 1993 and $275,375 in
1992 for allocated general and administrative expenses from Rocky
Mountain. For the nine months ended September 30, 1995 and 1994 these
reimbursements aggregated $72,000 and $117,000, respectively. The
reimbursements are presented as reductions of selling, general and
administrative expenses.
(4) Weighted average shares (including common share equivalents)
outstanding for the nine months ended September 30, 1995 and 1994 and
for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 were
103,000, 103,000 103,000, 111,274, 123,000, 123,000 and 98,000,
respectively.
</FN>
</TABLE>
66
<PAGE>
ADDED VALUE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth for the years ended December 31, 1994,
1993 and 1992 and for the nine months ended September 30, 1995 and 1994: (i)
certain items in Added Value's statement of income expressed as a percentage of
sales, and (ii) the percentage change of the dollar amounts for such items as
compared to the indicated prior year or period. The equity in earnings of Rocky
Mountain and intercompany sales and the related cost of those sales have been
eliminated.
<TABLE>
<CAPTION>
ITEMS AS A PERCENTAGE PERIOD TO PERIOD PERCENTAGE
OF SALES INCREASE (DECREASE)
---------------------------------------------------------- ----------------------------------
NINE
NINE MONTHS MONTHS
ENDED YEARS ENDED ENDED YEARS ENDED
SEPTEMBER 30 DECEMBER 31 SEPT. 30 DECEMBER 31
--------------------- ----------------------------------- ----------- ---------------------
1995 1994 1994 1993 1992 1995-94 1994-93 1993-92
--------- ---------- --------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales (1)............ 100.0% 100.0% 100.0% 100.0% 100.0% 23.5% 40.8% 14.0%
Gross Profit ............ 20.5 22.6 21.0 23.3 23.6 12.1 27.0 12.4
Selling, General and
Administrative Expenses. 16.3 17.0 17.5 18.3 19.2 18.2 34.4 8.8
Income from Operations... 4.2 5.6 3.5 5.0 4.4 (6.5) .2 28.3
Interest Expense......... .5 .4 .4 .4 .4 50.2 40.8 12.5
Income Before Income Taxes 3.7 5.4 3.5 5.4 3.9 (14.7) (9.5) 58.0
Net Income (2)........... 2.2 3.2 2.1 3.2 2.3 (14.7) (9.5) 58.0
</TABLE>
(1) Excludes sales of $19,000 to the Company for the nine months ended
September 30, 1995 which were recorded at cost.
(2) Added Value was an S corporation for all periods presented. Net income
has been restated as if Added Value was a C corporation at all times
and income taxes had been payable at statutory rates for such periods.
The following discussion excludes the effect of intercompany sales and the
related cost of those sales between Added Value and the Company and reflects
Added Value as if it had been a C corporation for all periods presented.
67
<PAGE>
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
NET SALES
Net sales for the first nine months of 1995 increased to $24.1 million,
a 23.5% increase over net sales of $19.5 million for the first nine months of
1994. The increase in net sales was attributable to a general increase in demand
for electronic products, and specifically an increase in the high volume low
gross profit memory module products assembled and sold by Added Value. Net sales
for the first nine months of 1995 were negatively impacted by the loss of
certain product lines, although the negative effect thereof was offset to some
degree by additional sales of other products to existing and new customers. It
is expected that Added Value's net sales will further increase in the future
from sales of value added products, including liquid crystal display boards,
graphic cards and memory modules.
GROSS PROFIT
Gross profit was $4.9 million in the first nine months of 1995, a $.5
million increase over gross profit of $4.4 million for the same period of 1994.
The increase was primarily due to the growth in sales of memory modules
discussed above. Gross profit as a percentage of sales was 20.5% for the first
nine months of 1995 compared to 22.6% for the first nine months of 1994. The
downward trend is attributable to a greater number of large volume transactions
for Added Value's memory modules at reduced margins and the competitive
environment in the electronic distribution marketplace generally. Added Value
expects to continue to experience lower gross margins in future periods as a
result of pricing competition in the industry and the increased sales of low
profit memory products and memory assemblies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased by $.6
million to $3.9 million for the first nine months of 1995 as compared to $3.3
million for the first nine months of 1994. The increase was primarily the result
of increases in payroll, employee benefits and related burdens. SG&A as a
percentage of sales improved to 16.3% for the nine months ended September 30,
1995, from 17.0% for the same period of 1994. This improvement in SG&A as a
percentage of sales reflects small reductions in overhead costs, increased
operating efficiencies and benefits from economies of scale.
SG&A includes an offset for accounting and administrative services and
management fees payable from Rocky Mountain, which are presented as reductions
of SG&A in Added Value's financial statements.
INCOME FROM OPERATIONS AND NET INCOME
Income from operations decreased slightly to $1.0 million for the first
nine months of 1995 compared to $1.1 million for the same period of last year.
This decrease was primarily attributable to the decline in gross profit margins
and an increase in SG&A.
Net income decreased to $.5 million for the nine months ended September
30, 1995 from net income of $.6 million for the nine months ended September 30,
1994. The decrease in net income for the 1995 period resulted primarily from the
declining gross profit margins and the increase in SG&A.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
NET SALES
Net sales for 1994 increased $8.1 million to $27.7 million, a 40.8%
increase over net sales of $19.6 million for 1993. The sales increase was
attributable to a general increase in demand for electronic products and an
increase in sales of assembled memory module products.
68
<PAGE>
GROSS PROFIT
Gross profit was $5.8 million for 1994, a $1.2 million or 27.0%
increase over gross profit of $4.6 million in 1993. The increase was due
predominantly to the growth in sales discussed above. Gross profit margins were
21.0% in 1994 compared to 23.3% in 1993. The downward trend reflects an increase
in sales of assembled memory products at reduced margins and the competitive
environment in the electronic distribution marketplace generally.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased $1.2 million to $4.8 million in 1994 compared to $3.6
million in 1993. The increase was primarily the result of expenses associated
with sales growth, administrative support relating to the sales growth and the
costs of relocation of Added Value's principal office. SG&A as a percentage of
sales decreased to 17.5% in 1994 as compared to 18.3% in 1993 due to the large
growth in sales.
INCOME FROM OPERATIONS AND NET INCOME
For the year ended December 31, 1994, income from operations and net
income were nearly the same as compared to the year ended December 31, 1993.
After exclusion of the equity in earnings of Rocky Mountain, the slight decline
in net income was primarily due to increases in interest expense on the line of
credit in 1994 as compared to 1993.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992
NET SALES
Net sales for the year ended December 31, 1993, increased $2.4 million
to $19.6 million, a 14.0% increase over net sales of $17.2 million for the year
ended December 31, 1992. The increase in net sales was attributable to a general
increase in demand for electronic products. In addition, in 1993 Added Value
introduced new memory module products and continued to benefit from a general
consolidation within the industry.
GROSS PROFIT
Gross profit was $4.6 million in 1993, a $.5 million or 12.4% increase
over gross profit of $4.1 million in 1992. The increase was due predominantly to
the growth in sales. Gross profit margins were 23.3% in 1993 compared to 23.6%
in 1992. The downward trend reflects a decline associated with the competitive
environment in the electronic distribution marketplace, as well as a small
change in Added Value's overall sales mix to include a larger base of
transactions for its low margin memory module products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased $.3 million, or 8.8%, to $3.6 million in 1993 compared
to $3.3 million in 1992. The increase was generally attributable to general
overhead cost increases. SG&A as a percentage of sales decreased in 1993 to
18.3% down from 19.2% in 1992. The improvement reflects operating efficiencies
and the economies of scale resulting from increased sales volume with relatively
less expenses associated therewith.
INCOME FROM OPERATIONS AND NET INCOME
Income from operations increased by $.2 million, or 28.3%, for 1993
over 1992. This increase, which was achieved despite declining gross profit
margins, resulted from increased sales and improvements in operating
efficiencies. For the year ended December 31, 1993, net income was $.6 million,
an increase of 58.0% from net income of $.4 million for 1992. The increase in
1993 is attributable to the combination of the growth in sales, increased
operating efficiencies, reduction in SG&A as a percentage of sales and increases
in non-operating income items including greater interest income and the effect
of reimbursements from Rocky Mountain for administrative costs.
69
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Added Value's principal source of funds is cash from operations. One of
the principal uses of cash has been distributions to shareholders to pay income
taxes which are taxed at the shareholder level due to S corporation status. The
current ratio at September 30, 1995 was 1.46 to 1 compared to 1.56 to 1 at
December 31, 1994. On September 20, 1995, Added Value's revolving line of credit
("Line of Credit") facility was increased from $2.75 million to $3.3 million and
currently expires in February 1996. At September 30, 1995, there was $3.1
million outstanding under the Line of Credit as compared to $1.9 million
outstanding at December 31, 1994 under the then $2.5 million Line of Credit. The
Line of Credit contains certain restrictive covenants as to which Added Value
was in compliance at September 30, 1995. Added Value believes that its cash flow
from operations and funds available from the Line of Credit should be sufficient
to support currently anticipated working capital needs in the next 12 months.
INFLATION
Added Value does not believe that inflation or currency fluctuations
significantly impacted its business during the periods presented; however,
inflation, changing interest rates and currency fluctuations have had
significant effects on the economy in the past and could adversely impact Added
Value's results in the future.
ROCKY MOUNTAIN SELECTED FINANCIAL DATA
The following selected financial data for Rocky Mountain (i) for each
of the years 1992 through 1994 and as of the end of each of the years 1993 and
1994 has been derived from the financial statements of Rocky Mountain, which
have been audited by Lazar, Levine and Company LLP, Certified Public
Accountants, and (ii) as of the end of 1992, for and as of the end of each of
the years 1990 and 1991, for the nine months ended September 30, 1994 and 1995
and as of the nine months ended September 30, 1995, have been derived from the
unaudited financial statements of Rocky Mountain. Such information should be
read in conjunction with Rocky Mountain's Financial Statements and related notes
included elsewhere in this Proxy Statement/Prospectus. See "INDEX TO FINANCIAL
STATEMENTS" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" hereafter.
70
<PAGE>
<TABLE>
<CAPTION>
ROCKY MOUNTAIN
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------- -----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
INCOME DATA:
Net Sales(1)(2)................... $ 6,574 $ 8,006 $10,200 $10,931 $ 8,105 $ 8,327 $ 6,948
Cost of Sales(2).................. (5,010) (6,121) (7,934) (8,476) (6,151) (6,274) (5,301)
------- ------- ------- ------- ------- ------- -------
Gross Profit...................... 1,564 1,885 2,266 2,455 1,954 2,053 1,647
Selling, General and
Administrative Expenses(3)...... (1,278) (1,295) (1,779) (1,907) (1,643) (1,471) (1,140)
------- ------- ------- ------- ------- ------- -------
Income from Operations............ 286 590 487 548 311 582 507
Interest Expense.................. (3) (18) (22) (7) (9) (34) (36)
Other Income ..................... 8 21 22 29 11 18 14
------- ------- ------- ------- ------- ------- -------
Income Before Income Taxes........ 291 593 487 570 313 566 485
Provision for Income Taxes........ (114) (232) (230) (212) (117) (208) (142)
------- ------- ------- ------- ------- ------- -------
Net Income........................ $ 177 $ 361 $ 257 $ 358 $ 196 $ 358 $ 343
======= ======= ======= ======= ======= ======= =======
Earnings Per Share(4)............. $165.39 $333.84 $238.43 $310.05 $169.91 $310.34 $309.13
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30 ------------------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
(unaudited) -----(unaudited)-----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital $ 2,378 $ 2,211 $ 1,997 $ 1,682 $ 1,460 $ 1,113
Total Assets 4,280 2,873 3,569 2,731 2,257 2,225
Long-Term Debt
(including current
portion) 25 38 - - - -
Shareholders' Equity 2,434 2,257 2,068 1,734 1,514 1,171
Book Value Per Common
Share $2,270.53 $2,105.14 $1,866.32 $1,564.63 $1,366.43 $1,056.57
</TABLE>
- ----------------
(1) Includes sales to the Company for the nine months ended September 30,
1995 of $168,000.
(2) Includes purchases from Added Value of $403,000, $852,000, $960,000,
$938,000, $1,342,000, $987,000 and $648,000 for the nine months ended
September 30, 1995 and 1994 and for the years ended December 31, 1994,
1993, 1992, 1991 and 1990, respectively. In addition, sales to Added
Value, which are not included in net sales but are instead reflected as
a reduction against the original purchase, were $649,000, $629,000,
$727,000, $619,000, $1,016,000, $954,000 and $329,000 for the nine
months ended September 30, 1995 and 1994 and for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990, respectively. Includes
purchases from the Company for the nine months ended September 30, 1995
of $134,000.
(3) Included in selling, general and administrative expenses for 1994 and
1993 is $36,000 and $72,000, respectively, related to an oral agreement
between Rocky Mountain and Added Value whereby Added Value provides
accounting and administrative services to Rocky Mountain. The
management fee for the year ended December 31, 1992 was deferred by
mutual agreement and paid in 1993. Rocky Mountain was also charged
$120,000, $144,000 and $275,375 for 1994, 1993 and 1992, respectively,
for allocated general and administrative expenses from Added Value
which is included in selling, general and administrative expenses. For
the nine months ended September 30, 1995 and 1994 these charges
aggregated $72,000 and $117,000, respectively.
(4) Weighted average shares (including common share equivalents)
outstanding for the nine months ended September 30, 1995 and 1994 and
for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 were
1,072, 1,080, 1,078, 1,154, 1,154, 1,154 and 1,108, respectively.
71
<PAGE>
ROCKY MOUNTAIN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following table sets forth for the years ended December 31, 1994,
1993 and 1992 and for the nine months ended September 30, 1995 and 1994: (i)
certain items in Rocky Mountain's statement of income expressed as a percentage
of sales, and (ii) the percentage change of the dollar amounts for such items as
compared to the indicated prior year or period. Intercompany sales and the
related cost of those sales have been eliminated.
<TABLE>
<CAPTION>
ITEMS AS A PERCENTAGE PERIOD TO PERIOD PERCENTAGE
OF SALES INCREASE (DECREASE)
---------------------------------------------------------- ----------------------------------
NINE
NINE MONTHS MONTHS
ENDED YEARS ENDED ENDED YEARS ENDED
SEPTEMBER 30 DECEMBER 31 SEPT. 30 DECEMBER 31
--------------------- ----------------------------------- ----------- ---------------------
1995 1994 1994 1993 1992 1995-94 1994-93 1993-92
--------- ---------- --------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales (1)............ 100.0% 100.0% 100.0% 100.0% 100.0% (20.0)% (6.7)% 34.9%
Gross Profit............. 24.4 23.6 22.2 22.5 24.1 (17.0) (7.7) 25.6
Selling, General and
Administrative Expenses. 19.9 16.2 17.4 17.4 20.3 (1.4) (6.7) 16.0
Income from Operations... 4.5 7.4 4.8 5.0 3.8 (51.5) (11.2) 76.4
Interest Expense......... - .2 .2 .1 .1 (84.8) 217.2 (20.8)
Income Before Income Taxes 4.5 7.4 4.8 5.2 3.9 (50.9) (14.6) 82.1
Net Income .............. 2.8 4.5 2.5 3.3 2.4 (50.8) (28.2) 82.5
</TABLE>
(1) Excludes sales of $168,000 to the Company for the nine months ended
September 30, 1995 which were recorded at cost.
The following discussion excludes the effect of intercompany sales and the
related cost of those sales between Rocky Mountain and the Company.
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
NET SALES
Net sales for the first nine months of 1995 decreased significantly to
$6.4 million from $8.0 million, a 20.0% decrease from the first nine months of
1994. The decrease in net sales represents the continuing effect of the loss of
key product lines in 1994. In addition, Rocky Mountain's overall customer base
has decreased and Rocky Mountain has refocused its efforts to provide more
extensive services to its remaining customers. Without giving effect to the
Transaction, Rocky Mountain would expect net sales to remain relatively constant
in the future unless new product lines are obtained to replace the lines lost in
1994.
GROSS PROFIT
Gross profit as a percentage of sales increased for the first nine
months of 1995 to 24.4% from 23.6% for the same period of 1994. The slight
increase in the gross profit percentage was attributable to the change in the
product mix sold. Gross profit dollars declined from $1.9 million for the first
nine months of 1994 to $1.6 million for the first nine months of 1995. The
decline in gross profit dollars reflects the decrease in sales during the first
nine months of 1995 as compared to the same period of 1994.
72
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A did not materially change for the first nine months of 1995 as
compared to the first nine months of 1994. However, as a result of declining
sales, SG&A as a percentage of sales increased for the first nine months of 1995
as compared to the first nine months of 1994. In addition, Rocky Mountain has
assumed greater responsibility for certain administrative functions previously
performed by Added Value, and thus Rocky Mountain paid $45,000 less for the nine
months of 1995 for such services as compared to the first nine months of 1994.
INCOME FROM OPERATIONS AND NET INCOME
Net income declined by $.2 million for the nine months ended September
30, 1995, from net income of $.4 million for the nine months ended September 30,
1994. The decline in net income is attributable primarily to increasing
competition in Rocky Mountain's sales territory, loss of product lines and the
relatively fixed SG&A expenses. Further declines in sales for the remainder of
1995 are likely to result in similar reduced year end earnings for 1995 as
compared to 1994.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
NET SALES
Net sales for 1994 of $10.2 million decreased by $.7 million from net
sales of $10.9 million for 1993. The sales decrease was attributable to the loss
of some principal customers, a general decrease in demand for all lines of
electronic products distributed by Rocky Mountain and the effects of the loss of
certain key product lines.
GROSS PROFIT
Gross profit declined $.2 million to $2.3 million in 1994 from gross
profit of $2.5 million in 1993. The decline in gross profit dollars reflects the
competitive environment in the electronic distribution marketplace and the
related decrease in sales. Gross profit as a percentage of sales decreased
slightly in 1994 to 22.2% as compared to 22.5% in 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A decreased $.1 million to $1.8 million in 1994 compared to $1.9
million in 1993. Continuing sales declines should produce an increase in SG&A as
a percentage of sales in the future.
INCOME FROM OPERATIONS AND NET INCOME
For the year ended December 31, 1994, income from operations decreased
slightly to $.5 million. Net income declined to $.3 million for 1994 as compared
to $.4 million for the year ended December 31, 1993. The decrease in net income
for 1994 as compared to 1993 was primarily attributable to lower sales in 1994
and increases in interest expense on its line of credit in 1994 as compared to
1993.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992
NET SALES
Net sales for the year ended December 31, 1993 was $10.9 million,
representing an increase of 34.9% over net sales of $8.1 million for the year
ended December 31, 1992. The increase in net sales was attributable to increased
marketing efforts attracting a large customer who accounted for more than 15% of
sales and a general increase in demand for electronic products in Rocky
Mountain's sales territory.
73
<PAGE>
GROSS PROFIT
Gross profit increased 25.6% over gross profit in 1992. The increase
was due predominantly to the growth in sales which more than offset the decline
in gross profit margins from 24.1% in 1992 to 22.5% in 1993. The decrease in
gross profit margins was attributable to the overall sales mix of products sold
during the comparative periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased $.3 million, or 16.0%, to $1.9 million in 1993 compared
to $1.6 million in 1992. The increase was attributable to the greater sales
costs and general overhead increases. The improvement in SG&A as a percentage of
sales reflects operating efficiencies and economies of scale resulting from
increased sales volume.
INCOME FROM OPERATIONS AND NET INCOME
Income from operations increased $.2 million for 1993 over 1992. This
increase resulted from increased sales and improvements in operating
efficiencies. For the year ended December 31, 1993, net income was $.4 million,
an increase of $.2 million from net income of $.2 million for 1992. The increase
in net income for 1993 was attributable to the combination of the growth in
sales, increased operating efficiencies and reduction in SG&A as a percentage of
sales.
LIQUIDITY AND CAPITAL RESOURCES
Rocky Mountain's principal source of funds is cash from operations, and
use of its line of credit. The current ratio at September 30, 1995, was 2.3 to
1. Rocky Mountain has a $1 million revolving line of credit. At September 30,
1995, $775,000 was outstanding under such line of credit. The line of credit
contains certain restrictive covenants as to which Rocky Mountain was in
compliance at September 30, 1995. Rocky Mountain believes that its cash flows
from operations and funds available from its line of credit should be sufficient
to support currently anticipated working capital needs in the next 12 months.
INFLATION
Rocky Mountain does not believe that inflation or currency fluctuations
significantly impacted its business during the periods presented; however,
inflation, changing interest rates and currency fluctuations have had
significant effects on the economy in the past and could adversely impact Rocky
Mountain's results in the future.
DIVIDEND POLICY
As a result of the stockholders of Added Value having elected S
corporation status under the Code and the corresponding tax laws of the State of
California, Added Value's income is taxed directly to its stockholders.
Accordingly, Added Value makes distributions to its stockholders to pay their
income taxes derived from Added Value's income. For the fiscal years ended
December 31, 1993 and 1994 and the nine months ended September 30, 1995, such
tax distributions aggregated $615,223, $551,026 and $543,203, respectively. The
balance of the net income of Added Value during such taxable periods was
employed for working capital in its operations. Rocky Mountain has never
declared or paid cash dividends. However, Rocky Mountain did repurchase and
retire 36 shares of its common stock during 1994 at a total cost of $68,202 (of
which $18,202 was paid in cash and the balance is payable over 36 months from
April 1994, together with 5% per annum interest thereon). Net income of Rocky
Mountain is employed for working capital purposes in its operations.
74
<PAGE>
MARKET INFORMATION
All of the shares of common stock of Added Value are owned of record by
9 Target Stockholders. All of the shares of common stock of Rocky Mountain are
owned by 4 Target Stockholders (which include Added Value and Wayne Vannoy who
also owns shares of Added Value common stock). Accordingly, there is no
established public trading market for shares of either of the Added Value
Companies. See "SELECTED INFORMATION WITH RESPECT TO THE ADDED VALUE COMPANIES
Ownership of Capital Stock; Directors and Officers."
BUSINESS
ADDED VALUE COMPANIES
The Added Value Companies are regional distributors of electronic
components manufactured by others and providers of value-added and manufacturing
services. These components and services are sold primarily to original equipment
manufacturers in a diverse and growing range of industries. Their customer base
includes manufacturers of consumer goods, satellite and communications products,
computers and computer-related products, robotics and industrial equipment,
defense and aerospace equipment and medical instrumentation. In addition, the
Added Value Companies sell various board level products of their own. These
products are manufactured for the Added Value Companies by various contract
manufacturers under the brand name A.V.E.D. The customer base for these products
includes manufacturers of computer and computer-related products, industrial
equipment and medical instrumentation.
Approximately 52% of the Added Value Companies' sales are derived from
the sale of semiconductors (active components), including transistors, diodes,
memory devices and other integrated circuits. Approximately 3% of the Added
Value Companies' sales are derived from electromechanical products, including
cable, connectors, filters and sockets. Approximately 43% of the Added Value
Companies' sales are derived from the sale of value-added and manufacturing
services and 2% from the sale of privately labeled board level products. Neither
of the Added Value Companies has in the past derived significant revenues from
the sale of microprocessors.
Added Value was incorporated in California on April 14, 1982. Rocky
Mountain was incorporated in Colorado on March 6, 1987. The Added Value
Companies, viewed in the aggregate, were recently recognized by an industry
publication as the 42nd largest distributor of electronic components in the
United States, up from the 47th largest distributor in the previous year.
CORPORATE STRATEGY
The Added Value Companies' strategy has been to drive growth by
expanding their customer base and by increasing sales to their existing
customers. One way in which the Added Value Companies intend to accomplish these
objectives is to capitalize on a growing industry trend for OEMs to outsource
procurement and manufacturing processes. Thus, the Added Value Companies have
developed a kitting and turnkey services division.
Another way in which the Added Value Companies attempt to increase
their sales is to sell board level products of their own design. In this regard,
the Added Value Companies have developed various products including LCD driver
boards, graphics cards and memory modules. To date, the Added Value Companies
have derived approximately 2% of their aggregate revenues from the sale of these
products.
PRODUCTS
Active and Passive Components
The Added Value Companies market both semiconductors and passive
products. The Added Value Companies have not in the past derived significant
revenues from the sale of microprocessors. Virtually all of the Added Value
Companies' customers purchase both active and passive products.
75
<PAGE>
The Added Value Companies do not offer express warranties with respect
to any of their distributed products, instead passing on only such warranties,
if any, as are granted by their suppliers.
Board Level Products
Flat panel displays are presently realizing rapid growth and are
expected to be one of the fastest growing and largest markets in the electronic
components industry. In order to properly function in any application, flat
panel displays need controlled inputs of electronic impulses. In this regard,
Added Value has developed its own board level product to control and regulate
the electronic input to drive the flat panel display. This product is commonly
referred to as a driver board.
In addition to the driver board, flat panel displays require a
back-light, an 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. Each display requires specific software to allow the driver
board to talk to the display. The software is developed by the Added Value
Companies either by a separate service or, in the case of the more popular
displays, they are developed ahead of customer requests and made available to
customers. The Added Value Companies have developed the expertise to assemble
the entire kit of parts needed so that the customer, a manufacturer of
equipment, can use one part number to order all of the components needed. This
greatly simplifies the customer's design-in and purchasing process.
To date, the Added Value Companies have had only minimal revenues from
the sale of flat panel displays, driver boards and display kits, however, by
having this comprehensive capability available, management believes that the
potential market could be substantial.
In addition to driver boards, the Added Value Companies also sell
memory modules and graphics cards which are needed in all PC's as well as in
many other types of electronic products. The driver boards, memory modules and
graphics cards are all manufactured for the Added Value Companies by contract
manufacturers.
With respect to all manufactured products, the Added Value Companies
offer a warranty for a period of one year against defects in workmanship and
materials under normal use and service and in their original unmodified
condition. The Added Value Companies also carry products liability insurance.
TURNKEY AND KITTING SERVICES
The Added Value Companies provide turnkey services which enable
customers to outsource the entire procurement and manufacturing process. This
service is attractive to smaller OEMs who do not have the capital resources
necessary to invest in state-of-the-art manufacturing equipment nor the
capacity requirements necessary to validate such an investment. Turnkey services
also enable the smaller OEMs to take advantage of the enhanced purchasing power
created by the combining of the procurement requirements of multiple turnkey
customers. These turnkey services enable customers to reduce end-product costs
and limit working capital requirements, while at the same time improving
processed and product quality. In performing turnkey services, the Added Value
Companies subcontract out all of the manufacturing work.
When providing kitting services, the Added Value Companies fill a
greater portion of their customers' procurement requirements by, in addition to
providing products from their regular supplier base, also providing customers
with products that are not part of their regular products offering. This service
enables customers to save on procurement costs by reducing their supplier base.
With respect to turnkey and kitting services, the Added Value Companies
offer a warranty against defects in workmanship which is a pass-through from the
assembler and at the component level a warranty that the parts meet the
manufacturer's data sheet specifications.
76
<PAGE>
SALES AND MARKETING
Overall Strategy
The Added Value Companies differentiate themselves from competitors in
the marketplace by the combination of products and services that they can
provide to their customers. They are broad-line distributors representing more
than 44 different component manufacturers. Their focus has been on servicing
middle and emerging market customers with a level of attention that the major
distributors do not offer and a level of service capabilities that the smaller
distributors cannot provide.
Marketing Techniques
The Added Value Companies use various techniques in marketing their
products. These include direct marketing through personal visits to customers by
management, salespeople and sales representatives, supported by a staff of
inside sales personnel who handle the acceptance, processing and administration
of sales orders, general advertising, sales referrals and marketing support from
component manufacturers. The Added Value Companies also use their expanded
service capabilities and their status as an authorized distributor for certain
manufacturers as marketing tools.
Sales Personnel
As of October 1, 1995, the Added Value Companies employed on a full-
time basis approximately 15 inside and approximately 20 outside salespeople with
approximately 8 more management employees involved in sales. The Added Value
Companies also had 2 sales representatives covering various territories where
the Added Value Companies do not have sales offices. In addition, the Added
Value Companies currently employ 3 application engineers in their technical
sales program. Salespeople are generally compensated by a combination of salary
and commissions based upon the profits obtained on their sales.
Sales Office Locations
Added Value currently operates 5 sales offices located in Tustin, San
Diego, Westlake Village and Visalia, California and Scottsdale, Arizona, with
the Visalia office staffed by a non-exclusive sales representative. Rocky
Mountain maintains sales offices in Wheat Ridge, Colorado and Midvale, Utah.
Transportation
All of the Added Value Companies' products are shipped through third
party carriers. Incoming freight charges are generally paid by the Added Value
Companies, while outgoing freight charges are typically paid by the customer.
Seasonality
The Added Value Companies' sales have not historically been materially
greater in any particular season or part of the year.
CUSTOMERS
The Added Value Companies market their products primarily to original
equipment manufacturers ("OEMs") in a diverse and growing range of industries.
Their customer base includes manufacturers of consumer goods, computers and
computer-related products, defense and aerospace equipment, satellite and
communications products, robotics and industrial equipment and medical
instrumentation. The customer list of the Added Value Companies includes
approximately 3,200 accounts. During 1994, no customer accounted for more than
15% of sales and the Added Value Companies do not believe that the loss of any
one customer would have a material adverse impact on their business.
77
<PAGE>
SUPPLIERS
Authorized Distributorships
The Added Value Companies generally purchase products from components
manufacturers pursuant to non-exclusive distribution agreements. Such suppliers
generally limit the number of distributors they will authorize in a given
territory. As an authorized distributor, the Added Value Companies obtain sales
referrals, as well as sales, marketing and engineering support, from components
manufacturers. These referrals and support assist the Added Value Companies in
closing sales and obtaining new customers. Their status as an authorized
distributor is also a valuable marketing tool as the end customers receive
greater support from the components manufacturers.
Most distribution agreements are cancelable by either party, typically
upon 30 to 90 days' notice. The Added Value Companies believe their exposure to
inventory loss is significantly reduced by the following provisions typically
found in their distribution agreements: price protection, stock rotation
privileges, obsolescence credit and return privileges. Price protection is
typically in the form of a credit for any inventory the Added Value Companies
have of products for which the manufacturer reduces its prices. The stock
rotation privileges typically allow the exchange of inventory in an amount up to
5% of a prior period's purchases. The obsolescence credit allows the return of
any products which the manufacturer discontinues. Most of the distribution
agreements contain some right to return inventory in the event of termination of
the distribution agreement. Some inventories are returnable with a 10% to 15%
restocking charge. Some are not returnable, some have age restrictions
associated with returnability, and some are fully returnable, but at adjusted
repurchase prices. There can be no assurance that all manufacturers will comply
with their contractual obligations.
The Added Value Companies do 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.
Supplier Base
Presently, the Added Value Companies have non-exclusive distribution
agreements with over 44 different suppliers and consider themselves to be
broad-line distributors. They do not regard any one supplier as essential to
operations, since most of the products they sell are available from other
sources at competitive prices. In 1994, their three largest suppliers accounted
for approximately 8%, 8% and 7% of consolidated purchases, respectively. While
the Added Value Companies do not believe that the loss of any one supplier would
have a material adverse impact on their business, the loss of a significant
number of suppliers in a short period of time could have such an impact. If the
Added Value Companies were to lose the right to distribute the products of any
one particular supplier, there can be no assurance that they would be able to
replace the products which were available from that particular supplier. The
Added Value Companies, from time to time, eliminate companies and add new
companies to their list of authorized suppliers in an attempt to provide their
customers with a better product mix.
PROPERTIES
Corporate headquarters for Added Value is 14192 Chambers Road, Tustin,
California 92680, which is a free-standing 12,000 square foot facility. Included
in this space are approximately 5,000 square feet of warehouse space.
This is leased space; the lease expires April 14, 1999.
Added Value's San Diego location is 5752 Oberlin Drive, #105, San
Diego, California 92121. This is an approximate 700 square foot facility. This
too is leased space; the lease expires December 31, 1995.
78
<PAGE>
Added Value's Westlake Village location is 699 Hampshire Road, Westlake
Village, California. This is an approximate 1,250 square foot, leased facility.
The lease expires May 14, 1998.
Added Value's Scottsdale, Arizona location is 7741 East Gray Road, #9,
Scottsdale, Arizona 85260. This is an approximate 1,000 square foot, leased
facility. The lease expires March 1, 1996.
Rocky Mountain's principal office is located at 4090 Youngfield Street,
Wheat Ridge, Colorado 80033. This is a 3,412 square foot, leased facility with
approximately 1,000 square feet of warehouse space. The lease expires January
31, 1996.
Rocky Mountain's Utah location is 942 E. 7145 South, Suite A101,
Midvale, Utah 84047. This is a 2,282 square foot, leased facility; the
lease expires in December of 1997.
FOREIGN MANUFACTURING AND TRADE REGULATION
A significant number of the components sold by the Added Value
Companies are manufactured outside the United States and purchased by the Added
Value Companies from United States subsidiaries or affiliates of those foreign
manufacturers. As a result, the ability of the Added Value Companies to sell at
competitive prices could be adversely affected by increases in tariffs or
duties, changes in trade treaties, currency fluctuations, strikes or delays in
air or sea transportation, and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. The
ability to be competitive in or with the sales of imported components could also
be affected by other governmental actions and changes in policies related to,
among other things, anti-dumping legislation and currency fluctuations. Since
the Added Value Companies purchase from United States subsidiaries or affiliates
of foreign manufacturers, their purchases are paid for in U.S. dollars which
reduces the potential adverse effect of currency fluctuations.
EMPLOYEES
As of October 1, 1995, the Added Value Companies employed in the
aggregate approximately 75 persons: 10 are involved in management; 3 are
involved in marketing; 33 are involved in sales; 6 are involved in warehouse and
shipping; 10 are involved in operations and kitting; 9 are involved in
bookkeeping and clerical; and 4 are involved in MIS. None of such employees is
covered by collective bargaining agreements. The Added Value Companies believe
that relations with employees are good.
COMPETITION
The Added Value Companies believe 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 $4 billion
worldwide. These distributors can be divided into global distributors who have
operations around the world, national distributors who have offices throughout
the United States, regional distributors and local distributors. With 7 offices
in 4 states, the Added Value Companies compete as a regional distributor. The
Added Value Companies, which were recently recognized by an industry publication
on a consolidated basis as the 42nd largest distributor of electronic components
in the United States, believe their primary competition comes from the top 50
distributors in the industry as well as from smaller local distributors. Most of
these top 50 distributors have greater assets and possess greater financial and
personnel resources than do the Added Value Companies.
LEGAL PROCEEDINGS
The Added Value Companies are from time to time involved in litigation
relating to claims arising out of their respective operations in the ordinary
course of business, including, in the case of Added Value, with respect to its
manufacturing of driver boards, memory modules and graphic cards. Such claims
are generally covered by insurance or, if they related to products which they
79
<PAGE>
distribute, the Added Value Companies would expect that the manufacturers of
such products would indemnify them, as well as defend such claims on behalf of
the Added Value Companies, although no assurance can be given that any
manufacturer would do so. The Added Value Companies believe that none of these
claims would or should have a material adverse impact on their respective
financial condition or results of operations. See "RISK FACTORS -- Potential
Product Liability."
SELECTED INFORMATION WITH RESPECT TO THE COMPANY
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME CLASS AGE POSITION
- ---- ----- --- --------
<S> <C> <C> <C>
Paul Goldberg(1).............................. III 67 Chairman of the Board of Directors and
Chief Executive Officer
Bruce M. Goldberg(1).......................... II 40 President and Chief Operating Officer
and Director
Howard L. Flanders............................ II 38 Vice President, Secretary and Chief
Financial Officer and Director
Rick Gordon................................... III 41 Senior Vice President of Sales
and Director
S. Cye Mandel(2)(3)........................... I 66 Director
Sheldon Lieberbaum(2)(3)...................... I 60 Director
</TABLE>
- ---------------------
(1) member of the Executive Committee
(2) member of the Audit Committee
(3) member of the Compensation Committee
The Company's Certificate of Incorporation provides for a staggered
board, consisting of three classes. The terms of office of Class I, II and III
directors expire in 1998, 1996 and 1997, respectively. See "DESCRIPTION OF
SECURITIES -- Certain Provisions of Certificate of Incorporation and By-laws."
The Company's executive officers serve at the discretion of the Board; however,
all executive officers have employment agreements with the Company. See
"Executive Compensation -- Employment Agreements." The following is a brief
resume of the Company's executive officers and directors.
PAUL GOLDBERG, one of the co-founders of the Company and the father of
Bruce M. Goldberg, has been employed by the Company in various executive
capacities since its predecessor's formation in 1964, and has served as Chairman
of the Board and Chief Executive Officer since 1978. Mr. Goldberg was also
President of the Company until July 1994.
BRUCE M. GOLDBERG, the son of Paul Goldberg, joined the Company in
October 1988 as Vice President, in 1990 became Executive Vice President and in
July 1994 became President and Chief Operating Officer. Bruce M. Goldberg has
served as a Director of the Company since 1987. From 1981 until joining the
Company, Bruce M. Goldberg practiced law.
HOWARD L. FLANDERS joined the Company in February 1991 as its Vice
President and Chief Financial Officer, and in 1992 became a Director of the
Company and Secretary. Prior to joining the Company, Mr. Flanders, who is a CPA,
was Controller of Reliance Capital Group, Inc., a subsidiary of Reliance Group
Holdings, Inc., where he held various positions since 1982. Prior thereto, Mr.
Flanders was an accountant with the public accounting firm of Coopers & Lybrand.
RICK GORDON has been employed by the Company since January 1986. He was
originally the General Manager of the Company's Northern California office and
Northwest Regional Manager. In March 1990, Mr. Gordon became the Western
80
<PAGE>
Regional Vice President and in 1992 Vice President of North American Sales and a
Director of the Company. In 1994, Mr. Gordon was appointed Senior Vice President
of Sales and Marketing for the Company and currently holds the title Senior Vice
President of Sales. Before working for the Company, Mr. Gordon was Western
Regional Vice President for Diplomat Electronics, another electronic components
distributor, from 1975 until 1986.
S. CYE MANDEL is a prominent South Florida businessman who has been an
executive in the food service industry for the past 20 years. Mr. Mandel has
been a principal in the entity which acted from 1989 to 1993 as the manager of
the Miccosukee Indian bingo enterprise located in Miami, Florida. Mr. Mandel has
served as Director of the Company since 1987.
SHELDON LIEBERBAUM is director of corporate finance and a director and
shareholder of Lew Lieberbaum & Co., Inc. ("Lew Lieberbaum"), an investment
banking firm which was the underwriter of the 1995 Public Offering and was one
of the underwriters of the Company's 1992 Public Offering. He was also an
officer of the underwriter which took the Company public in 1987. Mr. Lieberbaum
has been in the brokerage business for over 35 years and serves as a director
for Unapix Enterprises, Eastco Industrial Safety Corporation and In-Home Health,
Inc. Mr. Lieberbaum became a Director of the Company in 1992 in connection with
an agreement of the Company with the underwriters of the 1992 Public Offering
that until June 18, 1997, the Company would use its best efforts to cause one
individual designated by such underwriters to be elected to the Board or to be
an advisor to the Board. In connection with the 1995 Public Offering, a similar
agreement regarding the designation of a director of the Company was entered
into between the Company and Lew Lieberbaum which has a term of three years from
June 8, 1995, but is not operative until the expiration of the existing
agreement with the underwriters of the 1992 Public Offering so that only one
designee of either Lew Lieberbaum or the underwriters of the 1992 Public
Offering will serve on the Board at any time. The National Association of
Securities Dealers, Inc. ("NASD") alleged that Lew Lieberbaum and others,
including Mr. Lieberbaum, in 1991 engaged in market manipulation, inaccurately
maintained books and records and failed to adequately supervise the activities
of the Underwriter's personnel in connection with the trading for the
Underwriter's account of warrants which were part of a public offering of units
of convertible preferred stock and warrants of a company for which Lew
Lieberbaum had acted in 1991 as managing underwriter. In order to expeditiously
resolve this matter and without admitting or denying these allegations, in
January 1995 Mr. Lieberbaum and others voluntarily entered into a Letter of
Acceptance, Waiver and Consent with the NASD pursuant to which Mr. Lieberbaum
was censured and fined by the NASD, agreed to pay with the Lew Lieberbaum and
others restitution to customers and was suspended from associating with any NASD
member for a one month period.
BOARD COMMITTEES
EXECUTIVE COMMITTEE
The Executive Committee is comprised of Paul Goldberg and Bruce M.
Goldberg. During 1994, the Executive Committee did not meet formally, however,
its members met on nearly a daily basis in connection with the operations of the
Company. The Executive Committee possesses substantially all of the powers of
the Board and acts as the Board between Board meetings.
AUDIT COMMITTEE
The Audit Committee is comprised of S. Cye Mandel and Sheldon
Lieberbaum. The Audit Committee is responsible for recommending the selection of
the independent auditors (which was done during the last year by the Board as a
whole), reviewing the arrangements and scope of the independent audit, reviewing
internal accounting procedures and controls and reviewing the reports and
recommendations of the independent auditors with respect to internal controls.
COMPENSATION COMMITTEE
The Compensation Committee currently consists of S. Cye Mandel and
Sheldon Lieberbaum, two independent non-employee directors of the Company. On
March 27,
81
<PAGE>
1993, the Board had reconstituted the Compensation Committee to consist of S.
Cye Mandel and Sheldon Lieberbaum in order that only independent, non-employee
directors of the Company would be members of such committee. Effective with the
reconstitution of the Compensation Committee in March 1993, the Board decided
that management of the Company should make decisions with respect to the
compensation (other than the granting of stock options) of all employees other
than the executive officers of the Company. Furthermore, in connection with the
1995 Public Offering, the Company agreed with Lew Lieberbaum that the Company
will not increase or authorize an increase in the compensation of its executive
officers without the approval of the Compensation Committee for a period of
three years from June 8, 1995. In addition, the Company has agreed that for the
same three year period from June 8, 1995, it will use its best efforts to cause
one individual designee of the Lew Lieberbaum to be elected to the Company's
Board and that such designee will also serve as a member of the Compensation
Committee. Currently, Sheldon Lieberbaum, director of corporate finance and a
director and shareholder of Lew Lieberbaum, is a member of the Board and the
Compensation Committee. See "Executive Officers and Directors" and "Certain
Transactions" herein.
NOMINATING COMMITTEE
The Board does not have a Nominating Committee, such function being
performed by the Board as a whole.
BOARD COMPENSATION
The members of the Board do not currently receive compensation from the
Company for acting in their capacity as directors of the Company nor has the
Company adopted any standard arrangement for compensating non-employee directors
of the Company. The Company may decide in the future to compensate directors
and/or to establish a standard compensation arrangement for non-employee
directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation earned during each of the fiscal years ended December 31, 1994,
1993 and 1992 by the Chief Executive Officer and each of the other four most
highly compensated executive officers of the Company whose total annual salary
and bonus exceeded $100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
--------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- --------------------------- ---- --------------------- ---------- ------
<S> <C> <C> <C> <C> <C>
Paul Goldberg............................... 1994 184,000 -- -- 10,000
Chairman and Chief 1993 178,000 113,000 100,000 8,000
Executive Officer 1992 167,000 15,000 -- 5,000
Bruce M. Goldberg........................... 1994 150,000 -- -- 26,000
President and Chief 1993 135,000 98,000 100,000 14,000
Operating Officer 1992 114,000 15,000 -- 2,000
Rick Gordon................................. 1994 155,000 20,000 -- 16,000
Senior Vice President 1993 135,000 11,000 3,000 12,000
of Sales 1992 123,000 -- -- 2,000
Howard L. Flanders.......................... 1994 130,000 -- -- 17,000
Vice President and Chief 1993 105,000 11,000 103,000 14,000
Financial Officer 1992 93,000 -- -- --
</TABLE>
(1) All other compensation includes Company contributions to life insurance
policies, where the Company is not the beneficiary, to the Deferred
Compensation Plan and to the 401(k) Plan of the Company and the cost to
the Company of the nonbusiness use of Company automobiles used by
82
<PAGE>
executive officers. See hereinbelow and "Deferred Compensation Plan for
Executive Officers and Key Employees" and "401(k) Plan."
The Company has a $1,000,000 key man term life insurance policy on the
life of Paul Goldberg with benefits payable to the Company. In addition, the
Company pays for a $550,000 universal life insurance policy on the life of Paul
Goldberg with benefits payable to his wife. The current annual premiums on the
foregoing policies insuring the life of Paul Goldberg are approximately $9,300
and $7,700 for the key man and universal life insurance policies, respectively.
The Company owns and is the beneficiary of a $1,000,000 term policy on the life
of Bruce M. Goldberg. The current annual premium on this policy is $1,580.
Moreover, during 1994 the Company transferred ownership of a $1,000,000 whole
life insurance policy (the "Whole Life Policy") on the life of Bruce M. Goldberg
to Bruce M. Goldberg to fulfill an obligation under his 1992 employment
arrangement. The Company intends to make annual advances to Bruce M. Goldberg to
cover the annual premium of the Whole Life Policy currently in the amount of
$22,995. Such annual advances are secured by the cash surrender value of the
Whole Life Policy. Since more than two and one-half years had passed since the
date of Bruce M. Goldberg's 1992 employment agreement, fifty percent (50%) of
the advances through December 31, 1994, were cancelled and the related security
released on January 1, 1995. The remainder of the existing advances and any
future advances made to pay premiums on the Whole Life Policy through May 31,
1997, will be cancelled and any remaining security will be released in
accordance with a vesting schedule by May 31, 1997, provided Bruce M. Goldberg
continues employment with the Company through the end of such period. Thereafter
the Company will continue, for the duration of Bruce M. Goldberg's employment,
to pay the annual premium to Bruce M. Goldberg for the Whole Life Policy. If
Bruce M. Goldberg is terminated by the Company for cause prior to May 31, 1997,
he will be entitled to pay off the nonvested advances owed to the Company and
obtain a release of any collateral assignment. If Bruce M. Goldberg is
terminated without cause or upon a change in control, any nonvested advances
owed to the Company will become immediately vested and any remaining security
will be released. In addition, beginning in 1993 the Company has funded, and
intends to continue to fund, the premiums for $1,000,000 flexible premium life
insurance policies owned by each of Howard L. Flanders and Rick Gordon. The
Company's advances will be secured by a collateral assignment of the cash value
and death benefit of each of the policies. The current annual premium on each of
these policies is $11,500. The Company's obligations to make premium payments in
connection with Howard L. Flanders' and Rick Gordon's policies are expected to
last for a maximum of ten years. After Howard L. Flanders and Rick Gordon have
been with the Company for a period of five years from the year in which the
policy was acquired (1993) and provided they each remain in the employ of the
Company or they have become disabled or a change in control has occurred during
the term of their employment, the advances will be deemed cancelled and the
security released thereafter ratably over a five year vesting period until such
time as all advances are deemed cancelled.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options during its fiscal year
ended December 31, 1994, to any executive officer of the Company. But see
discussion of New Options granted in May 1995 in "Employment Agreements -- The
Goldberg Agreements."
AGGREGATED OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-ENDED OPTION
VALUES
The following table sets forth information concerning the aggregate
option exercises in the fiscal year ended December 31, 1994, and the value of
83
<PAGE>
unexercised stock options as of December 31, 1994 for the individual executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FY-END(#) FY-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Paul Goldberg................................. -- -- 120,000(E) 84,500(E)
80,000(U) -- (U)
Bruce M. Goldberg............................. 3,125(2) 6,700(2) 95,000(E) 63,375(E)
80,000(U) -- (U)
Rick Gordon................................... -- -- 85,600(E) 79,688(E)
37,400(U) 32,813(U)
Howard L. Flanders............................ -- -- 55,600(E) 44,375(E)
77,400(U) 37,500(U)
</TABLE>
- ---------------
(1) Value is based upon the difference between the exercise price of the
options and the last reported sale price of the Common Stock on
December 31, 1994.
(2) Stock options covering 3,125 shares of Common Stock at an exercise
price of $1.60 per share were exercised by Bruce M. Goldberg during the
fiscal year ended December 31, 1994. The value realized per share is
based upon the difference between the closing sale price of the
Company's Common Stock on The Nasdaq Stock Market on the date of
exercise and the exercise price.
EMPLOYEES', OFFICERS', DIRECTORS' STOCK OPTION PLAN
In 1987, the Company established an Employees', Officers', Directors'
Stock Option Plan (as previously amended and restated the "Option Plan"). Unless
earlier terminated, the Option Plan will continue in effect through May 28,
2004, after which it will expire and no further options could thereafter be
granted under the Option Plan. The expiration of the Option Plan, or its
termination by the Board, will not affect any options previously granted and
then outstanding under the Option Plan. Such outstanding options would remain in
effect until they have been exercised, terminated or have expired. A maximum of
3,250,000 shares of the Company's Common Stock has been reserved for issuance
upon the exercise of options granted under the Option Plan. The Option Plan
provides for the granting to key employees of both "incentive stock options,"
within the meaning of Section 422 of the Code and "non-qualified stock options"
("non-qualified stock options" are options which do not comply with Section 422
of the Code) and for the granting to non-employee directors and independent
contractors associated with the Company of non-qualified stock options.
The Option Plan is administered by the Compensation Committee comprised
of two or more "disinterested" directors appointed by the Board from among its
members. Any member of the Compensation Committee may be removed at any time
either with or without cause by action of the Board and a vacancy on the
Compensation Committee due to any reason can be filled by the Board. The current
members of the Compensation Committee are the two independent, non-employee
directors of the Company, S. Cye Mandel and Sheldon Lieberbaum. Subject to the
express limitations of the Option Plan, the Compensation Committee has
authority, in its discretion, to interpret the Option Plan, to adopt, prescribe,
amend and rescind rules and regulations as it deems appropriate concerning the
holding of its meetings and administration of the Option Plan, to determine and
recommend persons to whom options should be granted, the date of each option
grant, the number of shares of Common Stock to be included in each option, any
vesting schedule, the option price and term (which in no event will be for a
period more than ten years from the date of grant) and the form and content of
agreements evidencing options to be issued under the Option Plan.
Options may be currently granted under the Option Plan to any key
employee or non-employee director or prospective key employee or non-employee
director (conditioned upon, and effective not earlier than, his or her becoming
an employee or director) of or independent contractors associated with the
Company
84
<PAGE>
or its subsidiaries. However, as required by the Code, non-employee directors
and independent contractors are only eligible to receive non-qualified stock
options. In determining key employees to whom options will be granted, the
Compensation Committee takes into consideration the key employee's present and
potential contribution to the success and growth of the Company's business and
other such factors as the Compensation Committee may deem proper or relevant in
its discretion including whether such person performs important job functions or
makes important decisions for the Company, as well as the judgment, initiative,
leadership and continued efforts of eligible participants. Employees who are
also officers or directors of the Company or its subsidiaries will not by reason
of such offices be ineligible to receive options. However, no member of the
Compensation Committee is eligible to receive options under the Option Plan.
The exercise price for all options granted under the Option Plan shall
not be less than the fair market value of the Company's Common Stock on the date
of grant (or, in the case of incentive stock options, 110% of the fair market
value if the beneficiary of the grant beneficially owns 10% or more of the
outstanding shares of the Company's Common Stock). In addition, the aggregate
fair market value of the Company's Common Stock (determined at the date of the
option grant) for which an employee may be granted incentive stock options which
first become exercisable in any calendar year under the Option Plan may not
exceed $100,000. Options granted pursuant to the Option Plan are not
transferrable during an optionee's lifetime.
The term of and any vesting schedule (whether the option will be
exercisable immediately, in stages or otherwise, or the vesting will be based
upon any condition such as the operating performance of the Company) for an
option granted under the Option Plan is established by the Compensation
Committee, but the term may not be more than ten years from the date of grant of
the option, except that, in the case of a person receiving an incentive stock
option who at such time owns the Company's Common Stock representing more than
10% of the Company's Common Stock outstanding at the time the option is granted,
the term of such incentive stock option shall not exceed five years from the
date of grant of the option. In general, options will not be exercisable after
the expiration of their term. Furthermore, the Compensation Committee the
authority and discretion to determine the time frame in which an optionee has to
exercise his options (subject to the 10 year limitation from date of grant) in
the event of his termination of employment due to death, disability, termination
without cause, retirement, voluntarily leaving the Company and change in
control.
To the extent incentive stock options are granted under the Option
Plan, this generally entitles an optionee who is an employee to defer
recognition of income or loss for federal tax purposes until the shares
underlying the options are sold. Under the Option Plan the Company does not
obtain any federal tax deductions except in unusual circumstances.
On February 11, 1994, the Company filed a registration statement on
Form S-8 with the Commission in order to register 1,687,914 shares of Common
Stock then issuable under the Option Plan and 98,160 issuable to an employee of
the Company upon the exercise of a stock option granted outside of the Option
Plan in connection with an acquisition by the Company. So long as such
registration statement remains effective under the Act, shares of Common Stock
issued upon the exercise of outstanding options under the Option Plan will be
immediately and freely tradable without restriction under the Act, subject to
applicable volume limitations, if any, under Rule 144 and, in the case of
executive officers and directors of the Company, Section 16 of the Exchange Act.
It is contemplated that the Company will at the appropriate time file an
amendment to its registration statement on Form S-8 or an additional
registration statement in order to register any additional shares of Common
Stock reserved for issuance under the Option Plan.
As of October 31, 1995, a total of 2,316,690 options were granted and
had not expired or been forfeited, of which 156,627 were exercised and 2,160,063
options were outstanding (of which 1,631,000 options (including the 1,000,000
New Options) were held by executive officers and directors of the Company as a
group, see "Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-Ended Option Values" and 564,412 options are presently exercisable).
85
<PAGE>
These options, which are held by 68 persons, are exercisable at prices ranging
from $.75 per share to $2.63 per share and are exercisable through various
expiration dates from 1995 to 2005. In addition, certain options were issued to
the selling stockholders in connection with the Company's acquisitions in 1994.
See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE COMPANY - Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Acquisitions" and footnote (2) to the table in "Security Ownership of Certain
Beneficial Owners and Management" for the number of incentive stock options
currently held by executive officers and directors of the Company and
"Employment Agreements - The Goldberg Agreements" for a discussion of the New
Options recently granted to the Company's executive officers.
DEFERRED COMPENSATION PLAN FOR EXECUTIVE OFFICERS AND KEY EMPLOYEES
Effective January 1, 1988, the Company established a deferred
compensation plan (the "Deferred Compensation Plan") for executive officers and
key employees of the Company. The employees eligible to participate in the
Deferred Compensation Plan (the "Participants") are chosen at the sole
discretion of the Board, upon a recommendation from the Compensation Committee.
Pursuant to the 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 Deferred Compensation Plan will be
distributed monthly. The Company paid benefits under this plan of approximately
$52,000 during 1994, none of which was paid to any executive officer. The
maximum benefit payable to a Participant (including each of the executive
officers) under the Deferred Compensation Plan is presently $22,500 per annum.
401(K) PLAN
The Company maintains a 401(k) Plan (the "401(k) Plan"), which is
intended to qualify under Section 401(k) of the Code. All full-time employees of
the Company over the age of 21 are eligible to participate in the 401(k) Plan
after completing 90 days of employment. Each eligible employee may elect to
contribute to the 401(k) Plan, through payroll deductions, up to 15% of his or
her salary, limited to $9,240 in 1994. The Company makes matching contributions
and in 1994 its contributions were in the amount of 25% on the first 6%
contributed of each participating employee's salary.
EMPLOYMENT AGREEMENTS
THE GOLDBERG AGREEMENTS
Effective June 1, 1992, the Company entered into employment agreements
with Paul Goldberg, its Chief Executive Officer and Bruce M. Goldberg, its
current President and Chief Operating Officer (collectively, the "1992
Agreements"). The 1992 Agreements were for three-year terms expiring on May 31,
1995. Pursuant to their 1992 Agreements, Paul Goldberg and Bruce M. Goldberg
received a base salary of $186,000 and $150,000 per annum, respectively. Under
the 1992 Agreements, Paul Goldberg and Bruce M. Goldberg were also each entitled
to receive a bonus equal to 5% of the Company's pre-tax income in excess of
$1,000,000 in any calendar year. Such bonus compensation payable under the 1992
Agreements to Paul Goldberg and Bruce M. Goldberg was limited to $150,000 and
$100,000 per annum, respectively. For the calendar year 1994, Paul Goldberg and
Bruce M. Goldberg did not earn a bonus, although they were each paid $100,000
relating to bonuses earned for the Company's 1993 fiscal year.
In addition, the 1992 Agreements provided for certain additional
benefits, including participation in Company benefit plans, including the
Deferred Compensation Plan, payments to the employee upon his disability,
certain life insurance benefits and the continued use of a Company automobile.
See "Summary Compensation Table." The agreements prohibited Paul Goldberg and
Bruce M. Goldberg from competing with the Company for two years after any
voluntary termination of employment or termination for cause. The agreements
further provided that, if there was a change in control (as defined) of the
Company, the
86
<PAGE>
Company would have the option to either extend the agreements for two additional
years or terminate the agreements upon making a lump sum severance payment equal
to two years compensation. Further, if Paul Goldberg or Bruce M. Goldberg were
to be terminated without cause, each of them would have been be entitled to
receive severance benefits equal to the greater of two years compensation or the
remainder of the compensation due them under their respective employment
agreements.
In May 1995, the Company entered into new employment agreements with
each of Paul Goldberg and Bruce M. Goldberg to take effect on June 1, 1995, as
of the expiration of the 1992 Agreements (collectively the "1995 Agreements").
The 1995 Agreement for Paul Goldberg extends the term of his employment until
December 31, 2000, subject to earlier termination as a result of his retirement
as hereinafter described, and provides for a base salary effective as of June 1,
1995, of $250,000 per annum, subject to an annual increase commencing as of
January 1, 1996 (which increase shall be prorated for the period between June 1,
1995 and December 31, 1995) equal to the greater of 4% per annum or the increase
in the cost of living. The 1995 Agreement for Bruce M. Goldberg extends the term
of his employment until December 31, 2000, and provides for a base salary
effective as of June 1, 1995, of $275,000 per annum, subject to the same annual
increase formula as for Paul Goldberg under his 1995 Agreement. Under the 1995
Agreements, Paul Goldberg and Bruce M. Goldberg are each entitled to receive an
annual cash bonus equal to 3% of the Company's pre-tax income, before
nonrecurring and extraordinary charges, in excess of $1,000,000 in any calendar
year. Such annual bonus compensation for each of Paul Goldberg and Bruce M.
Goldberg is limited in any year to an amount no greater than two times his
respective base salary for the applicable year. In addition, Bruce M. Goldberg
will also receive an additional one time bonus in the amount of $30,000 by
January 15, 1996, in the event that the Company's net sales for calendar year
1995 exceed $135,000,000.
The 1995 Agreements, together with the new employment agreements
between the Company and each of Howard L. Flanders and Rick Gordon described
below, provide for the granting of an aggregate of 1,000,000 stock options
pursuant to the Option Plan as additional incentive compensation for such four
executive officers (collectively, the "New Options"). The 1995 Agreements
provide for Paul Goldberg and Bruce M. Goldberg to be granted New Options
covering 250,000 and 450,000 shares of the Company's Common Stock, respectively,
out of the aggregate of 1,000,000 New Options. Each of Messrs. Flanders and
Gordon are entitled to be granted New Options covering 150,000 shares of the
Company's Common Stock under his respective employment agreement. All of the New
Options were to be granted on the earlier to occur of the date that the
registration statement for the 1995 Public Offering became effective, or June
15, 1995. Since such registration statement became effective June 8, 1995, the
New Options were granted on such date. The New Options are immediately
exercisable over a 10 year period from the date of grant (until June 7, 2005),
subject to the vesting schedule set forth below and, in the case of Messrs.
Flanders and Gordon, subject to an exercise installment schedule through 2002
(10% in 1996; up to 20% in the aggregate in 1997; up to 30% in the aggregate in
1998; up to 40% in the aggregate in 1999; up to 50% in the aggregate in 2000; up
to 75% in the aggregate in 2001; and 100% in the aggregate in 2002) and further
subject to generally attempting to maintain at least through 2002 as many of the
New Options as possible as incentive stock options. Each of the New Options have
an exercise price equal to 100% of the fair market value of a share of the
Company's Common Stock on the date of grant. The 1995 Agreements, as well as
Messrs. Flanders' and Gordon's respective employment agreements, contemplated
that, if the date of grant was the effective date of the registration statement
for the 1995 Public Offering, the exercise price would be the public offering
price per share of the Company's Common Stock offered pursuant to the Offering.
Since the date of grant was such effective date, the exercise price per share of
the New Options is equal to the $1.875 public offering price per share. The New
Options granted to each of the executive officers will vest in no event later
than 9 years from the date of grant, subject to earlier vesting in the following
percentage increments based
87
<PAGE>
upon the Company attaining net earnings per share on a primary basis in any year
from 1995 through 2000, inclusive, in at least the following amounts:
PERCENTAGE OF NET EARNINGS
OPTIONS VESTED (%) PER SHARE ($)
------------------ -------------
25%............................................ $.18
50............................................. .22
75............................................. .28
100............................................. .38
In addition, in the event that the employment of Paul Goldberg or Bruce
M. Goldberg with the Company is terminated without cause (as defined in each of
such executive officer's employment agreement) by the Company, the New Options
held by such terminated executive officer shall become immediately 100% vested.
Furthermore, if there is a change in control (as defined in the employment
agreement of each of the four executive officers, including Messrs. Flanders and
Gordon) of the Company, the New Options held by each of the four executive
officers shall become immediately 100% vested. Upon any of the four executive
officer's termination of employment due to certain events, to the extent any or
all of the New Options granted to him have vested or otherwise vest within the
time frames hereinafter described for exercise after termination, the vested New
Options are immediately exercisable within the permitted time frames described
below. Generally, an executive officer has at least two (2) years from the date
of termination or cessation of his employment with the Company as a result of
death, disability, voluntary resignation within 180 days after a change in
control or retirement (which, for purposes of exercisability of a New Option, is
resigning as an employee after reaching age 65) to exercise his vested New
Options. In the event of an executive officer's termination or cessation of
employment with the Company (i) as a result of his voluntary resignation (other
than within 180 days after a change in control or as a result of retirement), he
will have three months to exercise any of his vested New Options (provided,
that, if he shall die during such three month period, the time of termination of
the unexpired portion of his vested New Options will be 18 months following
issuance of letters testamentary or letters of administration for his estate,
but in no event later than two years after his death) and (ii) for cause, all of
the New Options terminate immediately.
Under Paul Goldberg's 1995 Agreement, he will be able to elect, in his
sole discretion, to retire at any time on or after January 1, 1999 (the
"Retirement Election"). Upon the earlier to occur of the Retirement Election or
at the expiration of the term of the 1995 Agreement, the Company will be
obligated to pay Paul Goldberg (in addition to any other compensation he may be
entitled to upon termination), and his spouse upon his death, a retirement
benefit of $100,000 per annum until the later of the death of Paul Goldberg or
his spouse, provide him and his spouse, without cost, until the later of their
respective deaths, at least the same level of medical and health insurance
benefits as was provided prior to his retirement and continue to pay the
premiums on the life insurance policies covering his and his spouse's lives as
described hereinbelow and under "Summary Compensation Table" above.
The 1995 Agreements also provide certain additional benefits to each of
Paul Goldberg and Bruce M. Goldberg, including participation in the Company
benefit plans, including the Deferred Compensation Plan and the 401(k) Plan, and
the continued use of a Company automobile. In addition, in the event of the
disability of Paul Goldberg, the Company will be obligated to continue all
compensation and other benefits due under his 1995 Agreement for the shorter of
two years or until January 1, 1999, and to thereafter provide the retirement and
health benefits described above. In the event of the disability of Bruce M.
Goldberg, the Company will be obligated to continue all compensation and other
benefits due under his 1995 Agreement for two years thereafter. Furthermore, in
addition to the life insurance policies covering the life of Paul Goldberg and
Bruce M. Goldberg described under "Summary Compensation Table" being funded by
the Company, the Company has agreed to advance the Paul Goldberg Family
Insurance Trust or such other person designated by Paul Goldberg (i) each year
until the insured's death the amount of the annual premium for a new $1,000,000
face value insurance policy on Paul Goldberg's or his spouse's life and (ii)
each year until
88
<PAGE>
the later to die of Paul Goldberg or his spouse the amount of the annual premium
for a $1,000,000 face value second to die insurance policy on the lives of Paul
Goldberg and his spouse. Such annual advances (together with interest to accrue
thereon at the rate of 5% per annum) for each policy will be secured by the
respective insurance policy and the higher of the advances (together with the
interest accrued thereon) for and the cash surrender value of the respective
policy will be repaid to the Company upon the death of Paul Goldberg, the death
of his spouse or the death of Paul Goldberg and his spouse (as applicable) out
of the proceeds thereof.
The 1995 Agreements also provide that, in the event of change in
control (as defined) of the Company, each of Paul Goldberg and Bruce M. Goldberg
shall have the option in his sole discretion to terminate his 1995 Agreement. In
such event, Paul Goldberg would be entitled to elect (in lieu of electing to
continue to receive some or all of the compensation, payments and benefits as
and when due under the 1995 Agreement) to receive a lump sum payment equal to
the sum of (i) Paul Goldberg's compensation due through the greater of the end
of the term of the 1995 Agreement or three years after the change in control,
(ii) the present value (assuming a certain discount rate and life expectancy) of
the retirement payments payable to Paul Goldberg commencing from the later of
the end of the term or three years after the change in control until his death,
(iii) an amount sufficient to pay, until the later of his or his spouse's death,
the premium for at least the same level of health insurance benefits as was
provided before the change in control and (iv) an amount sufficient to pay,
until the later of his or his spouse's death (as applicable), the premiums on
the life insurance policies insuring his or his spouse's lives as described in
the previous paragraph. Similarly, under Bruce M. Goldberg's 1995 Agreement, in
the event of a change in control and Bruce M. Goldberg's election to terminate
his 1995 Employment Agreement, Bruce M. Goldberg at his option will be entitled
to elect to receive a lump sum payment equal to his compensation due through the
later of the end of the term of his 1995 Agreement or three years after the
change in control or for such period to continue to receive such compensation as
and when due under the 1995 Agreement. In addition, in the event of a change in
control, all unvested options held by Paul Goldberg or Bruce M. Goldberg, as
well as any other executive officer, would vest and become immediately
exercisable. These change in control provisions replaced the change in control
provisions of the 1992 Agreements as of June 1, 1995.
THE FLANDERS AGREEMENT
In May 1995, the Company entered into an employment agreement with
Howard L. Flanders, its Vice President, Corporate Secretary and Chief Financial
Officer (the "Flanders Agreement"). The Flanders Agreement will continue through
December 31, 1998, and provides for a base salary, effective as of March 1,
1995, of $157,500 per annum, subject to an annual increase commencing as of
January 1, 1996, equal to the greater of 5% per annum or the increase in the
cost of living. Under the Flanders Agreement, Mr. Flanders is entitled to
receive an annual cash bonus equal to 2% of the Company's pre-tax income, before
nonrecurring and extraordinary charges, in excess of $1,000,000 in any calendar
year. Such annual cash bonus compensation will be limited in any year to an
amount no greater than Mr. Flanders' base salary for the applicable year. The
Flanders Agreement also provides for Mr. Flanders to be granted the 150,000 New
Options. In addition, the Flanders Agreement provides for certain additional
benefits, including participation in the Company benefit plans, including the
Deferred Compensation Plan and the 401(k) Plan, payment to Mr. Flanders upon his
disability of his compensation and other benefits for two years thereafter and
the continued use of a Company automobile. The Flanders Agreement prohibits Mr.
Flanders from competing with the Company for two years after any voluntary
termination of employment or termination for cause. Further, if Mr. Flanders
were to be terminated without cause, he will be entitled to receive severance
benefits equal to the greater of two-years compensation or the remainder of the
compensation due under the Flanders Agreement. Additionally, under the Flanders
Agreement, the Company will pay premiums under a life insurance policy with the
beneficiary to be as designated by Mr. Flanders as described under "Summary
Compensation Table" above. The Flanders Agreement also provides that, in the
event of a change in control (as defined) of the Company, Mr. Flanders will have
the option in his sole discretion to terminate the Flanders Agreement. In such
event, Mr. Flanders
89
<PAGE>
at his option would be entitled to elect to receive a lump-sum payment equal to
Mr. Flanders' compensation due through the later of the end of the term of the
Flanders Agreement or two years after the change in control or for such period
to continue to receive such compensation as and when due under the Flanders
Agreement.
THE GORDON AGREEMENT
In May 1995, the Company entered into an employment agreement with Rick
Gordon, its Senior Vice President of Sales and Marketing (the "Gordon
Agreement"). The Gordon Agreement will continue through December 31, 1998, and
provides for a base salary, effective as of March 1, 1995, of $163,000 per
annum, subject to an annual increase commencing as of January 1, 1996, equal to
the greater of 5% per annum or the increase in the cost of living. Under the
Gordon Agreement, Rick Gordon is entitled to receive an annual cash bonus equal
to 2% of the Company's pre-tax income, before nonrecurring and extraordinary
charges, in excess of $1,000,000 in any calendar year. Such annual cash bonus
compensation will be limited in any year to an amount no greater than Mr.
Gordon's base salary for the applicable year. With respect to fiscal 1995, Rick
Gordon will also receive an additional one time bonus in the amount of $15,000
by January 15, 1996, in the event that the Company's net sales for calendar year
1995 exceed $135,000,000. The Gordon Agreement also provides for Mr. Gordon to
be granted the 150,000 New Options. In addition, the Gordon Agreement provides
for certain additional benefits, including participation in the Company benefit
plans, including the Deferred Compensation Plan and the 401(k) Plan, payment to
Mr. Gordon upon his disability of his compensation and other benefits for two
years thereafter and the continued use of a Company automobile. The Gordon
Agreement prohibits Mr. Gordon from competing with the Company for two years
after any voluntary termination of employment or termination for cause. Further,
if Mr. Gordon were to be terminated without cause, he will be entitled to
receive severance benefits equal to the greater of two-years compensation or the
remainder of the compensation due under the Gordon Agreement. Additionally,
under the Gordon Agreement, the Company will pay premiums under a life insurance
policy with the beneficiary to be as designated by Mr. Gordon as described under
"Summary Compensation Table" above. The Gordon Agreement also provides that, in
the event of a change in control (as defined) of the Company, Mr. Gordon will
have the option in his sole discretion to terminate the Gordon Agreement. In
such event, Mr. Gordon at his option would be entitled to elect to receive a
lump-sum payment equal to Mr. Gordon's compensation due through the later of the
end of the term of the Gordon Agreement or two years after the change in control
or for such period to continue to receive such compensation as and when due
under the Gordon Agreement.
CERTAIN TRANSACTIONS
Paul Goldberg, a director and executive officer of the Company, owns a
one-third interest in GBG of Maryland, Inc., a corporation that leased office
space to a wholly-owned subsidiary of the Company until December 1994. At such
time, the lease was terminated in connection with the sale to an unrelated third
party of the building in which the office space was located. The Company's
wholly-owned subsidiary currently leases the office space from such unrelated
third party. During fiscal year 1994, such wholly-owned subsidiary paid
approximately $31,000 in rent to lease such office space.
Sheldon Lieberbaum, a director of the Company, is director of corporate
finance and a director and shareholder of Lew Lieberbaum. In connection with the
1995 Public Offering, Lew Lieberbaum received compensation, including a selling
commission and discount equal to 9% of the gross proceeds of the 1995 Public
Offering (approximately $883,000), a non-accountable expense allowance equal to
3% of the gross proceeds of the 1995 Public Offering (approximately $294,000), a
consulting fee equal to $66,000, reimbursement of certain accountable expenses
aggregating approximately $64,000 and warrants to purchase (collectively, the
"1995 Underwriter's Warrants") 523,250 shares of the Company's Common Stock (the
number of shares of the Company's Common Stock equal to 10% of the Company's
Common Stock sold in the 1995 Public Offering) at an exercise price per share of
$2.625 per share (140% of the public offering price of the Company's Common
Stock
90
<PAGE>
sold in the 1995 Public Offering). The 1995 Underwriter's Warrants are
exercisable for a period of four years commencing on June 8, 1996.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of October 30, 1995, and
after the consummation of the Transaction assuming the maximum number of shares
(2,174,473 shares, exclusive of the 173,559 shares to be issued to the
California Subsidiary) of the Company's Common Stock were issued on the Closing
Date by: (i) each person known by the Company to be the beneficial owner of more
than five percent (5%) of the Company's Common Stock, (ii) each director of the
Company, (iii) each executive officer of the Company and (iv) all executive
officers and directors of the Company as a group. Except as indicated in the
notes to the following table, the persons named in the table have sole voting
and investment power with respect to all shares shown as beneficially owned by
them. Unless otherwise indicated in the notes to the table, officers and
directors can be reached at the principal office of the Company.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS AMOUNT AND NATURE OF OUTSTANDING
OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) SHARES(2)
---------------------- ----------------------- -----------
BEFORE AFTER
TRANSACTION TRANSACTION
----------- -----------
<S> <C> <C> <C>
Bruce M. Goldberg............................................................... 997,141(3) 5.6% 5.0%
Paul Goldberg................................................................... 817,476(4) 4.6% 4.1%
S. Cye Mandel................................................................... 5,625 * *
Howard L. Flanders.............................................................. 1,000 * *
Rick Gordon..................................................................... 1,000 * *
Sheldon Lieberbaum(4)(5)........................................................ -- -- --
All executive officers and directors as a group (6 persons)..................... 1,822,242 10.3% 9.1%
</TABLE>
- ----------------
* Less than 1%
(1) The address of each of Paul Goldberg, Bruce M. Goldberg, Howard L.
Flanders and Rick Gordon is the Company, 16115 N.W. 52nd Avenue, Miami,
Florida 33014; S. Cye Mandel is 1800 Northeast 114th Street, Apt. 2305,
North Miami, Florida 33181; and Sheldon Lieberbaum is 600 Old Country
Road, Suite 518, Garden City, New York 11530.
(2) Excludes outstanding stock options to purchase 2,375,774 shares of the
Company's Common Stock, of which 2,160,063 options to purchase shares
(including the New Options) were issued pursuant to the Option Plan. Of
these outstanding options, 1,631,000 options (including the New
Options) are held by the executive officers and directors of the
Company as a group, including 625,000 options (including 450,000 New
Options) held by Bruce M. Goldberg, 450,000 options (including 250,000
New Options) held by Paul Goldberg, 283,000 options (including 150,000
New Options) held by Howard L. Flanders and 273,000 options (including
150,000 New Options) held by Rick Gordon. Further excludes currently
outstanding warrants to purchase 1,243,125 shares of the Company's
Common Stock, and obligations of the Company upon the happening of
certain events and conditions to issue 1,000 shares of the Company's
Common Stock and incentive stock options covering an additional 130,000
shares. If all options and warrants outstanding as of October 30, 1995,
were exercised (which includes the New Options), Bruce M. Goldberg,
Paul Goldberg, Howard L. Flanders, Rick Gordon and all executive
officers and directors of the Company as a group would own as of
October 30, 1995, 7.6%, 5.9%, 1.3%, 1.3% and 16.1%, respectively, of
the Company's Common Stock.
(3) Includes 53,380, 26,000, 69,496, 69,496 and 69,496 shares of the
Company's Common Stock held of record by Bruce M. Goldberg as trustee
for his sons, Matthew Goldberg and Alec Goldberg, and for his nieces
and nephews, Kimberly Phelan, Tiffany Phelan and Patrick Phelan,
respectively. For federal securities law purposes only, Bruce M.
Goldberg is deemed to be the beneficial owner of these securities. Does
not include 7,500 shares of the Company's Common Stock held of record
by Jayne Goldberg, the wife
91
<PAGE>
of Bruce M. Goldberg, and 36,425 shares of the Company's Common Stock
held of record by an unrelated third party as trustee for Matthew
Goldberg (23,075 shares) and Alec Goldberg (13,350 shares). Bruce M.
Goldberg disclaims beneficial ownership over all such securities.
(4) Includes 319,218 shares of the Company's Common Stock owned of record
by Paul Goldberg's wife, Lola Goldberg, and 1,250 and 1,250 shares
of the Company's Common Stock held of record by Paul Goldberg as
custodian for Kimberly Phelan and Tiffany Phelan, respectively. For
federal securities law purposes only, Paul Goldberg is deemed to be
the beneficial owner of these securities. Does not include 192,898
shares of the Company's Common Stock held of record by Robin Phelan,
the daughter of Paul and Lola Goldberg, over which securities Paul
and Lola Goldberg disclaim beneficial ownership.
(5) Does not include the 1995 Underwriter's Warrants issued to Lew
Lieberbaum in connection with the 1995 Public Offering. See "Certain
Transactions."
DESCRIPTION OF SECURITIES
GENERAL
The Company currently has 40,000,000 shares of authorized common stock,
$.01 par value per share, and 1,000,000 shares of preferred stock, par value
$.01 per share. As of October 30, 1995, 17,689,791 shares of the Company's
Common Stock were issued and outstanding and held of record by approximately 525
shareholders. Outstanding stock options, warrants and obligations of the Company
upon the happening of certain events to issue shares of the Company's Common and
incentive stock options cover in the aggregate up to an additional 3,749,899
shares of the Company's Common Stock (collectively the "Existing Rights").
The following description of the Company's Common Stock and preferred
stock are based on the Company's Certificate and By-laws and applicable
Delaware law and are qualified in all respects by the provisions thereof.
See "AVAILABLE INFORMATION."
COMMON STOCK
Each shareholder is entitled to one vote for each share owned of record
on all matters submitted to a vote of shareholders. The holders of shares do not
possess cumulative voting rights, which means that the holders of more than
fifty percent of the outstanding shares voting for the election of directors can
elect all of the directors, and, in such event, the holders of the remaining
shares will be unable to elect any of the Company's directors. See "RISK
FACTORS." Holders of outstanding the Company's Common Stock are entitled to
receive ratably dividends out of assets legally available therefor at such times
and in such amounts as the Company's Board may from time to time determine,
subject to preferences that may be applicable to any outstanding preferred
stock. Upon the liquidation, dissolution, or winding up of the Company, holders
of the Company's Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding preferred stock. Holders of the Company's Common Stock have no
preemptive, conversion or subscription rights, and shares are not subject to
redemption. All outstanding shares are, and the shares of the Company's Common
Stock being offered hereby will be, when issued against the consideration set
forth in this Prospectus, fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Company's Certificate, the Board has the authority to
issue such preferred stock in one or more series and to fix the powers,
designations, preferences and relative, participating, optional or other rights
thereof, including dividend rights, conversion rights, voting rights, redemption
terms, liquidation preferences and the number of shares constituting any series,
without any further action by the shareholders. The issuance of preferred stock
in
92
<PAGE>
certain circumstances may have the effect of delaying, deferring or preventing a
change of control of the Company without further action by the shareholders, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Company's Common Stock and may adversely affect the market price
of, and the voting and other rights of the holders of, the Company's Common
Stock. The Company has no shares of preferred stock outstanding and has no
current plans to issue any such shares. See "RISK FACTORS -- Possible Issuance
of Additional Shares."
EXISTING WARRANTS
In connection with the 1992 Public Offering, the Company sold to JW
Charles Securities, Inc., Corporate Securities Group, Inc. and Lew Lieberbaum,
the underwriters thereof, for nominal consideration, 175,000 non-redeemable
warrants (the "1992 Underwriters' Warrants") to purchase units (the "1992
Units"), each 1992 Unit consisting of two shares of the Company's Common Stock,
one warrant to purchase one share of the Company's Common Stock for $1.10 and
one warrant to purchase one share of the Company's Common Stock for $1.50. The
1992 Underwriters' Warrants are exercisable until June 18, 1997, at an exercise
price of $3.30 per 1992 Unit, and have certain anti-dilution provisions. At the
date of this Proxy Statement/Prospectus, only 17,500 of these 1992 Underwriters'
Warrants have not been exercised together with the related warrants comprising
part of the 1992 Unit underlying the 1992 Underwriters' Warrants.
In September 1987, the Company issued to its financial public relations
firm (the "PR Firm") a warrant to acquire 90,000 shares of the Company's Common
Stock at an exercise price of $1.60 per share (as adjusted to give effect to the
1989 stock split) relating to a since expired consulting agreement covering
financial public relations/investor relations services. In connection with the
1992 Public Offering, the Company extended the exercise period of this warrant
to June 18, 1994, and, in connection with entering into a new consulting
agreement with the PR Firm in May 1993 as described below, the exercise period
was extended again to June 18, 1997. As of the date of this Proxy
Statement/Prospectus, this warrant has not been exercised.
In May 1993, the Company issued to the PR Firm two additional warrants
each to acquire 45,000 shares of the Company's Common Stock at an exercise price
of $1.35 per share through May 14, 1998. One of such warrants was issued to
induce the PR Firm to enter into a new consulting agreement with the Company
covering financial public relations/investor relations services and was fully
vested and immediately exercisable and not forfeitable. The other warrant was
forfeitable by the PR Firm if such consulting agreement was not renewed by the
Company for a second year and was only exercisable commencing on May 14, 1994,
if the consulting agreement was renewed for the second year. Such consulting
agreement was renewed for the second year and thus the second warrant has fully
vested and is exercisable. As of the date of this Proxy Statement/Prospectus,
neither of these warrants has been exercised.
In June 1994, as part of the 1994 Private Placement, the Company issued
386,250 common stock purchase warrants. Each warrant issued can be exercised to
purchase one share of the Company's Common Stock at any time between December
14, 1994 and June 13, 1999, at an exercise price equal to $3.15 per share. As
part of the 1994 Private Placement, RAS Securities Corp., the placement agent
for such offering, was issued warrants to purchase 38,625 shares of the
Company's Common Stock at any time between June 14, 1995 and June 13, 1999, at
an exercise price equal to $3.78 per share.
In June and July, 1995, as part of the 1995 Public Offering, Lew
Lieberbaum was issued the 1995 Underwriter's Warrants. See "Certain
Transactions."
In July 1995, the Company once again issued to the PR Firm an
additional warrant to acquire 45,000 shares of the Company's Common Stock at an
exercise price of $2.50 per share exercisable through July 20, 2000. The warrant
was issued in consideration of the PR Firm entering into a new one-year
consulting agreement with the Company covering financial public
relations/investor relation services.
93
<PAGE>
The holders of the foregoing warrants (the "Existing Warrants") have
been granted certain registration rights. As a consequence thereof, all of the
shares of the Company's Common Stock underlying the Existing Warrants (other
than the 1995 warrants issued to the PR Firm, the warrants issued in connection
with the 1994 Private Placement and the 1995 Underwriter's Warrants) have been
previously registered by the Company in connection with prior public offerings.
EXISTING OPTIONS AND OTHER RIGHTS
The Company has outstanding as of this date employee and other stock
options of the Company to acquire up to 2,375,774 shares of the Company's Common
Stock. In addition, under certain circumstances and events, the Company may be
obligated to issue 1,000 shares of the Company's Common Stock and incentive
stock options under the Option Plan covering an additional 130,000 shares of the
Company's Common Stock. See "BUSINESS AND FINANCIAL INFORMATION REGARDING THE
COMPANY - Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Acquisitions" and "Executive Compensation --
Employees', Officers', Directors' Stock Option Plan" and "-- Employment
Agreements."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is The
Trust Company of New Jersey, 35 Journal Square, Jersey City, New Jersey 07306.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate and By-laws of the Company include, among others, the
following provisions:
1. Annual and special meetings of the stockholders may be
called only by the Company's Board.
2. An affirmative vote of at least two-thirds of the
outstanding shares of the Company's Common Stock is required to approve
or authorize certain business combinations, unless 65% of the Company's
Board approves such transaction, in which case, a simple majority of
the outstanding shares of the Company's Common Stock will be required
to approve such transaction.
3. There exist three classes of directors, each class
elected for three-year staggered terms.
4. Officers and directors of the Company will be indemnified
to the fullest extent permitted under Delaware law.
5. The Company has elected not to be governed by Section 203
of the Delaware General Corporation Law which means that the Company is
not subject to the provisions of Delaware Law which generally provides
that certain transactions between the Company and an "interested
stockholder" be approved by the affirmative vote of two-thirds of the
outstanding shares which are not owned by the interested stockholders.
An interested stockholder ("Interested Stockholder") is (i) an owner of
15% or more of the outstanding voting stock of the Company; or (ii) an
affiliate or associate of the Company who was the owner of 15% or more
of the outstanding voting stock of the Company at any time within the
three year period prior to the date on which it is sought to be
determined whether such person is an Interested Stockholder, and the
affiliates and associates of such person.
The members of the Goldberg Group will not be considered
Interested Stockholders, as defined in Section 203 and the Certificate,
since they either (i) acquired greater than 15% of the outstanding
Company's Common Stock prior to December 23, 1987, or (ii) acquired
their shares of the Company's Common Stock by gift from a person
falling within (i) above, both of which are exceptions under Section
203 and the Certificate to the definition of Interested Stockholders.
94
<PAGE>
6. The Board when evaluating any offer of another person to
make a tender offer or certain business combinations is authorized, in
connection with the exercise of its judgment in determining what is in
the best interests of the Company as a whole, to give due consideration
to all relevant factors including, among others, the social, legal and
economic effects upon employees, suppliers, customers and others having
similar relationships with the Company and the communities in which the
Company conducts its business.
7. Any action required or permitted to be taken at any annual
or special meeting of shareholders may be taken only upon the vote of
the shareholders at such meeting duly called and may not be taken by
written consent of shareholders.
8. An affirmative vote of at least two-thirds of the
outstanding shares of the Company's Common Stock is required to amend
certain provisions of the Certificate including those described in
items numbered 2, 3, 5, 6 and 7 above.
The provisions of the Certificate and By-laws of the Company summarized
above may have certain anti-takeover effects. Such provisions, individually or
in combination, may discourage other persons, or make it more difficult, without
the approval of the Company's Board, for other persons to make a tender offer or
acquisitions of substantial amounts of the Company's Common Stock or from
launching other takeover attempts that a shareholder might consider in such
shareholder's best interest, including attempts that might result in the payment
of a premium over the market price of the Company's Common Stock held by such
shareholder.
CERTAIN PROVISIONS RELATING TO LIMITATION OF
LIABILITY AND INDEMNIFICATION OF DIRECTORS
The Company's Certificate contains provisions which would limit the
scope of personal liability of directors to the Company or its shareholders for
monetary damages for breach of fiduciary duty. The provisions are consistent
with Section 102(b)(7) of the Delaware General Corporation Law, which is
designed, among other things, to encourage qualified individuals to serve as
directors of Delaware corporations by permitting a Delaware corporation and its
shareholders to adopt provisions in the corporation's certificate of
incorporation limiting directors' liability for monetary damages for breach of
the duty of care.
Such provisions will protect the Company's directors against personal
liability from breaches of their duty of care in certain circumstances. The
provisions of the Certificate would absolve directors of liability for
negligence in the performance of their duties, including gross negligence.
Directors would remain liable, under current law, for beaches of their duty of
loyalty to the corporation and its shareholders, as well as acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law or a transaction from which a director derives any improper personal
benefit. Also, the provisions would not absolve directors of liability under
Section 174 of the Delaware General Corporation Law, which makes directors
personally liable for unlawful dividends or unlawful stock repurchases or
redemptions and expressly sets forth a negligence standard with respect to such
liability. Further, these provisions would not eliminate or limit liability of
directors arising in connection with causes of action brought under Federal
securities laws.
While the provisions of the Certificate provide directors with
protection from awards of monetary damages for breaches of the duty of care, it
does not eliminate the directors' duty of care. Accordingly, the provisions of
the Certificate would have no effect on the availability of suitable
non-monetary remedies such as an injunction or rescission based upon a
director's breach of the duty of care.
In addition, the Certificate provides that the Company shall indemnify
its directors and officers to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law, as the same may be amended and supplemented.
95
<PAGE>
Such indemnification provision is not exclusive of any other rights to which
those indemnified may be entitled under the Company's By-laws, agreements, vote
of stockholders or disinterested directors or otherwise.
The Company has also entered into indemnification contracts
("Indemnification Contracts") with its executive officers and directors
("Indemnitees"). The Indemnification Contracts provide that, in the event of
claims against an Indemnitee relating to an Indemnitee's position as an officer,
director, or agent of the Company, the Company shall indemnify such officer or
director to the fullest extent permitted by law against any and all expenses,
judgments, fines, penalties and amounts paid in settlement of such claims and
any taxes imposed on such Indemnitee as a result of payments received pursuant
to the Indemnification Contracts. The obligations of the Company to indemnify an
Indemnitee are subject to review by the Board, or persons appointed by the
Board, that such indemnification would be permissible under applicable law. In
the event of a change in control of the Company which has not been approved by a
majority of the Company's directors, a special independent counsel selected by
the Indemnitee must render its legal opinion to the Company and the Indemnitee
as to whether and to what extent the Indemnitee would be permitted to be
indemnified under applicable law.
The Indemnification Contracts require the Company to advance to
Indemnitees expenses incurred by the Indemnitees in connection with
investigating, defending, or otherwise participating in any indemnification
claim, subject to the condition that if the Board, or the special independent
legal counsel in the event of a change in control of the Company, determines
that such Indemnitee would not be permitted to be indemnified under applicable
law, the Company shall be reimbursed for any amounts advanced to the Indemnitee.
In the event of a potential change in control, the Indemnification Contracts
require the Company, upon written request by an Indemnitee, to create a trust
for the benefit of such Indemnitee. The Company must fund such trust in an
amount sufficient to satisfy any and all expenses reasonably related to any
claim anticipated at the time of such request. The trustee must pay to the
Indemnitee all amounts to which Indemnitee is entitled to indemnification and
all unexpended funds are to be returned to the Company.
Insofar as indemnifications for liabilities arising under the Act may
be permitted to directors and officers pursuant to the Certificate and By-laws
or the Indemnification Contracts, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy and,
therefore, may be unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 17,689,791 shares of Common Stock, without
giving effect to any future grants of options or warrants or exercise of any
outstanding Existing Rights to purchase the Company's Common Stock after the
date of this Proxy Statement Prospectus. Of the shares that are outstanding,
approximately 15,608,351 shares will be freely tradeable without restriction or
further registration under the Act unless purchased by "affiliates" of the
Company, as that term is defined in Rule 144 of the Act. Substantially all of
the remaining 2,081,440 shares of Common Stock to be outstanding upon completion
of the Offering are "restricted securities" as that term is defined in Rule 144.
None of the "restricted securities" have registration rights, except for 30,000
shares of the Company's Common Stock. See "RISK FACTORS -- Shares Available for
Future Resale".
In addition, the Company had outstanding as of the date of this
Prospectus Existing Rights representing options, warrants and other potential
rights to acquire up to 3,749,899 shares of the Company's Common Stock. Certain
of the shares underlying the Existing Rights have previously been registered by
the Company and the agreements evidencing the Existing Rights require the
Company to register or qualify, or both, the shares underlying the Existing
Rights on demand of the holders thereof (a "demand registration") and/or in any
future registration statements that the Company files generally during their
respective exercise periods (a "piggyback registration"). See "BUSINESS AND
FINANCIAL INFORMATION REGARDING THE COMPANY - Management's Discussion and
Analysis of
96
<PAGE>
Financial Condition and Results of Operations -- Acquisitions," "SELECTED
INFORMATION WITH RESPECT TO THE COMPANY - Executive Compensation -- Employees',
Officers', Directors' Stock Option Plan" and "-- Employment Agreements" and
"DESCRIPTION OF SECURITIES - Existing Warrants."
No predictions can be made as to the effect, if any, that future sales
of shares, or the availability of shares for future sale, or the future exercise
of the Existing Rights will have on the prevailing market price for the
Company's Common Stock. Sales of substantial amounts of the Company's Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Company's Common Stock and could impair the
Company's future ability to obtain capital through an offering of equity
securities.
COMPARISON OF THE RIGHTS OF HOLDERS OF THE ADDED VALUE
COMPANIES' COMMON STOCK AND THE COMPANY'S COMMON STOCK
The Company is incorporated in the state of Delaware, Added Value is
incorporated in the state of California and Rocky Mountain is incorporated in
the State of Colorado. Following the Effective Date, the California Subsidiary
(as successor by merger to Added Value) will continue to be governed by the
California General Corporation Law ("California Law"), the Colorado Subsidiary
(as successor by merger to Rocky Mountain) will continue to be governed by the
Colorado Business Corporation Act ("Colorado Law") and the Company will continue
to be governed by the DGCL. After the Effective Date, stockholders of Added
Value and Rocky Mountain, however, will hold the Company's Common Stock rather
than Added Value's or Rocky Mountain's common stock, respectively, and therefore
the rights of such stockholders will be governed by the DGCL following the
Mergers. The following is a summary comparison of certain provisions of the
DGCL, the California Law and the Colorado law. This summary does not purport to
be complete and is qualified in its entirety by reference to the corporate
statutes of those states, and the corporate charters and by-laws of Company,
Added Value and Rocky Mountain.
CUMULATIVE VOTING. In an election of directors under cumulative voting,
each share of stock normally having one vote is entitled to a number of votes
equal to the number of directors to be elected. A shareholder may then cast all
such votes for a single candidate or may allocate them among as many candidates
as the shareholder may choose. Without cumulative voting, the holders of a
majority of the shares present at an annual meeting or any special meeting held
to elect directors would have the power to elect all the directors to be elected
at that meeting, and no person could be elected without the support of holders
of a majority of the shares voting at such meeting.
Under the California Law, cumulative voting in the election of
directors is a right available to all shareholders of California corporations
unless a corporation is "listed" and that corporation's articles of
incorporation specifically eliminate cumulative voting. A "listed" corporation
is defined under the California Law as a corporation with (i) securities listed
on the New York or American Stock Exchange or (ii) securities designated as a
National Market System security on The Nasdaq Stock Market, if the corporation
has at least 800 holders of equity securities. Added Value does not meet this
definition and, further, Added Value's By-laws (as amended, "Added Value's
Bylaws") specifically provide for cumulative voting. Under the Colorado Law
cumulative voting is mandatory for the election of directors unless a statement
to the contrary is included in the articles of incorporation. Rocky Mountain's
Articles of Incorporation ("Rocky Mountain's Articles") forbid cumulative
voting. Under the DGCL, cumulative voting in the election of directors is not
mandatory and the Company's Certificate and By-laws do not provide for
cumulative voting. Added Value stockholders will therefore not retain their
right to cumulative voting which they held prior to the Merger.
SHAREHOLDER POWER TO CALL SPECIAL SHAREHOLDERS MEETING. Under the DGCL,
a special meeting of stockholders may be called by the board of directors or any
other person authorized to do so in the corporation's certificate of
incorporation or by-laws. The Company's By-laws provide that special meetings of
shareholders may be called only at the direction of the Board of Directors by
97
<PAGE>
resolution adopted by a majority of the Board. See "DESCRIPTION OF SECURITIES -
Certain Provisions of Certificate of Incorporation and By-laws."
Under the California Law, a special meeting of shareholders may be
called by the board of directors, the chairman of the board, the president, the
holders of shares entitled to cast not less than 10% of the votes at such
meeting and such persons authorized to do so in the articles of incorporation or
by-laws. Added Value's By-laws also permit a vice president or the secretary to
call a special meeting.
The Colorado Law permits a special meeting to be called by the board of
directors, those authorized by the by-laws to call such a meeting, as well as by
a written demand by shareholders representing at least 10% of the votes entitled
to be cast on any issue proposed to be considered at the meeting. Rocky
Mountain's By-laws ("Rocky Mountain's By-laws") permit a special meeting to be
called by the Board of Directors, the President or by either the President or
the Secretary upon a written demand by shareholders owning not less than one
half of the voting shares issued and outstanding.
DISSOLUTION. Under the DGCL, a dissolution must be approved by
stockholders holding 100% of the total voting power or the dissolution must be
initiated by the board of directors and approved by the holders of a majority of
the outstanding voting shares of the corporation. Under the California Law,
shareholders holding 50% or more of the total voting power may authorize a
corporation's dissolution and this right may not be modified by its articles of
incorporation. Under the Colorado Law, for a dissolution to be authorized, the
board of directors must adopt a proposal to dissolve, recommend it to the
shareholders and the shareholders entitled to vote must approve it as follows:
unless the board of directors, articles of incorporation, or the by-laws require
otherwise, the proposal shall be approved by each voting group entitled to vote
separately by a majority of all the votes entitle to be cast by that voting
group. Rocky Mountain's Articles and Rocky Mountain's By-laws are silent with
respect to dissolution.
SIZE OF BOARD OF DIRECTORS. The DGCL permits the board of directors of
a Delaware corporation to change the authorized number of directors by amendment
to the corporation's by-laws or in the manner provided in the by-laws unless the
number of directors is fixed in the corporation's certificate of incorporation,
in which case a change in the number of directors may be made only by amendment
to the certificate of incorporation.
Under the California Law, although changes in the number of directors
must in general be approved by the shareholders, the board of directors of a
California corporation may fix the exact number of directors within a stated
range set forth in the corporation's articles of incorporation or by-laws, if
the stated range has been approved by the shareholders.
The Colorado Law permits a board of directors to consist of one or more
members, with the number to be specified by the by-laws. The by-laws may specify
a range, and the number may be changed, within the range, by the shareholders or
the board of directors. Rocky Mountain's By-laws state that the number of
directors shall not be less than three (3) nor more than nine (9). However, if
the outstanding shares are held of record by fewer than three (3) shareholders,
there need only be as many directors as there are shareholders.
The Company's Certificate provides that the number of directors shall
be established from time to time by resolution of the Company's Board, with a
minimum of 1 and a maximum of 13 members. The minimum and maximum number may be
changed only upon the affirmative note of at least two-thirds of the outstanding
shares of the Company's Common Stock. See "DESCRIPTION OF SECURITIES - Certain
Provisions of Certificate of Incorporation and By-Laws."
CLASSIFIED BOARD OF DIRECTORS. A classified board is one with respect
to which a certain number of the directors, but not necessarily all, are elected
on a rotating basis each year. The DGCL permits, but does not require, a
Delaware corporation to provide in its certificate of incorporation for a
classified board of directors, pursuant to which the directors can be divided
into up to three
98
<PAGE>
classes of directors with staggered terms of office, with only one class of
directors to stand for election each year.
Under the California Law, generally directors must be elected annually;
however, a "listed" corporation (as described above) is permitted to amend its
articles of incorporation to provide for a classified board. Added Value is not
a "listed" corporation, and, accordingly, it does not have a classified board.
The Colorado Law permits staggered terms for directors if it is
provided for in the articles of incorporation. Staggering of terms is not
provided for in Rocky Mountain's Articles.
The Company has a staggered Board. See "DESCRIPTION OF SECURITIES
Certain Provisions of Certificate of Incorporation and By-laws" and "SELECTED
INFORMATION WITH RESPECT TO THE COMPANY - Management."
REMOVAL OF DIRECTORS. Under the DGCL, any director or the entire board
of directors of a Delaware corporation without a classified board of directors
or cumulative voting may be removed with or without cause by a majority of the
outstanding shares entitled to vote. In the case of a Delaware corporation
having cumulative voting, if less than the entire board is to be removed, a
director may not be removed without cause unless the number of shares voted
against such a removal would not be sufficient to elect the director under
cumulative voting. A director of a corporation with a classified board of
directors can be removed only for cause unless the certificate of incorporation
otherwise provides. See "DESCRIPTION OF SECURITIES - Certain Provisions of
Certificate of Incorporation and By-laws."
Under the California Law, any director or the entire board of directors
may be removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote; however, no director may be removed (unless
the entire board is removed) if the number of shares voted against the removal
would be sufficient to elect the director under cumulative voting.
Under the Colorado Law, shareholders can remove one or more directors,
with or without cause, unless the articles of incorporation provide otherwise,
with the following restrictions: (a) if a director is elected by a voting group
of shareholders, only the shareholders of that voting group may participate in
the vote to remove that director; and (b) a director may be removed only if the
number of votes cast in favor of removal exceeds the number of votes cast
against removal; except that, if cumulative voting is in effect, a director may
not be removed if the number of votes sufficient to elect the director under
cumulative voting is voted against such removal.
The Colorado Law also permits the removal of directors by judicial
proceedings brought by the corporation or by shareholders holding at least ten
(10) percent of the outstanding shares of any class. Rocky Mountain's By-laws
permit the removal of any director at any time, with or without cause.
VOTING REQUIREMENTS. Unless otherwise specified in a Delaware
corporation's certificate of incorporation, an amendment to the certificate of
incorporation requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon. Furthermore, under the DGCL, the holders of the
outstanding shares of a class are entitled to vote as a class upon any proposed
amendment to the certificate of incorporation, whether or not entitled to vote
thereon by the provisions of the corporation's certificate of incorporation, if
the amendment would increase or decrease the aggregate number of authorized
shares of such class, increase or decrease the par value of the shares of such
class, or alter or change the powers, preferences or special rights of the
shares of such class so as to adversely affect them.
Unless otherwise specified in a California corporation's articles of
incorporation, an amendment to the articles of incorporation requires the
affirmative vote of a majority of the outstanding shares entitled to vote
thereon. Under the California Law, the holders of the outstanding shares of a
class are entitled to vote as a class if the proposed amendment would (i)
increase or decrease the aggregate number of authorized shares of such class,
99
<PAGE>
(ii) effect an exchange, reclassification or cancellation of all or part of the
shares of such class, other than a stock split, (iii) effect an exchange, or
create a right of exchange, of all or part of the shares of another class into
the shares of such class, (iv) change the rights, preferences, privileges or
restrictions of the shares of such class, (v) create a new class of shares
having rights, preferences or privileges prior to the shares of such class, or
increase the rights, preferences or privileges or the number of authorized
shares having rights, preferences or privileges prior to the shares of such
class, (vi) in the case of preferred shares, divide the shares of any class into
series having different rights, preferences, privileges or restrictions or
authorize the board of directors to do so, and (vii) cancel or otherwise affect
dividends on the shares of such class which have accrued but have not been paid.
Under the Colorado Law, the board of directors or the holders of shares
representing at least ten percent of all the votes entitled to be cast on the
amendment may propose an amendment to the articles of incorporation. Unless
otherwise stated in the articles or by-laws, or by the proposing board or
shareholders, the amendment shall be approved by (a) a majority of the votes
entitled to be cast on the amendment by any voting group with respect to which
the amendment would create dissenters' rights; and (b) a majority of the votes
entitled to be cast by each class of shareholders entitled to vote as a separate
voting group (which occurs if the amendment would have any of the effects on
such voting group described above under California Law).
Under the DGCL, the California Law and the Colorado Law, with certain
exceptions, any merger, consolidation or sale of all or substantially all of a
corporation's assets must be approved by the corporation's board of directors
and a majority of the outstanding shares entitled to vote. In addition, the
California Law and the Colorado Law, but not the DGCL, requires such
transactions, among others, to be approved by a majority of the outstanding
shares of each class of stock (without regard to limitations on voting rights).
See "DESCRIPTION OF SECURITIES - Certain Provisions of Certificate of
Incorporation and By-laws" for matters (including certain business combinations)
requiring approval of the holders of two-thirds of the outstanding shares of the
Company's Common Stock. In addition, the Company's Certificate prohibits actions
to be taken by written consent of shareholders.
RIGHTS OF DISSENTING STOCKHOLDERS. Generally, stockholders of a
Delaware corporation who dissent from a merger or consolidation of the
corporation for which a stockholders' vote is required are entitled to appraisal
rights, requiring the surviving corporation to purchase the dissenting shares at
fair value. There are, however, no statutory rights of appraisal with respect to
stockholders of a Delaware corporation whose shares of stock are either (i)
listed on a national securities exchange, or (ii) held of record by more than
2,000 stockholders where such stockholders receive only shares of stock of the
corporation surviving or resulting from the merger or consolidation (or cash in
lieu of fractional interests therein). The DGCL does not provide appraisal
rights to stockholders who dissent from the sale of all or substantially all of
the corporation's assets unless the certificate of incorporation provides
otherwise. The Company's Certificate of Incorporation does not provide for such
rights.
Generally, shareholders of a California corporation who dissent from a
merger or consolidation of the corporation are entitled to appraisal rights.
Under the Colorado Law, a shareholder, whether or not entitled to vote, is
entitled to dissent and obtain payment of the fair value of his or her shares in
the event of the following corporate actions: merger, share exchange, the sale,
lease, exchange, or other disposition of all or substantially all of the
property of the corporation or any entity controlled by the corporation.
INSPECTION OF SHAREHOLDERS LIST. The DGCL, the California Law and the
Colorado Law all allow any shareholder to inspect the shareholders list for a
purpose reasonably related to such person's interest as a shareholder.
Additionally, the California Law provides for an absolute right to inspect and
copy the corporation's shareholders list by a person or persons holding at least
5% in the aggregate of the corporation's outstanding voting shares, or any
100
<PAGE>
shareholder or shareholders holding 1% or more of such shares who have filed a
Schedule 14B with the Commission relating to the election of directors. The DGCL
does not provide for any such absolute right of inspection.
DIVIDENDS. Subject to any restrictions contained in a corporation's
certificate of incorporation, the DGCL generally provides that a corporation may
declare and pay dividends out of surplus (defined as net assets minus stated
capital) or, when no surplus exists, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year. Dividends
may not be paid out of net profits if the capital of the corporation is less
than the amount of capital represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets. The Company's
Certificate contains no restrictions on the declaration or payment of dividends.
The California Law provides that a corporation may make a distribution
to its shareholders if: (i) the retained earnings of the corporation immediately
prior to the distribution equals or exceeds the amount of the proposed
distribution, (ii) immediately after giving effect to the distribution, (a) the
sum of the assets of the corporation (exclusive of goodwill, capitalized
research and development expenses and deferred charges) would be at least equal
to 14 times its liabilities (not including deferred taxes, deferred income and
other deferred credits), and (b) the current assets of the corporation would be
at least equal to its current liabilities or, if the average of the earnings of
the corporation before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of the interest expense of the
corporation for such fiscal years, at least equal to 14 times its current
liabilities, and (iii) the corporation making the distribution is not, or as a
result of the distribution would not be, likely to be unable to meet its
liabilities (except those whose payment is otherwise adequately provided for) as
they mature. Neither Added Value's Articles of Incorporation (as amended, "Added
Value's Articles") nor Added Value's By-laws contain restrictions on the
declaration or payment of dividends.
The Colorado Law provides that a corporation may make a distribution to
its shareholders, but that such distribution is subject to any limitations in
the articles of incorporation as well as those set forth below. No distribution
may be made if, after giving it effect (a) the corporation would not be able to
pay its debts as they become due; or (b) the corporation's total assets would be
less than the sum of its total liabilities plus the amount that would be needed,
if the corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. Neither
Rocky Mountain's Articles nor Rocky Mountain's By-laws contain restrictions on
the declaration or payment of dividends.
BY-LAWS. Under the DGCL, the authority to adopt, amend, or repeal the
by-laws of a Delaware corporation is held exclusively by the stockholders unless
such authority is conferred upon the board of directors in the corporation's
certificate of incorporation. The Company's Certificate expressly grants to its
directors the power to make, alter, or repeal any by-laws.
Under the California Law, a corporation's by-laws may be adopted,
amended or repealed either by the board of directors or the shareholders of the
corporation. Added Value's By-laws provide that the by-laws may be changed
either by the vote of the holders of a majority of the outstanding shares
entitled to vote or by the board of directors; provided, however, that the Added
Value Board of Directors may not amend the by-laws in order to change the
authorized number of directors.
Under Colorado Law the board of directors may amend that the by-laws at
any time to add, change or delete a provision unless such power is reserved by
the articles of incorporation to the shareholders in whole or part or a
particular by-law expressly prohibits the board of directors from doing so. The
shareholders may amend the by-laws even though the by-laws may also be amended
by the board of directors. Rocky Mountain's Articles and Rocky Mountain's Bylaws
expressly grant to its directors the power to make, adopt, alter or amend Rocky
Mountain's By-laws.
101
<PAGE>
PREEMPTIVE RIGHTS. Stockholders of a Delaware corporation have only
such preemptive rights as may be provided in its certificate of incorporation.
Shareholders of a California corporation have such preemptive rights as
may be provided in the corporation's articles of incorporation. Added Value's
Articles do not grant any preemptive rights to Added Value shareholders.
Shareholders of a Colorado corporation have certain preemptive rights
unless the articles of incorporation provide otherwise. Rocky Mountain's
Articles deny all preemptive rights to its shareholders.
TRANSACTIONS INVOLVING OFFICERS OR DIRECTORS. A Delaware corporation
may loan money to, or guarantee any obligation incurred by, its officers or
directors if, in the judgment of the board of directors, such loan or guarantee
may reasonably be expected to benefit the corporation. With respect to any other
contract or transaction between the corporation and one or more of its directors
or officers, such transactions are neither void nor voidable if either (i) the
director's or officer's interest is made known to the disinterested directors or
the stockholders of the corporation, who thereafter approve the transaction in
good faith, or (ii) the contract or transaction is fair to the corporation as of
the time it is approved or ratified by either the board of directors, a
committee thereof, or the stockholders.
Under the California Law, any loan or guaranty to or for the benefit of
a director or officer of the corporation or its subsidiaries requires approval
of the shareholders unless such loan or guaranty is provided for under a plan
approved by shareholders owning a majority of the outstanding shares of the
corporation. In addition, the California Law permits shareholders of a
corporation with 100 or more shareholders of record to approve a by-law
authorizing the board of directors alone to approve a loan or guaranty to or on
behalf of an officer (whether or not a director) if the board determines that
such a loan or guaranty may reasonably be expected to benefit the corporation.
The shareholders of Added Value have not approved such a by-law provision.
The California Law similarly states that contracts or transactions
between a corporation and (i) any of its directors or (ii) a second corporation
of which a director is also a director are not void or voidable if the material
facts as to the transaction and as to the director's interest are fully
disclosed and the disinterested directors or a majority of the disinterested
shareholders represented and voting at a duly held meeting approve or ratify the
transaction in good faith, or the person asserting the validity of the contract
or transaction sustains the burden of proving that the contract or transaction
was just and reasonable as to the corporation at the time it was authorized,
approved or ratified.
Under the Colorado Law no conflicting interest transaction shall be
void, or voidable, or be enjoined, set aside or give rise to an award of damages
or other sanctions in a proceeding by a shareholder solely because the
conflicting interest transaction involves the director of the corporation or an
entity in which a director of the corporation is a director or officer or has a
financial interest or because the director is present at, or participates in,
the meeting of the corporation's board of directors, or of the committee of the
board of directors, which authorizes, approves or ratifies the conflicting
interest transaction, or solely because the director's vote is counted for such
purpose, provided that material facts as to the director's relationship or
interest, and as to the conflicting interest transaction, are disclosed or known
to the board of directors or the committee, and (i) the board of directors or
committee in good faith authorizes, approves or ratifies the conflicting
interest transaction by the affirmative vote of a majority of the disinterested
directors, (ii) the material facts as to the director's relationship or interest
and as to the conflicting interest transaction are disclosed or known to the
shareholders entitled to vote thereon and the conflicting interest transaction
is specifically authorized, approved or ratified in good faith by a vote of the
shareholders or (iii) the conflicting interest transaction is fair as to the
corporation as of the time it is authorized, approved or ratified by the board
of directors or committee thereof or the shareholders.
102
<PAGE>
A conflicting interest transaction is defined in the Colorado Law to
include (i) any loan or other assistance by the corporation to a director of the
corporation, or to an entity in which a director of the corporation is a
director or officer or has a financial interest, (ii) a guaranty by a
corporation of an obligation of a director of the corporation or of an
obligation of an entity in which a director of the corporation is a director or
officer or has a financial interest or (iii) a contract or transaction between a
corporation and a director of the corporation or between the corporation and an
entity in which a director of the corporation is a director or officer or has a
financial interest.
LIMITATION OF LIABILITY OF DIRECTORS. Under the DGCL (i) a corporation
has the power to indemnify a director against expenses, judgments, fines and
settlements if that person acted in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct of
the person was unlawful, and (ii) a corporation has the power to indemnify, with
certain exceptions, any person who is a party to any action by or in the right
of the corporation, against expenses actually and reasonably incurred by that
person in connection with the defense or settlement of the action if the person
acted in good faith and in a manner the person believed to be in the best
interests of the corporation and its shareholders.
The indemnification authorized by the DGCL is not exclusive and a
corporation may grant its directors certain additional rights to
indemnification. The Company's Certificate states that it is authorized to
provide further indemnification through bylaw provisions, agreements with its
agents, vote of shareholders or disinterested directors or otherwise. See
"DESCRIPTION OF SECURITIES - Certain Provisions Relating to Limitation of
Liability and Indemnification of Directors" for a discussion of the limitation
of liability and indemnification provided by the Company to its directors and
executive officers.
Similarly, under the California Law the corporation has the power to
indemnify a director against monetary damages in connection with the defense of
such director in an action brought for breach of such director's duties to the
corporation, provided, however, the California Law specifically prohibits the
limitation of directors liability for acts or omissions involving misconduct, a
lack of good faith, transactions where the director derived an improper personal
benefit, acts evidencing a reckless disregard for the director's duties, or acts
or omissions constituting an unexcused pattern of neglect of the director's
duties.
Under the Colorado Law, a corporation may indemnify a director against
liability if such person acted in good faith and such person reasonably believed
(i) in the case of conduct in his or her official capacity with the corporation,
that his or her conduct was in the corporation's best interest and (ii) in all
other cases that his or her conduct was at least not opposed to the
corporation's best interest, and in the case of any criminal proceeding, the
person had no reasonable cause to believe his or her conduct was unlawful. A
corporation may not indemnify a director in connection with a proceeding by or
in the right of the corporation in which the director was adjudged liable to the
corporation, or in connection with any other proceeding charging that the
director derived an improper personal benefit, whether or not involving action
in an official capacity, or in which the director was adjudged liable on the
basis that he or she derived an improper personal benefit.
Rocky Mountain's Articles provide that indemnification will be provided
to the extent permitted under the Colorado Law, but will only be authorized upon
the determination that indemnification of the director, officer or employee,
fiduciary, or agent is proper in the circumstances because he has met the
applicable standard of conduct under the Colorado Law with respect to
indemnification of directors. Such determination shall be made by majority vote
of the disinterested members of the Board of Directors. The right of
indemnification shall not be deemed exclusive to any other right to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
103
<PAGE>
BUSINESS COMBINATIONS/REORGANIZATIONS. A provision of the DGCL
prohibits certain transactions between a Delaware corporation and an "interested
stockholder." An "interested stockholder" for purposes of this DGCL provision is
a stockholder that is directly or indirectly a beneficial owner of 15% or more
of the voting power of the outstanding voting stock of a Delaware corporation
(or its affiliate or associate). The provision prohibits certain business
combinations between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder acquired its stock, unless
(i) the business combination is approved by the corporation's board of directors
prior to the stock acquisition date; (ii) the interested stockholder acquired at
least 85% of the voting stock of the corporation in the transaction in which he
became an interested stockholder; or (iii) the business combination is approved
by a majority of the board of directors and the affirmative vote of two-thirds
of disinterested stockholders. The Company's Certificate provides that the
Company shall not be governed by the restrictions on certain business
combinations as described in this paragraph and contains certain other
provisions related to business combinations. See "DESCRIPTION OF SECURITIES -
Certain Provisions of Certificate of Incorporation and By-laws."
Under the California Law, there is no such comparable provision.
However, the California Law does provide that, except where the fairness of the
terms and conditions of the transaction has been approved by the California
Commission of Corporations and except in a "short-form" merger (the merger of a
parent corporation with a subsidiary in which the parent owns at least 90% of
the outstanding shares of each class of the subsidiary's stock), if the
surviving corporation or its parent corporation owns, directly or indirectly,
shares of the target corporation representing more than 50% of the voting power
of the target corporation prior to the merger, the nonredeemable common stock of
the target corporation may be converted only into nonredeemable common stock of
the surviving corporation or its parent corporation, unless all of the
shareholders of the class consent. The effect of this provision is to prohibit a
cash-out merger of minority shareholders, except where the majority shareholder
already owns 90% or more of the voting power of the target corporation and
could, therefore, effect a short-form merger to accomplish such a cash-out of
minority shareholders.
In addition, the California Law requires that, in connection with
certain transactions between a corporation whose shares are held of record by
100 or more persons and an "interested party," such interested party must
deliver a written opinion as to the fairness of the consideration to the
shareholders of the corporation. An "interested party" for purposes of this
California Law provision means a person who is a party to the transaction and
(i) directly or indirectly controls the corporation, (ii) is an officer or
director of the corporation, or (iii) is an entity in which a material financial
interest is held by any director or executive officer of the corporation.
There are no limitations under the Colorado Law with respect to
interested stockholder transactions nor any restrictions in Rocky Mountain's
Articles or Rocky Mountain's By-laws with respect to interested stockholder
transactions.
SELECTED INFORMATION WITH RESPECT TO THE ADDED VALUE COMPANIES
OWNERSHIP OF CAPITAL STOCK; DIRECTORS AND OFFICERS
The following tables set forth certain information regarding the
beneficial ownership of the common stock of each of the Added Value Companies as
of October 30, 1995, by (i) all of their respective stockholders, who comprise
all of the Target Stockholders, and (ii) each of the officers and directors of
each of the Added Value Companies. Except as otherwise noted, each of the
persons named in the tables has sole voting power and investment power with
respect to all of the shares of common stock beneficially owned as set forth
opposite his, her, its or their name. There are no outstanding stock options or
warrants to acquire common stock as of the date of this Proxy
Statement/Prospectus except for an incentive stock option held by Robert D.
Lurie covering 5,000 shares of common stock of Added Value, which option is
contemplated to be exercised by Mr. Lurie prior to the Closing Date. The tables
also set forth for each of the persons listed the
104
<PAGE>
approximate number of shares of the Company's Common Stock that would be issued
to such person upon the consummation of the Transaction assuming for purposes
thereof a Market Value of $2.98 per share for the Company's Common Stock and,
accordingly, the issuance on the Closing Date of 1,641,800 shares of the
Company's Stock [excluding those shares (131,043) issuable to the California
Subsidiary in the Rocky Mountain Merger as successor by merger to Added Value].
<TABLE>
<CAPTION>
ADDED VALUE BENEFICIAL OWNERSHIP TABLE
ADDED VALUE COMMON THE COMPANY'S COMMON
STOCK PRIOR TO MERGER STOCK AFTER MERGER
--------------------- --------------------
PERCENT OF PERCENT OF
OUTSTANDING OUTSTANDING
NAME NUMBER OF SHARES SHARES NUMBER OF SHARES SHARES (1)
---- ---------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Wayne Vannoy(2) 20,000 19.4% 276,048 1.4%
Gary R. Miller(2)(3)
and Rosalie C. Miller 20,000 19.4 276,048 1.4
Robert D. Lurie(2)(3) 15,000(4) 14.6 207,036 1.1
Kenneth A. Plock(2)(3) 10,000 9.7 138,024 0.7
Cathleen M. Plock 10,000 9.7 138,024 0.7
Jerry D. Fletcher and
Marie Fletcher 10,000 9.7 138,024 0.7
Richard W. McCauley(2)(3) 10,000 9.7 138,024 0.7
Alexandra J. Miller 5,000 4.9 69,012 0.4
Thomas Broesamle 3,000 2.9 41,407 0.2
------- ----- --------- ---
TOTALS 103,000 100.0% 1,421,647 7.4%
======= ===== ========= ===
<FN>
(1) As a result of the Added Value Merger occurring immediately prior to the Rocky Mountain
Merger, the shares of the Company's Common Stock issuable on account of Added Value's
ownership of Rocky Mountain will be issued to the California Subsidiary (a wholly-owned
subsidiary of the Company) as successor by merger to Added Value. Although such shares of
the Company's Common Stock will remain outstanding after the Merger, such shares will be
indirectly owned by the Company and for purposes of the Proxy Statement/Prospectus are not
deemed outstanding.
(2) A director of Added Value.
(3) The officers of Added Value are as follows:
Robert D. Lurie - President
Kenneth A. Plock - Vice President
Gary R. Miller - Vice President
Richard W. McCauley - Treasurer and Secretary.
(4) Includes the 5,000 shares of Added Value common stock which is
contemplated to be acquired prior to the Closing Date by Mr. Lurie
pursuant to the exercise of an incentive stock option held by him.
</FN>
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
ROCKY MOUNTAIN BENEFICIAL OWNERSHIP TABLE
ROCKY MOUNTAIN COMMON THE COMPANY'S COMMON
STOCK PRIOR TO MERGER STOCK AFTER MERGER
-------------------------------- -----------------------------------
PERCENT OF PERCENT OF
OUTSTANDING OUTSTANDING
NAME NUMBER OF SHARES SHARES NUMBER OF SHARES SHARES (1)
---- ---------------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Added Value 400 37.3% 131,043(1) (1)
Wayne Vannoy(2)(3)(4) 378 35.3 196,565(5) 1.0
The Vannoy Family Charitable
Remainder Trust(4) 222 20.7 0(5) -
Kim B. Cooper 72 6.7 23,588 0.1
------ ----- ------- ---
TOTALS 1,072 100.0% 351,196 1.1%(1)
====== ===== ======= ===
</TABLE>
(1) As a result of the Added Value Merger occurring immediately prior to
the Rocky Mountain Merger, the shares of the Company's Common Stock
issuable on account of Added Value's ownership of Rocky Mountain
will be issued to the California Subsidiary (a wholly-owned
subsidiary of the Company) as successor by merger to Added Value.
Although such shares of the Company's Common Stock will remain
outstanding after the Merger, such shares will be indirectly owned
by the Company and for purposes of the Proxy Statement/Prospectus
are not deemed outstanding.
(2) A director of Rocky Mountain. The other three directors of Rocky
Mountain are Kenneth A. Plock, Steve Culligan and Lucia Vannoy (the
wife of Wayne Vannoy), none of whom are stockholders.
(3) The officers of Rocky Mountain are as follows:
Wayne Vannoy - President
Steve Culligan - Vice President
Kenneth A. Plock - Treasurer and Secretary
Neither Messrs. Culligan or Plock own any common stock of Rocky
Mountain. However, Mr. Plock is a shareholder of Added Value and Mr.
Culligan will be entering into an employment agreement with the
Colorado Subsidiary on the Closing Date. See "THE PURCHASE AGREEMENT -
Transaction."
(4) Wayne Vannoy has recently transferred 222 shares of the common stock of
Rocky Mountain to a trust for the benefit of Mr. Vannoy's immediate
family and lineal descendants titled The Vannoy Family Charitable
Remainder Trust and created pursuant to a Trust Agreement dated August
11, 1995 (the "Trust"), of which Trust Mr. Vannoy is sole trustee.
(5) Although pursuant to the Added Value Merger Mr. Vannoy and the Trust
will in the aggregate receive merger consideration in the same cash to
stock proportions as other Target Stockholders, the Trust will receive
only cash and Mr. Vannoy will receive all of the stock with the
remaining balance in cash.
106
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Lazar, Levine and Company LLP currently serves as
independent auditors of both the Company and each of the Added Value Companies.
Representatives of Lazar, Levine and Company LLP are not expected to attend the
Special Meeting. The Company's Board of Directors has selected Lazar, Levine and
Company LLP as the Company's independent public accountants for the fiscal year
ending December 31, 1995.
LEGAL MATTERS
Rubin Baum Levin Constant Friedman & Bilzin, Miami, Florida has acted
as counsel to the Company in connection with the Transaction and will render
opinions as to the validity of the issuance of the shares of the Company's
Common Stock in connection with the Transaction and as to federal income tax
consequences of the Transaction on the Target Stockholders.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1994 and 1993, and for each of the three years in the consolidated period ended
December 31, 1994, included in this Proxy Statement/Prospectus and related
supplemental schedule included elsewhere in the Registration Statement have been
audited by Lazar, Levine and Company LLP, independent certified public
accountants, as stated in that firm's reports appearing elsewhere in this Proxy
Statement/Prospectus, and have been so included in reliance upon such report
given upon the authority of that firm as experts in accounting and auditing.
The financial statements of each of the Added Value Companies as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994 included in this Proxy Statement/Prospectus and related
supplemental schedules included elsewhere in the Registration Statement have
been audited by Lazar, Levine and Company LLP, independent certified public
accountants, as stated in that firm's reports appearing elsewhere in this Proxy
Statement/Prospectus, and have been so included in reliance upon such reports
given upon the authority of that firm as experts in accounting and auditing.
OTHER MATTERS
The Company's Board of Directors has no knowledge of any other matters
which may come before the Special Meeting and does not intend to present any
other matters. However, if any other matters shall properly come before the
Special Meeting or any adjournment or postponements thereof, the persons named
as proxies will have discretionary authority to vote the shares represented by
the proxy accompanying this Proxy Statement/Prospectus in accordance with their
best judgment.
107
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
ALL AMERICAN SEMICONDUCTOR, INC.
PAGE
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets at September 30, 1995 (unaudited), December 31, 1994 and December 31, 1993..... F-3
Consolidated Statements of Income for each of the nine months ended September 30, 1995
and 1994 (unaudited) and for each of the three years ended December 31, 1994, 1993 and 1992............... F-4
Consolidated Statements of Changes in Shareholders' Equity for the nine months
ended September 30, 1995 (unaudited) and for each of the three years ended
December 31, 1994, 1993 and 1992.......................................................................... F-5
Consolidated Statements of Cash Flows for each of the nine months ended
September 30, 1995 and 1994 (unaudited) and for each of the three years ended
December 31, 1994, 1993 and 1992.......................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
Independent Auditors' Report............................................................................... F-20
Balance Sheets at September 30, 1995 (unaudited), December 31, 1994 and
December 31, 1993......................................................................................... F-21
Statements of Income for each of the nine months ended September 30, 1995 and
1994 (unaudited) and for each of the three years ended December 31, 1994, 1993
and 1992.................................................................................................. F-22
Statements of Changes in Shareholders' Equity for the nine months ended
September 30, 1995 (unaudited) and for each of the three years ended
December 31, 1994, 1993 and 1992.......................................................................... F-23
Statements of Cash Flows for each of the nine months ended September 30, 1995
and 1994 (unaudited) and for each of the three years ended December 31, 1994,
1993 and 1992............................................................................................. F-24
Notes to Financial Statements.............................................................................. F-25
A.V.E.D. - ROCKY MOUNTAIN, INC.
Independent Auditors' Report............................................................................... F-32
Balance Sheets at September 30, 1995 (unaudited), December 31, 1994 and
December 31, 1993......................................................................................... F-33
Statements of Income for each of the nine months ended September 30, 1995 and
1994 (unaudited) and for each of the three years ended December 31, 1994, 1993
and 1992.................................................................................................. F-34
Statements of Changes in Shareholders' Equity for the nine months ended
September 30, 1995 (unaudited) and for each of the three years ended
December 31, 1994, 1993 and 1992.......................................................................... F-35
Statements of Cash Flows for each of the nine months ended September 30, 1995
and 1994 (unaudited) and for each of the three years ended December 31, 1994,
1993 and 1992............................................................................................. F-36
Notes to Financial Statements.............................................................................. F-37
</TABLE>
F-1
<PAGE>
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, 1994 and 1993
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
All American Semiconductor, Inc. and subsidiaries at December 31, 1994 and 1993
and the results of their operations and their cash flows for the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company adopted
accounting standards that changed its method of accounting for income taxes and
post retirement benefits in 1993.
/s/ LAZAR, LEVINE & COMPANY LLP
-------------------------------
LAZAR, LEVINE & COMPANY LLP
New York, New York
March 10, 1995, except as to
Note 6, the date of which is
March 28, 1995
F-2
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
SEPTEMBER 30 -------------------
1995 1994 1993
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................ $ 215,000 $ 200,000 $ 180,000
Accounts receivable, less allowances for doubtful
accounts of $723,000, $425,000 and $400,000........................ 27,439,000 16,615,000 11,498,000
Inventories......................................................... 51,986,000 34,971,000 23,254,000
Other current assets................................................ 1,135,000 1,543,000 619,000
----------- ----------- ----------
Total current assets............................................... 80,775,000 53,329,000 35,551,000
Property, plant and equipment - net.................................. 3,552,000 2,832,000 1,534,000
Deposits and other assets............................................ 1,249,000 1,178,000 751,000
Excess of cost over fair value of net assets
acquired - net...................................................... 544,000 519,000 132,000
----------- ----------- -----------
$86,120,000 $57,858,000 $37,968,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................... $ 797,000 $ 396,000 $ 589,000
Accounts payable and accrued expenses............................... 27,680,000 13,007,000 7,239,000
Income taxes payable................................................ 450,000 - 109,000
Other current liabilities........................................... 112,000 126,000 80,000
----------- ----------- -----------
Total current liabilities.......................................... 29,039,000 13,529,000 8,017,000
Long-term debt:
Notes payable....................................................... 22,655,000 20,507,000 14,339,000
Subordinated debt................................................... 6,540,000 6,872,000 -
Other long-term debt................................................ 211,000 - -
----------- ----------- -----------
58,445,000 40,908,000 22,356,000
----------- ----------- -----------
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, 20,000,000 and
20,000,000 shares authorized, 17,689,791, 12,416,791 and
12,017,750 shares issued and outstanding.......................... 177,000 124,000 120,000
Capital in excess of par value...................................... 20,249,000 11,764,000 10,782,000
Retained earnings................................................... 7,309,000 5,122,000 4,770,000
Treasury stock, at cost, 19,592 shares.............................. (60,000) (60,000) (60,000)
----------- ----------- -----------
27,675,000 16,950,000 15,612,000
----------- ----------- -----------
$86,120,000 $57,858,000 $37,968,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
-------------------- ----------------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES..................................... $130,723,000 $72,839,000 $101,085,000 $67,510,000 $49,015,000
Cost of sales................................. (101,826,000) (53,351,000) (74,632,000) (49,010,000) (35,083,000)
------------ ----------- ------------ ----------- -----------
Gross profit.................................. 28,897,000 19,488,000 26,453,000 18,500,000 13,932,000
Selling, general and administrative
expenses..................................... (23,178,000) (16,098,000) (23,335,000) (14,821,000) (11,366,000)
Nonrecurring expenses:
Relocation of plant facilities............... - - (185,000) (61,000) (114,000)
Write-off of product development
investment.................................. - - (363,000) - -
------------ ----------- ------------ ----------- -----------
INCOME FROM OPERATIONS........................ 5,719,000 3,390,000 2,570,000 3,618,000 2,452,000
Interest expense.............................. (2,013,000) (1,124,000) (1,772,000) (1,103,000) (1,153,000)
Other income (expense) - net.................. - (114,000) (39,000) 281,000 (18,000)
------------ ----------- ------------ ----------- -----------
Income before income taxes.................... 3,706,000 2,152,000 759,000 2,796,000 1,281,000
Provision for income taxes.................... (1,519,000) (861,000) (407,000) (1,094,000) (525,000)
------------ ----------- ------------ ----------- -----------
NET INCOME.................................... $ 2,187,000 $ 1,291,000 $ 352,000 $ 1,702,000 $ 756,000
============ =========== ============ =========== ===========
Earnings Per Share:
Primary...................................... $.15 $.10 $.03 $.19 $.12
==== ==== ==== ==== ====
Fully diluted................................ $.14 $.10 $.03 $.18 $.12
==== ==== ==== ==== ====
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
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
--------- -------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991.............. 3,721,791 $37,000 $2,344,000 $2,312,000 $(60,000) $4,633,000
Sale of equity securities............... 4,025,000 40,000 3,088,000 - - 3,128,000
Net income.............................. - - - 756,000 - 756,000
---------- -------- ----------- ---------- -------- -----------
Balance, December 31, 1992.............. 7,746,791 77,000 5,432,000 3,068,000 (60,000) 8,517,000
Sale of equity securities............... 4,270,959 43,000 5,350,000 - - 5,393,000
Net income.............................. - - - 1,702,000 - 1,702,000
---------- -------- ----------- ---------- -------- -----------
Balance, December 31, 1993.............. 12,017,750 120,000 10,782,000 4,770,000 (60,000) 15,612,000
Exercise of stock options and
warrants............................... 399,041 4,000 545,000 - - 549,000
Issuance of options and
warrants............................... - - 437,000 - - 437,000
Net income.............................. - - - 352,000 - 352,000
---------- -------- ----------- ---------- -------- -----------
Balance, December 31, 1994.............. 12,416,791 124,000 11,764,000 5,122,000 (60,000) 16,950,000
Sale of equity securities............... 5,232,500 53,000 8,447,000 - - 8,500,000
Exercise of stock options and
warrant................................ 40,500 - 38,000 - - 38,000
Net income (unaudited).................. - - - 2,187,000 - 2,187,000
---------- -------- ----------- ---------- -------- -----------
Balance, September 30, 1995
(unaudited)............................ 17,689,791 $177,000 $20,249,000 $7,309,000 $(60,000) $27,675,000
========== ======== =========== ========== ========= ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------------------ -------------------------------------
1995 1994 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $2,187,000 $1,291,000 $ 352,000 $1,702,000 $ 756,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................. 597,000 369,000 677,000 384,000 408,000
Non-cash interest expense................................. 52,000 - 47,000 - -
Nonrecurring expenses..................................... - - 363,000 - (124,000)
Other expense, net........................................ - - - 31,000 82,000
Changes in assets and liabilities:
Increase in accounts receivable.......................... (10,824,000) (3,363,000) (3,019,000) (2,835,000) (1,170,000)
Increase in inventories.................................. (17,015,000) (7,441,000) (9,508,000) (5,228,000) (2,850,000)
Decrease (increase) in other current assets.............. 292,000 (597,000) (904,000) (411,000) 67,000
Increase (decrease) in accounts payable and
accrued expenses........................................ 14,673,000 2,421,000 4,702,000 708,000 (618,000)
Increase (decrease) in other current liabilities......... 436,000 9,000 (63,000) 85,000 31,000
---------- ---------- ---------- ---------- ----------
Net cash used for operating activities.................. (9,602,000) (7,311,000) (7,353,000) (5,564,000) (3,418,000)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment....................... (1,074,000) (1,411,000) (1,618,000) (250,000) (159,000)
Decrease (increase) in other assets......................... (223,000) (573,000) (712,000) (134,000) 113,000
Purchases of net assets of acquired companies............... - (1,062,000) (1,084,000) - -
---------- ---------- ---------- ---------- ----------
Net cash used for investing activities.................. (1,297,000) (3,046,000) (3,414,000) (384,000) (46,000)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of equity securities............. 8,538,000 548,000 742,000 5,393,000 3,128,000
Increase in notes payable................................... 275,000 6,165,000 6,088,000 - 1,050,000
Repayments of notes payable................................. (310,000) (2,021,000) (2,119,000) (964,000) (1,463,000)
Net borrowings under line of
credit agreements....................................... 2,411,000 5,700,000 6,076,000 1,536,000 858,000
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities............... 10,914,000 10,392,000 10,787,000 5,965,000 3,573,000
---------- ---------- ---------- ---------- ----------
Increase in cash............................................ 15,000 35,000 20,000 17,000 109,000
Cash, beginning of period................................... 200,000 180,000 180,000 163,000 54,000
---------- ---------- ---------- ---------- ----------
Cash, end of period......................................... $ 215,000 $ 215,000 $ 200,000 $ 180,000 $ 163,000
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $1,733,000 $ 945,000 $1,604,000 $1,102,000 $1,150,000
========== ========== ========== ========== ==========
Income taxes paid........................................... $ 523,000 $ 860,000 $1,021,000 $1,163,000 $ 306,000
========== ========== ========== ========== ==========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital leases aggregating $634,000 for computer equipment became
effective in August 1994.
In September 1994, the Company acquired substantially all of the assets
of GCI Corporation. The Company paid $485,000 in cash, with the balance by a
combination of a promissory note and stock options. The Company also assumed
substantially all of the seller's disclosed liabilities. In addition, in January
1994, the Company acquired substantially all of the assets of Components
Incorporated. The Company paid $599,000 in cash, with the balance in a
promissory note. The Company also assumed substantially all of the seller's
disclosed liabilities. During 1993, the Company acquired substantially all of
the assets of an affiliated company. The purchase price payable for such assets
was the assumption of liabilities.
See notes to consolidated financial statements
F-6
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies are in accordance with generally
accepted accounting principles. Outlined below are those policies considered
particularly significant.
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.
Prior periods' financial statements have been reclassified to conform
with the current period's presentation.
CONCENTRATION OF CREDIT RISK
Accounts receivable potentially exposes the Company to concentrations
of credit risk, as defined by Financial Accounting Standards Board Statement No.
105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk."
INVENTORIES
Inventories, which consist solely of electronic components held for
resale, are stated at the lower of cost (determined on an average cost basis) or
market.
DEPRECIATION AND AMORTIZATION
Fixed assets are reflected at cost. Depreciation of office furniture
and equipment, computer equipment and motor vehicles is provided on
straight-line and accelerated methods over the estimated useful lives of the
respective assets. Amortization of leasehold improvements is provided using the
straight-line method over the term of the related lease or the life of the
respective asset, whichever is shorter. Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are capitalized.
The excess of cost over the fair value of net assets acquired is being
amortized over 40 years using the straight-line method.
INCOME TAXES
The Company has elected to file a consolidated federal income tax
return with its subsidiaries. Deferred income taxes are provided on transactions
which are reported in the financial statements in different periods than for
income tax purposes. The Company adopted Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" ("SFAS 109"), for the year
ended December 31, 1993. SFAS 109 requires recognition of deferred tax
liabilities and assets for expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the difference is expected to
reverse. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The effect of the adoption of SFAS 109 was not material. See
Note 7 to Notes to Consolidated Financial Statements.
F-7
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
EARNINGS PER SHARE
Primary earnings per share has been computed based upon the weighted
average number of common and common equivalent shares outstanding during each
period presented. Fully diluted earnings per share has been computed assuming
conversion of all dilutive stock options and warrants.
The following average shares were used for the computation of primary
and fully diluted earnings per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
-------------------- --------------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Primary............................15,050,361 13,073,309 13,029,714 9,166,908 6,514,481
Fully diluted......................15,822,097 13,073,309 13,029,714 9,511,500 6,514,481
</TABLE>
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
investments purchased with an original maturity of three months or less to be
cash.
POSTRETIREMENT BENEFITS
In 1993, the Company adopted Financial Accounting Standards Board
Statement No. 106, "Employers' Accounting for Post-Retirement Benefits Other
Than Pensions." The effect of the adoption of this Statement was not material.
POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board issued
Statement No. 112, "Employers' Accounting for Postemployment Benefits" which
became effective for fiscal years beginning after December 15, 1993. This
standard requires the expensing, on an accrual basis, of all benefits provided
to former or inactive employees, their beneficiaries and covered dependents
after employment but before retirement. The Company does not provide any
postemployment benefits at this time.
NOTE 2 -- PUBLIC OFFERING
On June 15, 1995, the Company completed a public offering of 4,550,000
shares (exclusive of the over-allotment option) of its common stock at $1.875
per share. On July 13, 1995, the Company issued an additional 682,500 shares of
its common stock as a result of the exercise of an over-allotment option. The
aggregate net proceeds from this offering, after deducting all associated costs,
aggregated approximately $8,500,000. As a result, the Company's common stock and
capital in excess of par value increased by $53,000 and $8,447,000,
respectively. The net proceeds initially were used to reduce the amount
outstanding under the Company's line of credit pending the use of the line of
credit for continued expansion, including opening new sales offices, inventory
diversification such as the recent addition of a microprocessor supplier, and
general working capital purposes.
F-8
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
<TABLE>
<CAPTION>
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31
SEPTEMBER 30 ------------------------
1995 1994 1993
------------ ---------- ----------
<S> <C> <C> <C>
Office furniture and equipment.......................................... $2,543,000 $2,210,000 $1,793,000
Computer equipment...................................................... 1,941,000 1,321,000 1,587,000
Leasehold improvements.................................................. 1,179,000 1,058,000 69,000
Motor vehicles.......................................................... 25,000 25,000 25,000
---------- ---------- ----------
5,688,000 4,614,000 3,474,000
Accumulated depreciation and amortization............................... (2,136,000) (1,782,000) (1,940,000)
---------- ---------- ----------
$3,552,000 $2,832,000 $1,534,000
========== ========== ==========
</TABLE>
NOTE 4 -- ACQUISITIONS
On September 9, 1994, the Company completed the acquisition of
substantially all of the assets of GCI Corp., a Philadelphia-area distributor of
electronic components. As consideration for this acquisition, the Company paid
$485,000 in cash, issued a promissory note of approximately $306,000 payable
interest only for two years and in quarterly installments over the next three
years, and issued stock options valued at $144,000 at September 9, 1994. The
Company also assumed substantially all of the seller's disclosed liabilities of
approximately $1,930,000, including a $1,400,000 bank note payable which has
been repaid. See Notes 6 and 8 to Notes to Consolidated Financial Statements.
The promissory note is required to be paid down by one-half of the then
outstanding principal balance if certain Net Earnings (as defined) are attained
for 1995 or 1996. The seller may earn up to an additional $760,000 of contingent
purchase price over the three-year period ending December 31, 1997 if certain
gross profit targets are met. The acquisition was accounted for by the purchase
method of accounting which resulted in the recognition of approximately $394,000
of excess cost over fair value of net assets acquired. The operating results of
the acquired company are included in the consolidated statement of income from
the date of acquisition.
The three principal stockholders and key employees of GCI Corp. (the
"GCI Principals") each received an employment agreement expiring on December 31,
1997 providing for base salary of $122,000, $113,000 and $110,000 per annum,
respectively. In addition to base salary, each of the GCI Principals may earn a
bonus based upon the percentage of the Net Earnings generated in the sales
Territory, as defined. In addition to the net earnings bonus, two of the GCI
Principals may earn an annual bonus based upon the gross profit of the Company
with respect to all sales made in Maryland, Virginia and Delaware, but only if
certain minimum gross profit levels are obtained. The Company has also agreed to
grant to each of the GCI Principals employee incentive stock options at fair
market value on the date of grant (10,000 to each by January 30, 1996; 10,000 to
each by January 30, 1997; and 10,000 to each by January 30, 1998), but each such
grant is conditional upon sales in the sales Territory, as defined, attaining a
minimum gross profit for the year most recently ended. One other key employee of
GCI Corp. accepted employment with the Company and was granted 10,000 employee
incentive stock options at an exercise price of $2.63 per share, the ability to
receive up to 15,000 additional employee incentive stock options (5,000 per year
in respect of 1995, 1996 and 1997) if certain minimum gross profit for sales in
the sales Territory, as defined, are attained during each such year, and shall
be issued 1,000 shares of Common Stock upon completing his 18th month of
service.
On January 24, 1994, the Company completed the acquisition of
substantially all of the assets of Components Incorporated, a Chicago-based
distributor of electronic components ("Components"). As consideration for this
acquisition, the Company paid $599,000 in cash and issued a promissory note of
approximately $399,000 due two years from closing. The Company also assumed
substantially all of the seller's disclosed liabilities of approximately
$700,000, including a
F-9
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
$400,000 bank note payable which has been repaid. See Note 6 to Notes to
Consolidated Financial Statements. The president and principal stockholder of
Components (the "Components Principal") received an employment agreement, which
may be renewed annually by the Company for up to a maximum term of four years,
providing for base salary of $105,000 per annum plus separate bonuses based on
specified net earnings and gross sales. In addition to the base salary and
bonuses, the Components Principal received $350,000 of consideration for a
covenant not to compete that restricts any competition with the Company for a
period equal to the later of the third anniversary of the Components Principal's
termination as an employee or January 24, 1999. The $350,000 consideration was
in the form of a grant of stock options valued at $100,000 as of January 24,
1994 and the delivery to the Components Principal of a promissory note in the
principal amount of $250,000. See Notes 6 and 8 to Notes to Consolidated
Financial Statements. The Company has also agreed to grant to the Components
Principal employee incentive stock options at fair market value on the date of
grant (5,000 on January 24, 1995; 10,000 on January 24, 1996; and 15,000 on
January 24, 1997), each of such three sets of options to be for a period of five
years, subject to earlier termination in the event of termination of employment,
death or disability. The acquisition was accounted for by the purchase method of
accounting. The operating results of the acquired company are included in the
consolidated statement of income from the date of acquisition.
On June 14, 1993, the Company completed the acquisition of
substantially all of the assets of All American Transistor Corporation of D.C.
("D.C."), formerly a 45% owned affiliate. The consideration for the acquisition
was the assumption of all of D.C.'s disclosed liabilities. As a result, the
Company's assets and liabilities each increased by approximately $1,000,000,
including principal and interest on a bank note payable of approximately
$503,000 which has been paid off in full. The acquisition of D.C. has been
accounted for by the purchase method of accounting and the purchase price
approximates the fair value of the net assets acquired. The operating results of
this acquisition are included in the Company's consolidated statements of income
from the date of acquisition. Prior to this acquisition, the Company sold
inventory to D.C. at cost plus 10%. Sales to D.C. aggregated approximately
$91,000 for the year ended December 31, 1992. In addition, the Company
previously accounted for its 45% investment in this affiliate under the equity
method of accounting.
The following unaudited pro forma consolidated income statement data
presents the consolidated results of operations of the Company as if the
acquisitions of GCI Corp., Components and D.C. had occurred at the beginning of
the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------ ----------------------------------------
1994 1994 1993 1992
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................ $79,293,000 $107,539,000 $81,341,000 $61,617,000
Net income....................................... 1,517,000 578,000 1,879,000 819,000
Primary earnings per share....................... $.12 $.04 $.21 $.13
Fully diluted earnings per share................. $.12 $.04 $.20 $.13
</TABLE>
The above pro forma information does not purport to be indicative of
what would have occurred had the acquisitions been made as of such date or of
the results which may occur in the future.
NOTE 5 -- PRODUCT DEVELOPMENT INVESTMENT WRITE-OFF
As a result of the rapid growth of the Company's electronic components
distribution business, the Company has decided to no longer pursue the design
and
F-10
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
development of certain licensed technology intended to protect various
electronic equipment and machines from surges and sags in power. Accordingly,
the Company has expensed its total investment of $363,000 in 1994, which had
been classified as deferred product development costs within deposits and other
assets in the Consolidated Balance Sheet at December 31, 1993.
NOTE 6 -- LONG-TERM DEBT
LINE OF CREDIT
On March 28, 1995, the Company's line of credit agreement was amended
to increase the facility up to $30 million; provided, however, that the Company
may borrow in excess of $27 million only after (i) the senior lender has
reviewed and been satisfied, in its sole discretion, with the Company's audited
consolidated financial statements for the year ended December 31, 1994, and (ii)
the Company has received additional capitalization of not less than $4 million
(after all expenses of issuance and sale) from the issuance of its equity
securities. Since the date of such amendment, the Company's senior lender has
reviewed and become satisfied with the consolidated financial statements for the
year ended December 31, 1994 and, as a result of the public offering (see Note 2
to Notes to Consolidated Financial Statements), the Company has satisfied the
additional capitalization requirement. Accordingly, the Company may borrow up to
$30 million. The amendment to the line of credit agreement permits the Company
to request standby letters of credit to be issued by the senior lender on the
Company's behalf, with a sublimit of $5 million available for letters of credit
under the line and such letters of credit being chargeable as advances against
the line. The Company will pay the senior lender an issuance fee equal to
three-quarters of one percent (.75%) per annum of the aggregate amount of
outstanding letters of credit. Outstanding borrowings under this loan facility,
which are collateralized by accounts receivable, inventories and equipment and a
pledge of the capital stock of the Company's subsidiaries, amounted to
$22,402,000 at September 30, 1995.
In 1994, the Company's line of credit agreement was amended to increase
the facility to $25 million, extend the maturity to May 31, 1997 and reduce the
Company's borrowing rate from one-quarter of one percent (1/4%) above prime to,
at the Company's option, either one-quarter of one percent (1/4%) below prime or
two percent (2%) above certain LIBOR rates. The Company will pay a nonusage fee
of one-tenth of one percent (1/10%) calculated on the unused portion of the line
of credit, payable quarterly in arrears. At December 31, 1994, outstanding
borrowings under the Company's then $25 million facility were $19,991,000.
Under the line of credit agreement, the Company is required to comply
with certain affirmative and negative covenants. These covenants place
limitations on the Company's future borrowings, dividend payments, redemption of
certain securities and transactions with affiliates on less than an arm's-length
basis, investments, acquisitions, mergers and changes in control and management.
Furthermore, the agreement requires the Company to maintain certain financial
ratios including a current asset support ratio based upon specified percentages
of eligible accounts receivable and inventories. As of September 30, 1995, the
Company was in compliance with the required financial ratios and other
covenants.
At December 31, 1993, outstanding borrowings under the Company's then
$20 million facility were $13,915,000.
NOTES PAYABLE -- OTHER
Other notes payable aggregating $232,000 and $133,000, of which
$211,000 and $109,000 is classified as long-term at September 30, 1995 and
F-11
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
December 31, 1994, respectively, are payable monthly with interest rates from
9.0% to 12.5% per annum.
SUBORDINATED DEBT
In September 1994, in connection with the acquisition of GCI Corp., the
Company issued a promissory note to the seller bearing interest at 7% per annum
in the approximate amount of $306,000 due in 1999. The promissory note, which is
subordinate to the Company's line of credit, is payable interest only on a
quarterly basis for the first two years with the principal amount, together with
accrued interest thereon, payable in equal quarterly installments over the next
three years. One-half of the then outstanding principal balance of the
promissory note is required to be paid if certain Net Earnings (as defined) are
attained for 1995 or 1996.
In June 1994, the Company completed a private placement (the "1994
Private Placement") of 51.5 units, with each unit consisting of a
non-convertible 9% subordinated debenture due 2004 in the principal amount of
$100,000 issuable at par, together with 7,500 common stock purchase warrants
exercisable at $3.15 per share. The 51.5 units issued represent debentures
aggregating $5,150,000 together with an aggregate of 386,250 warrants. See Note
8 to Notes to Consolidated Financial Statements. The debentures are payable in
semi-annual payments of interest only in arrears 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 line of credit and certain notes issued to the Company's landlord. The
386,250 warrants were valued at $.50 per warrant as of the date of the 1994
Private Placement and, accordingly, the Company has recorded the discount in the
aggregate amount of $193,125 as additional paid-in capital. This discount is
being amortized over the ten-year term of the debentures and approximately
$14,000 and $10,000 was expensed during the nine months ended September 30, 1995
and the year ended December 31, 1994, respectively.
In May 1994, the Company executed a promissory note in the amount of
$865,000 in favor of the Company's landlord to finance substantially all of the
tenant improvements necessary for the Company's new facility. This $865,000 note
requires no payments in the first year (interest accrues and is added to the
principal balance), is payable interest only in the second year and has a
repayment schedule with varying monthly payments over the remaining 18 years. At
the same time, the Company entered into another promissory note with the
Company's landlord for up to $150,000 to finance certain personal property for
the new 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. It is also contemplated that certain additional improvements to the
new facility related to various miscellaneous items aggregating approximately
$100,000 will be financed by the landlord and be repayable in 240 consecutive,
equal self-amortizing installments of principal and interest. These notes, which
are subordinate to the Company's line of credit, bear interest at 8% per annum
and are payable monthly. In addition, the Company executed a promissory note in
the approximate amount of $33,000 with the Company's landlord. This note is
payable monthly with interest at 9.5% per annum and matures in April 1997.
In January 1994, in connection with the acquisition of Components, the
Company issued a promissory note to the seller bearing interest at 8% per annum
in the approximate amount of $399,000, payable in quarterly installments of
interest only, for a term of two years, with the entire principal amount payable
in full in January 1996. In addition, as part of the consideration for a
covenant not to compete, the Company issued a promissory note to the principal
F-12
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
of the seller in the amount of $250,000 (the "Non-Compete Note"). The
Non-Compete Note bears interest at 8% per annum, payable quarterly, with
$100,000 of principal due March 10, 1995, $50,000 of principal due April 24,
1996, and the remaining $100,000 payable in eight quarterly principal
installments each in the amount of $12,500 payable over the fourth and fifth
years of such note. One-half of the then outstanding principal balance of the
Non-Compete Note is required to be paid if certain Net Earnings (as defined) are
attained in any fiscal year, with the entire then outstanding principal balance
of the Non-Compete Note required to be paid if at least the same level of Net
Earnings (as defined) are attained in a subsequent fiscal year. If the principal
of the seller resigns or is terminated for cause on or prior to January 24,
1996, he will be obligated to pay the Company $100,000, payable either in cash
or as a reduction of the principal balance of the Non-Compete Note. These notes
are subordinate to the Company's line of credit.
Long-term debt of the Company as of December 31, 1994, other than the
line of credit, matures as follows:
1995..................................... $ 161,000
1996..................................... 543,000
1997..................................... 189,000
1998..................................... 277,000
1999..................................... 192,000
Thereafter............................... 5,780,000
---------
$7,142,000
==========
OBLIGATIONS UNDER CAPITAL LEASES
The Company is the lessee of computer and office equipment under
capital leases expiring in various years through 1997. The assets, aggregating
$773,000, and liabilities under capital leases 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,
1994, accumulated depreciation of these assets aggregated approximately
$154,000. Depreciation of assets under capital leases is included in
depreciation expense.
Minimum future lease payments under capital leases as of December 31,
1994 and for each of the next five years and in the aggregate are approximately
as follows:
1995..................................... $347,000
1996..................................... 292,000
1997..................................... 190,000
1998..................................... -
1999..................................... -
--------
Total minimum lease payments............. 829,000
Less amount representing interest........ (187,000)
---------
Total obligations under capital leases... 642,000
Current portion.......................... (235,000)
---------
$407,000
========
Interest rates on capital leases vary from 11.7% to 13.9% per annum and
are imputed based on the lower of the Company's incremental borrowing rate at
the inception of each lease or the lessor's implicit rate of return. Various
capital leases provide for purchase options.
F-13
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 7 -- INCOME TAXES
The tax effects of the temporary differences that give rise to the
deferred tax assets and liabilities as of September 30, 1995, December 31, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
------------ ------------------
1995 1994 1993
------------ ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable........................................... $282,000 $168,000 $216,000
Inventory..................................................... 285,000 222,000 161,000
Other assets.................................................. 52,000 51,000 86,000
-------- -------- --------
619,000 441,000 463,000
Deferred tax liabilities:
Fixed assets.................................................. 464,000 326,000 352,000
-------- -------- --------
Net deferred tax asset......................................... $155,000 $115,000 $111,000
======== ======== ========
</TABLE>
The components of income tax expense for the nine months ended
September 30, 1995 and 1994 and for the years ended December 31, 1994, 1993 and
1992 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- -------- -----------
<S> <C> <C> <C>
September 30, 1995
Federal....................................................... $1,280,000 $ 35,000 $1,315,000
State......................................................... 199,000 5,000 204,000
---------- -------- ----------
$1,479,000 $ 40,000 $1,519,000
========== ======== ==========
September 30, 1994
Federal....................................................... $ 727,000 $ 4,000 $ 731,000
State......................................................... 129,000 1,000 130,000
---------- -------- ----------
$ 856,000 $ 5,000 $ 861,000
========== ======== ==========
December 31, 1994
Federal....................................................... $ 385,000 $ (3,000) $ 382,000
State......................................................... 26,000 (1,000) 25,000
---------- --------- ----------
$ 411,000 $ (4,000) $ 407,000
========== ========= ==========
December 31, 1993
Federal....................................................... $ 962,000 $(11,000) $ 951,000
State......................................................... 145,000 (2,000) 143,000
---------- --------- ----------
$1,107,000 $(13,000) $1,094,000
========== ========= ==========
December 31, 1992
Federal....................................................... $ 404,000 $ 51,000 $ 455,000
State......................................................... 64,000 6,000 70,000
---------- -------- ----------
$ 468,000 $ 57,000 $ 525,000
========== ======== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------ -----------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. Federal income tax statutory rate............................ 34.0% 34.0% 34.0% 34.0% 34.0%
State income tax, net of federal income tax benefit............... 3.6 3.5 4.6 3.4 3.6
Other -- including non-deductible items........................... 3.4 2.5 15.0 1.7 3.4
---- ---- ---- ---- ----
Effective tax rate................................................ 41.0% 40.0% 53.6% 39.1% 41.0%
==== ==== ==== ==== ====
</TABLE>
The high effective tax rate for the year ended December 31, 1994 is
primarily due to non-deductible entertainment expenses.
F-14
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 8 -- CAPITAL STOCK, OPTIONS AND WARRANTS
In connection with new employment agreements between the Company and
each of its four executive officers entered into in May 1995, an aggregate of
1,000,000 stock options were granted on June 8, 1995, to such four executive
officers pursuant to the Employees', Officers', Directors' Stock Option Plan, as
amended (the "Option Plan"). These options have an exercise price of $1.875 per
share and are exercisable through June 7, 2005, subject to a vesting schedule.
In connection with the public offering (see Note 2 to Notes to
Consolidated Financial Statements), the Company issued to the underwriter common
stock purchase warrants covering an aggregate of 523,250 shares of common stock
(including warrants issued in connection with the underwriter's exercise of the
over-allotment option). These warrants are exercisable at a price of $2.625 per
share for a period of four years commencing one year from June 8, 1995.
In June 1994, the Company issued an aggregate of 386,250 common stock
purchase warrants in connection with a private placement of subordinated
debentures (see Note 6 to Notes to Consolidated Financial Statements). The
warrants are exercisable at any time between December 14, 1994 and June 13, 1999
at an exercise price of $3.15 per share. In connection with this private
placement, the placement agent received warrants to purchase 38,625 shares of
the Company's common stock. The placement agent's warrants are exercisable for a
four-year period commencing June 14, 1995 at an exercise price of $3.78 per
share. At September 30, 1995, none of these warrants had been exercised.
During 1992, the Company sold units, each unit consisting of two shares
of common stock and two warrants. In addition, the underwriters of this offering
were issued warrants to purchase 175,000 units at $3.30 per unit. The
underwriters' warrants are exercisable for a four-year period which commenced in
June 1993. During 1993, the Company redeemed its then outstanding warrants. In
addition, during 1993, 78,750 of the underwriters' warrants were exercised. As a
result of these transactions, the Company received aggregate net proceeds of
approximately $5,393,000 in 1993. During 1994, an additional 78,750 of the
underwriters' warrants were exercised, leaving a balance of 17,500 warrants. The
Company received aggregate net proceeds of approximately $465,000 in 1994. The
net proceeds are being used for continued expansion and general working capital
purposes. At September 30, 1995, the 17,500 warrants remain unexercised.
In March 1992, the Company issued a warrant to acquire 30,000 shares of
its common stock at $1.00 per share in connection with a $1.0 million
subordinated loan to the Company which was repaid in June 1992. This warrant was
exercised in March 1995.
In September 1987, the Company issued a warrant to acquire 90,000
shares of its common stock at $1.60 per share (after the 1989 stock split)
relating to a since expired consulting agreement. In connection with the public
offering completed in June 1992, the Company extended the exercise period of
this warrant to June 1994. In May 1993, in connection with a new consulting
agreement with the same party, the Company further extended the exercise period
to June 1997 and issued additional warrants to acquire 90,000 shares of its
common stock at $1.35 per share. In July 1995, the Company granted a warrant to
acquire 45,000 shares of common stock at an exercise price of $2.50 per share
exercisable through July 20, 2000, related to a consulting agreement. At
September 30, 1995, none of the warrants relating to these consulting agreements
had been exercised.
In June 1987, the Company reserved 375,000 shares of common stock for
issuance under an employee stock option plan. In September 1992, the number of
shares of common stock reserved for issuance under this stock option plan was
F-15
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
increased to 750,000 shares, in 1993 the number of shares of common stock
reserved for issuance under this stock option plan was increased to 1,750,000
shares, in 1994 the number of shares of common stock reserved was increased to
2,250,000 shares and in 1995 the number of shares of common stock reserved was
increased to 3,250,000 shares. As of September 30, 1995 outstanding options
under this plan were as follows:
NUMBER OF
OPTIONS
DATE OF GRANT OUTSTANDING OPTION PRICE
------------- ----------- -------------
1991..................................... 425,000 $ .75 -$1.03
1993..................................... 469,063 $1.375-$2.53
1994..................................... 261,000 $2.125-$2.63
1995..................................... 1,005,000 $1.84 -$1.875
---------
Total outstanding........................ 2,160,063
Total exercised.......................... 156,627
Total available.......................... 933,310
---------
3,250,000
=========
All such options outstanding are exercisable within six years from the
date granted.
In connection with the acquisition of the assets of Components (see
Note 4 to Notes to Consolidated Financial Statements), the Company issued 98,160
unqualified stock options exercisable through January 1999 at an exercise price
of $1.65 per share.
In connection with the acquisition of the assets of GCI Corp. (see Note
4 to Notes to Consolidated Financial Statements), the Company issued 117,551
unqualified stock options exercisable from September 1995 through September 1999
at an exercise price of $1.65 per share.
In addition, under certain circumstances, the Company may be obligated
to issue 1,000 shares of its common stock and 135,000 incentive stock options.
See Note 4 to Notes to Consolidated Financial Statements.
NOTE 9 -- COMMITMENTS/RELATED PARTY TRANSACTIONS
In December 1991, the Company relocated its corporate offices and Miami
warehouse to a 37,000 sq. ft. facility. In addition, a warehouse in New York was
consolidated into this new Miami warehouse. In connection with the relocation
and consolidation, the Company entered into a new lease with an unrelated third
party which was to expire in December 1997. Annual rent payments under this
lease totaled $57,000 in 1994.
In May 1994, the Company terminated its lease covering the 37,000 sq.
ft. facility and entered into a new lease with its then existing landlord to
lease a new 110,800 sq. ft. facility for its corporate headquarters and Miami
warehouse. The Company is utilizing approximately 75% of this new facility, the
balance of which the Company is subleasing to an unrelated third party for a
term of three years ending on July 14, 1997. This sublease has no renewal
options and the Company has the right to recapture approximately 13,000 square
feet of the sublet space from the tenant after the eighteenth month of the
three-year term. The sublease provides for base rent of $5,000 per month
increasing 5% per year and additional rent representing the subtenant's pro rata
share of landlord pass-through expenses and other expenses pertaining to the
sublet premises. The new lease has a term expiring in 2014 (subject to the
Company's right to terminate at any time after the fifth year of term upon
twenty-four months prior written notice and the payment of all outstanding debt
owed to the landlord and without giving effect to the Company's three six-year
options to renew at the
F-16
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
fair market value rental rates) and provides for annual fixed rental payments
totaling approximately $264,000 in the first year, $267,000 in the second year,
$279,000 in each of the third, fourth and fifth years, $300,600 in the sixth
year, $307,800 in the seventh year and in each year thereafter during the term,
the rent shall increase once per year in an amount equal to the annual
percentage increase in the consumer price index not to exceed 4% in any one
year.
In addition, a Company executive officer and director owns a one-third
interest in a corporation that leased office space to the Company until December
1994. During 1994, the Company paid approximately $31,000 in rent to lease such
office space.
Approximate minimum future rental payments required under operating
leases, which include 20 sales office locations, equipment under lease and the
new corporate headquarters lease commencing in 1994, that have initial or
remaining noncancellable lease terms in excess of one year as of December 31,
1994, are as follows for the next five years:
YEAR ENDING DECEMBER 31
-----------------------
1995........................................ $1,307,000
1996........................................ 1,218,000
1997........................................ 987,000
1998........................................ 644,000
1999........................................ 444,000
Total rent expense, including real estate taxes and net of sublease
income, amounted to approximately $802,000 and $567,000 for the nine months
ended September 30, 1995 and 1994, respectively, and $753,000, $526,000 and
$492,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
Effective June 1, 1992, the Company entered into employment agreements
with Paul Goldberg, its Chief Executive Officer, and Bruce M. Goldberg, its
current President and Chief Operating Officer (collectively, the "1992
Agreements"). The 1992 Agreements are for three-year terms expiring on May 31,
1995. Pursuant to their 1992 Agreements, Paul Goldberg and Bruce M. Goldberg
currently receive a base salary of $186,000 and $150,000 per annum,
respectively. Under the 1992 Agreements, Paul Goldberg and Bruce M. Goldberg are
also each entitled to receive a bonus equal to five percent of the Company's
pre-tax income in excess of $1,000,000 in any calendar year. Such bonus
compensation payable under the 1992 Agreements to Paul Goldberg and Bruce M.
Goldberg is limited to $150,000 and $100,000 per annum, respectively. For the
calendar year 1994, Paul Goldberg and Bruce M. Goldberg did not earn a bonus,
although they were each paid $100,000 relating to bonuses earned for the
Company's 1993 fiscal year.
In addition, the 1992 Agreements provide for certain additional
benefits, including participation in Company benefit plans, including the
Deferred Compensation Plan, payments to the employee upon his disability, life
insurance coverage and the continued use of a Company automobile. The agreements
prohibit Paul Goldberg and Bruce M. Goldberg from competing with the Company for
two years after any voluntary termination of employment or termination for
cause. The agreements further provide that if there is a change in control (as
defined) of the Company, the Company shall have the option to either extend the
agreements for two additional years or terminate the agreements upon making a
lump sum severance payment equal to two years compensation. Further, if Paul
Goldberg or Bruce M. Goldberg were to be terminated without cause, each of them
would be entitled to receive severance benefits equal to the greater of two
years compensation or the remainder of the compensation due them under their
respective employment agreements.
F-17
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
Effective January 1, 1988, the Company established a deferred
compensation plan (the "Deferred Compensation Plan") for executive officers and
key employees of the Company. The employees eligible to participate in the
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 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 Deferred Compensation Plan will be
distributed monthly. The Company paid benefits under this plan of approximately
$52,000 during 1994, none of which was paid to any executive officer. The
maximum benefit payable to a Participant (including each of the executive
officers) under the Deferred Compensation Plan is presently $22,500 per annum.
At September 30, 1995 and December 31, 1994 the cash surrender values of
insurance policies owned by the Company under the Plan, which provide for the
accrued deferred compensation benefits, aggregated approximately $78,000 and
$67,000, respectively.
The Company maintains a 401(k) plan (the "401(k) Plan"), which is
intended to qualify under Section 401(k) of the Internal Revenue Code. All
full-time employees of the Company over the age of 21 are eligible to
participate in the 401(k) Plan after completing 90 days of employment. Each
eligible employee may elect to contribute to the 401(k) Plan, through payroll
deductions, up to 15% of his or her salary, limited to $9,240 in 1994. The
Company makes matching contributions and in 1994 its contributions were in the
amount of 25% on the first 6% contributed of each participating employee's
salary.
NOTE 10 -- SETTLEMENT OF INSURANCE CLAIM
In 1993, the Company settled its business interruption claim, which
occurred during the third quarter of 1992, for $237,000. This settlement is
reflected as other income in the Consolidated Statement of Income for the year
ended December 31, 1993.
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 each case, 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.
NOTE 12 -- ECONOMIC DEPENDENCY
For the nine months ended September 30, 1995, purchases from one
supplier were in excess of 10% of the Company's total purchases and aggregated
approximately $19,081,000. The net outstanding accounts payable to this supplier
at September 30, 1995 amounted to approximately $1,316,000.
For the nine months ended September 30, 1994, purchases from one
supplier were in excess of 10% of the Company's total purchases and aggregated
approximately $9,030,000. There was no outstanding accounts payable to this
supplier at September 30, 1994.
F-18
<PAGE>
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
For the year ended December 31, 1994, purchases from one supplier were
in excess of 10% of the Company's total purchases and aggregated approximately
$12,200,000. The net outstanding accounts payable to this supplier at December
31, 1994 amounted to approximately $246,000.
For the year ended December 31, 1993, purchases from one supplier were
in excess of 10% of the Company's total purchases and aggregated approximately
$9,600,000. The net outstanding accounts payable to this supplier at December
31, 1993 amounted to approximately $178,000.
For the year ended December 31, 1992, purchases from one supplier were
in excess of 10% of the Company's total purchases and aggregated approximately
$6,100,000. The net outstanding accounts payable to this supplier at December
31, 1992 amounted to approximately $300,000.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Added Value Electronics Distribution, Inc.
Tustin, California
We have audited the accompanying balance sheets of Added Value Electronics
Distribution, Inc. (An S Corporation) as of December 31, 1994 and 1993 and the
related statements of income, changes in shareholders' equity and cash flows for
the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Companys' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Added Value Electronics
Distribution, Inc. as of December 31, 1994 and 1993 and the results of its
operations and its cash flows for the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles.
/s/ LAZAR, LEVINE & COMPANY LLP
-------------------------------
LAZAR, LEVINE & COMPANY LLP
New York, New York
August 11, 1995
F-20
<PAGE>
<TABLE>
<CAPTION>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC
(AN S CORPORATION)
BALANCE SHEETS
- ASSETS -
December 31,
September 30, ----------------------------
1995 1994 1993
------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 43,918 $ 180,297 $ 160,962
Accounts receivable, less allowance for doubtful accounts of
$95,587 for 1995, 1994 and 1993 (Notes 1b, 4 and 10) 4,442,954 3,401,998 2,962,025
Inventories (Notes 1c and 4) 4,066,084 2,878,174 2,614,602
Due from affiliate (Note 2) 30,500 20,751 23,051
Prepaid expenses and other current assets 89,058 86,199 44,242
---------- ----------- ----------
TOTAL CURRENT ASSETS 8,672,514 6,567,419 5,804,882
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY (NOTE 2) 912,456 846,322 741,690
PROPERTY AND EQUIPMENT, NET (NOTES 1D, 3, 4 AND 6) 166,516 175,761 117,967
OTHER ASSETS 37,706 35,832 30,958
---------- ----------- ----------
$9,789,192 $7,625,334 $6,695,497
========== =========== ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Note payable - bank (Note 4) $3,144,200 $1,894,000 $1,615,591
Current portion of long-term debt (Note 6) - - 14,100
Accounts payable (Note 10) 2,610,758 1,979,560 1,895,165
Accrued expenses 186,534 227,506 106,400
Due to affiliate (Note 2) - - -
Advance from related party (Note 5) - 100,000 100,000
Income taxes payable (Notes 1f and 7) 14,500 - 8,665
---------- ----------- ----------
TOTAL CURRENT LIABILITIES 5,955,992 4,201,066 3,739,921
---------- ----------- ----------
LONG-TERM DEBT - NET OF CURRENT PORTION
(NOTE 6) - - 29,375
---------- ----------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 9, 10 AND 11)
SHAREHOLDERS' EQUITY (NOTES 8, 9 AND 11):
Common stock, no par value; 200,000 shares authorized,
98,000 shares issued and outstanding 55,000 55,000 55,000
Retained earnings 3,778,200 3,369,268 2,871,201
---------- ----------- ----------
3,833,200 3,424,268 2,926,201
---------- ----------- ----------
$9,789,192 $7,625,334 $6,695,497
========== ========== ==========
</TABLE>
See notes to financial statements.
F-21
<PAGE>
<TABLE>
<CAPTION>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
STATEMENTS OF INCOME
Nine Months Ended
September 30, Years Ended December 31,
------------------------------ -------------------------------------------------
1995 1994 1994 1993 1992
------------- ------------- ---------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES (NOTES 1E AND 10) $24,114,017 $19,510,385 $27,663,129 $19,649,768 $17,231,206
COST OF SALES (NOTE 10) 19,171,582 15,100,304 21,853,321 15,076,501 13,163,829
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 4,942,435 4,410,081 5,809,808 4,573,267 4,067,377
Selling, general and administrative
expenses (Note 2) 3,921,229 3,317,775 4,828,310 3,593,766 3,303,850
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,021,206 1,092,306 981,498 979,501 763,527
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (126,471) (84,225) (117,622) (83,531) (74,229)
Other income (expense) (Note 2) 5,766 47,649 97,043 166,231 (16,859)
Equity in earnings of unconsolidated
subsidiary (Note 2) 66,134 132,871 104,632 129,163 70,784
----------- ----------- ----------- ----------- -----------
(54,571) 96,295 84,053 211,863 (20,304)
----------- ----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 966,635 1,188,601 1,065,551 1,191,364 743,223
Provision for income taxes
(Notes 1f and 7) 14,500 29,715 16,458 24,366 16,200
----------- ----------- ----------- ----------- -----------
NET INCOME $ 952,135 $ 1,158,886 $ 1,049,093 $ 1,166,998 $ 727,023
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-22
<PAGE>
<TABLE>
<CAPTION>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Total
----------------------- Retained Shareholders'
Shares Amount Earnings Equity
-------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 (unaudited) 98,000 $55,000 $1,592,403 $1,647,403
Net Income 727,023 727,023
-------- --------- ---------- ----------
Balance, December 31, 1992 98,000 55,000 2,319,426 2,374,426
Net Income 1,166,998 1,166,998
Distributions to shareholders - - (615,223) (615,223)
-------- --------- ---------- ----------
Balance, December 31, 1993 98,000 55,000 2,871,201 2,926,201
Net Income 1,049,093 1,049,093
Distributions to shareholders - - (551,026) (551,026)
-------- --------- ---------- ----------
Balance, December 31, 1994 98,000 55,000 3,369,268 3,424,268
Net Income (unaudited) 952,135 952,135
Distributions to shareholders (unaudited) - - (543,203) (543,203)
-------- --------- ---------- ----------
Balance, September 30, 1995 (unaudited) 98,000 $55,000 $3,778,200 $3,833,200
======== ========= ========== ==========
</TABLE>
See notes to financial statements.
F-23
<PAGE>
<TABLE>
<CAPTION>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30, Years Ended December 31,
--------------------------- -----------------------------------------
1995 1994 1994 1993 1992
------------ ------------ ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 952,135 $ 1,158,886 $ 1,049,093 $ 1,166,998 $ 727,023
Adjustments to reconcile net earnings to net
cash provided by (used by) operating activities:
Depreciation and amortization 41,684 28,458 44,195 45,946 37,944
Provision for bad debts 17,847 39,075 74,587 108,418 53,003
Provision for obsolete inventory -- -- 81,000 -- --
Equity in earnings of unconsolidated
subsidiary (66,134) (132,872) (104,632) (129,163) (70,784)
Changes in assets and liabilities:
(Increase) decrease in account receivable (1,058,803) (397,217) (514,560) (1,113,929) 91,827
(Increase) in inventories (1,187,910) (345,824) (344,572) (795,131) (293,759)
(Increase) in prepaid expenses and other
current assets (2,859) (2,737) (41,957) (1,213) (22,330)
(Increase) decrease in other assets (1,874) (4,874) (4,874) -- 60,790
Increase in accounts payable 631,198 197,675 84,395 370,586 173,543
Increase (decrease) in accrued expenses (40,972) (2,230) 121,106 21,287 (72,708)
Increase (decrease) in income taxes payable 14,500 20,092 (8,665) 1,665 (2,194)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED BY) OPERATING
ACTIVITIES (701,188) 558,432 435,116 (324,536) 682,355
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property and equipment (32,439) (102,615) (101,989) (32,221) (97,131)
----------- ----------- ----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (32,439) (102,615) (101,989) (32,221) (97,131)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase (decrease) in short-term
borrowings 1,250,200 266,309 264,309 1,007,411 (692,308)
Increase (decrease) in advances from
related parties (109,749) (99,803) 2,300 43,013 (14,261)
Distribution to shareholders (543,203) (520,831) (551,026) (615,223) --
Increase (decrease) in long-term borrowings -- (29,375) (29,375) 29,375 --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED BY) FINANCING
ACTIVITIES 597,248 (383,700) (313,792) 464,576 (706,569)
----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (136,379) 72,117 19,335 107,819 (121,345)
Cash and cash equivalents, at beginning of year 180,297 160,962 160,962 53,143 174,488
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 43,918 $ 233,079 $ 180,297 $ 160,962 $ 53,143
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 118,805 $ 81,883 $ 117,622 $ 78,306 $ 70,508
Income taxes 7,800 28,673 16,458 15,701 9,200
</TABLE>
See notes to financial statements.
F-24
<PAGE>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies considered particularly significant.
(A) ORGANIZATION:
Added Value Electronics Distribution, Inc. (the "Company") was
incorporated in the state of California on April 12, 1982. The
Company's primary business is the distribution of semiconductors
and related electronic components.
(B) CONCENTRATION OR CREDIT RISK:
Accounts receivable potentially exposes the Company to
concentrations of credit risk, as defined by Financial
Accounting Standards Board Statement No. 105, "Discussions of
Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of Credit
Risk."
(C) INVENTORIES:
Inventories, which consist solely of electronic components held
for resale, are stated at the lower of cost (determined on an
average cost basis) or market.
(D) PROPERTY AND EQUIPMENT:
Property and equipment are reflected at cost. Depreciation is
provided on the straight-line method over the estimated useful
lives of the respective assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset, whichever
is shorter.
Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized.
(E) REVENUE RECOGNITION:
The Company recognizes revenue from distribution and turnkey
sales upon shipment.
(F) INCOME TAXES:
The shareholders of the Company have elected S corporation
status under Internal Revenue Code Section 1362(a) and the
corresponding tax laws of the state of California. S corporation
income is taxed directly to the shareholders for income tax
purposes.
The Company has adopted SFAS No. 109 "Accounting for Income
Taxes" ("SFAS No. 109") effective January 1, 1993. SFAS No. 109
requires the use of the asset and liability approach of
providing for income taxes. This adoption did not have a
material impact on the Company's operations or financial
position.
F-25
<PAGE>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(G) RECLASSIFICATIONS:
Prior period financial statements have been reclassified to
conform with the current period's presentation.
(H) 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.
(I) POST-RETIREMENT BENEFITS:
In 1993, the Company adopted Financial Accounting Standards
Board Statement No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions." The effect of the
adoption of this Statement was not material.
NOTE 2 - INVESTMENT IN UNCONSOLIDATED SUBSIDIARY/TRANSACTIONS
WITH AFFILIATE:
Investment in unconsolidated subsidiary is based on the equity
method and represents a 37.3%, 37.3% and 36.1% interest in the
common stock of A.V.E.D. - Rocky Mountain, Inc. at September 30,
1995, December 31, 1994 and 1993, respectively.
Summary financial information for A.V.E.D. - Rocky Mountain,
Inc. is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------- ---------------------------------------
1995 1994 1994 1993 1992
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets $ 4,208,298 $ 3,413,927 $ 2,801,498 $ 3,483,685 $ 2,656,277
Non-current assets 71,664 85,625 71,257 85,488 51,416
----------- ----------- ----------- ----------- -----------
$ 4,279,962 $ 3,499,552 $ 2,872,755 $ 3,569,173 $ 2,707,693
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current liabilities $ 1,830,656 $ 1,083,670 $ 590,938 $ 1,486,643 $ 997,607
Long-term debt 15,296 55,655 25,110 14,646 --
Stockholders' equity 2,434,010 2,360,227 2,256,707 2,067,884 1,710,086
----------- ----------- ----------- ----------- -----------
$ 4,279,962 $ 3,499,552 $ 2,872,755 $ 3,569,173 $ 2,707,693
=========== =========== =========== =========== ===========
NET SALES $ 6,573,906 $ 8,005,889 $10,199,757 $10,930,916 $ 8,105,464
=========== =========== =========== =========== ===========
NET EARNINGS $ 177,303 $ 360,545 $ 257,025 $ 357,798 $ 196,078
=========== =========== =========== =========== ===========
</TABLE>
F-26
<PAGE>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 2 - INVESTMENT IN UNCONSOLIDATED SUBSIDIARY/TRANSACTIONS WITH
AFFILIATE (CONTINUED):
Throughout the year, the Company purchases and sells components
from/to this affiliate at cost. Sales to this affiliate are not
included in net sales reflected on the respective statements of
income but are instead shown as a reduction against the original
purchase. Purchases from this affiliate are recorded in a manner
consistent with that of any purchase transaction with an
unrelated third party. Activity with respect to these sales and
purchase transactions are detailed below.
Sales to this affiliate for the nine month periods ended
September 30, 1995 and 1994 and for the years ended December 31,
1994, 1993 and 1992 aggregated approximately $403,000, $852,000,
$960,000, $938,000 and $1,342,000, respectively.
Purchases from this affiliate for the nine month periods ended
September 30, 1995 and 1994 and for the years ended December 31,
1994, 1993 and 1992 aggregated approximately $649,000, $629,000,
$727,000, $619,000 and $1,016,000, respectively.
The Company has entered into an oral agreement to provide
accounting and administrative services to A.V.E.D. - Rocky
Mountain, Inc. The Company is compensated based on 20% of
A.V.E.D. - Rocky Mountain Inc.'s net earnings subject to an
annual $36,000 ceiling. The management fee for the year ended
December 31, 1992 was deferred by mutual agreement and
subsequently paid in 1993. Included in other income in the
accompanying statement of earnings is $72,000 related to this
agreement for the years ended December 31, 1993 and 1992. The
Company also received reimbursements of $120,000 in 1994,
$144,000 in 1993 and $275,375 in 1992 for allocated general and
administrative expenses from A.V.E.D. - Rocky Mountain. For the
nine months ended September 30, 1995 and 1994 these
reimbursements aggregated $72,000 and $117,000, respectively.
The reimbursements are presented as reductions of general and
administrative expenses in the accompanying statements of
earnings.
NOTE 3 - PROPERTY AND EQUIPMENT:
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
------------------- ------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Furniture and
equipment $543,568 $512,404 $511,133 $423,743 $391,522
Leasehold
improvements 17,100 42,715 17,100 28,761 28,761
-------- -------- -------- -------- --------
560,668 555,119 528,233 452,504 420,283
Less accumulated
depreciation and
amortization 394,152 362,995 352,472 334,537 288,591
-------- -------- -------- -------- --------
$166,516 $192,124 $175,761 $117,967 $131,692
======== ======== ======== ======== ========
</TABLE>
F-27
<PAGE>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 4 - NOTE PAYABLE TO BANK:
The Company has a $2,500,000 revolving line of credit with a
bank that is collateralized by accounts receivable, inventories,
property and equipment and general intangibles. The interest
rate on the line is the bank's prime rate plus 1.25% per annum.
The Company had $1,894,000 outstanding under the revolving line
of credit at December 31, 1994 with $994,000 at an interest rate
of 9.75% and $900,000 at a fixed interest rate of 9.25%. The
line of credit contains certain restrictive covenants. The
Company is in compliance with or has obtained waivers for all
such covenants as of December 31, 1994. The original maturity
date on the note was February 1995. In February 1995, the
Company obtained an extension on the line of credit with a new
expiration date of February 1996 and on September 20, 1995
obtained an increase in the line to $3,300,000.
At September 30, 1995, the Company had $3,144,200 outstanding to
the bank under this line of credit agreement.
NOTE 5 - ADVANCE FROM RELATED PARTY:
The Company obtained a $100,000 advance from a related party.
Interest at a rate of 7.5% per annum is payable monthly with the
entire principal due on December 16, 1996; however, earlier
repayment in full can be requested by either party. In July 1995
this note was repaid in full.
NOTE 6 - LONG-TERM DEBT:
The Company had obtained financing for a computer system. The
computer system collateralized the loan which was payable
monthly with interest at prime plus 1.6% per annum. The Company
had $43,475 outstanding on the note payable at December 31, 1993
at an interest rate of 7.6%. There were no covenants related to
the note and during 1994 it was repaid in full.
NOTE 7 - INCOME TAXES:
The provision for income taxes for the nine month periods ended
September 30, 1995 and 1994 and for the years ended December 31,
1994, 1993 and 1992 represents the statutory state income tax
rate imposed on S corporations in California. Had the Company
not made the federal and state S corporation elections and been
taxed as a C corporation, income taxes would have aggregated
approximately $380,000, $465,000, $425,000, $480,000 and
$300,000 for the nine months ended September 30, 1995 and 1994
and the years ended December 31, 1994, 1993 and 1992,
respectively.
F-28
<PAGE>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 7 - INCOME TAXES (CONTINUED):
Deferred income taxes resulting from temporary differences
between the tax basis and financial reporting basis of the
Company's assets and liabilities are immaterial and do not have
a significant impact on the financial results of the Company.
NOTE 8 - STOCK OPTION PLAN:
In 1990, the Board of Directors adopted an incentive stock
option plan (the "Plan"), which allows for the issuance of
incentive stock options. A total of 25,000 options had been
granted to Company officers as of December 31, 1992 at an
exercise price of $13.09 per share. Effective June 1, 1994, a
total of 20,000 options were forfeited and therefore as of
December 31, 1994 and September 30, 1995, 5,000 options were
outstanding and exercisable. There have been no options
exercised or canceled under the Plan.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
(A) LEASES:
The Company leases certain of its facilities and equipment under
non-cancelable leases which expire at various dates and include
various escalation clauses, renewal options, etc. Approximate
future minimum lease payments as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1995 $129,000
1996 133,000
1997 120,000
1998 101,000
1999 27,000
--------
$510,000
</TABLE>
Rent expense aggregated approximately $135,000, $123,000 and
$120,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. For the nine month periods ended September 30,
1995 and 1994, rent expense aggregated approximately $99,000 and
$87,000, respectively.
F-29
<PAGE>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
(B) DEFINED CONTRIBUTION PENSION PLAN:
The Company had a defined contribution pension plan that covered
all employees 21 years of age or older who had completed 1,000
hours of service. Contributions were determined at the sole
discretion of the Board of Directors. There were no employer
contributions made during 1994, 1993 and 1992.
The pension plan was terminated effective March 18, 1993. All
participants became fully vested in the benefits accrued to them
as of the termination date. The Company has received a favorable
determination letter from the Internal Revenue Service and as of
December 31, 1994, all assets had been distributed.
(C) STOCK REDEMPTION AGREEMENTS:
The Company is party to two separate stock redemption
agreements. The agreements are between the Company and its
shareholders and the Company and A.V.E.D. - Rocky Mountain,
Inc., respectively. Both of the agreements give the Company the
first right of refusal to purchase the stock of a shareholder
who elects to transfer his stock and also obligate the Company
to repurchase the outstanding stock of a deceased shareholder.
NOTE 10 - ECONOMIC DEPENDENCY:
For the years ended December 31, 1994 and 1992 sales to one
customer were in excess of 10% of the Company's net sales and
aggregated approximately $5,270,000 and $2,830,000,
respectively. The net outstanding accounts receivable from these
customers at December 31, 1994 and 1992 amounted to
approximately $755,000 and $292,000, respectively. For 1993, no
single customer accounted for 10% or more of aggregate net
sales.
For the nine month period ended September 30, 1995, sales to two
customers were in excess of the Company's net sales and
aggregated approximately $3,800,000 and $2,900,000,
respectively. The net outstanding accounts receivable from these
customers at September 30, 1995 amounted to approximately
$715,000 and $346,000, respectively.
For the nine month period ended September 30, 1994, sales to one
customer were in excess of the Company's net sales and
aggregated approximately $3,300,000. The net outstanding
accounts receivable from this customer at September 30, 1994
amounted to approximately $479,000.
F-30
<PAGE>
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.
(AN S CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 10 - ECONOMIC DEPENDENCY (CONTINUED):
For the year ended December 31, 1994 purchases from three
vendors were in excess of 10% of the Company's net purchases and
aggregated approximately $2,500,000, $2,400,000 and $2,280,000.
The net outstanding accounts payable to these vendors at
December 31, 1994 amounted to approximately $341,000, $282,000
and $104,000, respectively.
For the year ended December 31, 1993 purchases from three
vendors were in excess of 10% of the Company's net purchases and
aggregated approximately $2,248,000, $1,774,000 and $1,498,000.
The net outstanding accounts payable to these vendors at
December 31, 1993 amounted to approximately $453,000, $95,000
and $242,000, respectively.
For the year ended December 31, 1992 purchases from two vendors
were in excess of 10% of the Company's net purchases and
aggregated approximately $2,000,000 and $1,790,000. The net
outstanding accounts payable to these vendors at December 31,
1992 amounted to approximately $56,000 and $96,000,
respectively.
For the nine month period ended September 30, 1995 purchases
from one vendor were in excess of 10% of the Company's net
purchases and aggregated approximately $2,800,000. The net
outstanding accounts payable to this vendor at September 30,
1995 amounted to approximately $19,000.
For the nine month period ended September 30, 1994 purchases
from three vendors were in excess of 10% of the Company's net
purchases and aggregated approximately $2,100,000, $1,800,000
and $1,700,000. The net outstanding accounts payable to these
vendors at September 30, 1994 amounted to approximately $58,000,
$267,000 and $241,000, respectively.
NOTE 11 - SUBSEQUENT EVENT:
Subsequent to the Company's year end, a non-binding letter of
intent was signed with All American Semiconductor, Inc.
regarding the potential sale of 100% of the Company's issued and
outstanding common stock. Consummation of the sale is subject to
a number of conditions including the negotiation of definitive
agreements, approval by the directors of both companies, consent
of the acquiring Company's senior lender, clearance by the
appropriate governmental agencies and additional investigation.
Either party may terminate the discussions at any time. The
Company expects this transaction to be consummated during the
fourth quarter of 1995.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
A.V.E.D. - Rocky Mountain, Inc.
Denver, Colorado
We have audited the accompanying balance sheets of A.V.E.D. - Rocky Mountain,
Inc. (the "Company") as of December 31, 1994 and 1993 and the related statements
of income, changes in shareholders' equity and cash flows for the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of the Companys' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of A.V.E.D. - Rocky Mountain, Inc.
as of December 31, 1994 and 1993 and the results of its operations and its cash
flows for the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
/s/ LAZAR, LEVINE & COMPANY LLP
-------------------------------
LAZAR, LEVINE & COMPANY LLP
New York, New York
August 11, 1995
F-32
<PAGE>
<TABLE>
<CAPTION>
A.V.E.D. - ROCKY MOUNTAIN, INC.
BALANCE SHEET
- ASSETS -
September 30, December 31,
1995 1994 1993
------------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 30,775 $ 21,591 $ 71,265
Accounts receivable, net of allowance for doubtful accounts of
$21,000 for 1995 and $201,000 for 1994 and 1993
(Notes 1b and 8) 1,227,600 995,969 1,012,878
Inventories (Notes 1c and 2) 2,864,281 1,665,498 2,303,173
Deferred income taxes (Note 5) 78,390 78,390 78,390
Prepaid expenses and other current assets 7,252 40,050 17,979
---------- ---------- ----------
TOTAL CURRENT ASSETS 4,208,298 2,801,498 3,483,685
PROPERTY AND EQUIPMENT, NET (NOTES 1D, 2 AND 4) 64,810 64,403 78,634
OTHER ASSETS 6,854 6,854 6,854
---------- ---------- ----------
$4,279,962 $2,872,755 $3,569,173
========== ========== ==========
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Note payable to bank (Note 2) $ 775,000 $ -- $ 240,000
Current portion of long-term debt (Note 7) 15,845 19,519 --
Accounts payable (Note 8) 980,044 490,455 920,274
Accrued expenses 29,267 55,369 76,514
Due to affiliate (Note 3) 30,500 20,751 23,051
Customer deposits -- -- 99,612
Income taxes payable (Notes 1f and 5) -- 4,844 127,192
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 1,830,656 590,938 1,486,643
---------- ---------- ----------
DEFERRED INCOME TAXES (NOTE 5) 6,435 6,435 14,646
---------- ---------- ----------
LONG-TERM DEBT:
Note payable to former shareholder - net of current portion
(Note 7) 8,861 18,675 --
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 8 AND 9)
SHAREHOLDERS' EQUITY (NOTES 6, 7 AND 8):
Common stock, no par value; 10,000 shares authorized, 1,072
shares issued and outstanding at September 30, 1995 and
December 31, 1994 and 1,108 shares at December 31, 1993 10,720 10,720 11,080
Retained earnings 2,423,290 2,245,987 2,056,804
---------- ---------- ----------
2,434,010 2,256,707 2,067,884
---------- ---------- ----------
$4,279,962 $2,872,755 $3,569,173
========== ========== ==========
</TABLE>
See notes to financial statements.
F-33
<PAGE>
<TABLE>
<CAPTION>
A.V.E.D. - ROCKY MOUNTAIN, INC.
STATEMENTS OF INCOME
Nine Months Ended
September 30, Years Ended December 31,
---------------------------- --------------------------------------------
1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES (NOTES 1E AND 8) $ 6,573,906 $ 8,005,889 $ 10,199,757 $ 10,930,916 $ 8,105,464
COST OF SALES (NOTE 8) 5,009,856 6,120,476 7,934,252 8,475,670 6,151,067
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 1,564,050 1,885,413 2,265,505 2,455,246 1,954,397
Selling, general and administrative
expenses (Note 3) 1,277,676 1,295,307 1,778,540 1,907,116 1,643,676
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 286,374 590,106 486,965 548,130 310,721
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (2,839) (18,619) (21,784) (6,868) (8,677)
Other income 7,718 21,458 22,134 29,103 11,193
------------ ------------ ------------ ------------ ------------
4,879 2,839 350 22,235 2,516
------------ ------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 291,253 592,945 487,315 570,365 313,237
Provision for income taxes
(Notes 1f and 5) 113,950 232,400 230,290 212,567 117,159
------------ ------------ ------------ ------------ ------------
NET INCOME $ 177,303 $ 360,545 $ 257,025 $ 357,798 $ 196,078
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-34
<PAGE>
<TABLE>
<CAPTION>
A.V.E.D. - ROCKY MOUNTAIN, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Total
-------------------------- Retained Stockholders'
Shares Amount Earnings Equity
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991 (unaudited) 1,108 $ 11,080 $ 1,502,928 $ 1,514,008
Net Income -- -- 196,078 196,078
----------- ----------- ----------- -----------
Balance, December 31, 1992 1,108 11,080 1,699,006 1,710,086
Net Income -- -- 357,798 357,798
----------- ----------- ----------- -----------
Balance, December 31, 1993 1,108 11,080 2,056,804 2,067,884
Repurchase and retirement of common stock (36) (360) (67,842) (68,202)
Net Income -- -- 257,025 257,025
----------- ----------- ----------- -----------
Balance, December 31, 1994 1,072 10,720 2,245,987 2,256,707
Net Income (unaudited) -- -- 177,303 177,303
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1995 (unaudited) 1,072 $ 10,720 $ 2,423,290 $ 2,434,010
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-35
<PAGE>
<TABLE>
<CAPTION>
A.V.E.D. - ROCKY MOUNTAIN, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30, Years Ended December 31,
------------------------- -----------------------------------------
1995 1994 1994 1993 1992
---------- ---------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 177,303 $ 360,545 $ 257,025 $ 357,798 $ 196,078
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 16,213 6,130 48,318 8,172 8,175
Provision for losses on accounts receivable 8,465 106 106 185,183 291,103
Provision for obsolete inventory -- -- 107,000 -- 2,089
Deferred income tax (benefit) -- -- (8,211) (46,446) (17,298)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (240,096) (288,491) 16,803 (422,548) (288,947)
(Increase) decrease in inventories (1,198,783) 506,467 530,675 (560,848) (450,091)
(Increase) decrease in prepaid expenses
and other current assets 32,798 (197,358) (22,070) 21,807 (20,206)
Increase (decrease) in accounts payable 489,589 (521,594) (429,819) 358,915 54,505
(Decrease) increase in accrued expenses (26,102) (39,522) (21,145) 41,829 (30,313)
(Decrease) increase in customer deposits -- (99,612) (99,612) 6,080 93,532
Increase (decrease) in income taxes payable (4,844) 102,952 (122,348) 124,162 (29,923)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED BY) OPERATING
ACTIVITIES (745,457) (170,377) 256,722 74,104 (191,296)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property and equipment (16,620) (6,267) (34,087) (38,253) (6,066)
----------- ----------- ----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (16,620) (6,267) (34,087) (38,253) (6,066)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions to shareholders -- (17,842) (17,842) -- --
Retirement of common stock -- (360) (360) -- --
Net increase (decrease) in bank line 775,000 55,000 (240,000) (65,000) 150,011
Reduction in note payable to former shareholder (13,488) (8,991) (11,807) -- --
Due to/from affiliate 9,749 99,803 (2,300) 56,987 14,261
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED BY)
FINANCING ACTIVITIES 771,261 127,610 (272,309) (8,013) 164,272
----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,184 (49,034) (49,674) 27,838 (33,090)
Cash and cash equivalents, at beginning
of year 21,591 71,265 71,265 43,427 76,517
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 30,775 $ 22,231 $ 21,591 $ 71,265 $ 43,427
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,839 $ 18,619 $ 20,104 $ 7,509 $ 7,705
Income taxes 90,358 325,708 230,301 104,164 190,234
</TABLE>
NON-CASH ITEMS:
The Company repurchased and retired 36 shares of stock during February 1994.
As part of this repurchase a $50,000 note payable was issued to the former
shareholder.
See notes to financial statements.
F-36
<PAGE>
A.V.E.D. - ROCKY MOUNTAIN, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies considered particularly significant.
(A) ORGANIZATION:
A.V.E.D. - Rocky Mountain, Inc. (the "Company") was incorporated
in the state of Colorado on March 9, 1987. The Company's primary
business is the distribution of semiconductors and related
electronic components.
(B) CONCENTRATION OR CREDIT RISK:
Accounts receivable potentially exposes the Company to
concentrations of credit risk, as defined by Financial
Accounting Standards Board Statement No. 105, "Discussions of
Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of Credit
Risk."
(C) INVENTORIES:
Inventories, which consist solely of electronic components held
for resale, are stated at the lower of cost (determined on an
average cost basis) or market.
(D) PROPERTY AND EQUIPMENT:
Property and equipment are reflected at cost. Depreciation is
provided on the straight-line method over the estimated useful
lives of the respective assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset, whichever
is shorter.
Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized.
(E) REVENUE RECOGNITION:
The Company recognizes revenue from distribution and turnkey
sales upon shipment.
(F) INCOME TAXES:
The Company has adopted SFAS No. 109 "Accounting for Income
Taxes" ("SFAS No. 109") effective January 1, 1993. SFAS No. 109
requires the use of the asset and liability approach of
providing for income taxes. This adoption did not have a
material impact on the Company's operations or financial
position.
(G) RECLASSIFICATIONS:
Prior period financial statements have been reclassified to
conform with the current period's presentation.
(H) 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 and cash equivalents.
F-37
<PAGE>
A.V.E.D. - ROCKY MOUNTAIN, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(I) POST-RETIREMENT BENEFITS:
In 1993, the Company adopted Financial Accounting Standards
Board Statement No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions." The effect of the
adoption of this Statement was not material.
NOTE 2 - NOTE PAYABLE TO BANK:
At December 31, 1994, the Company has a $1,000,000 revolving
line of credit with a bank that is collateralized by accounts
receivable, inventories and property and equipment. The interest
rate on the line is the bank's prime rate. The Company had no
outstanding balance under the revolving line of credit at
December 31, 1994 but owed the bank $775,000 as of September 30,
1995. The line of credit contains certain restrictive covenants
and the Company is in compliance with all such covenants at
December 31, 1994. The original maturity date on the note was
February 1995. In February 1995, the Company obtained an
extension on the line of credit with a new expiration date of
February 1996.
NOTE 3 - TRANSACTIONS WITH AFFILIATES:
The Company is owned 37.3% at September 30, 1995 and December
31, 1994 and 36.1% at December 31, 1993 and 1992, by Added Value
Electronics Distribution, Inc. ("AVED").
Throughout the year, the Company purchases and sells components
from/to this affiliate at cost. Sales to this affiliate are not
included in net sales reflected on the respective statements of
income but are instead shown as a reduction against the original
purchase. Purchases from this affiliate are recorded in a manner
consistent with that of any purchase transaction with an
unrelated third party. Activity with respect to these sales and
purchase transactions are detailed below.
Sales to this affiliate for the nine month periods ended
September 30, 1995 and 1994 and for the years ended December 31,
1994, 1993 and 1992 aggregated approximately $649,000, $629,000,
$727,000, $619,000 and $1,016,000, respectively.
Purchases from this affiliate for the nine month periods ended
September 30, 1995 and 1994 and for the years ended December 31,
1994, 1993 and 1992 aggregated approximately $403,000, $852,000,
$960,000, $938,000 and $1,342,000, respectively.
Included in selling, general and administrative expenses in the
accompanying statement of earnings for 1994 and 1993 is $36,000
and $72,000, respectively, related to an oral agreement between
the Company and AVED whereby AVED provides accounting and
administrative services to the Company. The management fee for
the year ended December 31, 1992 was deferred by mutual
agreement and paid in 1993. The Company was also charged
$120,000, $144,000 and $275,375 for 1994, 1993 and 1992,
respectively for allocated general and administrative expenses
from AVED which is included in general and administrative
expense in the accompanying statements of earnings. For the nine
months ended September 30, 1995 and 1994 these charges
aggregated $72,000 and $117,000, respectively.
F-38
<PAGE>
A.V.E.D. - ROCKY MOUNTAIN, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 4 - PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
<TABLE>
<CAPTION>
September 30, December 31,
------------------- ------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Furniture and equipment $166,185 $121,743 $149,563 $115,476 $ 82,285
Leasehold improvements 8,014 8,014 8,014 8,014 2,952
-------- -------- -------- -------- --------
174,199 129,757 157,577 123,490 85,237
Less accumulated depreciation and
amortization 109,389 50,987 93,174 44,856 36,683
-------- -------- -------- -------- --------
$ 64,810 $ 78,770 $ 64,403 $ 78,634 $ 48,554
======== ======== ======== ======== ========
</TABLE>
NOTE 5 - INCOME TAXES:
The tax effects of the temporary differences that give rise to
the deferred tax assets and liabilities as of September 30, 1995
and December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------
1995 1994 1993
------------- ------- -------
<S> <C> <C> <C>
Deferred Tax Asset:
Accounts receivable $78,390 $78,390 $78,390
Deferred Tax Liability:
Fixed assets 6,435 6,435 14,646
------- ------- -------
Net Deferred Asset $71,955 $71,955 $63,744
======= ======= =======
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------------- -----------------------------------
1995 1994 1994 1993 1992
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CURRENT:
Federal $ 106,455 $ 244,758 $ 207,100 $ 226,100 $ 112,783
State 15,705 36,345 31,400 35,170 17,328
--------- --------- --------- --------- ---------
122,160 281,103 238,500 261,270 130,111
--------- --------- --------- --------- ---------
DEFERRED:
Federal (7,155) (42,458) (7,155) (42,458) (10,734)
State (1,055) (6,245) (1,055) (6,245) (2,218)
--------- --------- --------- --------- ---------
(8,210) (48,703) (8,210) (48,703) (12,952)
--------- --------- --------- --------- ---------
Income tax expense $ 113,950 $ 232,400 $ 230,290 $ 212,567 $ 117,159
========= ========= ========= ========= =========
</TABLE>
F-39
<PAGE>
A.V.E.D. - ROCKY MOUNTAIN, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 5 - INCOME TAXES (CONTINUED):
A reconciliation of the difference between expected income tax
rate using the statutory federal tax rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
-------------------- ---------------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
US Federal income
tax statory rate 34.0% 34.0% 34.0% 34.0% 34.0%
State taxes, net of
federal income tax
benefit 3.4 3.5 3.5 3.3 3.4%
Other-including non-
deductible items 1.7 1.7 9.8 - -
---- ---- ---- ---- ----
Effective tax rate 39.1% 39.2% 47.3% 37.3% 37.4%
==== ==== ==== ==== ====
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
(A) LEASES:
The Company leases certain of its facilities through 1997 under
non-cancelable leases which expire at various dates and include
various escalation clauses, renewal options, etc. Approximate
future minimum lease payments as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1995 $47,000
1996 26,000
1997 25,000
-------
$98,000
=======
</TABLE>
Rent expense aggregated approximately $40,000, $31,000 and
$33,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. Rent expense for the nine months ended September
30, 1995 and 1994 aggregated approximately $31,000 for each
period.
The Company also subleases a certain portion of one of its
facilities on a month-to-month basis at a monthly rental of
$500.
(B) STOCK REDEMPTION AGREEMENT:
The Company is party to a stock redemption agreement between the
Company and AVED. The agreement gives the Company the first
right of refusal to purchase the stock of AVED if it elects to
transfer its stock.
F-40
<PAGE>
A.V.E.D. - ROCKY MOUNTAIN, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
(C) STOCK OPTION:
The Company had granted 46 shares of stock under it's Incentive
Stock Option Plan to an employee. The option price of $1,083 per
share approximates the fair value of the stock at the grant
date. All outstanding stock options at December 31, 1993 were
swapped for participation in the Discretionary Bonus Plan in
1994 and therefore there are no options outstanding at December
31, 1994 and September 30, 1995.
(D) DISCRETIONARY BONUS PLAN:
The Company has entered into an agreement with certain employees
of the Company, whereby a bonus will be paid to the individuals
if the Company is sold in future years. The bonus amount will be
based on the terms of a sale transaction. If the Company is not
sold or if the employee leaves the employ of the Company prior
to the sale of the Company, no bonus will be paid.
NOTE 7 - STOCK REPURCHASE:
The Company repurchased and retired 36 shares of its' common
stock during 1994 at a total cost of $68,202. The Company paid
$18,202 in cash and issued a note for the remaining balance. The
note is to be paid over 36 months beginning April 30, 1994
bearing interest at a rate of 5% per annum.
NOTE 8 - ECONOMIC DEPENDENCY:
For the years ended December 31, 1994 and 1993 and the nine
month periods ended September 30, 1995 and 1994, sales to one
customer were in excess of 10% of the Company's net sales and
aggregated approximately $1,115,000, $1,316,000, $782,000 and
$819,000, respectively. The net outstanding accounts receivable
from this customer at December 31, 1994 and 1993 and September
30, 1995 and 1994 amounted to approximately $95,000, $57,000,
$34,000 and $55,000, respectively. For 1992, no single customer
accounted for 10% or more of aggregate net sales.
For the year ended December 31, 1994 purchases from two vendors
were in excess of 10% of the Company's net purchases and
aggregated approximately $745,000 and $739,000. The net
outstanding accounts payable to these vendors at December 31,
1994 amounted to approximately $81,000 and $54,000,
respectively.
F-41
<PAGE>
A.V.E.D. - ROCKY MOUNTAIN, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 IS UNAUDITED)
NOTE 8 - ECONOMIC DEPENDENCY (CONTINUED):
For the year ended December 31, 1993 purchases from one vendor
were as excess of 10% of the Company's net purchases and
aggregated approximately $1,200,000. The net outstanding
accounts payable to this vendor at December 31, 1993 amounted to
approximately $106,000.
For the year ended December 31, 1992 purchases from three
vendors were in excess of 10% of the Company's net purchases and
aggregated approximately $1,790,000, $1,240,000 and $747,000.
The net outstanding account payable to these vendors at December
31, 1992 amounted to approximately $63,000, $7,000 and $82,000,
respectively.
For the nine months ended September 30, 1995 and 1994 no single
vendor accounted for 10% or more of net purchases.
NOTE 9 - SUBSEQUENT EVENT:
Subsequent to the Company's year end, a non-binding letter of
intent was signed with All American Semiconductor, Inc.
regarding the potential sale of 100% of the Company's issued and
outstanding common stock. Consummation of the sale is subject to
a number of conditions including the negotiation of definitive
agreements, approval by the directors of both companies,
clearance by the appropriate governmental agencies and
additional investigation. Either party may terminate the
discussions at any time. The Company expects this transaction to
be consummated during the fourth quarter of 1995.
F-42
<PAGE>
APPENDIX A
- -------------------------------------------------------------------------------
MERGER PURCHASE AGREEMENT
AMONG
ALL AMERICAN SEMICONDUCTOR, INC.,
AS PURCHASER,
AND
ALL AMERICAN ADDED VALUE, INC.,
AS CALIFORNIA SUBSIDIARY AND
CALIFORNIA SURVIVING CORPORATION
AND
ADDED VALUE ELECTRONICS DISTRIBUTION, INC.,
AS CALIFORNIA TARGET
AND
ALL AMERICAN A.V.E.D., INC.
AS COLORADO SUBSIDIARY AND
COLORADO SURVIVING CORPORATION
AND
A.V.E.D.-ROCKY MOUNTAIN, INC.
AS COLORADO TARGET
DATED AS OF OCTOBER 31, 1995
- -------------------------------------------------------------------------------
A-1
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 Defined Terms ............................................. 1
1.1 Defined Terms.............................................. 1
ARTICLE 2 The Merger Transactions.................................... 10
2.1 The Mergers................................................ 10
2.2 The Closing................................................ 10
2.3 Actions at the Closing .................................... 10
2.4 Effect of Mergers.......................................... 11
2.5 Procedure for Payment of Target Stockholders............... 12
2.6 Dissenting Target Shares................................... 13
2.7 Adjustments Upon Changes in Capitalization................. 13
ARTICLE 3 Other Agreements........................................... 14
3.1 Additional Consideration................................... 14
3.2 Adjustments Upon Changes in Capitalization................. 15
3.3 Registration and Proxy Statement........................... 15
3.4 Key Employees Employment Agreements........................ 16
3.5 Pledge Agreement........................................... 16
3.6 Voting Trust Agreement..................................... 16
3.7 Restrictive Covenant....................................... 16
3.8 Guaranty and Agreement..................................... 16
3.9 Releases of Corporations................................... 16
3.10 Liability of Target Stockholders to Corporations........... 16
3.11 HSR Act Filings and Authorizations......................... 17
3.12 List of Affiliates......................................... 17
ARTICLE 4 Representations and Warranties of Corporations............. 17
4.1 Organization and Good Standing............................. 17
4.2 Authority.................................................. 17
4.3 No Subsidiaries............................................ 18
4.4 Financial Statements....................................... 18
4.5 Leaseholds and Improvements................................ 18
4.6 Personal Property, Inventories and Title to Property....... 19
4.7 Intellectual Property Rights............................... 20
4.8 Litigation................................................. 20
4.9 Compliance with Laws....................................... 20
4.10 Entire Business............................................ 20
4.11 Contracts.................................................. 21
4.12 Receivables; Payables...................................... 22
4.13 Certain Transactions....................................... 23
4.14 Employees.................................................. 24
4.15 Employee Benefit Plans..................................... 24
4.16 Licenses and Permits....................................... 27
4.17 Transactions with Affiliates............................... 27
4.18 Truthfulness............................................... 27
4.19 Customers and Suppliers.................................... 28
4.20 Payments................................................... 28
4.21 Insurance.................................................. 28
4.22 Environmental Matters...................................... 28
4.23 Status of Corporations and Target Stockholders............. 29
4.24 Tax Matters................................................ 29
4.25 No Sale.................................................... 30
4.26 Investment Company Act..................................... 30
4.27 Purchase Commitments....................................... 30
4.28 Certain Reports............................................ 30
4.29 Certain Payments to Key Employees.......................... 30
4.30 Bank and Securities Accounts............................... 30
4.31 Status of Target Shares.................................... 30
4.32 Title to the Target Shares................................. 31
A-2
<PAGE>
PAGE
----
4.33 Charter Documents.......................................... 31
4.34 Capitalization............................................. 31
4.35 Officers and Directors..................................... 32
4.36 Dividends.................................................. 32
4.37 Bank Debt.................................................. 32
4.38 Continuity of Business Enterprise.......................... 32
4.39 No Intent to Sell.......................................... 32
ARTICLE 5 Representations and Warranties of
Purchaser and Subsidiaries................................. 32
5.1 Organization............................................... 32
5.2 Authority.................................................. 32
5.3 Litigation................................................. 33
5.4 Truthfulness............................................... 33
5.5 Continuity of Business Enterprise.......................... 33
5.6 Capital Structure.......................................... 33
5.7 SEC Reports................................................ 34
5.8 Material Changes Since December 31, 1994................... 34
5.9 No Undisclosed Liabilities................................. 34
5.10 No Default................................................. 34
5.11 Accuracy of Registration and Proxy Statement............... 34
5.12 Board Action............................................... 35
5.13 Compliance with Laws Generally............................. 35
ARTICLE 6 Further Covenants and Agreements........................... 35
6.1 Conduct of Business........................................ 35
6.2 Third Party Consents....................................... 38
6.3 Access; Information........................................ 38
6.4 Audited Financial Statements............................... 38
6.5 Interim Financial Statements and Other Financial Reports... 39
6.6 Insurance Proceeds......................................... 39
6.7 Trading in All American Share.............................. 39
6.8 Certain Purchaser Approvals................................ 39
6.9 California Franchise Tax Clearance......................... 39
6.10 Other Employment Agreements and Related Employee Matters... 40
6.11 Transfer by Wayne Vannoy to Vannoy Family Trust............ 40
ARTICLE 7 Conditions Precedent to Obligations of
Purchaser and Subsidiaries................................. 41
7.1 Opinion of Counsel......................................... 41
7.2 Performance by Corporations and Target Stockholders........ 41
7.3 Representations and Warranties............................. 41
7.4 No Actions or Proceedings.................................. 41
7.5 No Material Adverse Change................................. 41
7.6 Officer's Certificate...................................... 42
7.7 Satisfaction of Counsel.................................... 42
7.8 Consents and Estoppels..................................... 42
7.9 Title Reports, Lien, Judgment and Other Searches........... 42
7.10 Employment Agreements...................................... 42
7.11 Target Stockholder Release................................. 42
7.12 Pledge Agreement........................................... 42
7.13 Restrictive Covenant....................................... 42
7.14 Voting Trust Agreement..................................... 42
7.15 Merger Documents........................................... 42
7.16 Lender Consent............................................. 43
7.17 All American Stockholder Approval.......................... 43
7.18 Audited Financial Statements............................... 43
7.19 California Franchise Tax Clearance......................... 43
7.20 Guaranty and Agreement..................................... 43
A-3
<PAGE>
PAGE
----
7.21 Discretionary Bonus Cancellation Agreements and
Agreements Regarding Employment............................ 43
7.22 HSR Act.................................................... 43
ARTICLE 8 Conditions Precedent to Obligations of Seller.............. 43
8.1 Opinion of Counsel......................................... 43
8.2 Performance by Purchaser................................... 43
8.3 Representations and Warranties............................. 43
8.4 No Injunctions............................................. 44
8.5 Officer's Certificate...................................... 44
8.6 Employment Agreements...................................... 44
8.7 Satisfaction of Counsel.................................... 44
8.8 Merger Documents........................................... 44
8.9 Lender Consent............................................. 44
8.10 All American Stockholder Approval.......................... 44
8.11 Registration of All American Shares........................ 44
8.12 Merger Consideration....................................... 44
8.13 Restrictive Covenant....................................... 45
8.14 Discretionary Bonus Cancellation Agreements................ 45
8.15 HSR Act.................................................... 45
ARTICLE 9 Miscellaneous.............................................. 45
9.1 Brokers.................................................... 45
9.2 Expenses................................................... 45
9.3 Amendments and Waivers..................................... 45
9.4 Transferability............................................ 45
9.5 Termination................................................ 45
9.6 Notices.................................................... 46
9.7 Governing Law; Choice of Forum............................. 47
9.8 Partial Invalidity......................................... 47
9.9 Section Headings........................................... 47
9.10 Counterparts............................................... 48
9.11 Entire Agreement........................................... 48
9.12 Public Announcements....................................... 48
9.13 Survival................................................... 48
9.14 Disputes................................................... 48
9.15 Gender..................................................... 49
9.16 Indemnities................................................ 49
9.17 No Waiver; Cumulative Remedies............................. 49
A-4
<PAGE>
EXHIBITS AND SCHEDULES
EXHIBITS
EXHIBIT "A-1" FORM OF ROBERT D. LURIE EMPLOYMENT
AGREEMENT
EXHIBIT "A-2" FORM OF WAYNE VANNOY EMPLOYMENT AGREEMENT
EXHIBIT "A-3" FORM OF GARY R. MILLER EMPLOYMENT
AGREEMENT
EXHIBIT "A-4" FORM OF RICHARD W. MCCAULEY EMPLOYMENT
AGREEMENT
EXHIBIT "A-5" FORM OF KENNETH A. PLOCK EMPLOYMENT
AGREEMENT
EXHIBIT "B" FORM OF GUARANTY AND AGREEMENT
EXHIBIT "C" FORM OF PLEDGE AGREEMENT
EXHIBIT "D" FORM OF RESTRICTIVE COVENANT
EXHIBIT "E" FORM OF VOTING TRUST AGREEMENT
EXHIBIT "F-1" FORM OF AGREEMENT OF MERGER (CALIFORNIA)
EXHIBIT "F-2" FORM OF ARTICLES OF MERGER (COLORADO)
EXHIBIT "G" MERGER CONSIDERATION TABLES
EXHIBIT "H" FORM OF DISCRETIONARY BONUS
CANCELLATION AGREEMENT
EXHIBIT "I" FORM OF AGREEMENT REGARDING EMPLOYMENT
SCHEDULES
Schedule 4.2 Required Consents; Conflicts
Schedule 4.3 Related Companies
Schedule 4.4 Historical Financial Statements
Schedule 4.5 Leaseholds
Schedule 4.6 Liens
Schedule 4.7 Intellectual Property Rights
Schedule 4.8 Litigation
Schedule 4.11 Contracts
Schedule 4.12 Receivables
Schedule 4.13 Certain Transactions
Schedule 4.14 Employees
Schedule 4.15 Employee Plans
Schedule 4.16 Licenses
Schedule 4.17 Transactions with Affiliates
Schedule 4.19 Customers and Suppliers
Schedule 4.21 Insurance
Schedule 4.24 Taxes
Schedule 4.29 Certain Payments to Key Employees
Schedule 4.30 Bank and Securities Accounts
Schedule 4.31 Target Shares
Schedule 4.34 Capitalization
Schedule 4.35 Officers and Directors
Schedule 4.37 Bank Debt
A-5
<PAGE>
MERGER PURCHASE AGREEMENT
MERGER PURCHASE AGREEMENT, dated as of October 31, 1995
("Agreement"), among ALL AMERICAN SEMICONDUCTOR, INC., a Delaware corporation
("Purchaser"), ALL AMERICAN ADDED VALUE, INC., a California corporation
("California Subsidiary" or, after giving effect to the California statutory
merger described in this Agreement, the "California Surviving Corporation"),
ADDED VALUE ELECTRONICS DISTRIBUTION, INC., a California corporation
("California Target" or "Added Value"), ALL AMERICAN A.V.E.D., INC., a Colorado
corporation ("Colorado Subsidiary" or, after giving effect to the Colorado
statutory merger described in this Agreement, the "Colorado Surviving
Corporation"), and A.V.E.DROCKY MOUNTAIN, INC., a Colorado corporation
("Colorado Target" or "Rocky Mountain").
This Agreement contemplates a transaction in which Purchaser will
acquire all of the outstanding capital stock of each Target for cash and common
stock of Purchaser through a forward subsidiary merger of each such Target with
and into the applicable Subsidiary, with the applicable Subsidiary to be the
Surviving Corporation. Each such acquisition is intended to qualify as a
tax-free reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the premises and the
respective promises herein made, and in consideration of the representations,
warranties, covenants and agreements herein contained, the parties agree as
follows:
ARTICLE 1
DEFINED TERMS
1.1 DEFINED TERMS. The following terms shall have the
respective meanings ascribed to them below:
"Actual Share Appreciation Value" shall mean the higher of (a)
the All American Share Value and (b) the average last sale price of an All
American Share on The NASDAQ Stock Market (or on whatever stock exchange or
market All American Shares are then trading, if not The NASDAQ Stock Market)
over the 30-day period ending on the Share Appreciation Date, subject to any
necessary adjustments pursuant to Section 3.2.
"Added Value" shall mean Added Value Electronics Distribution,
Inc., a California corporation, which is sometimes herein referred to as
"California Target."
"Added Value Agreement of Merger" shall have the meaning
specified in Section 2.3.
"Added Value Effective Time" shall have the meaning specified
in Section 2.4.
"Added Value Merger" shall have the meaning specified in
Section 2.1.
"Added Value Merger Consideration" shall have the meaning
specified in Section 2.4(e).
"Added Value Target Shares" shall mean, collectively, the
103,000 issued shares of common stock of California Target (98,000 of which are
issued and outstanding on the date hereof and an additional 5,000 of which shall
be issued and outstanding upon the exercise by Robert D. Lurie prior to Closing
of options to acquire 5,000 shares of such common stock), having no par value,
which, at the Added Value Effective Time, shall constitute all of the issued
A-6
<PAGE>
capital stock of California Target (subject to the existence at such time of any
Dissenting Target Shares).
"Added Value Target Stockholder" shall mean any of, and "Added
Value Target Stockholders" shall mean all of, Wayne Vannoy, Gary R. Miller and
Rosalie C. Miller, husband and wife as their community property, Robert D.
Lurie, Richard W. McCauley, Kenneth A. Plock, Cathleen M. Plock, Jerry D.
Fletcher and Marie Fletcher, husband and wife as their community property,
Alexandra J. Miller and Thomas Broesamle with respect to their respective
ownership of the issued and outstanding capital stock of Added Value.
"Additional Consideration" shall mean (with respect to each
Target Stockholder other than the Vannoy Family Trust) the product obtained by
multiplying (a) the amount, if any, by which the Share Appreciation Target Value
exceeds the Actual Share Appreciation Value, by (b) the number of All American
Shares issued to such Target Stockholder pursuant to the Mergers which has been
owned by such Target Stockholder personally at all times from and after the
consummation of the respective Mergers through and including the Share
Appreciation Date (subject, however, to reduction of such number pursuant to
Section 3.1(c) and any necessary adjustments pursuant to Section 3.2).
"Affiliate" shall mean, with respect to any party, any person
who directly or indirectly through stock ownership or through any other
arrangement either controls, or is controlled by, or is under common control
with, such party. The term "control" shall mean the power to direct the affairs
of such party by reason of ownership of voting stock or other equity interests,
by contract or otherwise.
"Agreement Regarding Employment" shall have the meaning
specified in Section 6.10(c).
"All American Share" shall mean a share of common stock, $.01
par value, of Purchaser.
"All American Share Value" shall mean the higher of (a) $2.25
per share and (b) the average last sale price of an All American Share on The
NASDAQ Stock Market over the 30-day period ending on the trading day immediately
prior to the Closing Date.
"All American Stockholder Approval" shall mean the approval of
the basic transactions set forth in this Agreement (including, without
limitation, the Mergers) by the stockholders of Purchaser, which is to be
solicited pursuant to the Registration and Proxy Statement.
"Assets" shall mean all of the respective assets, properties,
interests, cash on hand and in bank accounts, cash equivalents, investments,
marketable securities, business, good will, claims and other rights of the
Corporations of every kind and nature whatever, tangible or intangible, vested
or unvested, fixed, contingent or otherwise, real, personal or mixed, and
wherever located, whether or not reflected on the books and records of the
Corporations and whether or not described herein or in any of the exhibits or
schedules delivered or to be delivered to Purchaser hereunder, including,
without limitation, all respective right, title and interest of the Corporations
in, to and under the names "Added Value Electronics Distribution" and "A.V.E.D.
- - Rocky Mountain"; the Tangible Personal Property (including the Inventories);
the Leaseholds; the Improvements; all rights, benefits, privileges and interests
under the Contracts (including all security and other deposits thereunder);
Receivables; Licenses; Intellectual Property Rights; Warranties; Records;
prepaid expenses; backlog; advances; rights, benefits, claims, credits,
prorations and refunds due or belonging to either of the Corporations under any
Contracts or insurance policies or otherwise; and all rights to any deposits
made by either of the Corporations to obtain goods, services, rights or
privileges of any kind;
A-7
<PAGE>
and including all of the foregoing acquired by or on behalf of the Corporations
between the date of this Agreement and the Closing Date.
"Audit Accountants" shall have the meaning set forth in
Section 6.4.
"Audited Financial Statements" shall mean the audited balance
sheet and results of operations (including audited statements of income or loss,
cash flows and stockholders' equity) of each of the Corporations as of and for
the fiscal years ended December 31, 1994, December 31, 1993 and December 31,
1992.
"Bank Debt" shall mean, collectively, the $3.3 million
revolving line of credit facility of Added Value with Bank of America, which is
secured by substantially all of Added Value's Assets, and the $1.0 million
revolving line of credit facility of Rocky Mountain with Colorado National Bank,
which is secured by substantially all of Rocky Mountain's Assets.
"Business" shall mean, collectively, the businesses of both
Corporations, which, in the aggregate, include, but are not necessarily limited
to (a) the distribution of semiconductor, electromechanical, electrical and
passive component products, including, but not limited to, the distribution of
transistors, diodes, integrated circuits, memory chips, microprocessors,
capacitors, connectors, mechanical hardware, resistors and cable manufactured by
others, and (b) value added services in connection therewith including, but not
limited to, cable assemblies, connector assemblies, flat panel display
assemblies and liquid crystal display (LCD) support services (including driver
board assemblies), programming services, terminal block modifications, turnkey
and kitting services, memory module manufacturing, other contract manufacturing
(or procurement thereof), and other assemblies and services, including,
packaging, testing and quality control, wherever conducted.
"California Franchise Tax Clearance" shall mean the franchise
tax clearance required to be issued by the State of California in connection
with cessation of existence of Added Value contemplated by the Added Value
Merger.
"California Subsidiary" shall mean All American Added Value,
Inc., a California corporation, and a wholly-owned subsidiary of Purchaser.
"California Surviving Corporation" shall mean California
Subsidiary after giving effect to the Added Value Merger.
"California Target" shall mean Added Value Electronics
Distribution, Inc., a California corporation, which is sometimes herein referred
to as "Added Value".
"Capital Stock Change" shall have the meaning specified in
Section 2.7.
"Closing" shall have the meaning specified in Section 2.2.
"Closing Date" shall have the meaning specified in Section
2.2.
"COBRA" shall have the meaning specified in Section 4.15(f).
"Colorado Subsidiary" shall mean All American A.V.E.D., Inc.,
a Colorado corporation, and a wholly-owned subsidiary of Purchaser.
"Colorado Surviving Corporation" shall mean Colorado
Subsidiary after giving effect to the Rocky Mountain Merger.
"Colorado Target" shall mean A.V.E.D.-Rocky Mountain, Inc., a
Colorado corporation, which is sometimes herein referred to as Rocky Mountain.
A-8
<PAGE>
"Contracts" shall mean, collectively, and "Contract" shall
mean, individually, all leases relating to Leaseholds, distribution agreements,
franchise agreements and arrangements, maintenance agreements, service
agreements, equipment or other personal property leases, arrangements regarding
the loaning of equipment or value added services, use agreements, loan, credit,
or financing agreements of any kind, security agreements, chattel or leasehold
mortgages, license agreements, agency agreements, purchase orders, sales orders,
blanket or master agreements with customers, supply contracts, output or
requirements contracts, commitments to purchase or sell goods, products or
services of any kind, stockholders agreements, stock redemption agreements,
stock option, warrant, purchase or rights agreements, any other agreements
relating to or affecting the capital stock of either of the Corporations,
buy-sell agreements, indentures, notes, restrictive covenants of any kind, and
other contracts and agreements of any kind or nature, whether written or oral,
to which either Corporation is a party or by which either Corporation or the
Assets or the Business (in whole or in part) are subject, and all rights,
interests, benefits and privileges arising thereunder.
"Corporation" shall mean either of, and "Corporations" shall
mean both of, Added Value and Rocky Mountain.
"Discretionary Bonus Cancellation Agreement" shall have the
meaning specified in Section 6.10(b).
"Dissenting Target Shares" shall have the meaning specified in
Section 2.6.
"Employee" shall mean any former or current, active or
inactive, employee, officer, agent, consultant, independent contractor or
subcontractor of either Corporation.
"Employee Agreement" shall have the meaning specified in
Section 4.15(a).
"Employee Plan" shall have the meaning specified in Section
4.15(a).
"Employment Agreement" shall mean each, and "Employment
Agreements" shall mean all, of the respective Employment Agreements to be
executed and delivered by the California Surviving Corporation or the Colorado
Surviving Corporation, as employer, and each of the Key Employees, as employee,
on the Closing Date, in the forms attached as Exhibits "A-1," "A-2," "A-3,"
"A-4" and "A-5," respectively.
"Environmental Laws" shall have the meaning specified in
Section 4.22.
"ERISA" shall have the meaning specified in Section 4.15(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Excess Target Expenses" shall mean the amount, if any, by
which the Targets' aggregate fees, costs and expenses referred to in Section 9.2
exceed $185,000.
"Franchised Inventory" shall have the meaning specified in
Section 4.6(c).
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
A-9
<PAGE>
"Guaranty and Agreement" shall mean the instrument in favor of
Purchaser and Subsidiaries to be executed and delivered by the Target
Stockholders (and Added Value, in its capacity as a stockholder of Rocky
Mountain) on the date hereof, pursuant to which the Target Stockholders, subject
to the limitations therein, are guaranteeing the representations, warranties,
covenants and agreements of the Corporations herein contained, agreeing to be
bound by the representations, warranties, covenants and agreements deemed to be
made by, or which are attributed to, them in this Agreement, and are making
certain indemnities of Purchaser and the Surviving Corporations, the form of
which is attached as Exhibit "B."
"Hazardous Substances" shall have the meaning specified in
Section 4.22.
"Historical Financial Statements" shall mean the unaudited
balance sheet and results of operations (including unaudited statements of
income or loss, cash flows and stockholders' equity) of the Corporations as of
and for the six-month period ending June 30, 1995, and the Audited Financial
Statements.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Improvements" shall have the meaning specified in Section
4.5.
"Indebtedness" shall mean any (i) debt for the payment of
money or borrowed money or for the deferred purchase price of property or
services, (ii) obligations evidenced by notes, bonds, debentures or other
instruments, (iii) lease obligations which would normally be capitalized under
GAAP, and (iv) obligations under direct or indirect guarantees of (including
obligations, contingent or otherwise, to assure a creditor against loss in
respect of) indebtedness or obligations of others of any of the types referred
to in clauses (i), (ii) or (iii) above.
"Interim Financial Statements" shall mean each Corporation's
internal unaudited balance sheet and statement of income or loss as of and for
the month ending July 31, 1995 and as and for each month thereafter the last day
of which is more than fifteen (15) days prior to the Closing Date. In the event
that the Registration and Proxy Statement is not effective on or prior to
November 13, 1995, such term shall also include each Corporation's internal
unaudited balance sheet, statement of income or loss and statement of cash flows
and stockholders' equity as of and for the fiscal quarter ended September 30,
1995.
"Intellectual Property Rights" shall mean (i) Patents, (ii)
Know-how, (iii) Trademarks, (iv) Trade Names, and (v) shop rights, copyrights,
inventions, technology, service marks and all other intellectual property
rights, whether registered or not.
"Internal Revenue Code" shall mean the Internal Revenue Code
of 1986, as amended.
"Inventories" shall mean all inventories, including, without
limitation, inventories of components, materials, parts, spare parts, scrap,
modules, work-in-process and finished goods, including, without limitation,
semiconductor, passive, electromechanical and other electronic components,
printed circuit boards, mother boards, driver boards, sheet metal, glass, cable,
back lamp inverter lights, and related products and supplies.
"Inventory List" shall have the meaning specified in Section
4.6(c).
"Key Employees" shall mean all of, and "Key Employee" shall
mean any of, Robert D. Lurie, Wayne Vannoy, Gary R. Miller, Richard W. McCauley
and Kenneth A. Plock.
"Know-how" shall mean all trade secrets, know-how (including,
without limitation, product know-how and use and application know-how),
processes, product designs, specifications, work flow analyses, charts and
designs, selling, quoting, bidding and other business techniques, methods and
systems, customer
A-10
<PAGE>
requirements, quality control procedures, testing procedures, manufacturing,
engineering and other drawings, blueprints, computer databases and software,
telephone numbers, facsimile numbers, technology and all other information and
similar intangibles, including, without limitation, technical information,
safety information, engineering data and designs and engineering specifications,
research records, market information and surveys and all promotional literature,
customer and supplier lists (and all other information relating to suppliers and
customers) and similar data.
"Lender Consent" shall mean the consent by Sun Bank/Miami,
N.A., Purchaser's senior lender, to the transactions (including but not limited
to the Mergers) set forth in this Agreement, which is required to be obtained
pursuant to the terms of the existing credit agreement between Purchaser and
such lender.
"Liabilities" shall mean, collectively, with respect to any
person, all types of Indebtedness, liabilities, obligations, debts, duties and
responsibilities of, and all claims, demands, judgments, orders, fines and
penalties against, such person of any kind or nature whatever, fixed or
contingent, liquidated or unliquidated, known or unknown, disclosed or
undisclosed.
"Licenses" shall mean all local, municipal, state, federal and
foreign licenses, franchises, permits, consents, approvals, waivers, rights and
authorizations used or required for use in connection with the conduct of the
Business (or any part thereof), and all industry certifications of the Business
or the Assets (or any part thereof), such as, by way of example only, ISO-9000
and ISO 9002.
"Lien" shall mean any mortgage, pledge, deed of trust,
assignment, lien, charge, encumbrance, judgment, restriction or security
interest of any kind or nature whatever, or the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Material Contract" shall mean any, and "Material Contracts"
shall mean all, of the following Contracts: (a) any Contract providing for the
purchase of Inventories (other than routine purchase orders made in the ordinary
course of business consistent with past practice) by, or the sale of Inventories
to, either Corporation (e.g., distributor, franchise, purchasing and supplier
agreements); (b) any Contract (other than routine purchaser orders received in
the ordinary course of business consistent with past practice) with any customer
of either Corporation; (c) any Contract relating to borrowings (including,
without limitation, the Bank Debt) made by either Corporation, or pursuant to
which Assets of either Corporation are pledged or assigned as collateral, or the
Business (in whole or in part) is restricted; (d) any Contract which in any
manner relates to the capitalization, capital structure or authorized shares of
either Corporation, or to any Target Shares, or to rights (contingent or
otherwise) to acquire any security of, or interest in, either Corporation or the
Business, including any agreement between or among any Target Stockholders
relating to either Corporation or the Business (whether or not either
Corporation is a party thereto); (e) any Contract which is not terminable upon
ninety (90) days (or shorter) notice without liability or cost to either
Corporation; (f) any Contract (other than routine purchase orders made or
received in the ordinary course of business consistent with past practice)
relating to the provision by either Corporation of "value added" services (as
that term is commonly understood in the Corporations' industry); (g) any
Contract relating to any of the Leaseholds; (h) any Contract relating to
insurance for the Business or the Assets, any Employee Plan, any Intellectual
Property Rights or any Licenses; (i) any Contract which a reasonably prudent
business person knowledgeable of the Business and exercising reasonable business
judgment would deem material to the Business; and (j) any Contract entered into
outside of the ordinary course of business consistent with past practice.
A-11
<PAGE>
"Merger" shall mean either, and "Mergers" shall mean both of,
the Added Value Merger and the Rocky Mountain Merger.
"Merger Consideration" shall mean, as the context requires,
either or both of the Added Value Merger Consideration and the Rocky Mountain
Merger Consideration.
"Patents" shall mean patents (including all reissues,
divisions, continuations, continuations in part and extensions thereof), patent
applications and patent disclosures docketed and all other patent rights
(including, without limitation, all claims against third parties for past
infringement not heretofore asserted).
"PBGC" shall have the meaning specified in Section 4.15(d).
"person" shall mean any natural person, corporation,
association, partnership, governmental agency or subdivision thereof, joint
venture or other entity.
"Pledge Agreement" shall mean the stock pledge agreement to be
executed by the Target Stockholders (other than the Vannoy Family Trust) in
favor of Purchaser and the Surviving Corporations pursuant to which such Target
Stockholders shall pledge to Purchaser and the Surviving Corporations the
Pledged Shares, the form of which is attached as Exhibit "C."
"Pledged Shares" shall mean the All American Shares to be
received by the Target Stockholders pursuant to the Mergers (including any
beneficial voting trust interests and certificates received by the Target
Stockholders in exchange for such All American Shares pursuant to the Voting
Trust Agreement) to the extent pledged to Purchaser and the Surviving
Corporations pursuant to the terms of the Pledge Agreement.
"Post-Termination Sale" shall have the meaning specified in
Section 9.5.
"Prior Year Tax Distribution" shall mean the sum of $149,000
distributed to the Added Value Target Stockholders during January - April, 1995
in the ordinary course of business to pay 1994 income tax liability of the Added
Value Target Stockholders in respect of Added Value's 1994 income.
"Purchaser" shall mean All American Semiconductor, Inc., a
Delaware corporation.
"Receivables" shall mean, collectively, all accounts
receivable, claims, notes and other amounts receivable by, or owed to, either of
the Corporations or which may be claimed by either of the Corporations as a
result of the operation or ownership of the Business (or any part thereof),
including, without limitation, all amounts due from customers, vendors and
Employees, together with any unpaid financing charges accrued thereon, whether
or not arising in the ordinary course of business.
"Records" shall mean, collectively, originals, or, to the
extent originals are not available, true and complete copies, of all business,
accounting and financial records, including corporate minute books and records,
and stock ledgers and records, property records, contract records, personnel
records, correspondence, files, books and documents of each of the Corporations,
including, without limitation, production, testing, quality control, backlog,
sales, marketing and advertising data and materials, customer and supplier
records and mailing lists of any and all types, vendor and customer invoices,
billing records, software and related documentation, art work, photographs and
advertising material, manuals and teaching aids, customer provided designs,
drawings or blueprints of any kind, and all other records relating to the
A-12
<PAGE>
Business as presently and heretofore conducted, including, without limitation,
all certifications and records concerning sources of supply, date codes, and
testing relating to Inventories, all certificates of compliance and conformance
and other documentation relating to products sold or to be sold in compliance
with military specifications or to original equipment manufacturers, and all
documentation relating to backlog, purchase orders (sent or received), current
shipments and work-in-process.
"Registration and Proxy Statement" shall mean the registration
statement on Form S-4 (which shall include a combined proxy statement/prospectus
of Purchaser) to be prepared and filed with the SEC by Purchaser pursuant to
which the All American Shares to be received by the Target Stockholders as part
of the Merger Consideration and, if applicable, Additional Consideration, are to
be registered under the Securities Act and pursuant to which the All American
Stockholder Approval is to be solicited.
"Restrictive Covenant" shall mean the restrictive covenant to
be executed and delivered to Purchaser and the Surviving Corporations by the
Target Stockholders on the Closing Date pursuant to which the Target
Stockholders shall agree, among other things, to certain confidentiality and
non-competition restrictions, and certain restrictions on the transferability of
the All American Shares to be issued to them in the Mergers, the form of which
is attached as Exhibit "D."
"Rocky Mountain" shall mean A.V.E.D. - Rocky Mountain, Inc., a
Colorado corporation, which sometimes herein referred to as "Colorado Target."
"Rocky Mountain Articles of Merger" shall have the meaning
specified in Section 2.3.
"Rocky Mountain Effective Time" shall have the meaning
specified in Section 2.4.
"Rocky Mountain Merger" shall have the meaning specified in
Section 2.1.
"Rocky Mountain Merger Consideration" shall have the meaning
specified in Section 2.4.
"Rocky Mountain Target Shares" shall mean, collectively, the
672 issued shares of common stock of Colorado Target, having no par value,
which, at the Rocky Mountain Effective Time, shall, except for the 400 shares
then to be owned by California Surviving Corporation (which are not included in
such 672 total), constitute all of the issued capital stock of Colorado Target
(subject to the existence at such time of any Dissenting Target Shares).
"Rocky Mountain Target Stockholder" shall mean any of, and
"Rocky Mountain Target Stockholders" shall mean all of, Wayne Vannoy, the Vannoy
Family Trust and Kim B. Cooper (but not Added Value, even though it is a
stockholder of Rocky Mountain) with respect to their respective ownership at the
Rocky Mountain Effective Time of the issued and outstanding capital stock of
Rocky Mountain.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Share Appreciation Date" shall mean June 30, 1998.
"Share Appreciation Target Value" shall mean the sum of (a)
the All American Share Value and (b) the quotient obtained by dividing (i)
$1,900,000 minus Excess Target Expenses, if any, by (ii) the total number of All
American
A-13
<PAGE>
Shares issued to the Target Stockholders, in the aggregate, upon consummation of
the Mergers, subject to any necessary adjustments pursuant to Section 3.2.
"Stockholder Tax Liability Amount" shall mean the amount of
federal and state income tax payable or reasonably estimated to be payable by
the Added Value Target Stockholders (due to Added Value's tax status as a
subchapter "S" corporation for federal and state income tax purposes) solely as
a result and in respect of the income of Added Value generated by Added Value's
operation of its business for the period commencing January 1, 1995 and ending
with the Added Value Effective Time. The term "Stockholder Tax Liability Amount"
does not include any other Taxes payable by the Added Value Target Stockholders,
including any Taxes payable as a result of, or in respect of, the Mergers (such
as capital gains or divided income Taxes with respect thereto) or amounts
received by Added Value Target Stockholders as salary or bonus in an employee
capacity, or income or gain from sources other than Added Value or which is not
attributable to Added Value's operations.
"Subsidiary" shall mean either of, and "Subsidiaries" shall
mean both of, California Subsidiary and Colorado Subsidiary.
"Successor Company" shall have the meaning specified in
Section 3.2.
"Successor Company Shares" shall have the meaning specified in
Section 3.2.
"Surviving Corporation" shall mean either of, and "Surviving
Corporations" shall mean both of, California Surviving Corporation and Colorado
Surviving Corporation.
"Tangible Personal Property" shall mean, collectively, all
fixed assets, machinery, equipment, tools, vessels, containers, computers,
vehicles, furniture, fixtures, leasehold improvements, office equipment, plant,
supplies, inventory (including, without limitation, Inventories) and other
tangible personal property owned by either Corporation of any kind or nature.
"Target" shall mean either of, and "Targets" shall mean both
of, California Target and Colorado Target.
"Target Shares" shall mean, collectively, the Added Value
Target Shares and the Rocky Mountain Target Shares.
"Target Stockholder" shall mean any of, and "Target
Stockholders" shall mean all of, the Added Value Target Stockholders and Rocky
Mountain Target Stockholders.
"Target Stockholder Release" shall have the meaning specified
in Section 3.9.
"Taxes" shall mean all taxes of any kind, including, without
limitation, those on, or measured by or referred to as, income, gross receipts,
capital gains, built-in gains, retained earnings, sales (including, without
limitation, sales taxes due or payable on leases), use, ad valorem, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
documentary stamp, intangible (recurring and non-recurring), occupation,
premium, property or windfall profits taxes, customs duties or similar fees,
import or export duties, and assessments or charges of any kind whatever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority, domestic or foreign.
"Third-Party Approval Date" shall have the meaning specified
in Section 6.8.
A-14
<PAGE>
"Trademarks" shall mean trademarks, registrations thereof,
pending applications therefor and such unregistered rights as may exist through
use.
"Trade Names" shall mean, collectively, trade names, brand
marks, trade dress, brand names and all other names and slogans used in
connection with the Business embodying either Corporation's good will for which
no trademark registration has been obtained and for which no application is
pending.
"Unrestricted Shares" shall have the meaning specified in
Section 3.1(c).
"Vannoy Family Trust" shall have the meaning specified in
Section 6.11.
"Voting Trust Agreement" shall mean the voting trust agreement
pursuant to which the Target Stockholders (other than the Vannoy Family Trust)
shall, on the Closing Date, grant to Paul Goldberg and Bruce M. Goldberg, Chief
Executive Officer and President, respectively, of Purchaser, as voting trustees,
the right to vote All American Shares beneficially owned by the Target
Stockholders with respect to certain matters, the form of which is attached as
Exhibit "E."
"Warranties" shall mean, collectively, all warranties in favor
of either of the Corporations with respect to any and all Tangible Personal
Property (including Inventories) or pursuant to any Contract, including, without
limitation, warranties of any supplier of Tangible Personal Property (including
Inventories) sold to either of the Corporations, whether resold or to be resold
by either of the Corporations to its customers.
ARTICLE 2
THE MERGER TRANSACTIONS
2.1 THE MERGERS. On and subject to the terms and conditions of
this Agreement, California Target will merge with and into California Subsidiary
(the "Added Value Merger") at the Added Value Effective Time. California
Subsidiary shall be the corporation surviving the Added Value Merger. On and
subject to the terms and conditions of this Agreement, Colorado Target will
merge with and into Colorado Subsidiary (the "Rocky Mountain Merger") at the
Rocky Mountain Effective Time. Colorado Subsidiary shall be the corporation
surviving the Rocky Mountain Merger. The Rocky Mountain Effective Time shall
occur following the Added Value Effective Time so that, at the Rocky Mountain
Effective Time, California Surviving Corporation (rather than Added Value) owns
the 400 shares of issued capital stock of Rocky Mountain currently owned by
Added Value.
2.2 THE CLOSING. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at the offices of Rubin Baum
Levin Constant Friedman & Bilzin, 2500 First Union Financial Center, Miami,
Florida, commencing at 10:00 a.m. local time on the second business day
following the satisfaction or waiver of all conditions to the obligations of the
parties to consummate the transactions contemplated hereby (other than
conditions with respect to actions the respective parties will take at the
Closing itself) or such other date as the parties may mutually determine (the
"Closing Date").
2.3 ACTIONS AT THE CLOSING. At the Closing, (i) each Target
will deliver or cause to be delivered to Purchaser and the applicable Subsidiary
the various certificates, instruments, agreements and documents referred to in
Article 7 of this Agreement, (ii) Purchaser and the appropriate Subsidiary will
deliver or cause to be delivered to the applicable Target and the Target
Stockholders the various certificates, instruments, agreements and documents
referred to in Article 8 of this Agreement, (iii) California Target and
California Subsidiary will file with the Secretary of State of the State of
A-15
<PAGE>
California an Agreement of Merger in the form attached hereto as Exhibit "F-1"
(the "Added Value Agreement of Merger"), (iv) Colorado Target and Colorado
Subsidiary will enter into a Plan of Merger and file with the Secretary of State
of the State of Colorado Articles of Merger in the respective forms attached
hereto as Exhibit "F-2" (such Articles of Merger are referred to as the "Rocky
Mountain Articles of Merger"), and (v) Purchaser will deliver or will cause to
be delivered, or provide for the delivery of, the Merger Consideration in the
manner provided below in this Article 2.
2.4 EFFECT OF MERGERS.
(a) GENERAL. The Added Value Merger shall
become effective at the time (the "Added Value Effective Time") California
Target and California Subsidiary file the Added Value Agreement of Merger with
the Secretary of State of the State of California. The Added Value Merger shall
have the effect set forth in the California General Corporation Law. The Rocky
Mountain Merger shall, as soon as reasonably possible following (but not before)
the Added Value Effective Time, become effective at the time ("Rocky Mountain
Effective Time") Colorado Target and Colorado Subsidiary file the Rocky Mountain
Articles of Merger with the Secretary of State of the State of Colorado. The
Rocky Mountain Merger shall have the effect set forth in the Colorado Business
Corporation Act. Each Surviving Corporation may, at any time after the
consummation of the Mergers, take any action (including executing and delivering
any document) inthe name and on behalf of the Target with which it was merged or
the Subsidiary it formerly was in order to carry out and effectuate the
transactions contemplated by this Agreement.
(b) ARTICLES OF INCORPORATION. The Articles of
Incorporation of California Surviving Corporation shall be the Articles of
Incorporation of California Subsidiary immediately prior to the Added Value
Effective Time. The Articles of Incorporation of Colorado Surviving Corporation
shall be the Articles of Incorporation of Colorado Subsidiary immediately prior
to the Rocky Mountain Effective Time.
(c) BYLAWS. The Bylaws of California Surviving
Corporation shall be the Bylaws of California Subsidiary immediately prior to
the Added Value Effective Time. The Bylaws of Colorado Surviving Corporation
shall be the Bylaws of Colorado Subsidiary immediately prior to the Rocky
Mountain Effective Time.
(d) DIRECTORS AND OFFICERS. The director(s) and
officers of each Subsidiary shall remain and be the director(s) and officers of
the applicable Surviving Corporation at and as of the consummation of the
applicable Merger (retaining their respective positions and terms of office).
(e) CONVERSION OF TARGET SHARES. At and as of
the Added Value Effective Time, each Added Value Target Share (up to a maximum
of 103,000 Added Value Target Shares, which shall be the total number of issued
shares of capital stock of Added Value at that time) shall be converted into the
right to receive an amount (the "Added Value Merger Consideration") equal to
$24.67869 in cash (without interest) plus $41.13115 in All American Shares
(valued at the All American Share Value). At and as of the Rocky Mountain
Effective Time, each Rocky Mountain Target Share and each of the 400 shares of
common stock of Rocky Mountain which shall then be owned by California Surviving
Corporation (up to a maximum of 1072 shares of common stock of Rocky Mountain,
which shall be the total number of issued shares of capital stock of Rocky
Mountain at that time) shall be converted into the right to receive an amount
(the "Rocky Mountain Merger Consideration") equal to $585.76265 in cash (without
interest) plus $976.27108 in All American Shares (valued at the All American
Share Value), except that, although with respect to the Target Shares owned by
Wayne Vannoy and the Vannoy Family Trust, viewed as a whole, the payment of cash
and All American Shares shall be in such proportion, as between Mr. Vannoy and
the Vannoy Family Trust, the allocation of cash and All American Shares shall be
as set forth in
A-16
<PAGE>
Exhibit "G." Aggregate amounts paid per Target Stockholder and, with respect to
the Rocky Mountain Merger, to California Surviving Corporation (as shown in
Exhibit "G") shall be rounded to the nearest whole cent (as shown in Exhibit
"G"). To the extent that the Added Value Target Stockholders (or any of their
respective Affiliates, spouses or relatives) have received or receive, in the
aggregate, during the period commencing January 1, 1995 and ending with the
Added Value Effective Time, dividends, distributions or similar or extraordinary
payments from Added Value (excluding employee compensation disclosed in Schedule
4.14) in an amount which is more than the sum of the Prior Year Tax Liability
and the Stockholder Tax Liability Amount, such excess shall, immediately upon
the demand of Purchaser, be paid by the Added Value Target Stockholders to
Purchaser, and such payment shall be considered a credit against the cash
portion of the Added Value Merger Consideration, pro rata as among the Added
Value Target Stockholders. To the extent that the Rocky Mountain Target
Stockholders (or any of their respective Affiliates, spouses or relatives,
including Added Value in its capacity as a stockholder of Rocky Mountain) have
received or receive, during the period commencing January 1, 1995 and ending
with the Rocky Mountain Effective Time, any amount of dividends, distributions
or similar or extraordinary payments from Rocky Mountain (excluding employee
compensation disclosed in Schedule 4.14), such amount shall, immediately upon
the demand of Purchaser, be paid by the Target Stockholders to Purchaser, and
such payment shall be considered a credit against the cash portion of the Rocky
Mountain Merger Consideration paid to the Rocky Mountain Target Stockholders,
pro rata as among the Target Stockholders' direct and indirect ownership
interests in Rocky Mountain. None of the foregoing is intended to diminish, or
shall diminish, the representations and warranties contained in Section 4.29
hereof, or is intended to authorize, or shall authorize, the making of any
distributions or dividends which would result in such a credit.
(f) SHARES OF SUBSIDIARY. None of the issued
shares of capital stock of either Subsidiary shall be converted as a result of
the Merger to which it is a party, but all of such shares shall remain issued
shares of capital stock of the applicable Surviving Corporation.
2.5 PROCEDURE FOR PAYMENT OF TARGET STOCKHOLDERS.
(a) Upon the effectiveness of each Merger, all
Target Shares involved in such Merger and, with respect to the Rocky Mountain
Merger, the 400 hares of Rocky Mountain common stock which shall then be owned
by California Surviving Corporation, without any further action being required,
shall automatically be cancelled and be of no further force, effect or
significance. At the Closing, all stock certificates evidencing any issued
Target Shares (together with spousal consents, for all married Target
Stockholders, in form and content reasonably satisfactory to Purchaser) and said
400 shares of Rocky Mountain common stock shall be delivered to Purchaser.
Purchaser may, upon or following the effectiveness of the Mergers, mark all of
such certificates "void" or "cancelled" and/or take such other action as
appropriate or desirable to evidence the cancellation and cessation of existence
of all of the Target Shares and said 400 shares of Rocky Mountain common stock.
(b) As soon as is reasonably practicable
following the Closing Date (but in no event later than the third business day
following the Closing Date), Purchaser shall, subject to the requirements of the
Pledge Agreement and the Voting Trust Agreement, pay and/or cause to be paid the
Merger Consideration in accordance with the Merger Consideration tables attached
as Exhibit "G." Purchaser shall rely exclusively on the stock certificates
evidencing ownership of Target Shares which are delivered to Purchaser at
Closing and the information contained in Exhibit "G" in paying the Merger
Consideration.
(c) For the convenience of Purchaser and to save
Purchaser the expense, fractional All American Shares shall not be issued. Any
person who would otherwise be entitled to receive a fractional interest in an
All American
A-17
<PAGE>
Share shall receive, at the time the Merger Consideration is to be paid, a cash
distribution in lieu of such fractional share based upon the All American Share
Value.
2.6 DISSENTING TARGET SHARES. All of the Target Stockholders
(and Added Value, in its capacity as a stockholder of Rocky Mountain) have
executed and delivered to Purchaser concurrently herewith the Guaranty and
Agreement; accordingly, each Target Stockholder (and Added Value, in its
capacity as a stockholder of Rocky Mountain) has irrevocably consented to the
Mergers and has knowingly and voluntarily waived any dissenters rights which
such Target Stockholder (and Added Value, in its capacity as a stockholder of
Rocky Mountain) has or may have at law or otherwise. Nonetheless, should there
hereafter arise, for any reason, a situation wherein a stockholder of either
Target could have rights under applicable law to dissent from the approval of
one or both of the Mergers (such as, as an example, with respect to a required
approval of a material amendment to this Agreement after the date hereof, even
though the Guaranty and Agreement provides that the approval of the Mergers
therein shall survive, unimpaired, any such amendment), Purchaser shall be
obligated (assuming all other conditions precedent to its obligation to close
under this Agreement have been satisfied or waived) to close under this
Agreement as long as those Added Value Target Stockholders who exercise such
dissenters rights own in the aggregate no more than 3% of the issued capital
stock of Added Value, and as long as stockholders of Rocky Mountain who exercise
such dissenters rights own in the aggregate no more than 7% of the issued
capital stock of Rocky Mountain (collectively, "Dissenting Target Shares").
Holders of Dissenting Target Shares, if any, shall be entitled to such
dissenters rights in respect of the applicable Merger as are set forth in the
California General Corporation Law or Colorado Business Corporation Act, as
applicable, and all applicable procedures therein contained shall be observed.
Holders of Dissenting Target Shares shall not be considered Target Stockholders
or entitled to Merger Consideration or Additional Consideration for any purpose
of this Agreement or any Exhibit to this Agreement. It is again emphasized that
no Dissenting Target Shares are anticipated, and that this Section has been
included only to address any unforeseen circumstance which would create
dissenters rights notwithstanding the unanimous approval of this Agreement by
the Target Stockholders (and Added Value, in its capacity as a stockholder of
Rocky Mountain) and waiver of all such dissenters rights concurrently herewith.
In the event that Dissenting Target Shares do exist, and the payment in solely
cash (as opposed to cash and stock) to the dissenters would cause the aggregate
consideration in a Merger to consist of a higher amount of cash than stock
(viewed in dollar value), the stockholders of the affected Corporation shall
automatically be deemed to have elected to increase, on a pro rata basis, the
proportion of stock to cash received to the extent necessary to render the stock
portion at least equal to the cash portion. Any payments required to be made to
dissenters shall be made by Purchaser (and not either Target or Surviving
Corporation).
2.7 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The
Corporations and the Target Stockholders shall not cause or permit to occur any
stock split, reverse stock split, stock dividend, reclassification or
recapitalization which changes the character or amount (a "Capital Stock
Change") of the Target Shares. Nonetheless, without in any manner limiting
Purchaser's or either Subsidiary's rights or remedies in respect of any breach
of the obligations set forth in the preceding sentence or elsewhere in this
Agreement, should a Capital Stock Change with respect to any Target Shares occur
prior to Closing, and Purchaser nevertheless elects to close, Purchaser shall
make such adjustments to the applicable Merger Consideration as shall be
equitable and appropriate in order to make such Merger Consideration (as a whole
and per affected stockholder of the affected Target), as nearly as practicable,
equivalent in value to such Merger Consideration (as a whole and per affected
stockholder of the affected Target) prior to the Capital Stock Change.
A-18
<PAGE>
ARTICLE 3
OTHER AGREEMENTS
3.1 ADDITIONAL CONSIDERATION.
(a) If, on the Share Appreciation Date, the
Actual Share Appreciation Value is not equal to or higher than the Share
Appreciation Target Value, the Additional Consideration, if any, shall, within
ten (10) days following the Share Appreciation Date, be paid to those Target
Stockholders entitled to receive Additional Consideration.
(b) The Additional Consideration may be paid by
Purchaser, solely at Purchaser's election, in cash, in All American Shares
(based upon the Actual Share Appreciation Value), or a combination thereof;
PROVIDED, HOWEVER, that payment shall be made in All American Shares (based upon
the Actual Share Appreciation Value) to the extent necessary to cause the total
Merger Consideration and Additional Consideration (viewed in dollar value using,
as to valuation of All American Shares, the All American Share Value or Actual
Share Appreciation Value, as applicable) paid to all Target Stockholders, in the
aggregate (and, viewed separately as to each Merger), to consist of a higher
dollar value of All American Shares than of cash consideration. In determining
the amount (viewed in dollar value) of All American Shares for these purposes,
effect shall be given to the amount of imputed interest for federal and state
income tax purposes, if any, which shall be deducted in making the above
calculation.
(c) Notwithstanding any of the foregoing to the
contrary contained in this Section 3.1, in calculating any Additional
Consideration, the following provisions shall apply:
(i) If, for any thirty (30) consecutive
trading days on The NASDAQ Stock Market (or such other market or exchange on
which All American Shares may, at such time, trade) prior to the Share
Appreciation Date, the last sale price of an All American Share is equal to or
higher than the Share Appreciation Target Value, the total number of All
American Shares acquired by the Target Stockholders pursuant to the Mergers the
sale of which have not been restricted pursuant to the Restrictive Covenant over
such period ("Unrestricted Shares") shall be excluded from and reduce the number
of All American Shares referenced in clause (b) of the definition of Additional
Consideration set forth in Article 1 when calculating Additional Consideration.
(ii) Once the last sale price of an All
American Share has equalled or exceeded the Share Appreciation Target Value for
any such 30-consecutive-trading-day period prior to the Share Appreciation Date,
to the extent that immediately following such period (but prior to the Share
Appreciation Date) the last sale price of an All American Share continues to
equal or exceed the Share Appreciation Target Value, each All American Share
acquired by any Target Stockholder pursuant to the Mergers the sale of which
becomes unrestricted pursuant to the Restrictive Covenant at any such time
during which All American Shares have continued, uninterrupted, to trade at a
price equal to or higher than the Share Appreciation Target Value shall
automatically become part of the Unrestricted Shares subject to exclusion in
calculating Additional Consideration.
(iii) If, and to the extent that,
Purchaser, in its sole discretion, permanently waives in writing the
restrictions on transferability of all of the All American Shares set forth in
the Restrictive Covenant at any time prior to the Share Appreciation Date and
during any 30-consecutive-trading-day period following (or commencing with) the
date that such written waiver is given (but which is prior to, or ends on, the
Share Appreciation Date) the last sale price of an All American Share equals or
exceeds the Share Appreciation Target
A-19
<PAGE>
Value, such All American Shares shall automatically become part of the
Unrestricted Shares subject to exclusion in calculating Additional
Consideration.
(iv) For purposes of calculating
Additional Consideration, each All American Share sold, transferred or otherwise
disposed of (other than the pledge thereof pursuant to the Pledge Agreement or
the transfer thereof to the voting trustee under the Voting Trust Agreement) by
any Target Stockholder to any person at any time after the Closing Date shall
conclusively be deemed to be an All American Share acquired by such Target
Stockholder pursuant to the Mergers the sale, transfer or disposal of which
shall reduce the number of All American Shares used to calculate Additional
Consideration (regardless of any acquisitions or reacquisitions of All American
Shares by such Target Stockholder at any time).
3.2 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) Should a Capital Stock Change occur with
respect to the All American Shares after the Closing Date, but prior to the date
on which any Additional Consideration is to be paid, and Purchaser has elected
or is required to pay some or all of such Additional Consideration in All
American Shares, Purchaser shall make such adjustments to such portion of the
Additional Consideration that will consist of All American Shares as shall be
equitable and appropriate in order to make such portion of the Additional
Consideration which is to consist of All American Shares, as nearly as
practicable, equivalent in value to what such portion of the Additional
Consideration which is to consist of All American Shares would have been had
such Capital Stock Change not occurred.
(b) Should a merger or exchange occur with
respect to the All American Shares after the Closing Date, but prior to the date
on which any Additional Consideration is to be paid, such that the holders of
All American Shares are given shares of capital stock ("Successor Company
Shares") of another company ("Successor Company") or cash or a combination
thereof and the All American Shares are cancelled or otherwise cease to exist,
in calculating and paying the Additional Consideration (if any), the Share
Appreciation Target Value and the Actual Share Appreciation Value shall be
calculated with reference to the value (and any increases thereto) of Successor
Company Shares, and paid, to the extent not paid in cash, in Successor Company
Shares, after making all adjustments as are necessary, equitable and appropriate
to reach the same result that would have been reached had any (or no)
appreciation in share value occurred with respect to the All American Shares,
rather than the Successor Company Shares, as if such merger or exchange had not
occurred. In the event of any such merger or exchange, this Agreement, including
but not limited to the obligation herein to pay Additional Consideration, shall
be binding upon any such Successor Company.
3.3 REGISTRATION AND PROXY STATEMENT. Purchaser agrees that
the maximum number of All American Shares which could be issued as part of the
Merger Consideration (2,348,032), and the maximum number of All American Shares
which could be issued as Additional Consideration (844,444), are to be
registered under the Securities Act and applicable state "blue sky" laws
(subject to available state law exemptions to registration or qualification) at
or prior to the Closing Date, and Purchaser shall use best efforts to register
all of such All American Shares pursuant to the Registration and Proxy
Statement. The parties acknowledge that the All American Stockholder Approval to
be solicited pursuant to the Registration and Proxy Statement is required to be
obtained in order for Purchaser to consummate the Mergers, and Purchaser shall
use reasonable efforts to obtain the All American Stockholder Approval.
Accordingly, the Target Stockholders and the Corporations shall cooperate with
Purchaser in connection with Purchaser's preparation and filing of the
Registration and Proxy Statement and all filings and applications required under
the "blue sky" laws of the various states, and, in this regard, shall provide to
Purchaser all such
A-20
<PAGE>
information and materials concerning the Corporations and the Target
Stockholders, execute, deliver and/or file all such documents, and do or
undertake all such acts and things, including, but not limited to, the provision
of customary representation letters and tax opinions of counsel of and to the
Targets and Target Stockholders (such tax opinions to be similar in form and
content to those to be rendered by Purchaser's counsel), in each case, as
reasonably requested by Purchaser, in connection with (a) the preparation and
filing of the Registration and Proxy Statement (and any required attachments
thereto) and any such filings and applications under state "blue sky" laws (and
any amendment or supplement to any of the foregoing which is reasonably required
to be completed, including, without limitation, any required by the
resolicitation of proxies), (b) the formulation of responses (if required) to
SEC and state "blue sky" authority comments and questions, and (c) Purchaser's
efforts to cause the federal and state registration or qualification of the All
American Shares pursuant thereto to become effective, and available state "blue
sky" exemptions to be obtained, and the All American Stockholder Approval to be
obtained as soon as is reasonably practicable (including any resolicitation of
proxies).
3.4 KEY EMPLOYEES EMPLOYMENT AGREEMENTS. On the Closing
Date, the Key Employees and the appropriate Surviving Corporation shall execute
and deliver the respective Employment Agreements.
3.5 PLEDGE AGREEMENT. On the Closing Date, the Target
Stockholders (other than the Vannoy Family Trust), Purchaser and the Surviving
Corporations shall execute and deliver the Pledge Agreement.
3.6 VOTING TRUST AGREEMENT. On the Closing Date, the
Target Stockholders (other than the Vannoy Family Trust) shall execute and
deliver, and Purchaser shall cause Paul Goldberg and Bruce M. Goldberg, as
voting trustees, to execute and deliver, the Voting Trust Agreement.
3.7 RESTRICTIVE COVENANT. On the Closing Date, the Target
Stockholders shall execute and deliver to Purchaser and the Surviving
Corporations the Restrictive Covenant. The Target Stockholders shall abide by
all confidentiality and noncompetition restrictions and covenants set forth in
the Restrictive Covenant from and after the date hereof, as if such covenants
and restrictions were fully set forth herein.
3.8 GUARANTY AND AGREEMENT. Concurrently with the
execution and delivery of this Agreement, the Target Stockholders (and Added
Value, in its capacity as a stockholder of Rocky Mountain) shall execute and
deliver to Purchaser and Subsidiary the Guaranty and Agreement.
3.9 RELEASES OF CORPORATIONS. On the Closing Date, the
Target Stockholders shall execute and deliver to each of the Corporations a
general release dated as of the Closing Date, in form and content reasonably
satisfactory to Purchaser (the "Target Stockholder Release").
3.10 LIABILITY OF TARGET STOCKHOLDERS TO CORPORATIONS.
Without in any manner, or to any degree, diminishing, impairing or limiting the
representations, warranties, covenants, obligations or indemnities of the
Corporations or the Target Stockholders or the rights or remedies of Purchaser
and Subsidiaries or Surviving Corporations against either Corporation or any
Target Stockholder set forth in this Agreement, the Guaranty and Agreement or
any other agreement, certificate or document executed or delivered in connection
with or pursuant to this Agreement, and without in any manner granting a release
of liability of any kind to either Corporation or any Target Stockholder with
respect to any of the foregoing or with respect to any acts, omissions, conduct,
events, occurrences or conditions constituting, underlying or relating to any of
the foregoing or on which any of the foregoing might be based, effective from
and after the Closing Date, Purchaser agrees that in the event either
Corporation has
A-21
<PAGE>
a cause of action or claim against any Target Stockholder as of the day prior to
the Closing Date, such claim may never be asserted or pursued by Purchaser or
either Surviving Corporation against such Target Stockholder, except to the
extent such claim is based upon acts or omissions on the part of a Target
Stockholder which constitute fraudulent or criminal conduct. To the extent of
any conflict between the provisions of this Section 3.10 and the Guaranty and
Agreement or any other provision of this Agreement or any agreement entered into
pursuant hereto, the Guaranty and Agreement, the other provisions of this
Agreement or such other agreement shall govern and control.
3.11 HSR ACT FILINGS AND AUTHORIZATIONS.
Purchaser and the Corporations (and, if applicable, the Target
Stockholders), promptly after the execution and delivery of this Agreement,
shall file or supply, or cause to be filed or supplied, all notifications,
reports and other information required to be filed or supplied pursuant to the
HSR Act in connection with the transactions set forth in this Agreement and
which are required by law to effectuate the consummation of such transactions.
Purchaser and the Corporations (and, if applicable, the Target Stockholders)
shall cooperate with each other in connection with such filings and furnish each
other with copies of such filings and any correspondence received from any
governmental body, agency or authority in connection therewith. Purchaser and
the Corporations (and, if applicable, the Target Stockholders), as promptly as
practicable, shall make, or cause to be made, all such other filings and
submissions under such laws as are applicable to them or to their respective
Affiliates as may be required for them to consummate the transactions set forth
in this Agreement in accordance with the terms of this Agreement. All such
filings shall comply in form and content in all material respects with
applicable law.
3.12 LIST OF AFFILIATES.
Prior to Closing, the Corporations shall deliver to Purchaser
a list, certified if requested, setting forth all Affiliates of each Corporation
in order to facilitate compliance by Purchaser under Rule 145 under the Exchange
Act.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CORPORATIONS
Each of the Corporations hereby represents and warrants to
Purchaser, Subsidiaries and Surviving Corporations, jointly and severally, which
representations and warranties shall survive the execution and delivery of this
Agreement and the Guaranty and Agreement and the consummation of the
transactions contemplated hereby (including the Mergers), as follows:
4.1 ORGANIZATION AND GOOD STANDING. Each Corporation is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its organization, with full power and authority to own or lease
its properties and assets as presently owned or leased and to conduct its
businesses as presently conducted and to consummate all transactions
contemplated to be consummated by it under this Agreement. Each Corporation is
in good standing and duly qualified to do business in each other jurisdiction in
which the ownership, leasing or operation of the Assets or the conduct of the
Business by it requires such qualification.
4.2 AUTHORITY. Each Corporation has full power and authority
to execute and deliver this Agreement and the other agreements and instruments
to be executed and delivered by it pursuant hereto and to consummate the
transactions contemplated hereby and thereby. This Agreement has been and, as of
the Closing Date, each of such other agreements and instruments will be, duly
executed and delivered by such Corporation and (assuming due authorization, exe-
A-22
<PAGE>
cution and delivery by Purchaser and each Subsidiary) this Agreement
constitutes, and each of such other agreements and instruments when duly
executed and delivered by such Corporation will constitute, legal, valid and
binding obligations of such Corporation enforceable against such Corporation in
accordance with their respective terms. Except as set forth in Schedule 4.2, the
execution and delivery by each Corporation of this Agreement and such other
agreements and instruments and the consummation by such Corporation of the
transactions contemplated hereby and thereby will not (a) violate, or conflict
with, result in any breach of, constitute a default (or an event which with
notice or lapse of time or both would become a default) under, permit the
cancellation of, or result in the creation of a Lien on any of the Target
Shares, the Business or any of the Assets pursuant to, the Articles of
Incorporation or Bylaws of either Corporation, or any indenture, mortgage, deed
of trust, lease, Contract or other agreement or instrument, judgment, order,
decree, law, ordinance, rule or regulation to which either Corporation is a
party or by which either Corporation or any of the Business or any of the Assets
is bound or affected, or the terms of any License held by either Corporation, or
(b) permit or result in the acceleration of the maturity of any Indebtedness of
either Corporation, or of any Indebtedness secured by any Assets. Except for
required filings and notifications under the HSR Act, no approval,
authorization, consent or other order or action of or filing with any court,
administrative agency or other governmental authority or any other person is
required or desirable to obtain for or in connection with the execution and
delivery by either Corporation of this Agreement or such other agreements and
instruments or the consummation by such Corporation of the transactions
contemplated hereby or thereby.
4.3 NO SUBSIDIARIES. Except for the current ownership interest
of Added Value in Rocky Mountain, neither Corporation owns stock or has any
other equity interest in, or controls, directly or indirectly, any corporation,
association, partnership, business, enterprise, joint venture or other entity or
person. Except as set forth in Schedule 4.3, neither Corporation is a party to
any participation, stockholder, joint venture or partnership agreement. Except
for Added Value and Rocky Mountain, and except as set forth in Schedule 4.3 (and
except for DE MINIMUS passive investments in public companies or in mutual funds
which invest in public companies which may be competitive with Purchaser), no
Target Stockholder owns stock or has any other equity interest in, controls
directly or indirectly, or otherwise directly or indirectly participates in any
manner or has any other interest of any kind in, any corporation, association,
partnership, joint venture, business, enterprise or other entity or person which
conducts or consists of or includes the business of distribution of electronic
or electrical components of any kind or any services (including any value added
services) related thereto or any activity similar or related to the Business or
any part thereof.
4.4 FINANCIAL STATEMENTS. The Historical Financial Statements,
true, correct and complete copies of which are attached as Schedule 4.4 hereto,
(a) were prepared in accordance with the books of account and records of the
respective Corporations, (b) present fairly in all material respects the
financial position and results of operations of the respective Corporations as
of the dates and for the periods indicated therein, (c) were prepared in
accordance with GAAP throughout the periods covered thereby, and (d) make full
and adequate disclosure of, and provision for, all material Liabilities of the
respective Corporations as of the dates thereof.
4.5 LEASEHOLDS AND IMPROVEMENTS. Neither Corporation owns any
real property. Schedule 4.5 contains a complete list of all real property and
interests in real property leased or used by either Corporation in connection
with the Business (or any part thereof) or otherwise (the "Leaseholds"). The
improvements located on the real property subject to the Leaseholds (the
"Improvements") which are material to the conduct or operation of the Business
are and as of the Closing will be in good condition and good operating and
working condition, and fit for operation in the usual course of business,
A-23
<PAGE>
ordinary wear and tear excepted. Each Corporation is the lessee of each of the
leasehold estates listed in Schedule 4.5 as being leased by it. Schedule 4.5
correctly identifies (A) each lease by each Corporation of any real property and
each space allocation arrangement with any other person covering any real or
other material property used in the Business (or any part thereof), (B) each
guaranty by either Corporation of or relating to any such lease or space
allocation arrangement, and (C) the current annual rent (and any additional rent
obligations, such as, but not necessarily limited to, taxes, insurance or common
area charges), and the term thereof (and any renewal options and the terms
thereof), including any scheduled increases in such rent or additional rent and
the effective date thereof. Except as set forth in Schedule 4.5, each lease
pursuant to which each Leasehold is purported to be granted is valid without any
default thereunder by either Corporation, or, to the best of each Corporation's
knowledge, any other party thereto. Such leases are the only leases of real
property to which either Corporation is a party or where offices of the Business
are maintained or on which tangible Assets (except for Inventories in transit)
are located. Except as set forth in Schedule 4.5, the Mergers will not be
subject to any lease restriction or required consent or other approval provision
in any such lease.
4.6 PERSONAL PROPERTY, INVENTORIES AND TITLE TO PROPERTY.
(a) All Tangible Personal Property owned, leased
or used by either Corporation is reflected in the Historical Financial
Statements, and is in good operating and working condition and fit for operation
in the usual course of business, ordinary wear and tear excepted, and all such
Tangible Personal Property (except for Inventories in transit) is located on
premises overed by Leaseholds.
(b) (i) Except as set forth in Schedule 4.6,
each Corporation has good and marketable title to all of its Assets, and a good
and valid leasehold interest in all property leased by such Corporation, free
and clear of all Liens.
(ii) All of the Improvements and Tangible
Personal Property owned or leased by either Corporation are being used and
operated in conformity with all applicable laws, statutes, codes, regulations
and ordinances. The Assets are, in the aggregate, sufficient in all material
respects to continue operating the Business as it is presently conducted and as
it is contemplated to be conducted in the foreseeable future.
(c) A true and complete list of all Inventories
of each Corporation (accompanied by a slow-moving inventory report) as of July
29, 1995 (for Rocky Mountain) and July 30, 1995 (for Added Value) has been
delivered to Purchaser (the "Inventory List"). None of the Inventories is
required to be certified to be in compliance with military specifications.
Substantially all of such Inventories are in good condition and usable in the
ordinary course of the Business and in such quantities as will be utilized in
the ordinary course consistent with past practice. Neither Corporation has taken
any action or omitted to take any action which would result in the impairment or
cancellation of any Warranties or either Corporation's right to return
Inventories or the Corporation's stock rotation or price protection rights or
privileges. At least 64% (by value) of the Inventories of Added Value, and at
least 59% (by value) of the Inventories of Rocky Mountain, have been supplied by
suppliers for whom the Corporations are currently authorized distributors (the
"Franchised Inventory"). The Inventory List accurately identifies (by
description and dollar amount) all Inventory with respect to which there has
been no activity for one year, two years, and three years, respectively. On or
prior to the date hereof, Purchaser has been delivered true, complete and
accurate schedules setting forth the volume of sales for each product which is
Franchised Inventory sold by each Corporation, identifying the product by part
number and manufacturer, for each of the following three (3) fiscal periods: (i)
the six-month period ended June 30, 1995; (ii) the fiscal year ended December
31, 1994; and the fiscal year ended December
A-24
<PAGE>
31, 1993. As of the Closing Date, the Inventories of the Corporation will be of
a quantity, mix, age, type and nature which are substantially similar to the
Inventories set forth on the Inventory List.
4.7 INTELLECTUAL PROPERTY RIGHTS. Neither Corporation owns, or
has ever owned, or licenses, or has ever licensed or obtained, the right to use,
any Patents. Neither Corporation has used any Trademark or Trade Name in
connection with the Business other than those listed on Schedule 4.7 and each
Corporation validly owns, beneficially and of record, and holds the entire
right, title and interest in and to, all of the Intellectual Property Rights
(including, without limitation, the Know-how) used in the Business conducted by
it, free and clear of any Lien. Without limitation on the generality of the
foregoing, Added Value, as between Added Value and Todd Collin, is the sole
owner of all Intellectual Property Rights in or relating to all work and work
product of every kind and nature produced or developed by Todd Collin for, or at
the request of, either Corporation or any Key Employee. To the best of each
Corporation's knowledge, the operation of the Business by the Corporations does
not and will not infringe any patent, trade secret, trademark, intellectual
property rights, or any other rights of any nature whatever of others. No
action, suit or arbitration, or legal, administrative or other proceeding, or
governmental investigation, is pending, or, to the best of either Corporation's
knowledge, threatened, nor has any claim been asserted or threatened, which
involves any Intellectual Property Rights of or used by either Corporation, and
no state of facts exists under which any such action, suit, arbitration,
proceeding or investigation might be based. Neither Corporation is subject to
any judgment, order, writ, injunction or decree of any court or any federal,
state, local or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, or any arbitrator, nor has either
Corporation entered into or is it a party to any Contract, which restricts or
impairs the use of any such Intellectual Property Rights.
4.8 LITIGATION. Except as set forth in Schedule 4.8, there is
no claim, legal action, counterclaim, suit, arbitration, governmental
investigation or other legal, administrative or tax proceeding, or any order,
decree, judgment, settlement agreement or settlement order, in effect, in
progress or pending, or to the best of each Corporation's knowledge, threatened,
against or relating to either Corporation, the Business or the Assets, nor does
either Corporation know or have reason to be aware of any basis for the same.
Except as set forth in Schedule 4.8, no Corporation or Target Stockholder is a
party to any legal, administrative or Tax proceeding, or arbitration or
mediation, of any kind or nature. Except as set forth in Schedule 4.8, there is
outstanding no order, writ, injunction, judgment or decree of any court,
governmental agency or arbitration tribunal or any settlement agreement or
arrangement of any kind against, with, binding upon or involving any Target
Stockholder, either Corporation, the Business (or any part thereof) or any of
the Assets.
4.9 COMPLIANCE WITH LAWS. Each Corporation has complied and is
currently in compliance in all material respects with all laws, ordinances,
regulations, licensing requirements, rules, decrees, awards and orders
applicable to it, the Business conducted by it and the Assets owned by it,
including, without limitation, any thereof relating to wages, hours, hiring,
promotions, retirement, working conditions, use and occupancy of the
Improvements, air or water pollution, disposal of wastes or hazardous or toxic
substances, other environmental matters, nondiscrimination, health, safety,
pensions, employee benefits, the production, assembly, marketing, sale and
distribution of products, labeling of products, trade regulation and antitrust,
except where the failure to comply would not, as to individual failures or as to
all failures in the aggregate, have a material adverse effect on either
Corporation, the Business or the Assets.
4.10 ENTIRE BUSINESS. The Mergers will effectively
collectively convey to the Surviving Corporations, directly or indirectly,
unrestricted, unencumbered (except for any Liens identified in Schedule 4.6),
100% beneficial
A-25
<PAGE>
ownership of the entire Business, Added Value and Rocky Mountain. The assets,
properties and rights which will be owned or possessed by each Corporation as of
the Closing will constitute all of the tangible and intangible property used by
either Corporation in connection with the conduct of the Business as now
conducted, and will all be transferred to the Surviving Corporations after
giving effect to the respective Mergers. Except for the sale of Inventories and
disbursements of cash to pay Liabilities when due in the ordinary course of
business, all of each Corporation's Assets on the date hereof shall be
transferred to the applicable Surviving Corporation as a result of the
applicable Merger.
4.11 CONTRACTS.
(a) Schedule 4.11 contains a true and complete
list of all Material Contracts to which each Corporation is a party or which are
or will be binding upon such Corporation, the Business (or any part thereof) or
the Assets. Except for the Material Contracts listed on Schedule 4.11 (true and
complete copies of which have been previously delivered to Purchaser or, in the
case of oral agreements, if any, descriptions of which are set forth on Schedule
4.11), and routine purchase orders sent or received in the ordinary course of
business consistent with past practice, neither Corporation is a party to or is
any of the Assets or the Business bound or affected by any Material Contract.
(b) On or prior to the date hereof, each
Corporation has delivered to Purchaser true, complete and accurate schedules
setting forth all customers of such Corporation who have accounted for more than
2% of such Corporation's gross sales for the six-month period ended June 30,
1995 and, separately, during each of the fiscal years of such Corporation ended
December 31, 1994 and December 31, 1993, respectively, listed in descending
order of sales volume, and showing further, with respect to each such customer's
sales volume, the portion thereof attributable to products supplied by each
supplier to such Corporation whose products were sold by such Corporation to
such customer, provided that with respect to each such customer's sales volume
for the period shown, no more than five suppliers (in descending order of volume
of products provided through such Corporation to such customer) need be shown.
On or prior to the date hereof, each Corporation has delivered to Purchaser
true, complete and accurate schedules setting forth all suppliers of Inventories
to the Business conducted by it who supply 5% or more (by purchase cost in
dollars) of such Corporation's Inventories requirements for each of the three
periods set forth in the preceding sentence.
(c) Each Corporation has in all material
respects performed all material obligations required to be performed by it under
all Material Contracts to which it is a party or by which it is bound, and will
in all material respects perform all material obligations required to be
performed by it under Material Contracts entered into after the date hereof.
Neither Corporation nor, to the best of each Corporation's knowledge, any other
party to a Material Contract with either Corporation, is in material default
under any such Material Contract, and no event exists which with the giving of
notice or the passage of time, or both, would create such a default, and neither
Corporation knows of any meritorious basis for any claim of any such default.
(d) Each of the Material Contracts has been, and
each Material Contract entered into after the date hereof will be, lawfully
entered into and is or will be valid and in full force and effect and is or will
be enforceable in accordance with its terms for the period stated in such
Material Contract. Neither Corporation has received any notice of cancellation
of (or notice of threat of cancellation of), nor are there any outstanding
disputes under, any Material Contracts.
(e) Except as set forth on Schedule 4.11, the
consummation of the transactions contemplated by this Agreement (including,
without
A-26
<PAGE>
limitation, the Mergers) does not require any consent under any Material
Contract (pursuant to or due to the existence of an anti-assignment provision,
in order to avoid or prevent a default or acceleration of obligations, or
otherwise), and the consummation of the transactions contemplated by this
Agreement (including, without limitation, the Mergers) will not require any
consent under any Material Contract entered into after the date hereof, in each
case, which will not have been obtained by the Closing (and copies of such
consents will be given to Purchaser on or prior to the Closing Date), and such
consummation will not result in the termination of any right or privilege under
any Material Contract now existing or entered into after the date hereof.
Neither Corporation has received notice that any party to any Material Contract
intends to cancel such Material Contract, nor has any party given either
Corporation notice of any alleged breach of any Material Contract or of its
intent to take any legal action in order to enforce its rights thereunder.
(f) Except as set forth in Schedule 4.11,
neither Corporation nor any of the Target Stockholders is a party to, nor is
either Corporation or any of the Target Stockholders or the Business (or any
part or aspect thereof) bound by, any shareholders agreement, buy-sell
agreement, non-competition agreement or arrangement or any other agreement or
arrangement restricting or prohibiting, in any fashion, the way in which the
Business (or any part or aspect thereof) is operated.
(g) Schedule 4.11 includes all noncompetition or
other agreements or arrangements (if any) which restrict, in any fashion, any
person or persons from competing with either Corporation or which otherwise are
for the benefit of either Corporation or the Business (or any part or aspect
thereof).
(h) True and complete copies of all forms
generally used by each Corporation, including, without limitation, forms of
customer agreements, invoices, sales orders, purchase orders, sales
acknowledgements or confirmations and purchase acknowledgements and
confirmations, have been delivered to Purchaser.
4.12 RECEIVABLES; PAYABLES.
(a) The accounts receivable set forth in the
Historical Financial Statements constitute all of the Receivables of the
Business as of the respective dates thereof. Since June 30, 1995, each
Corporation has collectedits Receivables only in the ordinary course of business
consistent with past practice, and since such date neither Corporation has made
any extraordinary efforts to collect any Receivables, nor has there been any
extraordinary prepayments of any Receivables, service fees or other amounts to
either Corporation. Except as set forth in Schedule 4.12, all of each
Corporation's Receivables arose from valid sales and bona fide transactions in
the ordinary course of business of such Corporation.
(b) The Receivables, as reflected in the
Historical Financial Statements and subsequent thereto through the date hereof:
(i) are, to the best of each
Corporation's knowledge, the genuine, valid and legally enforceable obligations
of the account debtor thereunder and are not actually or contingently subject to
any set-off or other defense on the part of such account debtor, or to any claim
on the part of such account debtor denying liability thereunder;
(ii) are, to the best of each
Corporation's knowledge, evidenced by an invoice or similar written billing;
(iii) do not arise out of a transaction or
transactions with any employee, officer, agent, director or stockholder of
either Corporation (including any Target Stockholder) or any Affiliate of either
Corporation; and
A-27
<PAGE>
(iv) represent bona fide transactions
arising in the ordinary course of business, completed substantially in
accordance with the terms and provisions contained in any agreements or
documents related thereto.
(c) The amount of the face value shown on any
invoice or statement with respect to each of such Receivables is the amount
owing to the applicable Corporation.
(d) To the best of each Corporation's knowledge,
there are no facts, events or occurrences which currently or potentially in any
way impair the validity, collectibility or enforcement of any of the Receivables
or tend materially to reduce the amount payable thereunder from the amount of
the invoice face value shown on all contracts, invoices and/or statements
relating thereto.
(e) Each Corporation's terms with customers are,
generally, net/30 days.
(f) A true, complete and correct schedule of the
accounts receivable of each Corporation as of June 30, 1995 (or a more current
date) showing aging on a 30, 60, 90 and over-90 day basis has been delivered to
Purchaser.
(g) All accounts payable and other Liabilities
reflected in the Historical Financial Statements arose or will have arisen in
the ordinary course of the applicable Corporation's business. A true, complete
and correct schedule of all accounts payable relating to or arising out of the
operation of the Business of each Corporation as of June 30, 1995 (or a more
current date) showing thereon any accounts payable which are 30, 60, 90 or more
than 90 days past due and, with respect to any overdue amount, accompanied by an
explanation as to why such amount is overdue, has been delivered to Purchaser.
4.13 CERTAIN TRANSACTIONS. Except as set forth in Schedule
4.13, since June 30, 1995, each Corporation has conducted its business only in
the ordinary course consistent with past practice and has not: (1) paid, or made
any accrual or arrangement for the payment of, bonuses or special compensation
of any kind or any severance or termination pay to any Employee; (2) made any
general wage or salary increases concerning its Employees (or any specific
increase to any Key Employee's salary or wages) or increased or altered in any
material respect any other benefits or insurance provided to or maintained on
behalf of any Employee or, except as set forth in Schedule 4.14, declared or
paid any bonus to any Employee; (3) mortgaged, pledged or subjected to Lien or
any other restriction any of the Assets; (4) sold, assigned or transferred or
agreed to sell, assign or transfer any of the Assets which in the aggregate
exceed $25,000 in value, other than sales of Inventories in the ordinary course
of business consistent with past practice; (5) granted any rights or licenses
relating to any Intellectual Property Rights or entered into any licensing,
franchise, agency, distributorship, requirements, output or similar
arrangements; (6) canceled or agreed to cancel any debts or claims; (7) waived
or agreed to waive any material rights (contractual or otherwise); (8) made or
permitted any amendment or termination of any Contracts other than in the
ordinary course of business; (9) effected any change in the accounting methods
or principles used in connection with its books, records and financial
statements; (10) suffered any damage, destruction, deterioration, impairment or
loss to any Assets or the Business, whether or not covered by insurance, or
suffered any event or condition of any character, which, individually or in the
aggregate with others, might reasonably be expected to have a material adverse
effect on such Corporation, the Business or the financial condition or prospects
of such Corporation or the Business; (11) suffered any material adverse change
in its financial condition or operations; (12) incurred, assumed or guaranteed,
or paid, discharged or satisfied, any obligations or Liabilities except in the
ordinary course of business consistent with past practice; (13) suffered any
default under, or suffered any event which with notice or lapse of time or both
would constitute a default under, any
A-28
<PAGE>
Contract, debt instrument or other agreement to which such Corporation is a
party or by which it, the Business or any of the Assets is bound; (14)
terminated or amended, or suffered a termination or amendment of, any License;
or (15) made or paid any distributions, dividends or extraordinary payments to
any of its stockholders other than salary and bonuses described in Schedule 4.14
and, as to the Added Value Target Stockholders, amounts not more than, in the
aggregate, when combined with all distributions, dividends and extraordinary
payments made since December 31, 1994, the sum of the Stockholder Tax Liability
Amount and the Prior Year Tax Distribution.
4.14 EMPLOYEES.
(a) Schedule 4.14 contains a list setting forth
the name and current annual salary and other compensation (of any kind) payable
by each Corporation to each current Employee, and the profit sharing, bonus or
other form of additional compensation paid or payable by such Corporation to or
for the benefit of each such person for the current fiscal year. Except as set
forth herein or in Schedule 4.11 or under the employment, consulting or other
agreements listed thereon or in Schedule 4.15, there are no oral or written
contracts, agreements or arrangements obligating either Corporation to increase
the compensation or benefits presently being paid or hereafter payable to any of
its Employees or other persons or to pay any bonus. Except as set forth in
Schedule 4.8, there is not now, and there will not be as of the Closing Date,
any liability or basis for liability of either Corporation arising out of claims
made or suits brought (including, without limitation, workers' compensation
claims and claims or suits for contribution to, or indemnification of, third
parties, occupational health and safety, environmental, consumer protection or
equal employment matters) for injury, sickness, disease, discrimination, death
or termination of employment of any Employee or other employment matter
attributable to an event occurring or a state of facts existing on or prior to
the Closing Date.
(b) Neither Corporation nor any Affiliate of
either Corporation is party to any collective bargaining agreement, written or
oral, which covers any Employees or which is binding upon either Corporation.
There have been, and there are, no strikes, grievances, disputes or
controversies pending or, to the best of each Corporation's knowledge,
threatened betweeneither Corporation and any of its Employees or any union or
other organization claiming to represent such Employees' interests. There is no
request for union representation pending or, to the best of each Corporation's
knowledge, no present union organizing or election activities in progress or
threatened with respect to any Employees. There is no unfair labor practice
complaint pending before the National Labor Relations Board or, to the best of
each Corporation's knowledge, threatened against or relating to either
Corporation or any of its Employees.
(c) Neither Corporation has engaged in any
unfair labor practice or discrimination on the basis of race, age, gender,
disability or otherwise in its employment conditions or practices with respect
to Employees the effect of which, individually or in the aggregate, could have a
materialadverse effect or either Corporation, the Business or the Assets.
4.15 EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.15 annexed hereto contains a true
and complete list of each plan, program, policy, practice, contract, agreement
or other arrangement providing for compensation, severance, termination pay,
performance awards, stock or stock-related awards, fringe benefits or other
employee benefits of any kind, whether formal or informal, proposed or final,
funded or unfunded, and whether or not legally binding, including, without
limitation, each "employee benefit plan" within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
("Employee Plan") which is
A-29
<PAGE>
now, or ever has been, maintained, contributed to, or required to be contributed
to, for the benefit of any Employee, and each management, employment, severance
or consulting agreement or contract between each Corporation and any Employee,
including, without limitation, summaries of all oral employment or consulting or
similar arrangements (other than purely "at will" employments or arrangements)
between each Corporation and any person (each, an "Employee Agreement"). Each
Corporation will provide to Purchaser prior to the Closing: true and complete
copies of all documents, if any, embodying each Employee Plan and Employee
Agreement, including all amendments thereto and written interpretations thereof;
the three most recent annual reports filed (Form 5500 Series with applicable
schedules) with respect to each Employee Plan required under ERISA; the most
recent summary plan description, if any, with respect to each Employee Plan
required under ERISA; the most recent favorable determination letter from the
Internal Revenue Service, if applicable, with respect to each Employee Plan; and
all material communications, if any, to any Employee relating to each Employee
Plan.
(b) Each Employee Plan that is intended to be
qualified under the Internal Revenue Code has received a determination letter
from the Internal Revenue Service to the effect that such Employee Plan and
related trust are qualified and exempt from federal income taxes under Sections
401(a) and 501(a) (as amended by the Tax Reform Act of 1986 and subsequent
legislation), respectively, and no such determination letter has been revoked
or, to the best of each Corporation's knowledge, has revocation been threatened.
Nothing has occurred or is expected to occur which would adversely affect the
qualified status of any such Employee Plan or any related trust subsequent to
the issuance of such determination letter.
(c) Each Corporation has performed in all
material respects all obligations required to be performed under each Employee
Plan, and each Employee Plan has been established and maintained in all material
respects in accordance with its terms and in compliance with all applicable
laws, statutes, orders, rules and regulations, including but not limited to
ERISA and the Internal Revenue Code. No Employee Plan is a defined benefit plan
within the meaning of Section 3(35) of ERISA. No Employee Plan is a
multiemployer plan within the meaning of Section 3(37) of ERISA. Neither
Corporation has any liability with respect to any defined benefit plan or
multiemployer plan as a result of having been considered a "single employer"
within the meaning of Section 414(b), (c), (m), (n) and (o) of the Internal
Revenue Code, or otherwise, and there is no basis for such liability being
imposed. There are no investigations, claims, suits or proceedings pending, or,
to the best of each Corporation's knowledge, threatened or anticipated (other
than routine claims for benefits) against any Employee Plan or the assets of any
Employee Plan, and, to the best of each Corporation's knowledge, there are no
facts that could give rise to any liability in the event of any such
investigation, claim, suit or proceeding. Each Employee Plan can be amended,
terminated or otherwise discontinued prior to the Closing without liability to
Purchaser, either Corporation or the Surviving Corporation. All premiums
required by any Employee Plan have been paid thereunder. All contributions due
to, and payments from, the Employee Plans that may have been required to be made
have been made. No "prohibited transaction" within the meaning of Section 4975
of the Internal Revenue Code or Section 406 of ERISA has occurred with respect
to any Employee Plan, and, to the best of each Corporation's knowledge, no
action or failure to act with respect to any Employee Plan could subject
Purchaser, either Corporation, the Surviving Corporation or any Employee Plan to
any tax, penalty or other liability, for breach of fiduciary duty or otherwise,
under ERISA or any other applicable law, whether by way of indemnity or
otherwise.
(d) With respect to any defined benefit plan of
either Corporation, there has been no failure to make any contribution or pay
any amount due as required by Section 412 of the Internal Revenue Code, Section
302 of ERISA or the terms of such defined benefit plan, and there has been no
request for or
A-30
<PAGE>
receipt of any funding waiver from the Internal Revenue Service. No trust has
been established in connection with such defined benefit plan pursuant to
Section 4049 of ERISA (as in effect on December 17, 1987), and no liabilities
that would have a material adverse effect on the condition of the Business have
been asserted against either Corporation or any entity with which it would be
considered a "single employer" in connection with the Pension Plan by the
Pension Benefit Guaranty Corporation ("PBGC") or by a trustee appointed pursuant
to Section 4042(b) or (c) of ERISA, and no Lien has been attached and neither
the PBGC nor the Internal Revenue Service has threatened to attach a Lien on any
Assets of either Corporation or any entity within which it would be considered a
"single employer" as a result of any failure to comply with the Internal Revenue
Code or the Treasury regulations thereunder or ERISA. Neither Corporation nor
any entity with which either is or would be considered a "single employer" has
provided or is required to provide security to any such defined benefit plan
pursuant to Section 401(a) of the Internal Revenue Code. Neither Corporation nor
any entity with which either is or would be considered a "single employer" has
incurred or reasonably expects to incur any Liabilities under Title IV of ERISA
with respect to any such defined benefit plan. Neither Corporation nor any
entity with which either is or would be considered a "single employer" has
transferred any assets or liabilities of such defined benefit plan which had, at
the date of such transfer, "unfunded benefit liabilities" within the meaning of
Section 4001(a)(18) of ERISA. No "reportable event," within the meaning of
Section 4043(b) of ERISA, has occurred with respect to any such defined benefit
plan. As of December 31, 1994, no such defined benefit plan had any amount of
"unfunded benefit liability," within the meaning of Section 4001(a)(18) of
ERISA, and termination of any such defined benefit plan has not resulted and
will not result in any liability to either Corporation or any entity with which
either is or would be considered a "single employer," Purchaser or either
Surviving Corporation.
(e) Neither Corporation maintains or contributes
to any Employee Plan which provides, or has any liability to provide, life
insurance, medical or other employee welfare benefits to any Employee upon his
retirement or termination of employment, and neither Corporation has ever
promised, represented to, or contracted with (orally or in writing) any Employee
(individually or as a group) that life insurance, medical or other employee
welfare benefits would be provided upon their retirement or termination of
employment.
(f) Each "group health plan" within the meaning
of Section 4980B(g)(2) of the Internal Revenue Code maintained by each
Corporation or any entity with which either Corporation is or would be
considered a "single employer" has been administered in good faith in compliance
with the continuation coverage requirements contained in the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), as set forth at
Section 4980B of the Internal Revenue Code and any regulations promulgated or
proposed (if such proposed regulations constitute substantial authority within
the meaning of Section 6662 of the Internal Revenue Code and any regulations
promulgated thereunder) thereunder.
(g) The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby (including, without
limitation, the Mergers) will not (either alone or when taken together with any
additional or subsequent events) constitute an event under any Employee Plan or
Employee Agreement that will or may result in any payment, upon a change in
control or otherwise, whether of severance, accrued vacation, or otherwise,
acceleration, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee. No payment or benefit which will or may
be made by either Corporation with respect to any Employee as a result of the
transactions contemplated hereby will be characterized as an "excess parachute
payment" within the meaning of Section 280G(b)(1) of the Internal Revenue Code.
A-31
<PAGE>
(h) Each Corporation (except to the extent that
any of the following noncompliances, failures or liabilities would not, either
individually or in the aggregate, have a material adverse effect on either
Corporation, the Business or the Assets): (i) is in compliance with all
applicable federal and state laws, rules and regulations respecting employment,
employment practices, terms and conditions of employment and wages and hours, in
each case, with respect to all Employees; (ii) has withheld all amounts required
by law or by agreement to be withheld from the wages, salaries and other
payments to Employees; (iii) is not liable for any arrearages of wages or any
Taxes or any penalty for failure to comply with any of the foregoing; and (iv)
(other than routine payments to be made in the normal course of business and
consistent with past practice and reserved for on the June 30, 1995 balance
sheet including within the Historical Financial Statements) is not liable for
any payment to any trust or other fund or to any governmental or administrative
authority with respect to unemployment compensation benefits, Social Security or
other benefits for Employees.
(i) No material promises or commitments have
been made with respect to any Employee Plan of either Corporation other than in
accordance with a reasonable interpretation of the terms of such Employee Plan.
There is no plan or commitment, whether legally binding or not, to establish any
new Employee Plan of either Corporation, to modify any Employee Plan or to enter
into any new Employee Plan; nor has any intention or commitment to do any of the
foregoing been communicated.
4.16 LICENSES AND PERMITS. Each Corporation has all Licenses
necessary or appropriate for the operation of the Business conducted by it and
the use of its assets and properties as presently operated or used by it except
where the failure to obtain such Licenses would not, individually or in the
aggregate, have a material adverse effect upon either Corporation, the Business
or the Assets. All Licenses held by each Corporation are valid and in full force
and effect and no proceedings which could result in the termination or
impairment of any such License are pending, or, to the best of each
Corporation's knowledge, threatened. Schedule 4.16 sets forth a complete and
accurate description of all such Licenses. Neither Corporation is in violation
of, has received any notice of any violation of, nor, to the best of each
Corporation's knowledge, does any state of facts exist which could lead to a
penalty in respect of or termination of, any License. The consummation of this
Agreement (including without limitation the Mergers) will not result in or
create the loss or impairment of, or a reduction of the benefits or privileges
conferred by, or an obligation to make payments of any kind to maintain, any
License.
4.17 TRANSACTIONS WITH AFFILIATES. Except as set forth in
Schedule 4.17, neither Corporation has purchased, acquired or leased any
property or services from, or sold, transferred or leased any property or
services to, or loaned or advanced any money to, or borrowed any money from, or
guaranteed or otherwise become liable for any indebtedness or other obligations
of, or acquired any capital stock, obligations or securities of, or made any
management, consulting or similar fee arrangement with, any Affiliate, or any
officer, director or stockholder, of such Corporation, nor is such Corporation
party to any agreement oral or written with respect to any of the foregoing.
4.18 TRUTHFULNESS. No statement, representation or warranty of
either Corporation or any Key Employee in this Agreement (including the Exhibits
and Schedules hereto) or in any agreement, written document or certificate
delivered by or on behalf of either Corporation or any Key Employee pursuant to
this Agreement, including, without limitation, all information prepared or
delivered by or on behalf of either Corporation concerning either Corporation,
any Key Employee or the Business in connection with the preparation and filing
of the Registration and Proxy Statement, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
A-32
<PAGE>
necessary in order to make the statements contained herein or therein not
misleading.
4.19 CUSTOMERS AND SUPPLIERS. Concurrently with or prior to
the execution and delivery of this Agreement, each Corporation shall deliver to
Purchaser true and complete lists of all of such Corporation's suppliers and
customers. Except as set forth in Schedule 4.19, to the best of each
Corporation's knowledge, no material customer or supplier of either Corporation
will cease to do business with such Corporation, or materially reduce the volume
of business historically transacted, after, or as a result of, the consummation
of any transaction contemplated hereby (including, without limitation, either of
the Mergers). Except as set forth in Schedule 4.19, there is and has been no
customer of the Business conducted by either Corporation whose business has
accounted for more than 10% of such Corporation's gross revenues for the
six-month period ended June 30, 1995, the year ended December 31, 1994 or the
year ended December 31, 1993.
4.20 PAYMENTS. Neither Corporation nor any director, officer
or Employee thereof, nor, to the best of each Corporation's knowledge, any other
person (including, without limitation, any representative of, or broker for,
either Corporation acting on behalf of the Corporation) has ever, directly or
indirectly, on behalf of or with respect to either Corporation, had any
transactions or payments which are not recorded in the applicable Corporation's
accounting books and records or disclosed in its financial statements, or had
any off-book bank or cash accounts or "slush funds".
4.21 INSURANCE. Schedule 4.21 contains a complete list of all
insurance policies or binders insuring the property, assets or business
liabilities of each Corporation and with respect to the Business, true and
complete copies of which have been made available to Purchaser. All properties
and assets of each Corporation are insured by reputable insurance companies
against loss or damage by fire and other risks to the extent and in the manner
customary for companies engaged in similar businesses. Except as set forth in
Schedule 4.21, each Corporation is in compliance with the terms of all policies
and instruments of insurance it owns and coverage thereunder will not be
affected by the transactions contemplated hereby (including, without limitation,
either of the Mergers). With respect to the Business there are no pending or
asserted material claims against such insurance by either Corporation as to
which the insurers have denied liability. Schedule 4.21 sets forth each claim
(if any) made against said insurance for the preceding two years (both insured
and self-insured).
4.22 ENVIRONMENTAL MATTERS. There has been no manufacture,
refining, storage, disposal or treatment of Hazardous Substances (as hereinafter
defined) by either Corporation at any real property currently or in the past
owned, operated, used, leased or contracted for by either Corporation, or
otherwise in violation of any Environmental Laws (as hereinafter defined) or
which would require remedial action under any Environmental Law. During the past
five years neither Corporation has received any (a) notice of any such violation
with respect to any Hazardous Substance at or by any of such real property, (b)
notice from any governmental agency that either Corporation, or any present or
former owner, lessee or operator of such real property, is a potentially
responsible party for cleanup liability with respect to the emission, discharge
or release of any Hazardous Substance or for any other matter arising under the
Environmental Laws or in any litigation, administrative proceeding, finding,
order, citation, notice, investigation or complaint under any Environmental Law,
or (c) notice of violation, citation, complaint, request for information, order,
directive, compliance schedule, notice of claim, proceeding or litigation from
any party concerning either Corporation's compliance with any Environmental Law.
There are no incinerators, septic tanks or cesspools located on any such real
property, all sewage is discharged into a public sanitary sewer system and no
Hazardous Substances are emitted, discharged or released, directly or
indirectly,
A-33
<PAGE>
by either Corporation into the atmosphere or any body of water. No permits,
licenses or other authorizations issued pursuant to the Environmental Laws are
required for either Corporation's use or occupancy of, or either Corporation's
present use or occupancy of, any such real property. As used herein
"Environmental Laws" means the Resource Conservation Recovery Act, the
Comprehensive Environmental Responsibility Compensation and Liability Act, the
Superfund Amendments and Reauthorization Act, the Toxic Substances Control Act,
the Hazardous Materials Transportation Act, the Clean Air Act, the Clean Water
Act, and other similar federal, state and local laws, as amended, together with
all regulations issued or promulgated thereunder, relating to pollution, the
protection of the environment or the health and safety of workers or the general
public. As used herein "Hazardous Substance" means any hazardous substance,
hazardous or toxic waste, hazardous material, pollutant or contaminant, as those
or similar terms are used in the Environmental Laws, including, without
limitation, asbestos and asbestos-related products, chlorofluorocarbons, oils or
petroleum-derived compounds, polychlorinated biphenyls, pesticides and radon.
4.23 STATUS OF CORPORATIONS AND TARGET STOCKHOLDERS.
Neither Corporation nor any Target Stockholder is a "foreign person" within the
meaning of Section 1445 of the Internal Revenue Code.
4.24 TAX MATTERS. Each Corporation has timely filed all
federal, state and local Tax returns and all information returns and reports
required to be filed by or with respect to it under the laws of the United
States or any state or other jurisdiction for all periods ending on or prior to
the date hereof and will timely file all such returns and reports required to be
filed from the date hereof through the Closing Date. True and complete copies of
such reports and returns filed within three years prior to the date hereof have
been delivered to Purchaser and true and complete copies of all such returns and
reports filed after the date hereof and on or before the Closing Date will be
furnished to Purchaser within ten days after they are filed. All such reports
and returns were or will be in all material respects accurately prepared in
accordance with all applicable statutes, rules and regulations and are or will
be correct as filed. Each Corporation has paid all Taxes (including, without
limitation, Taxes for which such Corporation is a collection agent - e.g.,
withholding, excise, sales, use, Social Security and similar Taxes) which have
become due or payable (and will pay on or prior to the Closing Date all Taxes
which have become due or payable on or prior to the Closing Date). Neither
Corporation has ever been included in a consolidated federal income tax return
or combined or unitary state tax return. Neither Corporation is a party to or
has been notified that it is the subject of any pending, proposed or threatened
action, investigation, proceeding, audit, claim or assessment by or before the
Internal Revenue Service or any other governmental authority, and no claim for
assessment, deficiency or collection of Taxes, or proposed assessment,
deficiency or collection, for which either Corporation may be liable, has been
asserted or threatened against it. Neither Corporation has received any notice
of deficiency, assessment or collection or proposed deficiency, assessment or
collection from the Internal Revenue Service or any other governmental authority
which has not been satisfied, nor does either Corporation have any reason to
believe that any such notice will be received in the future. Except as set forth
in Schedule 4.24, neither the Internal Revenue Service nor any state taxing
authority has ever audited any Tax return of either Corporation. The charges,
accruals and reserves shown in the Historical Financial Statements of each
Corporation in respect of Taxes for all fiscal periods to date are adequate.
There are no material unpaid assessments or proposals for additional Taxes for
which the applicable Corporation does not have adequate reserves, nor does
either Corporation know of any basis therefor for any such period. There are no
Tax rulings, requests for rulings or closing agreements relating to either
Corporation which could affect its liability for Taxes for any period. No power
of attorney has been granted by either Corporation or any of its Affiliates with
respect to any matter relating to Taxes of either Corporation which is currently
in force. Neither Corporation has executed or filed with the Internal Revenue
Service or any other governmental
A-34
<PAGE>
authority any agreement which is still in effect waiving limitations on, or
extending, the period for assessment or collection of any Taxes.
4.25 NO SALE. Neither Corporation and no Target Stockholder
has entered into any contract to sell, mortgage, pledge or encumber any of the
Target Shares or the shares of common stock of Rocky Mountain owned by Added
Value other than this Agreement. Neither Corporation has entered into any
contract to sell, mortgage, pledge or encumber, directly or indirectly, any of
its Assets (other than sales of Inventories in the ordinary course of business,
consistent with past practice, and with respect to Liens disclosed in Schedule
4.6).
4.26 INVESTMENT COMPANY ACT. Neither Corporation is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
4.27 PURCHASE COMMITMENTS. No purchase commitment of or by
which either Corporation is bound is in excess of the normal, ordinary and usual
requirements of the Business conducted by such Corporation or at an excessive
price. Each Corporation has delivered to Purchaser a true and complete list of
such Corporation's purchase commitments through the date of this Agreement.
4.28 CERTAIN REPORTS. Each Corporation has filed all reports,
applications, documents, instruments and information required to be filed by it
pursuant to applicable rules and regulations or requests of every regulatory
body or other governmental authority having jurisdiction over such Corporation,
the Business conducted by it or the use of the Assets owned or used by it.
4.29 CERTAIN PAYMENTS TO KEY EMPLOYEES. Schedule 4.29 sets
forth all amounts and benefits which have been paid or provided to any Target
Stockholder (or Affiliate or spouse or relative thereof) by either Corporation
(whether as dividend, distribution, loan, loan repayment, salary, bonus or other
payment or benefit) since December 31, 1994. No stockholder of either
Corporation has received during, or in respect of, any period subsequent to
December 31, 1994, any dividends or distributions or extraordinary payments
whatever except for salary and bonuses at the respective compensation rates set
forth in Schedule 4.14, and, as to the Added Value Target Stockholders, amounts
not more than, in the aggregate, the sum of the Stockholder Tax Liability Amount
and the Prior Year Tax Distribution.
4.30 BANK AND SECURITIES ACCOUNTS. Schedule 4.30 contains a
true and complete list of the names and addresses of (a) all bank, investment
and securities accounts of each Corporation, together with the names of all
persons authorized to draw thereon or withdraw therefrom, and (b) all persons to
whom powers of attorney have been granted by such Corporation. The cash and
securities held in such accounts are not subject to restrictions or limitations
as to withdrawals, margin balances or compensating balances. Schedule 4.30 also
includes all accounts, deposits or safe deposit boxes and the names of all
persons authorized to draw on such accounts or deposits or to have access to
such safe deposit boxes. The books of account of each Corporation show all
checks and drafts outstanding, and there are sufficient funds in the bank
accounts listed on Schedule 4.30 to pay any and all checks or drafts presented,
or outstanding, but not yet presented on said accounts.
4.31 STATUS OF TARGET SHARES. Immediately prior to the Added
Value Effective Time, none of the Added Value Target Shares will be subject to
any restrictions (on transferability or otherwise). Immediately prior to the
Rocky Mountain Effective Time, none of the Rocky Mountain Target Shares will be
subject to any restrictions (on transferability or otherwise). Except as set
forth in Schedule 4.31, there are currently no outstanding options, warrants,
calls, preemptive rights, rights of first refusal or other rights to purchase or
acquire from any Target Stockholder, or any plans, contracts or commitments
providing for the issuance of to any Target Stockholder or the granting of
rights to any Target Stockholder to acquire: (a) any capital stock of either
Corporation or (b) any
A-35
<PAGE>
securities or rights convertible into or exchangeable for any capital stock of
either Corporation. Except as set forth in Schedule 4.31, no Target Stockholder
is contractually or otherwise obligated or entitled to repurchase or otherwise
acquire any outstanding shares of capital stock of either Corporation.
4.32 TITLE TO THE TARGET SHARES. Each Target Stockholder (and
Added Value, as a stockholder of Rocky Mountain) currently owns and holds title
to, and will on the Closing Date own and hold title to, respectively, the Target
Shares (or shares) now (and at Closing to be) owned by him or her (or it), as
set forth in Schedule 4.34, free and clear of any Lien of any kind. All of the
Target Shares (and the shares owned by Added Value) are and will be evidenced by
duly executed and issued stock certificates. None of such stock certificates
bears or will bear restrictive or other legends of any kind, including, without
limitation, any legends imposed by the California Department of Corporations.
4.33 CHARTER DOCUMENTS. Each Corporation has heretofore
delivered to Purchaser true and complete copies of the Articles of Incorporation
(certified by the Secretary of State of the States of California and Colorado,
respectively) and Bylaws of each Corporation as in effect on the date hereof.
The corporate minute, stock and transfer books of each Corporation (or copies
thereof) have been made available to Purchaser for its inspection and are true
and complete.
4.34 CAPITALIZATION. The authorized capital stock of the
respective Corporations and the number of issued and outstanding shares of
capital stock of the respective Corporations, and the name of each stockholder
thereof (as it appears on its, his or her stock certificate for such shares) as
of the date hereof, together with the number of such shares owned by such
stockholder on the date hereof, and the number of shares that will be owned by
such stockholder on the Closing Date, are and will be (as applicable) as set
forth in Schedule 4.34, which is true, correct and complete in all material
respects. Each Corporation is authorized to issue only one class of capital
stock, which is common stock, and is not authorized to issue, and has not
issued, any other security of any kind. All outstanding shares of capital stock
of each Corporation are (and will be at the Added Value Effective Time and Rocky
Mountain Effective Time, respectively) duly authorized and validly issued, are
and will be fully paid and nonassessable and were not and will not be issued in
violation of any preemptive right, right of first refusal or any other
contractual or legal restriction of any kind. Except as set forth in Schedule
4.34, there are no outstanding or authorized (a) securities of either
Corporation convertible into or exchangeable for shares of capital stock or
voting securities of either Corporation or (b) options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, calls,
preemptive rights, rights of first refusal or other contractual rights or
commitments that would require or obligate either Corporation to issue any
capital stock, voting securities or securities convertible into or exchangeable
for capital stock or voting securities of either Corporation. Except as set
forth in Schedule 4.34, there are no outstanding obligations of either
Corporation to repurchase, redeem or otherwise acquire any securities of either
Corporation, and there are no outstanding or authorized stock appreciation,
phantom stock, profit participation or similar rights with respect to either
Corporation. Without limitation of the foregoing or the generality thereof (and
notwithstanding the disclosure of any of the following in Schedule 4.2, 4.3,
4.11, 4.31, 4.34 or any other Schedule): (i) following the anticipated exercise
by Robert Lurie prior to Closing of his option to acquire 5,000 shares of common
stock of Added Value for a purchase price of $65,450 pursuant to Added Value's
incentive stock option plan, and the funding of employee compensation in that
amount to him therefor under the accompanying funding agreement, no remaining
options (or obligations to fund their exercise) shall be outstanding (and no
others have been promised) under or pursuant to such plan and such plan will be
terminated and of no further force or effect; (ii) the stock redemption
agreements referred to in Schedule 4.34, Note 9(c) to the Audited Financial
Statements of Added Value and Note 6(b) to the Audited Financial Statements of
Rocky Mountain (i.e., as to Added Value, Stock Redemption
A-36
<PAGE>
Agreement, dated April 19, 1982, among Added Value, Kenneth A. Plock, Gary R.
Miller, Jerry D. Fletcher and Richard W. McCauley, as amended by Amendment to
Stock Redemption Agreement, dated March 4, 1987, and, as to Added Value and
Rocky Mountain, Stock Redemption Agreement, dated March 1, 1987, among Rocky
Mountain, Wayne Vannoy and Added Value) have been (and, as a confirmatory
matter, are hereby) cancelled and are of no further force or effect; (iii) all
prior "Incentive Stock Option Plans" of Rocky Mountain or agreements thereunder
between Rocky Mountain and any person have been cancelled, and none presently
exist; and (iv) all existing or prior agreements between Kirk Hulbert and either
Corporation, including any discretionary bonus or independent contractor
agreements, have been terminated and Mr. Hulbert has and will have no rights
thereunder. Schedule 4.34 also sets forth the number, if any, of All American
Shares owned by each Target Stockholder or either Corporation on the date
hereof.
4.35 OFFICERS AND DIRECTORS. The officers and directors
of each Corporation on the date hereof are as set forth in Schedule 4.35.
4.36 DIVIDENDS. All dividends and distributions paid by each
Corporation have been legally and properly declared and paid in all respects,
and no dividends or distributions have been made since December 31, 1994 outside
of the usual and ordinary course of business.
4.37 BANK DEBT. No portion of the proceeds of the Bank Debt
has been, or will be, used in order to pay or allow the payment of non-routine
compensation, dividends, distributions or loan repayments or to provide loans,
personal benefits or perquisites to any Target Stockholder or any of their
respective spouses, relatives or Affiliates. Neither Corporation has used
proceeds of the Bank Debt for any purpose other than to finance Inventories and
operations of the Business in the ordinary course. Each Corporation is in
compliance (without giving effect to any waivers or consents) with all financial
and other covenants contained in all Contracts evidencing or relating to the
Bank Debt, and is not in any manner in non-compliance, violation, breach or
default thereof. The outstanding principal amount of the Bank Debt on the date
hereof, and the amount thereof owed by each Corporation, is as set forth in
Schedule 4.37.
4.38 CONTINUITY OF BUSINESS ENTERPRISE. Each Corporation
operates at least one significant historic business line, or owns at least a
significant portion of its historic business assets, in each case within the
meaning of Treasury Regulation ss. 1.368-1(d) promulgated under the Internal
Revenue Code.
4.39 NO INTENT TO SELL. No Target Stockholder has, or on the
Closing Date will have, any present plan, intention or arrangement to sell,
transfer or otherwise in any manner dispose of any of the All American Shares to
be issued to such Target Stockholder pursuant to the Mergers or as Additional
Consideration (if any).
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND SUBSIDIARIES
Each of Purchaser and each Subsidiary represents and warrants to the
Corporations and the Target Stockholders, which representations and warranties
shall survive the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, as follows:
5.1 ORGANIZATION. Each is a corporation duly organized, validly
existing and in good standing under the laws of its state of organization.
5.2 AUTHORITY. Each has full corporate power and authority to
execute and deliver this Agreement and the other agreements and instruments to
be executed and delivered by it pursuant hereto and to consummate the transac-
A-37
<PAGE>
tions contemplated hereby and thereby. All proceedings required to be taken by
or on the part of each to authorize such execution, delivery and consummation
have been or will be duly and properly taken prior to the Closing Date. This
Agreement has been duly executed and delivered by each and (assuming due
authorization, execution and delivery by the Corporations and the Target
Stockholders) this Agreement constitutes, and such other agreements and
instruments when duly executed and delivered will constitute, legal, valid and
binding obligations of each enforceable against each in accordance with their
respective terms. The execution and delivery by each of this Agreement and such
other agreements and instruments and the consummation by each of the
transactions contemplated hereby and thereby will not violate any law, or
conflict with, result in any breach of, constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or result in
the creation of a lien or encumbrance on any of the properties or assets of any
of them pursuant to, the Certificate or Articles of Incorporation or Bylaws of
any of them or any indenture, mortgage, lease, agreement or other instrument to
which any of them is a party or by which any of them or any of their respective
properties or assets is or are bound (except that the Lender Consent and the All
American Stockholder Approval must be obtained by Purchaser). Except for the
Registration and Proxy Statement (and any required state "blue-sky" filings
relating thereto), the Added Value Agreement of Merger, Rocky Mountain Articles
of Merger, required filings and notifications under the HSR Act and the
California Franchise Tax Clearance, no approval, authorization, consent or other
order or action of or filing with any court, administrative agency or other
governmental authority in the United States of America is required for the
execution and delivery by Purchaser or either Subsidiary of this Agreement and
such other agreements and instruments or the consummation by any of them of the
transactions contemplated hereby or thereby.
5.3 LITIGATION. There is no claim, legal action, counterclaim,
suit, arbitration, governmental investigation or other legal, administrative or
tax proceeding, or any order, decree, judgment, settlement agreement or order,
in effect, in progress or pending, or to the best of Purchaser's or either
Subsidiary's knowledge, threatened, against or relating to any of them, nor does
any of them know or have reason to be aware of any basis for the same, which
would individually or in the aggregate have a material adverse effect on the
transactions contemplated by this Agreement, or the business, assets and
properties of Purchaser or either Subsidiary. There is outstanding no order,
writ, injunction, judgment or decree of any court, governmental agency or
arbitration tribunal or any settlement agreement or arrangement which would
individually or in the aggregate have a material adverse effect on the
transactions contemplated by this Agreement, or the business, assets and
properties of Purchaser or either Subsidiary.
5.4 TRUTHFULNESS. No statement, representation or warranty of
Purchaser or either Subsidiary in this Agreement or in any agreement, written
document or certificate delivered by or on behalf of any of them pursuant to
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading.
5.5 CONTINUITY OF BUSINESS ENTERPRISE. It is the present
intention of each of the Subsidiaries, as the respective Surviving Corporations,
to continue at least one significant historic business line of Added Value and
Rocky Mountain, respectively, or to use at least a significant portion of Added
Value and Rocky Mountain's respective historic business assets in a business, in
each case within the meaning of Treasury Regulation ss. 1.368-1(d) promulgated
under the Internal Revenue Code.
5.6 CAPITAL STRUCTURE. The authorized capital stock of
Purchaser consists of 40,000,000 shares of common stock, $.01 par value, of
which approximately 17,700,000 shares are issued and outstanding as of the date
of this
A-38
<PAGE>
Agreement, and 1,000,000 shares of preferred stock, $.01 par value, no shares of
which are outstanding as of the date of this Agreement. All of the outstanding
shares of Purchaser's common stock are duly authorized, validly issued, fully
paid and nonassessable. The All American Shares to be issued to the Target
Stockholders pursuant to this Agreement, when issued and delivered in accordance
with the terms of this Agreement, will be validly issued, fully paid and
nonassessable. The authorized capital stock of each Subsidiary consists of 100
shares of common stock, having no par value, of which 100 shares are issued and
outstanding as of the date of this Agreement. The issued and outstanding shares
of each Subsidiary are owned by Purchaser and are duly authorized, validly
issued, fully paid and nonassessable shares of capital stock of such Subsidiary.
California Subsidiary was organized by Purchaser on September 27, 1995 and
Colorado Subsidiary was organized by Purchaser on September 25, 1995, and
neither has as of the date hereof engaged or participated in any business
activities other than as contemplated by this Agreement.
5.7 SEC REPORTS. Purchaser's Annual Reports on Form 10-K for
each of the fiscal years ended December 31, 1994 and December 31, 1993, filed
with SEC under the Exchange Act, together with all other reports filed by
Purchaser with the SEC after December 31, 1994 (collectively, "Purchaser's SEC
Reports") contain all of the information required by the Exchange Act and the
rules and regulations thereunder, and do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to made the statements therein, in the light of the
circumstances under which they were made, not misleading. Copies of Purchaser's
SEC Reports have been delivered to the Corporations.
5.8 MATERIAL CHANGES SINCE DECEMBER 31, 1994. Since December
31, 1994 there has not occurred or arisen, other than as disclosed in this
Agreement or Purchaser's SEC Reports, (i) any material adverse change in the
assets or liabilities or in the condition, financial or otherwise, or business,
properties, earnings, net worth or prospects of Purchaser and its subsidiaries
viewed as a whole, or (ii) any damage or destruction in the nature of a casualty
or loss, whether covered by insurance or not, materially and adversely affecting
any property or business of Purchaser and its subsidiaries viewed as a whole.
5.9 NO UNDISCLOSED LIABILITIES. Purchaser does not have any
material liabilities, fixed or contingent, other than (i) liabilities fully
reflected in Purchaser's SEC Reports, and (ii) liabilities incurred since
December 31, 1994 in the ordinary course of business or referred to in
Purchaser's SEC Reports, which, in the aggregate, taking into consideration all
other changes in the financial condition of Purchaser and its subsidiaries
viewed as a whole in the ordinary course of business, have had no material
adverse effect on the financial condition, results of operations or business of
Purchaser and its subsidiaries viewed as a whole.
5.10 NO DEFAULT. Except as set forth in Purchaser's SEC
Reports, Purchaser is not in default in any material respect under any material
agreement, lease or other document to which it is a party, or received written
notice of or is, to the knowledge of any executive officer of Purchaser, in
material violation of any law or order, writ, injunction or decree of any court
or Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality (including, without limitation,
applicable environmental protection laws and regulations, equal employment and
civil rights laws and occupational health and safety laws) the effects of which,
individually or in the aggregate, would have a material adverse effect on the
financial condition, results of operations or business of Purchaser and its
subsidiaries viewed as a whole.
5.11 ACCURACY OF REGISTRATION AND PROXY STATEMENT. The
Registration and Proxy Statement (including any amendment or supplement thereto)
will, when filed with the SEC and when mailed to the shareholders of Purchaser,
contain the information required by the Securities Act and the Exchange Act and
the rules and regulations of the SEC under such acts. The Registration and
Proxy Statement
A-39
<PAGE>
will not, at the time of mailing, at the time of the meeting of shareholders of
Purchaser, or on the Closing Date, include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that Purchaser makes no
representations or warranties as to statements or omissions regarding
information to the extent relating to the Corporations, the Business, the Assets
or the Target Stockholders which have been provided or reviewed by or on behalf
either of the Corporations or any Target Stockholder.
5.12 BOARD ACTION. The respective Boards of Directors of
Purchaser and Subsidiaries, at duly held meetings, or by written consent in lieu
thereof, by requisite vote, determined that the respective Mergers are in the
best interests of Purchaser and the applicable Subsidiary and their respective
stockholders, approved this Agreement and recommended approval and adoption of
this Agreement by their respective stockholders.
5.13 COMPLIANCE WITH LAWS GENERALLY. To the knowledge of its
executive officers, Purchaser is in compliance in all material respects with all
statutes, rules and regulations applicable to it, its properties or its business
operations, except where the failure so to comply would not, as to individual
failures or all failures in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of Purchaser. Without
limiting the generality of the foregoing, to the knowledge of its executive
officers, except where the failure so to comply would not, as to individual
failures or all failures in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of Purchaser: (i)
Purchaser is in compliance in all material respects with the provisions of the
Securities Act and the Exchange Act (and the rules and regulations respectively
promulgated thereunder) and applicable state "blue sky" laws and has made all
necessary filings with the SEC and any state agency regulating the issuance or
transfer of securities; and (ii) Purchaser has complied and is in compliance in
all material respects with all Environmental Laws. To the knowledge of its
executive officers, Purchaser maintains all licenses, permits and governmental
authorizations necessary or appropriate for the ownership of its properties and
the conduct of its business the failure of which to maintain which would have a
material adverse effect upon the assets or business of Purchaser and its
subsidiaries viewed as a whole.
ARTICLE 6
FURTHER COVENANTS AND AGREEMENTS
6.1 CONDUCT OF BUSINESS. Without limiting in any way any
rights of Purchaser or either Subsidiary under Article 7, during the period from
the date of this Agreement to the Closing Date, or until this Agreement has been
cancelled in accordance with its terms, except as (A) otherwise consented to by
Purchaser in writing, (B) otherwise expressly permitted or contemplated under
this Agreement, or (C) otherwise required by law, each Corporation and each Key
Employee will:
(a) carry on, and cause each Corporation to carry on, its
Business in, and only in, the usual, regular and ordinary course in the same
manner as heretofore conducted, and, to the extent consistent with such
Business, use best efforts to preserve intact its present business organization
and relationships with customers, vendors, suppliers, Employees and others
having business relations with either Corporation;
(b) not, and ensure that each Corporation does not,
terminate or replace, or amend or modify in any material respect, any of the
Material Contracts, or waive any material obligation or right of any party under
any such Material Contract;
A-40
<PAGE>
(c) not, and ensure that each Corporation does not, incur
or increase any Indebtedness or Liabilities other than in the ordinary course of
business consistent with past practice, or issue or sell any debt or equity
securities, or pay any distribution or dividend to any stockholder of either
Corporation, except, as to the Added Value Target Stockholders, for amounts
which would not, in the aggregate, when combined with all other distributions
and dividends paid since December 31, 1994, exceed the sum of the Stockholder
Tax Liability Amount and the Prior Year Tax Liability;
(d) not, and ensure that each Corporation does not, make
any loan to any director, shareholder or Employee of either Corporation or grant
to any Employee of either Corporation any unusual or nonroutine increase in
compensation, bonus, or any severance or termination pay, or enter into any new,
or modify or amend any existing, employment agreement with any Employee, or fire
any Key Employee or any Employee who is the subject of a Discretionary Bonus
Cancellation Agreement or Agreement Regarding Employment or other employment
agreement contemplated by Section 6.10;
(e) not, and ensure that each Corporation does not, adopt
or amend in any material respect, any collective bargaining, bonus, profit
sharing, compensation, stock option, pension, retirement, deferred compensation,
or similar plan for the benefit of Employees of the Corporation;
(f) not, and ensure that each Corporation does not, fail
to take any action required for the ordinary and usual operation of the
Business;
(g) not, and ensure that each Corporation does not, make
any material change with respect to accounting policies or procedures;
(h) not, and ensure that each Corporation does not, make
any tax election of any kind;
(i) not, and ensure that each Corporation does not, sell,
assign, pledge, dispose of or encumber any of the Assets other than sales of
Inventories to customers of each Corporation in the ordinary course of business
consistent with past practice;
(j) not, and ensure that each Corporation does not, pay,
discharge or satisfy any claims, Liabilities, Indebtedness or obligations, other
than the payment, discharge or satisfaction thereof when due and payable in the
ordinary course of business consistent with past practice, and does not make any
capital expenditures in excess of $200,000 in the aggregate (for both
Corporations);
(k) comply, and ensure that each Corporation complies, in
all material respects, with its material obligations under the Material
Contracts;
(l) after written notification to, and consultation with,
Purchaser, defend, initiate or proceed with, and cause each Corporation to
defend, initiate or proceed with, as the case may be, any matter before any
governmental, regulatory or administrative authority that is necessary to
protect the Business or the Assets or any material part thereof;
(m) cause each Corporation to (i) maintain the Assets in
customary repair, and in good order and condition and, in any event, in the same
repair, order and condition as existed on December 31, 1994, (ii) maintain
insurance for the Assets comparable in all material respects to that in effect
on the date hereof, and (iii) in the event of casualty, loss or damage to any of
the Assets prior to the Closing Date for which either Corporation is insured,
either repair or replace such damaged assets with assets of industry grade
quality and usefulness or, at the option of Purchaser, retain in such
Corporation's bank account the proceeds of such insurance;
A-41
<PAGE>
(n) comply, and cause each Corporation to comply, with all
legal and regulatory requirements applicable to such Corporation, the Business
or the Assets, except where the failure to comply would not, individually or in
the aggregate with other failures, have a material adverse effect on the
condition (financial or otherwise) of either Corporation, the Business or the
Assets;
(o) not, and ensure that each Corporation does not, enter
into any Material Contract or become obligated to enter into any Material
Contract;
(p) maintain, and cause each Corporation to maintain, its
Records in the usual, regular and ordinary manner, and on a basis consistent
with the Historical Financial Statements;
(q) obtain and maintain, and cause each Corporation to
obtain and maintain, all consents, authorizations and approvals from all
appropriate federal, state and local governmental agencies or authorities which
are necessary or required for the operation of the Business as presently or then
conducted by it, as and when such consents, authorizations and approvals are
necessary or required;
(r) comply, and cause each Corporation to comply, with all
applicable laws, rules, ordinances, regulations, codes, orders, decrees,
licenses and permits of all applicable jurisdictions and governmental
authorities or agencies relating to it, its properties, the Assets or the
conduct of the Business, except where the failure to comply would not,
individually or in the aggregate with other failures, have a material adverse
effect on the condition (financial or otherwise) of either Corporation, the
Business or the Assets;
(s) use best efforts to cause the transactions
contemplated by this Agreement to be consummated in accordance with the terms
hereof and use best efforts to refrain from taking any action which would result
in any of the conditions to Purchaser's or either Subsidiary's obligation to
consummate the transactions contemplated by this Agreement being unsatisfied in
accordance with the terms hereof;
(t) collect, and cause each Corporation to collect, the
Receivables in the ordinary course of business consistent with past practice,
except to the extent it is in the best interests of such Corporation to
accelerate or compromise (as the case may be) a Receivable;
(u) pay, and cause each Corporation to pay, its trade
accounts payable in the ordinary course of business consistent with past
practice and not default under, or breach any term or provision of, or fail in
any material respect to perform, or suffer or permit to exist any condition or
event which, after notice or lapse of time, or both, would constitute a default
under, any Contract or any License, consent or insurance policy;
(v) if either Corporation receives or becomes aware of any
finding, order, complaint, citation or notice prior to Closing which states that
any aspect of the Business or its operations or the condition of any of the
Assets violates any law, rule, regulation or code of any governmental authority
(each, an "Administrative Violation"), promptly notify Purchaser of the
Administrative Violation, and remove or correct the Administrative Violation;
(w) not directly or indirectly solicit or engage in
discussions or negotiations with, or provide any information to or otherwise
cooperate with, any other person or entity which seeks to, or expresses an
interest in, acquiring all or any substantial part of the Assets or the Business
(either directly or by purchase of capital stock of either Corporation or
merger), or directly or indirectly enter into any agreement with or grant any
A-42
<PAGE>
option to any third person or entity in connection with any transaction
affecting the Target Shares, the shares of common stock of Rocky Mountain owned
by Added Value, the Assets, the Business or which is inconsistent with this
Agreement;
(x) not, and ensure that each Corporation does not, amend
in any respect or for any reason the Articles of Incorporation or Bylaws of such
Corporation or elect or appoint any new or additional director or officer of
such Corporation or take any other action with respect to the capital stock,
corporate structure or management or organic documents of such Corporation; and
(y) pay, and cause to be paid, all Taxes payable by each
Corporation when due and payable.
The Corporations will promptly notify Purchaser of any
material adverse change in the financial condition, results of operations,
properties, Assets, or prospects of the Business. From the date hereof to the
Closing, neither Corporation, nor any Target Stockholder, will take any action
or engage in any transaction which would render any representation and warranty
of either Corporation inaccurate in any material respect as of the date hereof
or as of the Closing Date or as of any date between the date hereof and the
Closing Date.
6.2 THIRD PARTY CONSENTS.
(a) The Corporations will obtain at the earliest
practicable date and in any event before the Closing all consents, governmental
authorizations, approvals, estoppel certificates and filings required to be
obtained or made by either or which may be necessary for the consummation of the
transactions contemplated by this Agreement to occur without causing impairment
to, or loss of, any Contract or License, or which are reasonably required by
Purchaser or its counsel in writing.
(b) On or prior to the Closing Date, the Corporations
shall obtain all such waivers and consents under any Contract to which either
Corporation is a party as are necessary to prevent a breach or violation of, or
acceleration of, or default under, any such Contract as a result of the
consummation of the transactions contemplated by this Agreement.
6.3 ACCESS; INFORMATION. From the date hereof to and including
the Closing Date or, if Closing does not occur, termination of this Agreement,
the Corporations shall (a) afford to the officers, employees, attorneys,
accountants and other authorized representatives of Purchaser reasonable access,
during normal business hours, to the offices, plants, properties, books and
records of each Corporation in order that Purchaser may have full opportunity to
make such operational, legal, financial, accounting and other reviews or
investigations of the Business and the Assets as Purchaser shall desire to make,
(b) permit, and cause each Corporation's certified public accountant to permit,
Purchaser's independent public accountants to inspect its work papers and other
records relating to the Business and the Assets, and (c) furnish, and cause the
officers and Employees of each Corporation to furnish, to Purchaser and its
authorized representatives such additional financial and operating data and
other information regarding such Corporation's assets, properties, contracts,
goodwill and business including, without limitation, the Assets and the
Business, as Purchaser shall from time to time reasonably request including,
without limitation, all interim financial and operating reports relating to the
Business prepared by or for officers of each Corporation.
6.4 AUDITED FINANCIAL STATEMENTS. The Corporations have caused
to be prepared and delivered to Purchaser the Audited Financial Statements. The
Audited Financial Statements have been prepared at Purchaser's expense by
independent certified public accountants selected by Purchaser (the "Audit
Accountants"). Each Corporation confirms that it has caused its accountants to
provide to Purchaser and the Audit Accountants, upon request, all schedules,
A-43
<PAGE>
accountant's work papers and notes, and a detailed explanation of all
assumptions used in conducting any prior audits, examinations or reviews of each
Corporation's books, records and financial statements. Each Corporation confirms
that it has agreed, in connection with the audit, to execute, deliver and
provide to the Audit Accountants such documents, books and records as the Audit
Accountants have requested, including, without limitation, management
representation letters and engagement letters in form and content reasonably
acceptable to the Audit Accountants.
6.5 INTERIM FINANCIAL STATEMENTS AND OTHER FINANCIAL
REPORTS. As soon as they are prepared, but in all events no later than the
fifteenth day of the month following the end of the respective months to which
they relate (or, if applicable, the thirtieth day following the end of the
fiscal quarter to which they relate), the Corporations shall deliver the
applicable Interim Financial Statements to Purchaser, which shall be complete
and accurate in all material respects. In addition, no later than the business
day preceding, and no earlier than the fifth business day preceding, the Closing
Date, each Corporation shall deliver to Purchaser the following, each as of the
then most recent practicable date (but in all events as of a date no earlier
than the tenth day preceding the Closing Date), each of which shall be complete
and accurate in all material respects: (a) a list of its Inventories; (b) a
schedule of its accounts receivable showing aging on a 30, 60, 90 and over 90
day basis; (c) a schedule of its accounts payable showing thereon any accounts
payable which are 30, 60, 90 or more than 90 days past due; and (d) a list of
its purchase commitments.
6.6 INSURANCE PROCEEDS. If any Assets are destroyed or damaged
or taken in condemnation, the insurance proceeds or condemnation award with
respect thereto shall remain an Asset of the Business and the property of the
applicable Corporation, and such proceeds shall not be withdrawn by, or
distributed to, any person.
6.7 TRADING IN ALL AMERICAN SHARES. Neither Corporation nor
any Target Stockholder or anyone acting on its, his or her behalf shall engage,
or shall permit or encourage any of their respective Affiliates, spouses or
immediate family to engage, in any sales, purchases or trading of any kind of
All American Shares from and after the date hereof through and including the
Closing Date.
6.8 CERTAIN PURCHASER APPROVALS. In the event that (a) the
Lender Consent has not been obtained by the 30th day following the date of
execution and delivery of this Agreement, or (b) the All American Stockholder
Approval has not been obtained by December 31, 1995, or (c) Purchaser receives
notice from the SEC that the All American Shares may not or cannot be registered
as herein required and such impediment is not removed on or before the 45th day
following Purchaser's receipt of such notice (as the case may be, a "Third-Party
Approval Date"), either party may, at its option, terminate this Agreement
without incurring obligation or liability of any kind to any other party, by
giving written notice to that effect to each other party. Effective the date of
the giving of such notice, this Agreement shall be deemed terminated and of no
further force or effect, and neither party shall have any further obligation or
liability to the other thereafter. The Third-Party Approval Date relating to the
All American Stockholder Approval may be extended by Purchaser for up to 30 days
as long as the Registration and Proxy Statement is effective prior to December
31, 1995.
6.9 CALIFORNIA FRANCHISE TAX CLEARANCE. On or promptly
following the execution and delivery of this Agreement, the appropriate parties
shall cause to be executed and filed in the appropriate California governmental
office all documents necessary to obtain the California Franchise Tax Clearance,
including, without limitation, a customary assumption of tax liability by
California Subsidiary.
A-44
<PAGE>
6.10 OTHER EMPLOYMENT AGREEMENTS AND RELATED EMPLOYEE MATTERS.
(a) In addition to the Key Employees entering into the
Employment Agreements at Closing, the following persons shall enter into
employment agreements with the applicable Surviving Corporation at Closing:
Cathleen M. Plock; Alexandra J. Miller; Thomas Broesamle; and Kim B. Cooper. In
order to induce such persons to enter into such employment agreements, and to
accept therein certain terms favorable to the employer, such persons shall be
paid, at Closing, the following sums as incentive employment compensation:
Cathleen Plock - $100,000; Alexandra J. Miller - $40,000; Thomas Broesamle -
$25,000; and Kim B. Cooper - $25,000. In addition, at Closing each such person
shall enter into a two-year employment agreement with the applicable Surviving
Corporation on terms and conditions reasonably satisfactory to Purchaser,
including, but not limited to, salary and benefits comparable to what such
person currently receives from the applicable Corporation, and the right of the
employer to terminate said employment agreement without cause (without any
severance pay obligations) on 15 days advance notice.
(b) The Corporations shall cause each of Steven Culligan, Alan
Bowen and Cheryl Sargent, each an employee of Rocky Mountain, to agree to cancel
their respective "Discretionary Bonuses" and to accept in lieu thereof new
employment arrangements, as more particularly set forth in the form of Agreement
Cancelling Discretionary Bonus and Promising to Enter Into An Employment
Agreement and Pay Additional Employee Compensation attached as Exhibit "H"
(each, a "Discretionary Bonus Cancellation Agreement"). The Corporations shall
cause each of such three (3) persons to execute and deliver, and Rocky Mountain
and Colorado Subsidiary shall execute and deliver, concurrently herewith, a
Discretionary Bonus Cancellation Agreement. The total amount of "Additional
Compensation" (as defined in each Discretionary Bonus Cancellation Agreement)
for each of such three persons shall be as follows: Steven Culligan - $161,400
($6,725 per month); Alan Bowen - $118,600 ($4,941.67 per month); and Cheryl
Sargent - $19,500 ($812.50 per month), and the "Incentive Bonus" (as defined in
each Discretionary Bonus Cancellation Agreement) for each of such persons shall
be $50,000, $35,000 and $8,500, respectively.
(c) The Corporations shall cause each of Todd Collin, James
Stonich, Jack Quinn, William Jamar and Lester (Dan) Hall, each an employee of
Added Value, to execute and deliver concurrently herewith, and Added Value and
California Subsidiary shall execute and deliver concurrently herewith, an
agreement to enter into an employment agreement with California Subsidiary at
Closing in the form attached as Exhibit "I" (each an "Agreement Regarding
Employment"). It is further agreed that, to the extent not paid by Added Value
prior to Closing, each of Jack Quinn and William Jamar shall receive at or
promptly following Closing incentive employment compensation of $25,000.
(d) The Corporations shall obtain from Todd Collin documentary
evidence in the nature of appropriate written acknowledgments, agreements and/or
assignments which demonstrates to Purchaser's reasonable satisfaction that, as
between Added Value and Todd Collin, solely Added Value is the owner of all work
product produced or developed by Todd Collin for or at the request of Added
Value both before and following the date of his employment with Added Value.
(e) The Corporations shall obtain, prior to Closing, an
amendment to that certain Representative Agreement dated July 1, 1994 between
Added Value and Forrest R. Mitchell d/b/a FRM Sales ("FRM") to the effect that
FRM's rights thereunder shall be nonexclusive and that FRM shall receive
commissions after Closing only with respect to sales of the type for which FRM
now receives commissions.
6.11 TRANSFER BY WAYNE VANNOY TO VANNOY FAMILY TRUST.
Purchaser acknowledges that Wayne Vannoy has, for estate planning purposes,
recently transferred 222 Rocky Mountain Target Shares owned by him to a trust
for the
A-45
<PAGE>
benefit of Mr. Vannoy's immediate family and lineal descendants of which Mr.
Vannoy is sole trustee and which is known as The Vannoy Family Charitable
Remainder Trust, created pursuant to Trust Agreement dated August 11, 1995 (the
"Vannoy Family Trust"). Copies of all cancelled, new and reissued stock
certificates (front and back) relating to the effectuation of, or evidencing,
such transfer, have been, or promptly following execution and delivery of this
Agreement will be, delivered to Purchaser. Wayne Vannoy shall execute all
agreements which he is to execute pursuant hereto (except with respect to his
capacity as an employee under his Employment Agreement) both individually and as
sole trustee on behalf of the Vannoy Family Trust, unless such agreement relates
solely to All American Shares owned by the Target Stockholders.
ARTICLE 7
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER AND SUBSIDIARIES
All obligations of Purchaser and Subsidiaries under this
Agreement are subject to the satisfaction of the following conditions precedent
on or before the Closing Date, any of which may be waived in whole or in part at
the sole discretion of Purchaser:
7.1 OPINION OF COUNSEL. Purchaser shall have received an
opinion of Bruck & Perry, counsel to the Corporations and the Target
Stockholders, addressed to Purchaser and each Subsidiary and dated the Closing
Date, in form and content reasonably satisfactory to Purchaser and its counsel.
7.2 PERFORMANCE BY CORPORATIONS AND TARGET STOCKHOLDERS. All
of the terms, covenants, agreements and conditions of this Agreement, the
Guaranty and Agreement, the Pledge Agreement and the Voting Trust Agreement to
be complied with and performed by the Corporations and the Target Stockholders
on or before the Closing Date shall have been complied with and performed in all
material respects.
7.3 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Corporations and the Target Stockholders in this
Agreement and the Guaranty and Agreement shall have been true and correct in all
material respects at the date hereof and as of the Closing Date with the same
force and effect as though all such representations and warranties had been
again made as of the Closing Date.
7.4 NO ACTIONS OR PROCEEDINGS. No action, suit, proceeding or
investigation by or before any court, administrative agency or other
governmental authority shall have been instituted or threatened to restrain,
prohibit or invalidate the transactions contemplated by this Agreement or which
may affect the right of Purchaser or either Subsidiary directly or indirectly to
own, operate or control, after Closing, either Corporation or the Business or
any material portion thereof, or which could have any material adverse effect on
either Corporation, the Business or the Assets or the value or prospects of any
of them.
7.5 NO MATERIAL ADVERSE CHANGE. Since June 30, 1995: (a) there
shall have occurred no material adverse change in (i) the Business or Assets,
the condition of either Corporation (financial or otherwise), or the results of
operations of either Corporation or the Business, whether or not arising from
transactions in the ordinary course of business, or (ii) either Corporation's
prospects or its industry segment generally; (b) neither the Assets nor the
Business shall have been adversely affected in any material way by, or sustained
any material loss, whether or not insured, as a result of any fire, flood,
accident, explosion or other calamity or casualty or any strike, labor
disturbance, riot, act of God or the public enemy; and (c) no condemnation
proceedings affecting any of the Leaseholds or Improvements shall have been
commenced and neither Corporation shall have received notice of the proposed
commencement of any such proceedings.
A-46
<PAGE>
7.6 OFFICER'S CERTIFICATE. Purchaser and Subsidiaries shall
have received from the Corporations and the Key Employees, in form and substance
reasonably satisfactory to Purchaser and its counsel, a certificate, dated the
Closing Date, of the Corporations and the Key Employees, as to the satisfaction
of the conditions set forth in Sections 7.2, 7.3, 7.4 and 7.5, and as to such
other matters as are reasonably required by Purchaser or its counsel.
7.7 SATISFACTION OF COUNSEL. All corporate and other actions
and proceedings of the Corporations in connection with the transactions
contemplated hereby, all resolutions, documents and instruments incidental
thereto, and all other related legal matters, shall be reasonably satisfactory
in form and substance to Purchaser and its counsel, and Purchaser shall have
received all such resolutions, documents and instruments, or copies thereof,
certified if requested, as its counsel shall have reasonably requested.
7.8 CONSENTS AND ESTOPPELS. All consents of third parties
under any Contract or License, and all consents, orders, approvals and
authorizations of, and registrations, qualifications and filings with, any
regulatory or governmental authority, required in connection with the
consummation of the transactions contemplated hereby (or of the kind referred to
in Section 6.2), and all estoppel letters from landlords and lenders reasonably
requested by Purchaser, shall have been obtained in form and content reasonably
satisfactory to Purchaser.
7.9 TITLE REPORTS, LIEN, JUDGMENT AND OTHER SEARCHES.
Purchaser shall have received true and complete copies of the results of
searches of appropriate title records, UCC filings, tax liens, fixture filings,
judgments and pending judicial proceedings in each state and county in which
each Corporation and each Target Stockholder maintains (or has within the last
five years maintained) an office or residence, as of an effective search date no
earlier than 10 days prior to the Closing Date, showing that there is on file in
such records no effective encumbrance, UCC financing statement or federal, state
or local Tax Lien, or other Lien, or judgment naming any Target Stockholder,
either Corporation or any trade names used in the conduct of the Business,
except as described in Schedule 4.6 or otherwise disclosed to Purchaser in
writing prior to the date hereof, and, whether or not set forth in Schedule 4.6,
all Liens on any of the Assets, other than those securing the Bank Debt,
including, without limitation, any Liens in favor of Mitsubishi Electronics,
shall have been terminated.
7.10 EMPLOYMENT AGREEMENTS. The Key Employees shall have
executed and delivered to the appropriate Surviving Corporation their respective
Employment Agreements.
7.11 TARGET STOCKHOLDER RELEASE. The Target Stockholders
shall have executed and delivered to the Corporations the Target Stockholder
Release.
7.12 PLEDGE AGREEMENT. The Target Stockholders shall have
executed and delivered to Purchaser and Surviving Corporations the Pledge
Agreement.
7.13 RESTRICTIVE COVENANT. The Target Stockholders shall have
executed and delivered to Purchaser and the Surviving Corporations the
Restrictive Covenant.
7.14 VOTING TRUST AGREEMENT. The Target Stockholders shall
have executed and delivered to Paul Goldberg and Bruce M. Goldberg the Voting
Trust Agreement.
7.15 MERGER DOCUMENTS. Added Value shall have executed and
delivered to California Subsidiary, in suitable form for filing, the Added Value
Agreement of Merger, and Rocky Mountain shall have executed and delivered to
A-47
<PAGE>
Colorado Subsidiary the Plan of Merger in the form attached and, in suitable
form for filing, the Rocky Mountain Articles of Merger.
7.16 LENDER CONSENT. Purchaser shall have obtained the Lender
Consent.
7.17 ALL AMERICAN STOCKHOLDER APPROVAL. The All American
Stockholder Approval shall have been obtained.
7.18 AUDITED FINANCIAL STATEMENTS. The Audited Financial
Statements shall have been completed and all required financial reporting
regarding of the Corporations shall have been completed in accordance with all
SEC rules and regulations and the SEC shall not have given any indication of any
belief on its part (which is not subsequently remedied) that the financial
reporting or other disclosures made in the Registration and Proxy Statement
concerning, in whole or in part, either Corporation are inadequate, deficient or
problematic in any material respect.
7.19 CALIFORNIA FRANCHISE TAX CLEARANCE. The California
Franchise Tax Clearance shall have been obtained.
7.20 GUARANTY AND AGREEMENT. The Guaranty and Agreement shall
have remained of full force and effect and no Target Stockholder shall have
asserted that the Guaranty and Agreement or any part thereof is unenforceable or
invalid.
7.21 DISCRETIONARY BONUS CANCELLATION AGREEMENTS AND
AGREEMENTS REGARDING EMPLOYMENT. All of the Discretionary Bonus Cancellation
Agreements and Agreements Regarding Employment referenced or described in
Section 6.10 shall have been executed and delivered by all parties thereto, and
the employment agreements to be executed and delivered at Closing pursuant to
Section 6.10 shall have been executed and delivered to the applicable Surviving
Corporation by all of the respective Employees who are to enter into such
respective employment agreements.
7.22 HSR ACT. Any applicable waiting period under the HSR Act
relating to the transactions set forth in this Agreement shall have expired.
ARTICLE 8
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
All obligations of the Corporations under this Agreement are
subject to the satisfaction of the following conditions precedent on or before
the Closing Date, any of which may be waived in whole or in part at the sole
discretion of the Corporations.
8.1 OPINION OF COUNSEL. The Target Stockholders shall have
received an opinion of Rubin Baum Levin Constant Friedman & Bilzin, counsel to
Purchaser and Subsidiaries, and dated the Closing Date, in form and content
reasonably acceptable to the Key Employees and their counsel.
8.2 PERFORMANCE BY PURCHASER. All the terms, covenants,
agreements and conditions of this Agreement to be complied with and performed by
Purchaser or either Subsidiary on or before the Closing Date shall have been
complied with and performed in all material respects.
8.3 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Purchaser and Subsidiaries in this Agreement shall have been
true and correct in all material respects at the date hereof and as of the
Closing Date with the same force and effect as though all such representations
and warranties had been again made as of the Closing Date.
A-48
<PAGE>
8.4 NO INJUNCTIONS. There shall not be in effect any
injunction or restraining order issued by a court of competent jurisdiction (or
any application therefor or similar proceeding) against the consummation by
Purchaser or either Subsidiary of any of the material transactions set forth in
this Agreement.
8.5 OFFICER'S CERTIFICATE. The Target Stockholders shall have
received from Purchaser and Subsidiaries, in form and substance reasonably
satisfactory to the Key Employees and their counsel, a certificate, dated the
Closing Date, of the President or any Vice President of each of Purchaser and
each Subsidiary, certifying as to the satisfaction of the conditions set forth
in Sections 8.2, 8.3 and 8.4 and as to such other matters as are reasonably
required by such counsel.
8.6 EMPLOYMENT AGREEMENTS. The Surviving Corporations (as
applicable) shall have executed and delivered to the Key Employees their
respective Employment Agreements (provided, however, the inability or refusal of
a Surviving Corporation to deliver an Employment Agreement to a Key Employee as
a result of the death or disability of such Key Employee or for any other reason
relating to the Key Employee (as opposed to an inability or refusal caused by
Purchaser, either Subsidiary or their Affiliates) shall not constitute an excuse
to the Corporations' or Target Stockholders' obligations to close under this
Agreement, and, in such event, this Agreement shall close, at Purchaser's
election, without such Key Employee or his successors receiving an Employment
Agreement or the benefits thereof); and the Key Employees and other employees of
the Corporations who will be employed by one of the Surviving Corporations
following Closing and are to receive incentive employment compensation at
Closing pursuant to Section 6.10(a) shall have received all of such incentive
employment compensation required to be paid to them at Closing (or such payments
shall have been adequately provided for).
8.7 SATISFACTION OF COUNSEL. All corporate and other actions
and proceedings of Purchaser and each Subsidiary in connection with the
transactions contemplated hereby, all resolutions, documents and instruments
incidental thereto, and all other related legal matters, shall be reasonably
satisfactory in form and substance to the Key Employees and their counsel, and
such parties shall have received all such resolutions, documents and
instruments, or copies thereof, certified if requested, as its counsel shall
have reasonably requested.
8.8 MERGER DOCUMENTS. California Subsidiary shall have
executed and delivered to Added Value, in suitable form for filing, the Added
Value Agreement of Merger, and Colorado Subsidiary shall have executed and
delivered to Rocky Mountain the Plan of Merger in the form attached and, in
suitable form for filing, the Rocky Mountain Articles of Merger.
8.9 LENDER CONSENT. Purchaser shall have obtained the Lender
Consent.
8.10 ALL AMERICAN STOCKHOLDER APPROVAL. The All American
Stockholder Approval shall have been obtained.
8.11 REGISTRATION OF ALL AMERICAN SHARES. All All American
Shares to be issued to the Target Stockholders in the Mergers and potentially to
be issued as Additional Consideration shall have been effectively registered
under the Securities Act and there shall be no stop order in effect.
8.12 MERGER CONSIDERATION. The Merger Consideration shall,
subject to the requirements of the Voting Trust Agreement and the Pledge
Agreement, have been paid or reasonably satisfactory provisions for its payment
shall have been made.
A-49
<PAGE>
8.13 RESTRICTIVE COVENANT. The payments required to be made to
the Target Stockholders at Closing pursuant to the Restrictive Covenant shall
have been made or reasonably satisfactory provisions for such payment shall have
been made.
8.14 DISCRETIONARY BONUS CANCELLATION AGREEMENTS. The
employment agreements to be executed and delivered at Closing pursuant to the
Discretionary Bonus Cancellation Agreements shall have been executed and
delivered by Colorado Surviving Corporation (subject to the same PROVISO set
forth in Section 8.6).
8.15 HSR ACT. Any applicable waiting period under the HSR Act
relating to the transactions set forth in this Agreement shall have expired.
ARTICLE 9
MISCELLANEOUS
9.1 BROKERS. Each Corporation represents and warrants to
Purchaser and Subsidiary, and each of Purchaser and Subsidiary represents and
warrants to the Corporations, that neither they nor any party acting on their
behalf has incurred any Liability, either express or implied, to any "broker",
"finder", financial adviser, employee, or similar person in respect of any of
the transactions contemplated hereby.
9.2 EXPENSES. Except as otherwise specifically provided in
this Agreement, each party will pay its own expenses incident to this Agreement
and the transactions contemplated hereby, including legal and accounting fees
and disbursements.
9.3 AMENDMENTS AND WAIVERS. The parties hereto may, by written
agreement signed by the parties, modify any of the covenants or agreements or
extend the time for the performance of any of the obligations contained in this
Agreement or in any document delivered pursuant to this Agreement. Any party
hereto may waive, by written instrument signed by such party, any inaccuracies
in the representations and warranties of another party or compliance by another
party with any of its obligations contained in this Agreement or in any document
delivered pursuant to this Agreement. This Agreement may be amended only by
written instrument signed by the parties hereto.
9.4 TRANSFERABILITY. The rights and obligations of the
Corporations and the Target Stockholders, including but not limited to the right
to receive Merger Consideration and Additional Consideration (if payable), are
personal and shall not be assignable or delegable. The rights and obligations of
Purchaser and each Subsidiary shall be assignable so long as Purchaser remains
responsible for payment of the Merger Consideration and Additional
Consideration. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assignees.
Nothing herein expressed or implied is intended to confer upon any person
(including, without limitation, any Employees), other than the parties hereto
and their respective successors and permitted assignees, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
9.5 TERMINATION. In the event that the Closing cannot be held
because any of the conditions to the Closing cannot be fulfilled on or prior to
January 31, 1996, or any extended date for the Closing agreed to by the parties
hereto, none of the parties shall have any obligation or liability of any nature
whatever to the other parties hereto, and all expenses incurred by any party
hereto shall be for its own account, except as may otherwise be specifically
provided in this Agreement; PROVIDED, HOWEVER, that no party hereto shall be
deemed to have waived any rights it may have arising from the breach or default
of another party of any of the latter's representations, warranties, covenants
or indemnities under this Agreement. In the event that Added Value, Rocky
A-50
<PAGE>
Mountain or any Target Stockholder wrongfully or unjustifiably refuses or fails
to perform its obligations with respect to the Closing, or to proceed to Closing
or to close, or Purchaser terminates this Agreement as a result of the breach or
default hereunder or under the Guaranty and Agreement of either of the
Corporations or any of the Target Stockholders, or due to the failure to occur
of any of the conditions precedent set forth in Article 7 (other than those set
forth in Sections 7.16, 7.17 or 7.18), and, within one year following the date
hereof, a substantial portion of the Assets, or more than 50% of the issued and
outstanding capital stock or beneficial ownership of either Corporation is
directly or indirectly acquired, or any merger, business combination or other
transaction is effected which directly or indirectly has the effect of
transferring a substantial portion of the Assets or more than 50% of the issued
and outstanding capital stock or beneficial ownership of the Corporations
(viewed on a consolidated basis), or any contract or letter of intent or
expression of interest is executed or delivered for or with respect to any of
the foregoing (as the case may be, a "Post-Termination Sale"), the following
shall apply: Without limitation of any of Purchaser's or either Subsidiary's
rights or remedies and in addition to such rights and remedies and any damages
or other relief to which Purchaser or either Subsidiary is entitled, the
Corporations and the Key Employees shall be jointly and severally obligated to
pay to Purchaser, immediately upon the consummation (whenever consummated) of
the Post-Termination Sale, or, if to be consummated in a series of related
transactions, upon the consummation of the first part thereof, an amount in cash
equal to 25% of the amount, if any, by which the total consideration,
compensation and remuneration paid and payable to the Corporations, the Target
Stockholders (and other then beneficial owners of the Corporations) and any of
their respective Affiliates pursuant to or in connection with the
Post-Termination Sale exceeds the total Merger Consideration and other
consideration and compensation payable at Closing pursuant to this Agreement.
Notwithstanding anything to the contrary contained in this Section 9.5, in no
event shall any of the parties be liable to any other party in respect of a
wrongful or unjustifiable refusal or failure to close under this Agreement for
consequential damages such as loss of profits, market share, business
opportunity and the like.
9.6 NOTICES. Any notice, request or other document to be given
hereunder to a party hereto shall be in writing and delivered in person or sent
by registered or certified mail, postage prepaid, return receipt requested, or
by facsimile or telex, or an overnight air courier service, as follows:
If to Purchaser or either Subsidiary, addressed to it at:
All American Semiconductor, Inc.
16115 Northwest 52nd Avenue
Miami, Florida 33014
Attention: Paul Goldberg and Bruce M. Goldberg
Telecopier No.: (305) 624-5258
With a copy to:
Marc J. Stone, Esq.
Rubin Baum Levin Constant Friedman & Bilzin
2500 First Union Financial Center
Miami, Florida 33131
Telecopier No.: (305) 374-7593
If to either Corporation or to the Target
Stockholders (or any of them), addressed to it or
them at:
c/o Robert D. Lurie
Added Value Electronics Distribution, Inc.
14192 Chambers
Tustin, California 92680
Telecopier No.: (714) 573-5050
A-51
<PAGE>
- and -
c/o Wayne Vannoy
A.V.E.D. - Rocky Mountain, Inc.
4090 Youngfield Street
Wheat Ridge, Colorado 80033
Telecopier No.: (303) 422-2529
With a copy to:
Richard H. Bruck, Esq.
Teresa Tormey Fineman, Esq.
Bruck & Perry
One Newport Place, 10th Floor
Newport Beach, California 92660
Telecopier No.: (714) 955-0835
All such notices, requests and other documents shall be deemed to have been duly
given at the time delivered by hand, if personally delivered; three business
days after being deposited in the mail, first class postage prepaid, return
receipt requested, if mailed; when answered back, if telexed; when receipt
confirmed, if sent by facsimile; and the next business day after timely delivery
to the courier, if sent by an overnight air courier service guaranteeing next
day delivery. Any party hereto may change its address for receiving notices,
requests and other documents by giving written notice of such change to the
other parties hereto.
9.7 GOVERNING LAW; CHOICE OF FORUM. This Agreement and the
Guaranty and Agreement shall be governed by and construed in accordance with the
laws of the State of Florida (other than with respect to the statutory
requirements of the States of California and Colorado as concerns the respective
Mergers, and of Delaware law as concerns matters relating to Purchaser and the
All American Shares which, pursuant to applicable conflicts of laws rules, are
to be governed by Delaware law). The parties to this Agreement and the Guaranty
and Agreement (and each other agreement executed in connection herewith or
pursuant hereto) consent to jurisdiction for any action, suit or proceeding
relating to this Agreement and the Guaranty and Agreement (and any agreement
executed in connection herewith or pursuant hereto) in the courts of the United
States of America sitting in either the County of Orange, California or the
County of Dade in the City of Miami, Florida, or, if such courts shall not have
jurisdiction over the subject matter thereof, in the courts of either the State
of California sitting in the County of Orange, or the State of Florida sitting
in Miami, Dade County, and each such party hereby irrevocably and
unconditionally agrees to submit to the jurisdiction of such courts for purposes
of any such action, suit or proceeding. Each party irrevocably waives any
objection it may have to the venue of any action, suit or proceeding brought in
such courts or to the convenience of the forum. Final judgment in any such
action, suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment, a certified or true copy of which shall
be conclusive evidence of the fact and the amount of any indebtedness or
liability of any party therein described.
9.8 PARTIAL INVALIDITY. In the event that any provision of
this Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, and is not reformed by such court, such holding shall not
invalidate or render unenforceable any other provision hereof, except if such
holding materially adversely affects a party's ability to realize the essential
benefits of this Agreement.
9.9 SECTION HEADINGS. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
A-52
<PAGE>
9.10 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, or by the
execution and attachment of counterpart signature pages to one or more
counterparts, but all of which together shall constitute one and the same
instrument.
9.11 ENTIRE AGREEMENT. This Agreement, together with the
Schedules and Exhibits and the agreements, certificates and instruments
delivered pursuant hereto or thereto, contain the entire agreement among the
parties hereto, and supersede all prior agreements and undertakings between or
among the parties hereto relating to the subject matter hereof and thereof,
including, without limitation, any letter of intent or proposal executed or
delivered by or on behalf of any of the parties prior to the date hereof (except
for any existing confidentiality restrictions and exclusivity agreements,
including, without limitation, those set forth in paragraphs 8, 9, 10 and 11 of
that certain letter of intent, dated June 28, 1995, as extended, among
Purchaser, Added Value, Rocky Mountain and certain of the Target Stockholders,
which shall survive).
9.12 PUBLIC ANNOUNCEMENTS. Neither party shall make any public
announcements concerning the transactions contemplated by this Agreement or the
consummation thereof without first obtaining the prior written consent of the
other as to the content, form and timing of any such announcement (except that
Purchaser may make such announcements, at such times, as Purchaser, in its sole
discretion, deems necessary or appropriate to comply with applicable securities
laws).
9.13 SURVIVAL. The representations, warranties, covenants and
agreements contained in this Agreement, and in any agreements, certificates or
other instruments delivered pursuant to this Agreement, shall survive the
Closing and the Mergers and the consummation of the transactions contemplated
hereby, and shall remain in full force and effect, regardless of any
investigation made by or on behalf of any party or of the actual or constructive
knowledge by any party of any inaccuracy or breach thereof. Notwithstanding any
of the foregoing to the contrary, any claim asserting a breach of any of the
representations and warranties of the parties set forth in Articles 4 or 5, or
of any of the covenants of the parties set forth in Article 6, must be asserted
in writing to the breaching party no later than the end of the 42nd full month
following the Closing Date, failing which such claim shall be barred, except
that such limitation shall not apply to (a) claims based upon any of the
representations and warranties contained in Sections 4.1, 4.2, 4.10, 4.24, 4.31,
4.32, 4.34, 5.1, 5.2 and 5.6, or (b) any criminal or fraudulent act or omission,
or any wilful, intentional or knowing misrepresentation, breach of warranty or
breach of covenant. Further, assuming Closing occurs, the liability of the
Target Stockholders pursuant to the Guaranty and Agreement shall be limited as
set forth therein, and the liability of Purchaser and Subsidiaries under this
Agreement shall be limited as follows: No Target Stockholder shall be entitled
to recover any damages, losses, costs or expenses (collectively, "Target
Stockholder Losses") as a result of a breach of any representation, warranty or
covenant in this Agreement by Purchaser or Subsidiaries unless and until such
Target Stockholder Losses exceed, in the aggregate, $200,000. However, once such
Target Stockholder Losses do, in the aggregate, exceed $200,000, the Target
Stockholders may recover all of such Target Stockholder Losses, including the
first $200,000 thereof. The foregoing limitation on the rights and remedies of
the Target Stockholders shall not apply to Target Stockholder Losses which
result from any criminal or fraudulent act or omission or any willful,
intentional or knowing misrepresentation, breach of warranty or breach of
covenant, or to the rights and remedies of the Target Stockholders referred to
in Sections 9.5 and 9.16 hereof in the event Closing does not occur.
9.14 DISPUTES. In the event of a dispute hereunder or
relating to the transactions contemplated hereby, including under or with
respect to any of the agreements to be executed and delivered pursuant hereto,
the prevailing party
A-53
<PAGE>
in such dispute shall be entitled to recover from the other party all of its
costs and expenses incurred in connection with the enforcement of its rights
hereunder, including reasonable attorneys' fees and costs incurred before and at
trial or any other proceeding, at all tribunal levels, and whether or not suit
or any other proceeding is brought.
9.15 GENDER. With respect to the language of this Agreement,
the use of the masculine gender shall include the feminine and neuter, and the
use of the neuter shall include the masculine and/or feminine, in each case, as
the context reasonably requires.
9.16 INDEMNITIES. Purchaser and Subsidiaries jointly and
severally agree to indemnify and hold harmless the Corporations and the Target
Stockholders from, against and in respect of any and all Liabilities, losses,
costs and expenses (including reasonable attorneys' fees and costs incurred
before and at trial, at all tribunal levels, whether or not suit is instituted,
and in establishing this right to indemnification) asserted against or suffered
or incurred by either of the Corporations or any of the Target Stockholders to
the extent caused by or resulting from a breach by Purchaser or either
Subsidiary of any of its representations, warranties, covenants or obligations
herein contained. The Corporations jointly and severally agree to indemnify and
hold harmless Purchaser and each Subsidiary from, against and in respect of any
and all Liabilities, losses, costs and expenses (including reasonable attorneys'
fees and costs incurred before and at trial, at all tribunal levels, whether or
not suit is instituted, and in establishing this right to indemnification)
asserted against or suffered or incurred by Purchaser or either Subsidiary to
the extent caused by or resulting from a breach by either Corporation of any of
its representations, warranties, covenants or obligations herein contained. All
the indemnities provided for in this Section shall terminate upon the
consummation of the Mergers, but, if the Mergers are not consummated, shall
survive any termination of this Agreement.
9.17 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of
any party to exercise, and no delay in the exercise of, any right, power,
privilege or remedy of such party hereunder, or under any other agreement or
instrument executed in connection herewith or pursuant hereto, or pursuit of any
particular right, power, privilege or remedy hereunder or thereunder at any
particular time, singly or together with others, or any partial exercise
thereof, shall operate as a waiver of, or preclude the exercise or availability
of, any right, power, privilege or remedy of such party under this Agreement or
any such other agreement or instrument executed in connection herewith or
pursuant hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed as of the day and year first above written.
PURCHASER:
ALL AMERICAN SEMICONDUCTOR, INC.
By: /S/ BRUCE M. GOLDBERG
----------------------------
Title: PRESIDENT
CALIFORNIA SUBSIDIARY:
ALL AMERICAN ADDED VALUE, INC.
By: /S/ BRUCE M. GOLDBERG
-----------------------------
Title: PRESIDENT
A-54
<PAGE>
COLORADO SUBSIDIARY:
ALL AMERICAN A.V.E.D., INC.
By: /S/ BRUCE M. GOLDBERG
-----------------------------
Title: PRESIDENT
CALIFORNIA TARGET:
ADDED VALUE ELECTRONICS
DISTRIBUTION, INC.
By: /S/ ROBERT D. LURIE
-----------------------------
Title: PRESIDENT
COLORADO TARGET
A.V.E.D.-ROCKY MOUNTAIN, INC.
By: /S/ WAYNE W. VANNOY
-----------------------------
Title: PRESIDENT
A-55
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by the Delaware General Corporation Law, directors and
officers of the Company are indemnified against liability under certain
circumstances. Reference is made to the Company's Certificate of Incorporation,
as amended, and to "DESCRIPTION OF SECURITIES - Certain Provisions Relating to
Limitation of Liability and Indemnification of Directors."
<TABLE>
<CAPTION>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
2.1 -- Merger Purchase Agreement (the "Purchase Agreement") dated as
of October 31, 1995, among the Company, the Subsidiaries and the
Added Value Companies (included without exhibits and schedules as
Appendix A to the Proxy Statement/Prospectus with exhibits filed
as Exhibit 2.1).**
3.1 -- Certificate of Incorporation, as amended (incorporated by reference
to Exhibits 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).
3.2 -- By-laws (incorporated by reference to Exhibit 3.1 to the Company's
Form 10-Q for the quarter ended June 30, 1994).
4.1 -- Specimen Certificate of Common Stock (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-2,
File No. 33-47512).
5.1 -- Opinion of Rubin Baum Levin Constant Friedman & Bilzin Re:
Legality.**
8.1 -- Opinion of Rubin Baum Levin Constant Friedman & Bilzin re: Tax
Matters.**
9.1 -- Form of Voting Trust Agreement attached as Exhibit "E" to Purchase
Agreement (included as part of Exhibit 2.1).**
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 (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended
December 31, 1991).
10.3 -- 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), together with
related agreement dated May 1, 1994 between Drake and the Company
(incorporated by reference to Exhibit 10.5 to the Company's
Form 10-K for the fiscal year ended December 31, 1994).
10.4 -- Promissory Notes, all dated May 1, 1994, payable to the Company's
landlord in the amounts of $865,000, $150,000 and $32,718
(incorporated by reference to Exhibit 10.2 to the Company's
Form 10-Q for the quarter ended March 31, 1994).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
10.5 -- 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 fiscal
year ended December 31, 1994).
10.6 -- License Agreement for Patented Technology (incorporated by reference
to Exhibit to the Company's Form 10-K for the fiscal year ended
December 31, 1991).
10.7 -- Revolving Credit Agreement, Master Promissory Note, Security
Agreement and Stock Pledge Agreement, all dated December 29, 1992
with the Company's lender (incorporated by reference from the
Company's Current Report on Form 8-K dated December 29, 1992).
10.8 -- First Amendment to Revolving Credit Agreement (Letter Agreement),
Master Promissory Note and Guaranty Agreement, all dated May 27,
1993, with the Company's lender (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
June 30, 1993).
10.9 -- Second Amendment to Revolving Credit Agreement and First Amendment
to Stock Pledge Agreement and Master Promissory Note, all dated
July 19, 1993, with the Company's lender (incorporated by reference
to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
June 30, 1993).
10.10 -- Third Amendment to Revolving Credit Agreement and Master Promissory
Note, both dated as of August 4, 1994, and Second Amendment to Stock
Pledge Agreement, Security Agreement and Guaranty Agreement, all
dated as of August 10, 1994, with the Company's lender (incorporated
by reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended June 30, 1994).
10.11 -- Fourth Amendment to Revolving Credit Agreement and Master Promissory
Note, both dated as of March 28, 1995, with the Company's lender
(incorporated by reference to Exhibit 10.22 to the Company's
Form 10-K for the fiscal year ended December 31, 1994).
10.12 -- Asset Purchase Agreement dated March 30, 1993 by and between All
American Semiconductor of Rockville, Inc. and All American
Transistor Corporation of D.C. (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-K for the fiscal year ended
December 31, 1992).
10.13 -- Asset Purchase Agreement dated January 5, 1994 by and between All
American Semiconductor of Chicago, Inc. and Components Incorporated
and as an exhibit thereto the employment agreement with Robert Ryan
(incorporated by reference to exhibits to the Company's current
report on Form 8-K dated January 19, 1994).
10.14 -- Asset Purchase Agreement dated as of July 1, 1994 by and between the
Company and GCI Corp.; Letter Agreement dated July 1, 1994 among the
Company, GCI Corp., Robert Andreini, Joseph Cardarelli and Joseph
Nelson; Guaranty dated July 1, 1994; and Amendment Letter to Asset
Purchase Agreement and Letter Agreement dated July 15, 1994
(incorporated by reference to Exhibit 10.1 to the Company's Form 10-
Q for the quarter ended June 30, 1994).
10.15 -- Amended and Restated All American Semiconductor, Inc. Employees',
Officers', Directors' Stock Option Plan (incorporated by reference
to Exhibit 10.36 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
10.16 -- Deferred Compensation Plan (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-2,
File No. 33-47512).
10.17 -- 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 fiscal year ended December 31, 1994).
10.18 -- Form of Financial Advisory and Investment Banking Agreement
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-2, File No. 33-47512).
10.19 -- Form of Consulting Agreement between the Company and Lew Lieberbaum
& Co., Inc. (incorporated by reference to Exhibit 10.19 to Amendment
No. 1 to the Company's Registration Statement on Form S-1, File No.
33-58661).
10.20 -- Consulting Contract dated May 14, 1993 by and between the Company
and The Equity Group, Inc. (incorporated by reference to
Exhibit 10.19 to the Company's Form 10-K for the fiscal year ended
December 31, 1993).
10.21 -- Employment Agreement dated as of June 1, 1992 between the Company
and Paul Goldberg (incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-2, File No. 33-47512).
10.22 -- 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).
10.23 -- Employment Agreement dated as of June 1, 1992 between the Company
and Bruce M. Goldberg (incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement on Form S-2,
File No. 33-47512).
10.24 -- Employment Agreement dated as of May 24, 1995, between the Company
and Bruce M. Goldberg (incorporated by reference to Exhibit 10.24 to
Amendment No. 1 to the Company's Registration Statement on Form S-1,
File No. 33-58661).
10.25 -- Employment Agreement dated as of May 24, 1995, between the Company
and Howard L. Flanders (incorporated by reference to Exhibit 10.25
to Amendment No. 1 to the Company's Registration Statement on Form
S-1, File No. 33-58661).
10.26 -- Employment Agreement dated as of May 24, 1995, between the Company
and Rick Gordon (incorporated by reference to Exhibit 10.26 to
Amendment No. 1 to the Company's Registration Statement on Form S-1,
File No. 33-58661).
10.27 -- Warrant issued to Sam Berman in connection with the $1.0 million
loan (incorporated by reference to Exhibit 10.4 to the Company's
Form 10-K for the fiscal year ended December 31, 1991).
10.28 -- Form of Warrant Extension Agreement relating to the Warrant issued
to The Equity Group, Inc. (assigned to Robert D. Goldstein)
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-2, File No. 33-47512).
10.29 -- Warrant Certificates Nos. 93-1 and 93-2 dated as of May 13, 1993,
issued to The Equity Group, Inc. (incorporated by reference to
Exhibit 10.24 to the Company's Form 10-K for the fiscal year ended
December 31, 1994).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<S> <C>
10.30 -- Form of Warrant Agreement (incorporated by reference to Exhibit 4.4
to the Company's Registration Statement on Form S-2,
File No. 33-47512).
10.31 -- Form of Underwriter's Warrant Agreement (incorporated by reference
to Exhibit 4.5 of the Company's Registration Statement on Form S-2,
File No. 33-47512).
10.32 -- Fiscal Agency Agreement, dated as of June 8, 1994, between the
Company and American Stock Transfer & Trust Co. ("American Stock
Transfer"), as fiscal agent, paying agent and securities registrar
(incorporated by reference to Exhibit 4.1 to the Company's Form 8-K
dated June 14, 1994, and filed with the Commission on June 15,
1994).
10.33 -- Warrant Agreement, dated as of June 8, 1994, between the Company and
American Stock Transfer, as warrant agent (incorporated by reference
to Exhibit 4.2 to the Company's Form 8-K dated June 14, 1994, and
filed with the Commission on June 15, 1994).
10.34 -- Placement Agent's Warrant Agreement, dated as of June 8, 1994,
between the Company and RAS Securities Corp. (incorporated by
reference to Exhibit 4.3 to the Company's Form 8-K dated June 14,
1994, and filed with the Commission on June 15, 1994).
10.35 -- 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).
10.36 -- Form of Underwriter's Warrant Agreement between the Company and Lew
Lieberbaum & Co., Inc. (incorporated by reference to Exhibit 4.2 to
Amendment No. 1 to the Company's Registration Statement on Form S-1,
File No. 33-58661)
11.1 -- Earnings per share; see Note 1 to Notes to Consolidated Financial
Statements regarding computation of per share earnings.
21.1 -- List of Subsidiaries of Registrant (incorporated by reference to
Exhibit 21.1 to the Company's Form 10-K for the fiscal year ended
December 31, 1994).
23.1 -- Consent of Rubin Baum Levin Constant Friedman & Bilzin (included as
part of Exhibits 5.1 and 8.1).**
23.2 -- Consents of Lazar, Levine and Company LLP, independent certified
public accountants (included at pages II-8 and II-9).*
24.1 -- Powers of Attorney (included as part of Signatures).**
27.1 -- Financial Data Schedule (incorporated by reference to
Exhibit 27.1 to the Company's Form 10-Q for the fiscal quarter ended
September 30, 1995).
99.1 -- Form of Proxy to be used in soliciting holders of shares of the
Company's Common Stock for the Special Meeting to be held on
December ___, 1995.**
</TABLE>
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES*
SCHEDULE DESCRIPTION
II Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees other than Related
Parties.
- ---------------
* Filed herewith
** Previously filed
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended; (ii) to reflect in the prospectus
any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purposes of determining any liability under
the Securities Act of 1933, as amended, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and
the Offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) Insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended, may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the
provisions of Item 14, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(5) That, for the purposes of determining any liability under
the Securities Act of 1933, each filing of the registrant's annual
report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the
II-5
<PAGE>
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(7) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the
registration statement when it became effective.
(8) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of
this registration statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), the issuer undertakes
that such reoffering prospectus will contain the information called for
by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(9) That every prospectus (i) that is filed pursuant to
paragraph (e) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is
used in connection with an offering of securities subject to Rule 415,
will be filed as part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, All
American Semiconductor, Inc., has duly caused this amendment no. 1 to
registration statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Miami, Florida, on the 29th day of November,
1995.
ALL AMERICAN SEMICONDUCTOR, INC.
By: /s/ PAUL GOLDBERG
----------------------------
Paul Goldberg,
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
amendment no. 1 to registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PAUL GOLDBERG Chairman of the Board and Chief November 29, 1995
- ----------------------------------------------------
Paul Goldberg Executive Officer (Principal
Executive Officer)
* President and Chief Operating November 29, 1995
- ----------------------------------------------------
Bruce M. Goldberg Officer and Director
/s/ HOWARD L. FLANDERS Vice President, Chief Financial November 29, 1995
- ----------------------------------------------------
Howard L. Flanders Officer and Director (Principal
Financial and Accounting
Officer)
* Senior Vice President of Sales November 29, 1995
- ----------------------------------------------------
Rick Gordon and Director
*
- ----------------------------------------------------
Sheldon Lieberbaum
Director November 29, 1995
*
- ----------------------------------------------------
S. Cye Mandel
Director November 29, 1995
*By: /s/ PAUL GOLDBERG
- ----------------------------------------------------
Paul Goldberg
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
All American Semiconductor, Inc.
Miami, Florida
We hereby consent to the use in the Proxy Statement/Prospectus
constituting part of this Registration Statement on Form S-4 of our report
included herein dated March 10, 1995, except as to Note 6, the date of which is
March 28, 1995, relating to the consolidated financial statements of All
American Semiconductor, Inc. and Subsidiaries. We also consent to the
application of our report to Financial Statement Schedule II listed under Item
21(b) of this Registration Statement when such schedule is read in conjunction
with the consolidated financial statements referred to in our report. The audits
referred to in such report also include such schedule. We also consent to the
references to our firm under the headings "Experts" and "Selected Consolidated
Financial Data - The Company" in the Proxy Statement/Prospectus. However, it
should be noted that Lazar, Levine & Company LLP has not prepared or certified
such "Selected Consolidated Financial Data - The Company."
/s/ LAZAR, LEVINE & COMPANY LLP
-------------------------------
LAZAR, LEVINE & COMPANY LLP
New York, NY
November 29, 1995
II-8
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
All American Semiconductor, Inc.
Miami, Florida
We hereby consent to the use in the Proxy Statement/Prospectus
constituting part of this Registration Statement on Form S-4 of our reports
included herein, each dated August 11, 1995, relating to the respective
financial statements of Added Value Electronics Distribution, Inc. and
A.V.E.D.-Rocky Mountain, Inc. We also consent to the references to our firm
under the headings "Experts" and "Added Value Selected Financial Data" and
"Rocky Mountain Selected Financial Data" in the Proxy Statement/Prospectus.
However, it should be noted that Lazar, Levine & Company LLP has not prepared or
certified such "Added Value Selected Financial Data" or "Rocky Mountain Selected
Financial Data."
/s/ LAZAR, LEVINE & COMPANY LLP
-------------------------------
LAZAR, LEVINE & COMPANY LLP
New York, NY
November 29, 1995
II-9
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS,
AND EMPLOYEES OTHER THAN RELATED PARTIES
DEDUCTIONS BALANCE AT
BALANCE AT ---------- END OF PERIOD
BEGINNING AMOUNTS AMOUNTS -------------
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT NOT CURRENT
- -------------- --------- --------- --------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
1992:
Control Devices International.......... $318,631 -0- $318,631(1) -0- -0- -0-
- ---------------
</TABLE>
(1) The note receivable from Control Devices International, a joint
venture between the Company and an unrelated third party, was
reclassified as an Other Asset-Deferred Product Development cost during
1992, when the Company acquired 100% of the joint venture pursuant to a
mandatory buy-out provision in the joint venture agreement.
S-1
